ICSC Canadian Shopping Centre Law Conference … Canadian Shopping Centre Law Conference 2017...

ICSC Canadian Shopping Centre Law Conference 2017

Concurrent Session: You Shook Me All Night Long

Compendium of Papers

Moderator

Melissa M. McBain

Partner

Daoust Vukovich LLP

Toronto, ON

Papers and Panelists:

“A Landlord’s Covenant for Quiet Enjoyment and Limiting that Covenant/Nuisance”

Marco Gammone

Partner

Aird & Berlis LLP

Toronto, ON

“Asserting Fundamental Breach and a Derogation from Grant: Two Potential Tenant Remedies”

Joseph Grignano

Partner

Blake Cassels & Graydon LLP

Toronto, ON

“Remedies Available to the Tenant for Landlord’s Breach of Quiet Enjoyment, Fundamental

Breach and Derogation from Grant”

Michael Kennedy

Partner

Patterson Law

Halifax, NS

“The Quebec Perspective”

Fracois Viau

Partner

Gowling WLG (Canada)

Montreal, QC

1

A LANDLORD’S COVENANT FOR QUIET ENJOYMENT AND LIMITING THAT

COVENANT/NUISANCE

By: Marco Gammone

Aird & Berlis LLP

Introduction

While landlords have general rights to renovate and redevelop their property, they must consider

the rights of their tenants to make use of the leased premises free from interference. Absent

specific terms in a lease that limit a tenant’s rights, a landlord must generally be mindful not to

breach the covenant of quiet enjoyment, not to create a nuisance, and not to derogate from its

own grant. While these concepts may not be specifically included in a lease, these are implied

terms at common law in every commercial lease. With the recent increase in mall

redevelopments/renovations, reconfigurations, de-malling and backfilling of vacant anchor boxes

across the country, these issues are becoming increasingly relevant to retail landlords and

tenants.

What is the covenant for quiet enjoyment?

It is suggested by some that the term “covenant for quiet enjoyment”1 is generally

misunderstood. Quiet enjoyment has little to do with noise necessarily, though it may in some

cases. Quite simply, the covenant should be taken to mean that a tenant has the right to make use

of the leased premises without interference from the landlord.

Beyond this simple understanding of quiet enjoyment, it has become well established that there

at least three elements to the covenant of quiet enjoyment:

The landlord has title to grant the lease;

The tenant has the right to have exclusive possession of the premises; and

1 Robert D Malen, “The Landlord’s Covenant for Quiet Enjoyment” in Harvey M. Haber ed, Tenant’s Rights and

Remedies in a Commercial Lease (Toronto: Canada Law Book, 2014) 201.

2

The tenant has the right to occupy the premises without interference by the landlord.2

Where a landlord does not have good title to the premises, the covenant of quiet enjoyment can

be understood as an agreement that it will indemnify the tenant if the tenant’s enjoyment of the

premises is interfered with by those who have good title.3

How does the covenant arise?

As mentioned above, the covenant of quiet enjoyment is implied in every lease at common law.

It arises from the very relationship of landlord and tenant4 but quiet enjoyment can also be

statutorily implied or be agreed to as an express term of a lease.

In Ontario, for example, Section 23(1) of the Ontario Conveyancing and Law of Property Act5

provides that in a conveyance for valuable consideration, there is an implied covenant of quiet

enjoyment provided by the landlord.

In addition to the common law and statutorily implied covenants, most commercial leases also

contain an express covenant for quiet enjoyment.6 Where an express covenant is agreed to, the

express covenant for quiet enjoyment replaces the implied covenant. In this way, the parties are

not bound to the interpretation of the covenant at common law and can instead contractually

outline the nature and scope of the covenant.

Because this provides the parties with freedom to alter the covenant to suit their purposes, it also

means that the covenant can be entirely excluded from a lease. Where this is the intention,

however, the parties must be certain that this is done clearly and precisely.7

Scope of the covenant

Landlords are not strictly liable for any interruption to the tenant’s enjoyment of the premises.

Landlords are liable if it was reasonably foreseeable that their actions would constitute an

2 Richard Olson, A Commercial Tenancy Handbook at 3-2.

3 Supra note 1 at 201.

4 Supra note 1 at 202 citing Geary v Clifton Co, [1928] 3 DLR 64 (ON SC).

5 RSO 1990, c C.34, s 23(1) at para 1.


7 Ibid at 205.

3

interruption.8 Even where the landlord has a right to commit certain acts under the lease, the

landlord can still be found to be in breach of the covenant, as often occurs in the context of the

landlord’s right to repair.9

The covenant of quiet enjoyment can be either qualified or absolute, though it is usually

qualified. A qualified covenant is one that only extends to the acts of the landlord and those

claiming under it. Thus, where there is a landlord, tenant and subtenant, the landlord could evict

the subtenant for non-payment of rent without the tenant being found to have breached the

covenant of quiet enjoyment.10

An absolute covenant, on the other hand, means that the tenant

could be liable to its subtenant in the event of interruption by the landlord in such an instance.11

In 581834 Alberta Ltd v Alberta (Gaming & Liquor Commission),12

the Court was required to

determine whether a covenant protecting a subtenant from interference by the sublandlord could

extend to protect the subtenant from interference by the head landlord. In this case, the head

landlord had granted a mortgage on the leased premises and the mortgagee was attempting to

foreclose on the property.

In their decision, the Court held that qualified covenants in a sublease do not typically protect

against actions of the headlessor.13

Ultimately, the Court held that the covenant only protected

the appellant against persons "claiming by, through or under the sublandlord" and thus the

mortgagee, who had superior title to the landlord, could in fact foreclose on the mortgage

without the subtenant having any recourse against the landlord.

As well, it is worth noting that acts by those claiming under a landlord can constitute a breach of

the covenant. This includes employees of a landlord or even other tenants. The modern principle

has been summarized in Sundberg v JED Holdings Ltd,14

where it was held that:

8 Ibid at 208.

9 Ibid.


11 Ibid..

12 2007 ABCA 332.

13 Ibid at para 12.

14 (1984), 36 RPR 103 (BC SC).

4

If such conduct is a breach when engaged in by the landlord directly, then it is

equally a breach if, although preventable by the landlord, he stands idly by while

others engage in such conduct.15

This is especially important in the shopping centre context, where it’s been suggested that such a

landlord is better positioned, both legally and financially, to take action against interfering

tenants. The covenant of quiet enjoyment does not render a landlord liable, however, for the acts

of third parties who are strangers, unless there is some term in an express covenant that has this

effect.

What constitutes a breach of the covenant for quiet enjoyment?

A breach of the covenant for quiet enjoyment is a question of fact16

and can occur in two ways:

by defective title or by substantial interference.

Defective Title

As mentioned above, the covenant provides that the landlord has good title to the premises and

as such that the tenant can be provided with exclusive possession of the leased premises. Where

the landlord does not have good title to the land and the tenant does not receive exclusive

possession, this is a breach of the covenant for quiet enjoyment. Thus, lawful interference by a

third party having good title is a breach. In such a case, the tenant may claim against the landlord

for damages.17

Substantial interference

A breach of the covenant in this sense can take place where the landlord interferes with the

enjoyment of the leased premises. This does not mean, however, that there has to be an

interruption or interference with the title to the premises. It also does not mean that there has to

be any physical interference with the tenant’s use of the premises. It is not that just any and all

interference with the enjoyment of the leased premises will necessarily result in a breach of the

15 Ibid at para 4. See also Sun Life Assurance Co of Canada v Pentex Print Master Industries Inc., 2000

CarswellOnt 2584, 99 A.C.W.S. (3d) 156 (ON SC).

