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COVID-19 pandemic: A first perspective from the Québec Courts discussing the availability of the force majeure defence in a real estate context

Author(s): Céline Legendre, Yan A. Besner, Frédéric Plamondon, Julien Hynes-Gagné, Josy-Ann Therrien

Jul 23, 2020

On July 16, 2020, the Québec Superior Court rendered a judgment (Hengyun International Investment Commerce Inc. v. 9368-7614 Québec inc., 2020 QCCS 2251) providing, among other things, a first perspective on the availability of the COVID-19 pandemic as a force majeure defence (whether directly or indirectly) in the real estate context. Although the analysis of force majeure will inevitably vary from case to case, being a discretionary analysis based on the facts at hand (see, inter alia, Deux-Montagnes (Ville de) v. St-Joseph-du-Lac (Municipalité de), 2015 QCCA 749 at para. 22), in this case, the Court concluded that the Landlord could not insist on payment of rent for the period during which the Tenant’s gym was closed as a result of the Québec government’s orders.

Read Osler’s first Update on the COVID-19 pandemic being deemed a source of force majeure under Québec civil law.

Facts

In this case, Hengyun International Investment Commerce Inc. (the Landlord) sought a declaration that its tenant (9368-7614 Québec Inc.) (the Tenant) had been occupying the premises illegally for a number of months and sought to be compensated for the Tenant’s use of the premises. The Tenant, a gym centre, sought to maintain the lease and to significantly reduce the amount of rent payable.

Importantly, amongst the Tenant’s submissions to Court was the argument that it should not be held liable, as a result of force majeure, for the rent corresponding to the months of March to June 2020, as a result of the fact that it had not been able to operate its gym activities (having not been deemed an essential service).

Analysis

The Court first concluded that the Landlord and the Tenant were parties to a valid lease. 

However, the Court disagreed with the Tenant’s argument on force majeure, indicating that while COVID-19 may have been unforeseeable, the Tenant had applied a “subjective approach to irresistibility” in arguing its inability to generate revenues to pay rent. The Court wrote:

[99] Quebec Inc. argues that it was prevented from fulfilling its obligation to pay rent because it was unable to generate revenue due to the Decree.  

[100] The Court does not agree with Quebec Inc.’s analysis which applies a subjective approach to irresistibility.  In order to qualify as superior force, the event at issue must prevent any tenant in Quebec Inc.’s situation from paying its rent and not just those who lack sufficient funds.

However, the Court proceeded to analyze the force majeure argument from the perspective of the Landlord. The Court wrote:

[101] In the Court’s view, it is the Landlord that was prevented by superior force from fulfilling its obligation to [Tenant] to provide it with peaceable enjoyment of the Premises. While it is true that [Tenant] still had access to the Premises, continued to store its equipment there and benefited, to some extent, from services, the Lease provides that the Premises are to be used “solely as a gym” and this activity was prohibited by virtue of the Decree.  As a result, it is the Court’s view that [Tenant] had no peaceable enjoyment of the Premises during this period.

Consequently, the Court deemed that the Landlord could not insist on payment of rent for that period, having been unable (according to the Court) to provide peaceable enjoyment of the premises in this context.

Note that the Court also touched upon contractual modulations of force majeure found in the lease. The Court disagreed with the Landlord that the lease provided that the Tenant would remain liable for rental payments, adding:

[107] That said, even if the Landlord’s interpretation of paragraph 13.03 was correct, it cannot be read in such a way as to fully and completely relieve the Landlord of its principal obligation under the Lease, which is to provide peaceable enjoyment of the Premises.  The parties to a lease can agree to limit the impact of a landlord’s failure to provide peaceable enjoyment but cannot agree to exclude it altogether. This view has been expressed in doctrine and has been endorsed by the Court of Appeal of Quebec.

Conclusion

While this is the first detailed analysis on COVID-19 being used in the context of a force majeure defence, it is expected that many more judgments will come. The determination of a force majeure defence in Québec is eminently circumstantial and depends on a number of factors, such that each case should be reviewed independently and in accordance with the factual matrix at hand. Finally, note that this decision could be subject to an appeal.