Commercial Leases & COVID-19

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Given this unprecedented situation, commercial landlords and tenants should review their lease documents to determine their rights and obligations.

Force Majeure or Unavoidable Delay Clause

Force majeure or ‘unavoidable delay’ clauses in commercial leases address events beyond a party’s control, such as a natural disaster, that prevent a party from performing its obligations under the agreement. Usually, force majeure clauses are drafted in favour of the landlord and expressly exclude relief from rent payment obligations.

Health Emergency Clauses

Since the SARS outbreak in 2003, some commercial leases have been drafted to include health emergency provisions that give the landlord additional rights and access to the premises in the event of a health crisis.

For example, accessing the premises to disinfect and clean it, or restricting tenant or customer access to the building. Landlords and tenants should review their lease agreements to determine what the landlord or tenant are legally able or required to do in these circumstances.

Contact Your Landlord

Some commercial leases require the tenant to stay open for business. Failure to do so may constitute an event of default but may also void other rights such as options to renew, rights of first refusal, and parking.

If your lease includes an operating covenant and does not include a force majeure provision in your favour, then technically your closure may constitute a default of the lease.

However, it is unlikely that the courts would enforce such a default given the fact that most non-essential businesses have been ordered to remain closed and people are being urged to practice self-isolation and social distancing. 

It may be worth reaching out to your landlord to see if a rent relief package can be negotiated, even if rent abatement is not contemplated in your lease. Consider negotiating a rental deduction, or have the rent fully abated during the emergency period followed by increased rental rates after a recovery period or a longer rental commitment. It may not be in the landlord’s best interests to attempt to find replacement tenants during this period of uncertainty. 

Contact Your Insurance Broker

Review your business insurance policy and ask your insurance broker if your business interruption insurance policy covers pandemic scenarios.

If are working remotely and have temporarily closed your premises, advise your insurer and your landlord.  Most insurance policies will require you to notify the insurer of any material change in circumstances, and a failure to do so may void the insurer’s obligation to pay out in the event of a claim.

If your insurance policy requires that your premises be monitored on a regular basis, then you should make arrangements, with your landlord if necessary, to ensure this requirement is met.

Frustration of Contract

Tenants may seek to rely on the common law doctrine known as “frustration” as a way to gain financial relief from their lease obligations. Frustration occurs when an unforeseen event either renders contractual obligations impossible or substantially frustrates a party’s principal purpose for entering into the contract.

This would be a fairly novel cause of action as the present situation is unique, and it is as yet unknown if the adverse impacts of this pandemic would meet the threshold for a successful frustration claim.

If you are a landlord or a tenant and have concerns over lease payments or lease agreements, please contact a lawyer to review your lease and your rights and obligations.

Please contact Michael Paiva at 519.729.5038 or 416.800.1733 for more information, or if you require assistance with a commercial litigation, real estate or construction matter.