16 Harvey M Haber, “The Commercial Lease: A Practical Guide (Toronto: Canada Law Book, 2013) at 420.

17 Ibid at 207 citing Sanderson v Berwick-Upon-Tweed (Borough) (1884), 13 QBD 547 (Eng CA) at 551.

5

covenant. Instead, the courts are tasked with assessing whether or not such interference rises to

the level of substantial interference.18

What then amounts to substantial interference? The courts have had much to say about what

constitutes a breach and what rises to this level of interference over the last hundred or so years.

At one time, for a breach to have occurred, the courts held that there must be some physical

interference with the enjoyment of the premises; and that actions by the landlord that resulted in

a “temporary inconvenience” or “personal annoyance” did not sufficiently constitute a breach.19

Further evolution of the standard occurred and the courts began to find that for a breach to have

occurred it was necessary for the landlord to commit acts that amounted to an eviction. From this

line of decisions, it became required that the acts of the landlord were “…something of a grave

and permanent character done by the landlord with the intention of depriving the tenant of the

enjoyment of the demised premises.”20

More recently, however, the test for substantial interference has become increasingly relaxed

and in the English case of McCall v Abelesz,21

Lord Denning stated that the covenant should be

extended to “any conduct of the landlord or his agents which interferes with the tenant’s freedom

of action in exercising his rights as tenant…[and] it covers, therefore, any acts calculated to

interfere with the peace or comfort of the tenant, or his family.”22

This principle was

subsequently applied in Ontario and now informs the modern standard that the courts use for

assessing a breach.

In DMX Plastics Ltd v Misco Holdings Inc.,23

a tenant entered into a lease that expressly

covenanted for quiet enjoyment and repair or replacement as necessary of levellers and roof. The

landlord however, failed to reply to requests for repairs and subsequently ignored expert

18 Deborah A Watkins and Brian Parker, “Landlord Renovations and Redevelopments: When, if ever, do they give

rise to a breach of the Landlord’s Covenant for Quiet Enjoyment?” in The Law Society of Upper Canada: The Six-

Minute Commercial Leasing Lawyer 2016 at 1-4.


20 Ibid at 214 citing Upton v Townend (1855), 17 CB 30 (Eng CP) at 65-65.

21 (1975), [1976] 1 All ER 727 (Eng CA) cited in Supra note 1 at 216.

22 Ibid.

23 (2008), 2008 CarswellOnt 6579, 172 ACWS (3d) 212

6

opinions that found the roof needed to be replaced. Eventually, the leaks worsened to the point

where it appeared to be raining indoors and the landlord suggested that the tenant move to

another of its buildings. The tenant brought a claim for breach of the covenant of quiet

enjoyment. The Superior Court found that in this case the landlord had breached the covenant of

quiet enjoyment due to the fact that the ongoing leaks in the roof caused a serious and substantial

interference with the tenant’s use and enjoyment of the premises and had a significant impact on

the tenant’s ability to carry on business.

Despite relatively recent relaxing of the standard, the interference a tenant suffers must still be

substantial. A temporary minor interference will not be enough.24

The courts have dismissed the

claims of tenants where there was alleged interference with a restaurant’s parking spaces in a

shopping plaza25

or where there was defective air conditioning and heating (which only caused

physical discomfort).26

In summary, it is helpful to keep in mind that where interference amounts to more than mere

annoyance and becomes an “invasion of a tenant’s peace and comfort,” this may be found to be a

breach of the covenant of quiet enjoyment. In arriving at such a conclusion, the courts have

considered the following factors when determining whether the covenant for quiet enjoyment has

been breached:

Effect on access to the premises;

Effect on visibility of the premises, including signage;

Duration of repair or renovation work;

Intrusion into the leased premises itself; and

Effect on the operation of the tenant’s business.27


25 Supra note 1 at 217 citing Firth v BD Management Ltd (1990), 73 DLR (4th

) 375 (BC CA).

26 BG Preeco 3 Ltd v Universal Explorations Ltd (1987), 42 DLR (4th

) 673 (Alta QB).

27 Supra note 17 at 1-6.

7

How to limit the covenant for quiet enjoyment or exclude liability

There are two ways by which landlords may attempt to contract out of the covenant for quiet

enjoyment: (1) express limitations to the covenant for quiet enjoyment and (2) exculpatory

clauses that exclude liability for damages suffered where the covenant is breached.

Limiting the covenant for quiet enjoyment

By replacing the implied covenant for quiet enjoyment with an express covenant, landlords have

the ability to alter the expectations and terms of that which is normally implied in the covenant.

Thus, devoting attention to the construction of an express covenant or the use of exclusion

clauses provides landlords an opportunity to limit the obligations and liabilities that arise as a

result of the covenant.

As such, express covenants in a commercial lease will often contain terms that make the

covenant subject to other terms in the lease or even subject to interference arising from the

landlord’s renovations or repairs. In crafting an express covenant that will limit the tenant’s

rights to be free from interference, the restriction will have to be specific and precise.28

As well

the landlord should keep in mind and consider how the lease is to be read as a whole.

In Bloor Street Diner Ltd v Manufacturers Life Insurance Co,29

the tenant and landlord agreed to

amend their lease to allow the landlord to undertake restoration of the development in spite of

lease provisions that entitled the tenant to the right of quiet enjoyment. The tenant operated a

restaurant on the ground floor of the commercial development and visibility from the street was

important for business. The landlord undertook the restoration and there was no significant

damage or disturbance to the tenant’s business. Following this though, the landlord began plans

to redevelop the building, proposing to encase street frontages in a glass façade to put a

temporary hoarding wall along the tenant’s premises for at least 8 months.

The tenant applied for a permanent injunction in this case, which the Superior Court granted. It

was held that when read as a whole, the lease did not permit the redevelopment plan to the extent


29 2016 ONSC 440.

8

it would have a negative impact on the leased premises. Otherwise, proceeding with the plan

would constitute a breach of the covenant of quiet enjoyment as it would have a permanent

negative impact on the tenant’s business.

Excluding liability under the covenant for quiet enjoyment

Similarly, if a landlord wishes to exclude liability for the breach of the covenant, there must be

concern for how the exculpatory clause is drafted. Courts tend to interpret such clauses strictly.30

Typically, such clauses will not be enforced unless they are (1) clearly applicable to the

circumstances; and (2) not given under unconscionable circumstances (i.e. where the parties have

unequal bargaining power).31

In Orion Interiors Inc. v State Farm Fire and Casualty Co,32

the tenant purchased all-risk

insurance where the landlord was listed as the named insured under the policy. When the leased

premises experienced flooding due to a dislodged drain plug, the tenant brought an action against

the landlord for loss incurred as a result of the flooding and claiming that the landlord breached

the covenant for quiet enjoyment in its failure to conduct maintenance and repairs. Under the

lease, however, there was an exculpatory clause that excluded liability for the landlord with

respect to loss or damage:

Section 7.04 Loss or Damage

The Landlord is not liable for any death or injury arising from or out of any

occurrence in, upon, at, or relating to the Project or damage to property of the

Tenant or of others wherever located, whether or not resulting from (a) the

negligence of the Landlord or those for whom it may in law be responsible, or (b)

by the Landlord's failure to supply any services or utilities required by this Lease

where the failure is beyond the Landlord's reasonable control. The intent of this

Section is that the Tenant (and all other Persons having business with the Tenant)

is to look solely to its insurers to satisfy any claim which may arise on account of

death, injury, loss or damage, irrespective of its cause.33


31 Ibid at 12.

32 2015 ONSC 248.

