Recent decisions from British Columbia courts underline the risk to commercial landlords in misinterpreting their leases or otherwise assuming there is little risk in shutting down the business of a unprofitable tenant.
In Shanahan v. Turning Point Restaurant Ltd., [2011 BCSC 956; 2012 BCCA 411], the tenant had initially paid an amount equal to two months’ base rent. The tenant’s business was not profitable when it defaulted on a rent payment. The landlord properly issued a notice of default advising the tenant that after 30 days without payment, the lease could be terminated. The tenant then asked the landlord to apply part of the deposit to the arrears. The landlord refused and terminated the lease.
At trial, the Court found that as the lease did not expressly provide for the deposit to cover first and last month’s rent, the tenant was within his right to ask for the deposit to be applied towards the arrears. Accordingly, once the landlord terminated the lease, this in turn breached the lease and entitled the tenant to accept the lease termination and claim for damages.
Although the Court of Appeal reduced the amount awarded, the tenant was awarded damages on the basis that it lost an opportunity to recover from its poor economic position. Even though the tenant was losing money, value had to be attributed to the potential it could turn its business around or minimize its losses.
In Jarvie v. Banwait, 2012 BCSC 337, the tenant ran a struggling business (raising and selling pigeons) that had difficulty paying rent, although there were assets of value located on the premises, including pigeon stock. Notwithstanding rental arrears, the landlord had yet to make formal demand for rent. The tenant died and, upon his death, his estate attempted to access the premises to protect the business assets. After a few days granting partial access, the landlord revoked access and informed the estate that the assets would be held by the landlord to cover the arrears.
The estate sued on the basis that the landlord had improperly terminated the lease by denying access and that, upon termination of the lease, the landlord had lost the opportunity to seize the goods to cover rental arrears (a common law right granted to landlords only if the lease is still in place). The court agreed and awarded damages for the value of the assets, although the landlord was entitled to set off the then outstanding amount of rent arrears.
Under either of the above scenarios, a landlord would also lose out on the ability to sue for future rent (until the space was filled) and to sue any guarantor under the lease.
Landlords can learn two important lessons from these cases. First, ‘common sense’ or ‘self-help’ based remedies can backfire and the landlord can be found to be the first person to have actually terminated the lease. Second, the mere fact the tenant’s business is failing does not eliminate the economic risk in wrongfully terminating the lease. Commercial landlords should consult their advisors to consider these potentially significant legal-economic risks.
The information provided above is for educational purposes only. This information is not intended to replace the advice of a lawyer or address specific situations. Your personal situation should be discussed with a lawyer. If you have any questions or concerns, contact a legal professional.