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I’ll Just Add it To Your Bill: Court Discusses Lease Damages, Mitigation, and Summary Judgment in Commercial Lease Dispute

A tenant does not pay rent. In the normal course, the landlord may work with the tenant if the cash flow problem is short-term, but, ultimately, if the tenant cannot meet its obligations, the landlord will take possession of the premises, re-let them, and look to the tenant for damages. What happens when the tenant does not pay rent as a power play to negotiate better terms and the landlord sits back, does nothing to take possession, and ultimately sues for arrears of rent? This unusual situation was dealt with in 7Marli Ltd. v. Pet Valu Canada Inc. (2017) 85 RPR (5^th) 112 (Ont SCJ).

Dispute

The parties had a 10 year lease with minimum rent at $20 a square foot for the first 5 years and $22 a square foot for the next 5 years. After factoring in additional rent, the tenant was liable to pay $9,500 per month in rent for the first 5 years. In 2013, two years into the term, the parties agreed that the tenant could pay a reduced minimum rent at $15 per square foot, resulting in a reduction of rent to $7,700 per month.

We assume that everything went well until the landlord demanded that the tenant re-commence paying the higher rent (the “Full Rent“) stipulated in the lease. The tenant took the position that, in 2013, the parties had negotiated a permanent rent reduction for the balance of the term. The landlord took the position that the reduction was only temporary. The tenant paid the lower rent (the “Reduced Rent“) until January 2016 and, on February 1, 2016, the tenant failed to pay any rent at all and abandoned the premises. When the tenant was asked in its examination for discovery why it had not at least paid the Reduced Rent, the tenant answered that it had hoped that the non-payment “would encourage (the landlord) to agree to a compromise.”

The landlord did not agree to a compromise. Instead of terminating the lease, the landlord demanded payment for unpaid rent. Of course, the landlord demanded the rental arrears based on the Full Rent. When the tenant did not pay, the landlord sued for the rent arrears. The tenant defended, claiming that only the Reduced Rent was appropriate and that the landlord had not mitigated its damages. The landlord then moved for partial summary judgment for payment of the arrears of Reduced Rent, with the issue as to whether the tenant was liable for the difference between the Full Rent and the Reduced Rent to be left for trial. As of February 1, 2017, the Reduced Rent due was $101,000.

Alternatives

The motions judge, Justice Perell, was and is very knowledgeable on real estate and landlord and tenant law. He set out the various options available to a landlord after a tenant breached a lease, all of which were based on Highway Properties v. Kelly Douglas [1971] SCR 562.

1. The landlord sues or distrains for arrears of rent. This choice treats the lease and the tenant’s interest in the property as continuing. Since the lease continues, there is no claim for damages and no duty to mitigate.

2. As a corollary to the first remedy, the landlord refuses to accept the tenant’s repudiation, but, instead of seeking rent, the landlord gives the tenant appropriate notice and re-rents the premises on behalf of the defaulting tenant. Presumably, the landlord has the right to claim against the tenant the difference between the rent being received from a new tenant and the rent under the lease with the defaulting tenant.

3. The landlord re-takes possession of the premises and terminates the lease. The right to distrain is gone.

4. As a corollary to the 3^rd remedy, and in addition to it, the landlord notifies the tenant that the landlord is claiming damages for losing the benefit of the lease over its term. The measure of damages is the present value of the unpaid future rent over the unexpired period of the lease less the actual rental value of the premises for that period plus reasonably foreseeable consequential losses. The measure of damages is not the total of the rental payments for the balance of the lease term because that measure would fail to account for any costs that the breach may have saved and for the benefits that the landlord receives from the property by leasing to a new tenant. Under this remedy, the landlord is obliged to mitigate its damages in accordance with normal contract law principles.

Almost invariably, the landlord chooses remedies 3 and 4. It does not usually want the property to sit vacant and, often, it will be difficult to collect rent from the tenant while the property is vacant. As the judge noted, “most defaulting tenants have no financial means to pay accruing rent and so there is no advantage to the landlord in keeping the lease alive.”

This case was unusual. The tenant, a large retailer, most certainly had the financial means to pay accruing rent and, it seems, the landlord did not care whether the property was vacant. We assume that the property was not a full shopping centre or a major strip mall; in those situations, vacancies are an anathema to landlords because they signal to the public and current and prospective tenants that the shopping centre or mall is in trouble.

Result

The tenant claimed that summary judgment was not appropriate because the landlord had not mitigated its losses. The judge noted that the landlord did not have to mitigate its losses because, under remedy #1, it was not claiming for damages, which need to be mitigated; it was merely claiming for rent due.

The tenant then argued that the case was not appropriate for partial summary judgment because it would be inefficient to have sequential partial summary judgment motions (i.e. every now and then while the case was wending its way towards trial, the landlord could bring another motion for partial summary judgment).

The judge agreed with this contention, but said, in essence, “so what.” The law permits the choice that the landlord made, which was to keep the lease alive and sue for rent without any obligation to mitigate its loss. Further, the alleged inefficiency was speculative. The landlord could change its mind and terminate the lease or move into remedy #2 and lease the property on the tenant’s behalf, which, in both situations, might end the accrual of arrears of rent.

As to the technical arguments that the tenant raised relating to partial summary judgment, the judge stated that:

1. The tenant was “too clever by half in suggesting that the partial summary judgment motion does not resolve a contested issue.” He noted that the summary judgment motion was a partial judgment on the indefensible portion of the landlord’s claim for unpaid rent. It was not an advance payment of an undetermined quantum of damages.

2. A partial summary judgment had no potential for duplicative or inconsistent findings of fact because the only matter for trial was the issue of deferral or permanent rent reduction and, win or lose, there would be no re-litigation or inconsistent findings of facts.

3. This case was an example of the type of case in which the motion disposed of a discrete issue, thus shortening the actual trial to the real issue.

The judge granted partial summary judgment as claimed. Given that the landlord could keep bringing motions for partial summary judgment, we suspect that the tenant either entered into a full settlement with the landlord or started to pay the Reduced Rent on a monthly basis. The tenant’s original strategy to push the landlord into a compromise was a complete failure.

 

Image courtesy of krosseel.

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.