33 Ibid at para 36.

9

In construing the exculpatory clause, the Court considered that such clauses are to be

“considered in harmony with the rest of the contract and in light of its purposes and commercial

context.”34

Further, the clause, when read in the context of the entire lease was clearly intended

to allocate to the tenant the risk of loss to its own property. As a result, the exculpatory clause in

this case successfully barred the tenant’s claim for damages against the landlord.

Nuisance

The Tort of Nuisance is both related and closely connected to the covenant of quiet enjoyment.

It arises independent of a lease. In many cases, the two overlap and one can sometimes be

characterized as the other. Simply put, nuisance is the “wrongful interference with a neighbour’s

property.”35

To be found to meet this threshold, the courts use a two-part test to assess whether

the acts claimed lead to:

(1) physical injury to land or substantially interfering with the use or enjoyment of

land… (2) where, in light of all of the surrounding circumstances, injury or

interference is held to be unreasonable.36

Noise, dust, vibration, smells and the appearance of liquids can be categorized as nuisances if

they interfere with the leased premises and otherwise meet this threshold.

In TMS Lighting Ltd. v KJS Transport Inc.,37

two parties operated neighbouring commercial

businesses. For a period of five years, airborne dust generated by KJS’s trucking operations

disrupted the lighting manufacturing business of TMS. As a result, TMS brought a claim against

the KJS seeking damages for losses stemming from nuisance. Of importance in this case, the

Court considered that the airborne dust was incompatible with the character of the

neighbourhood in which the parties' businesses were located; that KJS allowed an unexplained

delay before attempting to eliminate the nuisance; and the alleged sensitivity of TMS's

34 Ibid at para 38.


36 Ibid citing Osler Developments Ltd v British Columbia, 2001 BCSC 129 (BC SC) citing St. Pierre v Ontario

(Minister of Transportation & Communications), 39 DLR (4th

) 10 at 16.

37 2014 ONCA 1.

10

manufacturing operations to damage from dust.38

Based on these findings, the Court of Appeal

affirmed the two-part test for establishing nuisance and found that the airborne dust generated by

the one party amounted to an unauthorized interference with the private property rights of the

other party that was substantial and unreasonable.

While this case did not include legal action taken against a landlord, it illustrates how nuisance

may arise. As a result, it is common in commercial leases to have provisions that specify what

can and cannot be done in or around the leased premises and what may be considered a nuisance

to other tenants.

It is important to keep in mind that nuisance claims can be brought against landlords for both

acts of the landlord and for acts of other tenants. Claims against landlords for nuisance caused by

acts of the landlord often occur in connection to the breach of the covenant of quiet enjoyment.

In certain circumstances, a landlord can be found liable to a third party for the nuisance created

by a tenant.39

A landlord’s liability in such cases only arises where the landlord has actively

participated in the activity which is the cause of the nuisance or else where the business which is

permitted under the lease cannot be carried on without creating a nuisance.

Though in many ways nuisance overlaps with the covenant of quiet enjoyment, a claim of

nuisance should only be brought in the clearest of cases. This is because, it is more difficult to

prove nuisance as it requires satisfying a number of tests.40

Generally, the courts consider the

following factors:

1. The nature of the act complained of;

2. The nature of the injuries suffered;

3. The character of the neighbourhood;

4. The frequency of the occurrence which causes the interference;

38 Ibid at para 19.

39 Ibid at 6-60.

40 Ibid.

11

5. The duration of the alleged nuisance;

6. The utility of the defendant’s conduct;

7. Other factors which could be of significance in special circumstances; and

8. The sensitivity of the tenant measured against the sensitivity of a “reasonable” person.41

As a result, it is much more likely that a claim would be brought for a breach of the covenant of

quiet enjoyment rather than a claim for nuisance.

Conclusion

While a landlord will have certain rights to deal with its property, it must always keep its tenants’

rights at the forefront in mind before doing so. While the lease will provide many for many of

the rights that exist for both the tenant and the landlord, there must be regard for those additional

rights that are implied at common law. Where the lease does not make specific provision for the

watering down of the covenant of quiet enjoyment, landlords should heed caution before

undertaking acts which may disturb or interfere with the tenants use of the land.

A prudent landlord takes steps to ensure they are not in breach of the covenant of quiet

enjoyment or causing a nuisance to their tenants. This is especially important before undertaking

any repairs or renovations on the premises. Of course, landlords can limit their liability through

the use of express covenants and exclusion clauses. However, taking the time to consult with

tenants is a small first step that landlords can and should take to avoid exposing themselves up to

liability unnecessarily. More and more, landlords are involving tenants earlier on in the process

of redeveloping and renovating a property and this approach, in my view, will help reduce the

likelihood of a claim of a breach of the covenant of quiet enjoyment or a claim for nuisance.

41 Ibid at 6-58.

12

ASSERTING FUNDAMENTAL BREACH AND

A DEROGATION FROM GRANT: TWO POTENTIAL TENANT REMEDIES

By: Joseph Grignano1

Blake, Cassels & Graydon LLP

It is common knowledge that a tenant’s rights and remedies in the face of a landlord default are,

generally speaking, much more limited than the rights and remedies available to a landlord for a

tenant default. Absent express rights and remedies set out in the lease document, a tenant must

look to the common-law and statutes for relief. This paper discusses two such common law

rights and remedies, namely the doctrine of fundamental breach and the covenant that landlord

may not derogate from its grant.

While both of these common law rights and remedies are, in theory, available to a tenant in the

face disruption stemming from a landlord redevelopment, renovation or repair, the practical

reality is that an argument based upon a landlord’s derogation from its grant may be the better of

the options discussed herein. Judge for yourself.

Part 1 - Fundamental Breach

Highway Properties Limited v. Kelly, Douglas and Company Limited, [1971] S.C.R. 562, is well

known to all commercial leasing lawyers. In this landmark decision, the Supreme Court of

Canada held that a commercial lease of real property is more than a mere conveyance of real

property - it is also a commercial contract allowing for contract principles to be imposed.

Accordingly, since that time, leasing lawyers across Canada have had at their disposal the full

arsenal of remedies based in contract law to assist them in developing legal strategies. Of these

contract-based remedies, fundamental breach is arguably the most significant remedy available

to tenants when faced with a breach of lease by the landlord.

1 The fundamental breach portion of this paper has been updated using an earlier article which I co-wrote many

years ago with Francine Baker-Sigal. Hence, Francine deserves some credit.

13

What is Fundamental Breach?

The law recognizes that in certain instances, a claim for damages against a defaulting party may

not be sufficient. Accordingly, when a defaulting party has committed a breach of such

significance as to deprive the innocent party of the very essence of what it contracted for, the law

provides the innocent part with the additional remedy of treating the contract as at an end. The

Supreme Court of Canada has stated that a fundamental breach occurs “where the event resulting

from the failure by one party to perform a primary obligation has the effect of depriving the other

party of substantially the whole benefit which it was the intention of the parties that he should

obtain from the contract” (Hunter Engineering Co. v. Syncrude Canada Ltd. (1989), 57 D.L.R.

