Written By Simon Crawford and Samantha Weng

Markets change. Situations change. Plans change. And in the face of change, tenants are often faced with future lease obligations that no longer suit their business plans. They need (or at least want) to change the deal with their landlord. But what commercial tenants and their landlords need to remember, is that leases are not quite the same as other commercial contracts.

In many commercial contracts, where one party wishes to unilaterally terminate the transaction, it can do so and face a claim for damages. And in many commercial contracts, the terminating party knows that the counterparty’s claim for damages will be subject to their obligation to mitigate those damages, where possible. Which is all to say, that the repudiation of many commercial contracts often results in the terminating party being liable for something less than the full balance of liabilities for the remainder of the term of the contract.

Commercial leases, however, are different, and a recent Ontario decision in The Canada Life Assurance Company et al. v. Aphria Inc.¹ provides a sound reminder that, when faced with lease repudiation by a commercial tenant, a landlord has choices, and among those choices is the right to not accept the termination, continue to sue for rents as they become due, and not take any action to mitigate future damages. Or to put it another way, the landlord can simply deny the tenant’s request to end the tenancy and hold it accountable for the balance of the lease obligations.

Facts in Aphria

In June 2018, Aphria Inc. (Aphria) leased a suite located at 1 Adelaide Street East, Toronto (the Premises) for a term of 10 years. However, its business needs changed shortly thereafter, resulting in a situation where Aphria no longer required use of the Premises.

In March 2021, Aphria approached the landlords—the Canada Life Assurance Company and I.G. Investment Management, Ltd.² (collectively, the Landlords)—seeking an early termination of the lease.  The Landlords rejected the proposal and advised Aphria that it was not entitled to unilaterally terminate the lease.

Aphria responded with a notice of repudiation dated August 26, 2021, and vacated the Premises on or around the same date. Again, the Landlords did not accept the repudiation and reminded Aphria that it remained obligated to fulfill its covenants under the lease.  Aphria then took the position that the Landlords were required to mitigate their damages from the repudiation.

The Landlords disagreed and continued conducting their affairs pursuant to the terms of the lease, including persistently asserting their entitlement to arrears, and taking no steps to re-let the Premises or to deny Aphria access, among other things. Finally, the Landlords sued Aphria for outstanding rents and future rents, relying on Justice Bora Laskin’s comment in the 1971 Supreme Court of Canada (the Supreme Court) decision Douglas and Co. Ltd., Highway Properties Ltd. v. Kelly³ (Highway Properties)—a landmark case on lease repudiation—supporting the principle that “the landlord is not under a duty of mitigation”⁴.

At trial, Aphria invited the Ontario Superior Court of Justice (the Court) to disregard Justice Laskin’s comment, asserting that Highway Properties created an “anomaly in contract law”⁵ by not requiring the landlord to take reasonable steps to reduce its losses in instances of repudiation, which is unlike the approach generally taken when other commercial contracts are repudiated. Aphria argued that applying the doctrine of mitigation to leasing transactions would achieve several ends, not the least of which is harmonizing commercial leasing law with commercial contract law. It also asserted that this application would ensure economic efficiency, recognize that commercial landlords are typically better positioned to mitigate losses, discourage absurd outcomes and multiplicity of actions, and encourage freedom of contract.⁶ Aphria’s arguments rested on Supreme Court decisions following Highway Properties which promote mitigation over specific performance for contractual repudiation, but none of these cases concerned commercial leases.⁷

Commercial Landlords’ Remedies for Lease Repudiation

So what remedies are available to the landlord when a tenant attempts to unilaterally terminate a commercial lease?  Pursuant to Highway Properties, the landlord may:

• continue under the lease and insist on the tenant’s performance thereunder, then sue for rents as they become due or for ancillary damages on the basis that the lease remains in full force and effect; or
• accept the termination and sue for arrears or ancillary damages to the termination date; or
• re-enter and re-let the premises on the tenant’s behalf with appropriate notice, while retaining the right to sue for arrears or ancillary damages; or
• accept the termination and serve notice on the tenant of its intention to sue for prospective losses stemming from unfulfilled covenants under the lease.⁸

The last of these remedies was granted by the Supreme Court in what was, at the time, a significant moment in leasing law.  Prior to Highway Properties, commercial landlords could only avail themselves of remedies 1 to 3, which permit only the recovery of accrued losses.  The reason lies in the historically divergent lineages of property law and contract law.

Although leases are contracts in form and function, property law had traditionally characterized them as conveyances of interest in land. Once a landlord accepts the repudiation of a lease by a tenant, the lease and the tenant’s interest in land would both terminate, thereby precluding the landlord from a claim for prospective losses.⁹ The logic is: since rents are derived from an interest in land, they would cease to be payable with the cessation of such interest in land.¹⁰

The Supreme Court in Highway Properties recognized the limitation of this approach and ruled that it was no longer sensible to treat a commercial lease as “simply a conveyance and not also a contract”¹¹, thereby granting commercial landlords the relief of suing for future rents.  However, proper notice must be served on the defaulting tenant as a precondition, as such notice would theoretically prompt the defaulting tenant to reassess the situation and perhaps work toward changing its course to prevent further financial and reputational setback.

Decision in Aphria

Returning to the case at hand, the Court adjudicated the issue of mitigation by considering whether Justice Laskin’s comment in Highway Properties was binding and, if so, whether the Court should depart from precedent.

Aphria argued that the statement “the landlord is not under a duty of mitigation”¹² was simply a judicial remark rather than a pronouncement and thus not binding on lower courts.  However, the Court found the converse to be true given mitigation and the commercial landlord’s duty following a lease repudiation were key issues in Highway Properties, and certain judicial remarks issuing from the Supreme Court are to be regarded as authoritative.¹³

The Court also declined to diverge from precedent to preserve certainty of the law and the stability of existing and future commercial leasing transactions. Afterall, the law in Highway Properties has been observed for over 50 years (except in an odd instance or two), and therefore any change issuing from a lower court would upset the law and the market. The Court was, however, sympathetic to Aphria’s arguments and agreed that it does seem unusual that a duty of mitigation does not exist for commercial landlords.

Ultimately, Aphria was ordered to pay outstanding rents to June 15, 2023, but not future rents unless the Landlords bring further lawsuit to recover same. This aligns with the remedy associated with the Landlords’ election to keep the lease alive. In addition, the Court ruled that the amount of future rents payable by Aphria will need to be assessed with regard to any mitigation that in fact occurs.  This is notwithstanding that commercial landlords are not required to mitigate losses stemming from lease repudiation.

So, what do we take away from this? Commercial tenants who are considering unilaterally terminating an unexpired lease should think twice (or perhaps multiple times) before walking away. For now, landlords in Canadian common law jurisdictions facing a commercial lease repudiation have four remedies at law and are not required to mitigate damages under any of these remedies. As a landlord, the cost-benefit of each remedy must be weighed against the circumstances of the repudiation to determine the best course of action. In addition, regard must be had to the notice requirement under each remedy to ensure that one enjoys the maximum benefit afforded by each remedy.

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