(4th

) 321). Fundamental breach has also been described as a breach “going to the root of the

contract” and as a breach which deprives a party of “the very heart of what it bargained for”.

It is important to note that since the Supreme Court of Canada released its decision in Tercon

Contractors Ltd. v. British Columbia (Ministry of Transportation and Highways) (2010), SCC 4,

some observers seem to mistakenly believe that the doctrine of fundamental breach has been

“laid to rest” in Canada. In fact, Tercon only deals with fundamental breach in the context of

exclusionary and other exculpatory clauses. Thus, Tercon should be kept separate from the

general legal principles relating to fundamental breach as described herein.2

Laying the Foundation & Adoption of the Remedy

Courts in Canada first considered fundamental breach in a commercial lease setting in Bramalea

Ltd. v. Canada Safeway Ltd. (1985), 37 R.P.R. 191 (Ont. H.C.J.). That case involved a

landlord’s motion for an injunction to restrain the defendant from closing its store. The tenant

had served notice that it considered the lease terminated after the landlord made significant

alterations to the shopping centre, including closing the interior of the mall. In denying the

injunction, the Court insinuated (without deciding the matter) that the landlord’s alterations

amounted to a fundamental breach of the lease which entitled the tenant to walk away from the

agreement.

2 For further information regarding Tercon, see my paper in the materials prepared for Law Society of Upper

Canada’s Six Minute Commercial Leasing Lawyer: Fundamental Breach in Leasing Law: Effect of Tercon.

14

While Bramalea could be described as laying the foundation for the acceptance of

fundamental breach as a remedy for tenants, it wasn’t until 1989, in the case of Lehndorff

Canadian Pension Properties Ltd. v. Davis Management Ltd. (1989), 59 D.L.R. (4th

) 1

(B.C.C.A), that the contractual remedy was fully adopted. In Lehndorff, a law firm attempted to

assign its lease of office space but required the landlord’s consent under the terms of its lease.

After the landlord unreasonably refused to provide its consent, the tenant went to court in order

to obtain relief. The British Columbia Court of Appeal concluded that in unreasonably refusing

to provide its consent, the landlord prevented the assignment and thereby “deprived the tenant of

the entire economic benefit” of the lease. As such, the landlord was found to have committed a

fundamental breach of the lease, entitling the tenant to treat the lease as at an end.

What makes these cases even more interesting is that they dispelled the previously held notion

that that there could be no fundamental breach by the landlord unless the tenant was deprived of

the right to physically occupy the space which was the subject matter of the bargain.

Subsequent Development of the Case Law

Just over a year after rendering its decision in Lehndorff, the British Columbia Court of Appeal

was given the opportunity to consider another fundamental breach of lease claim. In Wesbild

Enterprises Ltd. v. Pacific Stationers Ltd. (1990), 14 R.P.R. (2d) 25, the tenant operated a

stationery and office equipment store. The landlord altered the means of access to the rear of the

premises such that it became extremely difficult to deliver merchandise both in and out of the

premises. A majority of the Court was of the view that the landlord’s alterations constituted a

fundamental breach of the lease as the tenant’s business depended on easy access to the rear of

the premises. Also noteworthy, were Lambert J.A.’s comments to the effect that the courts must

take a tenant-centered approach in assessing whether a particular breach entitles the tenant to

treat the lease as at an end:

...I think that it is possible that a landlord can make identical leases

with two tenants and then breach the lease agreement with the two

tenants in the identical clause and that could be a fundamental

breach in relation to one tenant and not a fundamental breach in

15

relation to the other. It is the particular business that has to be

looked at to decide whether the breach is a fundamental one in

relation to that tenancy and not just the clause that was breached.

In 1995, the Ontario Court of Appeal followed the lead of its Western counterpart, finding that

an office tenant was entitled to terminate its lease due to the landlord’s failure to recognize the

tenant’s right of first refusal to lease adjoining space. In the Court’s view, the expansion space

was an essential term of the bargain and, as such, the tenant was justified in treating the lease as

at an end (see Ad Hoc Management Inc. v. Prudential Insurance, [1995] O.J. No. 1419 (QL)).

Further Refinement of the Law - 5 Factors to Consider

One Ontario case involving fundamental breach deserves special attention for its role in

confirming a set of factors to consider when determining whether fundamental breach has

occurred. In Spirent Communications of Ottawa Ltd. v. Quake Technologies (Canada) 2008,

ONCA 92, a subtenant had tried to assert that its sublandlord’s delay in delivering possession of

the subleased premises by six weeks amounted to fundamental breach. Ultimately, the Court of

Appeal of Ontario overruled the lower Court and concluded that the six week delay did not

amount to fundamental breach. In the Court of Appeal’s view, a delay in occupancy of six weeks

in the context of a three year sublease was not sufficiently significant to amount to a deprivation

of substantially the whole benefit of the lease. In this regard, the Court noted that there was a

distinction to be made between breaches which were significant and material, and those that

deprived a party from substantially the whole benefit of its contract.

As noted above, Spirent is of particular importance as it identified five factors for judicial

consideration when determining whether a fundamental breach as occurred. The factors are:

(1) the ratio of the party’s obligations not performed to that party’s obligations as a whole;

(2) the seriousness of the breach to the innocent party;

(3) the likelihood of the consequences of the breach;

16

(4) the seriousness of the consequences of the breach; and

(5) the relationship of the part of the obligation performed to the whole obligation.

Examples of Other Cases which have Considered Fundamental Breach

A review of the case law pertaining to fundamental breach reveals that the courts in Canada have

set a high threshold for establishing fundamental breach of a commercial lease. The case law

also serves to illuminate the highly fact specific and contextual analysis undertaken by the

courts. The cases cited below, all of which have a somewhat similar set of facts, serve to drive

these points home and serve as a reminder that tenants should proceed with caution prior to

attempting to walk away from a lease under the guise of fundamental breach.

In Shun Cheong Holdings B.C. Ltd. v. Gold Ocean City Supermarket Ltd. (2000), 31 R.P.R. (3d)

179 (B.C.S.C.), the tenant operated a grocery store which was subjected to frequent leaks of a

foul-smelling, greasy liquid, which emanated from the restaurant situated above the tenant’s

store. These leaks created a health and safety hazard as well as a negative effect on the

attractiveness of the tenant’s business. The Court found that the landlord’s failure to remedy the

leakage problem could reasonably be described as having the effect of preventing the tenant from

operating its business and, as such, the “very purpose of the tenancy was undermined in a

fundamental way.” Accordingly, the Court was of the view that the tenant was justified in

terminating its lease. In reaching its decision, the Court noted that each case must simply turn on

its own set of facts (explicitly adopting the principles enunciated in Wesbild).

Shun Cheong should be contrasted against Framlance Properties Ltd. v. Dahan’s Fashion

Optical Ltd., [2000] O.J. No. 1746 (QL). Framlance was decided shortly after Shun Cheong and

had a similar set of facts. In Framlance, the tenant vacated the premises claiming that they were

not fit for business due to a constant foul smell and the presence of live mice, dead birds and

animal feces. The tenant also claimed (and the evidence disclosed) that the premises were prone

to flooding after every rainfall. In finding for the landlord, the Court noted that the lease did not

require the landlord to repair the premises nor was there an implied condition that the premises

17

were fit for the use intended by the tenant. As such, there had not been a fundamental breach of

the lease by the landlord which could justify the tenant’s repudiation.

In Stearman v. Powers, 2013 BCCA 206, the tenant claimed that a foul smell emanating from its

HVAC system made it impossible for the tenant to carry on its retail clothing business. In

finding that there was no fundamental breach, the Court of Appeal held that while the odour was

unpleasant, it did not make performance under the lease impossible nor deprive the tenant of the

use of its premises. Furthermore, the lease required the tenant (and not the landlord) to service

and repair the HVAC system.

In Kenny Alwyn Whent Inc. v. J. Mao Dentistry Professional Corp. 2016 ONSC 584, the Ontario

Superior Court of Justice ruled that an infestation of mice and spiders, the presence of litter in a

parking lot and the landlord’s unreasonable refusal to grant consent to a sublease, did not amount

to fundamental breach.

Part 2 – Derogation from Grant

Unlike fundamental breach, the right afforded to a tenant in connection with a landlord

derogation from grant does not depend on Highway Properties and the contract-like nature of a

commercial lease. On the contrary, it is a right that has its origins in real property law. Also,

while there is some debate on the subject44

, a finding of derogation from grant does not entitle

the non-defaulting party to treat a lease as at an end. Rather, the non-defaulting party is able to

pursue other remedies such as damages, specific performance and injunctive relief. Hence, in

many instances, it may be prudent to pursue a derogation from grant claim in parallel with a

claim based on fundamental breach.

What is Derogation from Grant?

A landlord’s obligation not to derogate from its grant is a legal principle that holds that if a party

agrees to confer a benefit on another, that party cannot later do (or omit to do) anything which

3 See, for example, English Court of Appeal decision in Fleet Mobile Types Ltd. v. Stone & Anor, [2006] E.W.C.A.

Civ. 1209, as quoted in Derogation From Grant: A Fresh Approach to an Old Problem by David Sterns and Andy

Seretis (Sotos LLP).

18

substantially deprives the other party of the enjoyment of that benefit. In a commercial lease

setting, the principle protects a tenant of leased premises insofar as the landlord may not use or

alter its adjoining lands so as to frustrate or substantially hamper the purpose of which the lease

was granted. While the rule against derogation from grant is often difficult to define with any

measure of exact precision (and for this reason often overlaps with breaches of quiet enjoyment,

nuisance and fundamental breach), it appears that the rule is focused on landlord acts or

omissions on the portion(s) of the lands which the landlord has retained and not leased to the

tenant. Also, unlike fundamental breach, a derogation from grant only requires that there be

some act or omission rendering the premises substantially less fit for the purposes for which they

were originally leased45

. By way of contrast, to constitute fundamental breach, the landlord’s

conduct must go to the very root of the contract (not simply part of it) so as to deprive the tenant

of substantially the whole benefit of the lease. For example, where a landlord has leased

premises to a tenant for the primary purpose of a warehouse which is highly dependent on having

continuous access to its truck loading/unloading dock bays, the landlord cannot close or block

off access to those bays by erecting a fence or wall within the parking facilities that would make

it impossible for trucks to reach or back into the loading dock bays. In such as case, the tenant

would still have full use of its leased premises (through the front doors), but the inability to use

the loading dock bays would substantially interfere or diminish with the purpose for which the

lease was granted. Clearly, the threshold for establishing a derogation from grant is much lower

as compared to the threshold for fundamental breach.

Case Law

Some case law examples dealing with derogation from grant help illustrate the application of the

rule. In Langley’s Ltd. v. Lawrence Manor Investments Ltd., [1960] O.W.N. 436 (HC), the

tenant had understood that it premises would have the benefit of a large parking area situated

immediately in front of the premises. In fact, the parking area was clearly delineated on a plan

which was attached to the tenant’s lease. Once the tenant opened for business, a large store was

erected in the parking area and the tenant’s business suffered. The Court ruled that new store

caused an obstruction of the tenant’s right to use the parking area and as a result the landlord had

4 See Firth v. BD Management, [1990] BCJ No. 2035 (CA).

19

derogated from its grant. The tenant was awarded damages.

In Country Style Food Services Inc. v. 1304271 Ontario Ltd., [2005] OJ No. 2730 (CA), the

tenant leased a coffee and donut establishment within the landlord’s shopping centre. A site plan

of the shopping centre had been attached to the lease. At some point during the term of the lease,

the landlord began making changes to its centre which diminished the visibility of the tenant’s

premises and access to its drive though lane. The tenant’s business declined significantly. In

that case, the Court held that the landlord’s changes to the site plan constituted a derogation from

the landlord’s grant. In the Courts words:

…the various elements of the new configuration – the change in

access, the narrower entrance, the strip malls as opposed to the L-

shaped retail commercial building, the nature of the new tenancies,

the increase in the traffic and congestion, the decrease in visibility

to [the tenant], individually and collectively, constituted a

derogation from the grant.

Part 3 - Summary: Fundamental Breach & Derogation from Grant in the Context of

Redevelopment, Renovations & Repairs

The very high threshold for establishing fundamental breach may explain why there is little case

law in Canada where a tenant has successfully established fundamental breach in conjunction

with a landlord redevelopment, renovation or repair of a commercial property (one of the few

cases is Wesbild Enterprises which is discussed above). In cases of redevelopment, renovation

or repair, the disruption to a tenant may be material and of serious concern, but typically such

landlord work is only temporary and the tenant is able to carry on business in some form. As

such, the disruption cannot easily be categorized as rising to the level of depriving the tenant of

substantially the whole benefit of its lease. In cases where a tenant experiences disruption or loss

of business due to landlord redevelopment, renovation or repair, an argument based on the

landlord’s derogation from its grant may prove to be more successful for the tenant. This is

because, as noted above, the tenant must clear a lower hurdle, namely that the work undertaken

20

by its landlord has rendered the premises substantially less fit for the purposes for which they

were leased to the tenant.

Of course, in addition to the two common law rights and remedies discussed in this paper,

consideration should also be given to pursuing other rights and remedies such as those based on

nuisance and a breach of the covenant of quite enjoyment. These could be pursued in lieu of, or

in parallel to, fundamental breach and derogation from grant. In this regard, I invite you to read

the excellent papers written by my colleagues Marco Gammone (Aird Berlis LLP), Michael

Kennedy (Patterson Law) and François Viau (Gowling WLG), copies of which accompany this

paper.

21

REMEDIES AVAILABLE TO THE TENANT FOR LANDLORD’S BREACH OF QUIET

ENJOYMENT, FUNDAMENTATION BREACH AND DEROGATION FROM GRANT

By: Michael Kennedy

Patterson Law

Introduction

Highway Properties Ltd. v. Kelly, Douglas and Co. Ltd.1 (“Highway Properties”) is the starting

point for any discussion of remedies for a breach of a commercial lease. Highway Properties

determined that the modern commercial lease is both a conveyance of interest in real property as

well as contract. The Supreme Court of Canada outlined that a Landlord has all of the existing

common law real property remedies in a lease in addition to remedies under contractual

principles. From that, one can conclude, that both of these types of remedies are also available to

Tenants.

Since the decision in Highway Properties, it would seem that, in the leasing context, more

emphasis has been placed on contractual remedies rather than the historical real property

remedies. In any commercial lease dispute, it would be prudent to investigate both avenues in

order to determine which remedies will best suit the client in achieving its goal.

The following discussion outlines the remedies available in each of the stated contexts and their

limitations. Remedies may be available in common law real property and contracts in the

situation of breach of quiet enjoyment, a fundamental breach or derogation from grant, and as

such care must be taken at the initial stages to ensure that all possibilities are pursued in parallel,

and not in substitution for, other avenues available.

The determination of whether a Tenant may claim for a breach of quiet enjoyment, a

fundamental breach or derogation from grant is a question of fact and the determination of which

of these avenues are to be pursued flows from the specific facts. One should determine which

avenues are to be pursued based upon the facts and the rights and remedies of the Tenant can

then be determined.

1 [1971] SCR 562

22

What is not discussed in this paper is the ability of the Tenant to proceed with a claim against the

Landlord in nuisance or a claim related to any breach of a good faith obligation by the Landlord.

The good faith obligation has greatly expanded the rights and liabilities of the parties to a Lease

and should always be considered in the framing of a claim by either party to a Lease. In any

given factual situation, either or both of these should be considered.

Remedies for Landlord’s Breach of Quiet Enjoyment

(a) Damages

As long established by the common law, the general remedy for a Landlord’s breach of quiet

enjoyment is damages: a monetary compensation for the Tenant’s losses caused by the breach.

This compensation is intended to put the Tenant in the same position as if the lease had been

performed. The criteria for this claim for damages would follow the contractual theory for

consideration of damages being those damages flowing from the breach which would be in the

reasonable contemplation of the parties at the time of entering into the contract or Lease.

For a business in a shopping centre, where the Landlord is aware of the purpose for the Lease,

this would include lost profits, reduction in rent along with wasted operating costs, costs of store

operation, costs of employees, and other consequential losses such as additional cleaning and

signage that may be required because of the Landlord’s renovations.

As we all are aware, Tenants, as most plaintiffs in similar situations, over-estimate the losses

which can be claimed and under estimate the difficulties associated with proving and

establishing their losses in Court on the balance of probabilities. Any claim of damages is surely

to be attacked by the opposing party on all fronts and this usually results in a substantial

reduction of the amount being claimed by the Tenant.

The Tenant must prove a loss by providing evidence in Court. Lost profits are best established

through an expert report or business records that show a decline in profits for the renovation

period. An expert report is costly, but is more likely to be accepted by the Court as proof of lost

profits. Where the Tenant has not been able to establish a baseline of profits, such as where the

Landlord’s interference begins before the business even opens, the Tenant may be able to use a

23

business plan to show expected profits: Country Stop Donuts Ltd v Great West Life Assurance

Co2.

As part of the claim for damages, a Tenant may request an abatement of rent for the renovation

period as partial compensation for its losses: Caldwell v Valiant Property Management3. The

Tenant must prove that it did not receive or enjoy a benefit that was reasonably expected in

return for paying rent. The court will look at the duration, nature, and impact of the disruption on

the Tenant to determine the appropriate amount for abatement.

A word of caution here. Tenants should not stop paying rent even if there has been a perceived

breach of the lease, in the Tenant’s opinion. The covenant to pay rent is an independent

covenant and as such cannot be used as a method of counterclaim by the Tenant unless the Lease

specifically allows for this or unless ordered by the Court. The Tenant must continue to pay the

rent, have the Courts establish that there has been a breach and seek an award of damages, which

may in part be an abatement of the rent. Tenants cannot be proactive in “claiming” their own

damages by no longer paying the rent to the Landlord, or they risk termination by the Landlord

for their breach of the Lease.

Although abatement of rent may prove to be an easy method of awarding damages, in most

circumstances the amounts saved by the Tenant through abatement of rent, pale in comparison to

the quantum being claimed as damages by the Tenant and any such claim should be advanced in

addition to other claims associated with damages suffered.

Two less common heads of damages tenants might use in addition to the above discussed are

aggravated and punitive damages. Both are only relevant in cases where the landlord’s behaviour

is egregious. Aggravated damages are compensatory and must be sought under a recognized

cause of action. They are generally granted in compensation for a tenant’s injured dignity and

pride. As such, they likely do not apply to corporate tenants. Stewart v. Canada Life Assurance

2 (1996), 15 OTC 172, 5 RPR (3d) 187 (Ont Ct Jus)

3 (1997), 145 DLR (4th) 559 (Ont Ct Jus)

24

Co.4, is a recent case in which the landlord’s egregious behaviour resulted in an award of

aggravated damages.

Punitive damages are non-compensatory and also must be sought under a recognized cause of

action. They are generally granted as a result of a landlord’s highhanded behaviour. Given their

purpose is to punish and deter the landlord’s behaviour, rather than compensate the tenant, they

can be awarded to corporate tenants as well as individuals.

(b) Injunctions

A Tenant may apply for injunctive relief to stop the Landlord from continuing to breach the right

to quiet enjoyment. This relief is an equitable remedy, granted at the discretion of the Court, and

may be used to prevent further damages by the Landlord until the matter is settled. Tenants

should be aware that injunctive relief has a high bar and is an expensive process.

To obtain this form of injunction, the Tenant must show the following: (1) a serious issue to be

tried; (2) that irreparable harm will be suffered if the injunction is not granted; and (3) that the

balance of convenience favours the injunction: RJR-MacDonald Inc v Canada (Attorney

General)5.

A serious issue must not be frivolous or vexatious and it must have a real chance of success.

Irreparable harm means that an award of damages for the breach would be inadequate, such as

the possibility of the Tenant going out of business. When measuring the balance of convenience,

the court weighs the potential effects on each of the parties, with a priority to the status quo.

As an injunction is an equitable remedy, the applicant, Tenant, must have “clean hands” and

therefore must at all times be deemed to act appropriately in the circumstances. The Court may

refuse to grant an injunction if the Tenant acts unfairly or with ulterior motives or waits too long

before asking for the injunction. The last point is crucial – the Tenant cannot sit back on

enforcement of its rights as it will thereby risk losing those rights. Additionally, as an injunction

is an equitable remedy, it is at the discretion of the Courts.

4 1994 CarswellNS 119

5 [1994] 1 SCR 311 (SCC)

25

Although an injunction is available on short notice, and may be used to prevent a problem from

becoming even worse, the application for an injunction is costly and may be beyond the means

of most Tenants.

In the case of Evergreen Building Ltd. v. IBI Leasehold Ltd.6 the tenant obtained a permanent

injunction at the trial level against the Landlord to prevent an office building from being

converted to a residential property. The Court of Appeal ruled that the trial judge erred when it

characterized a lease as predominantly an interest in land and replaced the permanent injunction

with a temporary one. Leave to the Supreme Court of Canada was granted, however, the appeal

was abandoned before it could be heard.

Remedies for Fundamental Breach

The Tenant may claim that the Landlord has fundamentally breached the Lease. This places the

Tenant in the same situation as the wronged party in a contractual scenario.

If the Landlord’s breach fundamentally deprives the Tenant of the substantial benefit of the

lease, then the Tenant may terminate the Lease and claim damages. The threshold for a

fundamental breach is high and must essentially be based upon the premise that the Landlord’s

renovations have effectively evicted the Tenant. As such, termination of the Lease by the Tenant

is a very risky procedure which could give rise to a substantial damages claim by the Landlord

including loss of rents for the term, if the facts do not justify a fundamental breach.

The Landlord will likely oppose any such actions through Court procedures, including an

injunction which will frustrate the Tenant’s ability to make a clean break. Unless the Landlord’s

actions are a clear and unequivocal fundamental breach which can be well justified in Court, the

Tenant is strongly advised to continue paying rent according to the lease and bring an action in

Court for damages or an injunction.

The Ontario Superior Court of Justice examined the issue of fundamental breach in Framlance

Properties Ltd. v. Dahan’s Fashion Optical Ltd.7 In the case, the premises leased by the Tenant

6 [2005] B.C.J. No. (C.A.)

7 [2000] O.J. No. 1746

26

experienced significant flooding which resulted in a foul odour. The lease did not have a

covenant that the Landlord had to perform repairs and the Landlord was not liable for water

damages. The Court held that while the flooding impacted the tenant’s business, it was not a

fundamental breach and therefore, damages were the appropriate remedy.

If the Tenant is in the position to claim a fundamental breach then an injunction may be the best

method for the Tenant to enforce its rights. Please refer to the discussion of injunctions in

Section II, above.

In addition to an application for an injunction, in theory, if damages are an inadequate remedy,

the Tenant may seek the equitable remedy of specific performance. This would allow the Tenant

to enforce whatever part of the contract that has yet to be executed by the Landlord, in addition

to those breaches remediable with damages. Specific performance in the lease context was

applied in Walsh v Lonsdale8. Walsh’s ruling on specific performance in the leasing context has

been confirmed and applied in Nova Scotia in South Shore Venture Capital Ltd. v. Haas.9

Remedies for Derogation from Grant

The doctrine of non-derogation from grant is not easily characterized. To enforce the principle

behind the doctrine, that one cannot take with one hand what they give with the other, Courts

have to use remedies of varying natures. As such, the potential remedies used under this doctrine

are based upon, and compared to, such remedies available in situations where easements, implied

easements, restrictive covenants and grants of all kinds form the basis for the action. These

considerations bring us clearly within the realm of the remedies which are available in the

context of the common law of real property.

The basis for a claim that the Landlord has derogated from the grant is not identical to the claim

of breach of quiet enjoyment but is very similar. Likewise, the same argument may be made

when comparing the claim for a fundamental breach by the Landlord. By advancing the

position, on behalf of the Tenant, that the factual situation also includes the basis for derogation

from grant, this may improve the Tenant’s position, increase the Tenant’s ability to buttress the

8 (1882) 21 Ch D 9

9 131 N.S.R. (2d) 9; See also paragraph 38 of this decision for other examples of Walsh’s rule in Canada.

27

quantum of damages and its ability to obtain an injunction due to the fact that this action and the

remedies flowing therefrom are based solely in the realm of real property.

Any discussion of the platform of derogation from grant is founded upon principles of real

property law such as implied easements and restrictive covenants and the subsequent removal of

these rights by the party who granted them in the first instance as outlined below.

The implied easement concept was born from the principle of non-derogation from grant in the

often cited case Wheeldon v Burrows10

. The principle is well known; if a party is granted land

from a larger tenement, easements necessary for the enjoyment of that land are implied. Note

that in the leasing context, it flows quite naturally that the Tenant has been granted a leasehold

interest in a portion of the land owned by the grantor, Landlord.

Babine Investments Ltd. v. Prince George Shopping Centre Ltd.11

, is an example where a

Landlord’s derogation from grant led to an implied easement. In that case, the Tenant was

granted premises with a rear entrance that was accessed from a lane and vacant lot the Landlord

owned. When the Landlord built fences on the back lane and vacant lot, effectively preventing

the Tenant from accessing their rear entrance, the court implied an easement on the lane.

Courts over the years have used non-derogation from grant to create rights that are best

characterized as restrictive covenants, because these rights restrict Landlords from doing acts

considered to be a derogation from grant.12

These covenants have been enforced with injunctions

and damages.

In Cable v Bryant13

the plaintiff had leased land for use of a stable. The defendant had erected a

hoarding (i.e. a billboard) that blocked the stable’s ventilation system. The court ordered a

mandatory injunction requiring the defendant to tear down the hoarding.14

10 (1878) 12 Ch.D. 31

11 2002 BCCA 289

12 D.W. Elliott, “Non-derogation From Grant” (1964) 80 L.Q.R. 244 at 264-5.

13 [1908] 1 Ch. 259


28

In Grosvenor Hotel v Hamilton15

the Tenant was leased an unstable dwelling that was eventually

damaged by vibrations coming from the Landlord’s neighbouring land. The Tenant was awarded

damages for all loses suffered as a consequence.16

In cases where one cannot enforce non-derogation from grant’s principle using easements, or

restrictive covenants, it is possible for courts to use non-derogation from grant to imply the grant

of a right simpliciter.17

For example, in Pwllbach Colliery Co Ltd v Woodman18

the leased land was used for a mining

business. When in operation, the activity on the leased land caused coal dust to spread over the

Landlord’s adjacent property. The court determined that allowing dust to spread on a parcel of

land is not in the nature of an easement, and that the application of non-derogation from grant

under these facts would have to be a grant of a right to spread dust. However, non-derogation

from grant was not proven in this case, and so this remedy was not applied.

The cases above demonstrate that the Tenant, when faced with what could be a derogation from

grant in the leasing context, would clearly be entitled to damages and possibly injunctive relief.

There may be additional benefits for a Tenant in these circumstances.

At common law, particularly where it is a breach of a real property right, the Courts have been

much more willing to grant injunctive relief. (See the discussion above related to the criteria

associated with injunction relief particularly as it relates to adequate compensation in damages.)

The reason for this is the recognition that real property rights are, for the most part, deemed to be

unique and therefore damages can never be an adequate compensation. One need only consider

the inherent probability of success for an injunction where the right was in the form of an

easement or restrictive covenant.

The other question which arises from this discussion is, given the fact that the real property right

is unique, does the breach of the principle of derogation from grant provide a better argument for

specific performance? This would seem to be the case as specific performance, like injunctive

15 [1894] 2 Q.B. 836


17 Supra note 12 at 265-6

18 [1915] A.C. 634

29

relief is more readily available when the subject matter is unique as is the case with real property

rights. The raising of the specific performance issue in the context of this discussion is meant

only to point out that opening the door to consideration of real property rights can considerably

add to the possibilities of remedies available to the Tenant.

It is recommended that, wherever possible, Tenants should add as a claim against the Landlord,

the derogation of grant concept. Aside from adding damages and injunctive relief which are

already available for breach of quiet enjoyment and fundamental breach, the remedies available

for derogation of grant enhance those remedies particularly with respect to injunctive relief and

specific performance.

Conclusion

Generally the remedies available for breach of quiet enjoyment and fundamental breach are the

same when the Tenant does not wish to terminate the Lease as it may with a fundamental breach.

These remedies consist of damages and injunctive relief.

Termination is risky from the Tenant’s perspective. Further, any withholding of rent by the

Tenant as a perceived right of offset for damages is not an avenue that the Tenant should pursue

as the Landlord will simply terminate the Lease.

The derogation of grant argument is worth pursuing in parallel and not in substitution for the

other causes of action. By adding this, the Tenant may enhance its ability to obtain injunctive

relief and further, would strengthen its position if specific performance is available.

30

THE QUEBEC PERSPECTIVE

By: Francois Viau

Gowling WLG (Canada)

“Peaceable Enjoyment of the Property”

Under Quebec law, there is no need for a quiet enjoyment clause to be added to lease

agreements, as not only is this covenant included in all leases, residential or commercial, but it is

considered to be a part of the essence of the lease itself and one of the primary and fundamental

obligations of the landlord. Indeed, Article 1854 of the Civil Code of Quebec (“CCQ”) states the

following:

1854. The lessor is bound to deliver the leased property to the lessee in a good state of

repair in all respects and to provide him with peaceable enjoyment of the property

throughout the term of the lease.

He is also bound to warrant the lessee that the property may be used for the purpose for

which it was leased and to maintain the property for that purpose throughout the term of

the lease.

In addition, if a tenant does not have the peaceable enjoyment of their premises due to the acts of

another tenant, the CCQ specifically allows for that first tenant to be compensated by the

landlord or even to terminate their lease:

1861. A lessee who is disturbed by another lessee or by persons whom another lessee

allows to use or to have access to the property may obtain, according to the

circumstances, a reduction of rent or the resiliation of the lease, if he notified the

common lessor of the disturbance and if the disturbance persists.

He may also recover damages from the common lessor unless the lessor proves that he

acted with prudence and diligence; the lessor has a recourse against the lessee at fault to

be indemnified for the injury suffered by him.

31

In the case where is it not a tenant, but a third party which is diminishing a tenant’s peaceful

enjoyment of its premises, the landlord must take action to cease the third party’s nuisance or

else the landlord may be subject to the same remedies mentioned above, the whole by virtue of

Article 1859 CCQ:

1859. The lessor is not bound to make reparation for injury resulting from disturbance to

enjoyment of the property caused by the act or omission of a third person; he may be so

bound where the third person is also a lessee of that property or is a person the lessee

allows to use or to have access to the property.

However, if the enjoyment of the property is diminished by the disturbance, the lessee

retains his other remedies against the lessor.

While the abovementioned CCQ Articles are considered to be of public order in the case of

residential leases they are not so for the purpose of commercial leases. Meaning that the parties

to a commercial lease can agree not to include the abovementioned provisions or to vary the

obligations of each party. However, it should be noted that, as mentioned above, the “peaceful

enjoyment” obligation is so fundamental that it cannot be completely struck out, only partially

limited, through mutual agreement by the parties.

The Court of Appeal has confirmed the validity of parties agreeing to limitations to their right to

peaceful enjoyment on various occasions. Notably, in Max Aviation inc. v. Développement de

l'aéroport Saint-Hubert de Longueuil (DASH-L), 2013 QCCA 551 (CanLII) the Court of Appeal

concluded that a tenant occupying an airport which included in the lease specific regulations as

to the time when flights were permitted and allowed the landlord the discretion to modify those

times was indeed a limitation to the peaceable enjoyment of the premises but one that was

permitted given the commercial nature of the agreement and the consent of the parties. The

Court of Appeal went even further in Karrum Realties Inc. v. Ama Investments Inc., 2007 QCCA

880 (CanLII) where it confirmed that the limitations to peaceful enjoyment included in a lease by

reason of the presence of various strips clubs in the area was valid considering the fact that the

tenant was aware of the potential nuisance these clubs would create at the time the lease entered

into.

32

The extent of the obligation to provide peaceable enjoyment was recently (June 2016) reviewed

by the Court of Appeal in 9185-4000 Québec inc. v. Centre commercial Innovation inc., 2016

QCCA 538 (CanLII).

In this case, the tenant, operating a restaurant, complained that the noises caused by the work

being performed by another tenant, in this case a grocery warehouse, were a nuisance to its

clients and were preventing them from having the “peaceable enjoyment” to their premises to

which they were entitled. Even though both the landlord and the noisy tenant made reasonable

efforts to limit the noises, they were still disturbing the restaurant’s clients to a point that, a few

weeks later, the tenant simply left the premises. The landlord sued them shortly thereafter for

damages related to breaking their lease.

When the case was heard before the Superior Court, the landlord obtained all the arrears of rent

owed to it in addition to nine (9) months of rent as compensation for the abandonment of the

premises by the tenant. The Court stressed the fact that the tenant was not able to prove its

financial difficulties were caused by the noises and that the previous tenant had never

complained about such a problem. However, this judgment was overturned on appeal.

The Court of Appeal insisted that the fundamental obligation to provide peaceable enjoyment, set

out under Article 1854 CCQ, was in no way related to the financial situation of a tenant. Either

the landlord provided peaceable enjoyment or it did not: the tenant does not bear the burden of

proving the consequences of a failure by the landlord to provide peaceable enjoyment. The Court

of appeal drew a parallel between this fundamental obligation of the landlord and the

inconveniences neighbors are supposed to tolerate under Article 976 CCQ:

976. Neighbours shall suffer the normal neighbourhood annoyances that are not beyond

the limit of tolerance they owe each other, according to the nature or location of their

land or local usage.

The Court of Appeal insisted that both Article 976 and 1854 CCQ were impose an obligation of

results and not an obligation of means, some decisions going as far as qualifying it as a guarantee

supported by the landlord. Only a “superior force” or force majeure (Quebec equivalent of an

33

“act of God”) or a fault by a third party not under the landlord’s responsibility (in opposition to

other tenants, as seen above in relation with Article 1861 CCQ) can free a landlord from this

obligation.

In the case before the Court of Appeal, it meant that even if the landlord put reasonable and

diligent efforts into reducing the nuisance, the tenant was still allowed to terminate the lease as

the nuisance continued to cause “serious injury” to its business. Consequently, the Court

considered that the lease was validly terminated when the tenant abandoned the premises and

reduced the Superior Courts judgment to the payment of arrears until the date of departure.

Remedies

The “serious injury” criterion related to the termination of a lease is mentioned under Article

1863 CCQ which lists the remedies available to both the tenant and the landlord:

1863. The nonperformance of an obligation by one of the parties entitles the other party

to apply for, in addition to damages, specific performance of the obligation in cases

which admit of it. He may apply for the resiliation of the lease where the nonperformance

causes serious injury to him or, in the case of the lease of an immovable, to the other

occupants.

The nonperformance also entitles the lessee to apply for a reduction of rent; where the

court grants it, the lessor, upon remedying his default, is nonetheless entitled to the re-

establishment of the rent for the future.

The presence of vermin (such as in Lunneterie Newlook inc. v. Édifice 1616 Ste-Catherine Ouest

Le Faubourg, 2012 QCCS 3855 (CanLII)) or odors (such as in Société de gestion Complan

(1980) inc. v. Bell Distribution inc., 2011 QCCA 320 (CanLII)) have been considered “serious”

enough to allow the termination of the lease.

It should be noted that in King George Electronique inc. v. 2842122 Canada inc., 2006 QCCA

764 (CanLII), the Court of Appeal confirmed the decision of the Superior Court to refuse to

terminate a lease because, even though there were some water infiltrations, these inconveniences

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could not be considered “serious” to the point where the tenant could obtain the termination of

the lease.

The decision of the Court to allow the termination of the lease or to instead allow a reduction of

rent will vary depending of the facts of each case.

“Form or Destination of the Leased Property”

Another fundamental obligation of the lease under Quebec law is with regards to the

conservation of the “form or destination” of the rented premises or, in other words, the obligation

for both the tenant and the landlord to use the premises in for the purpose agreed to between the

parties. This obligation is set out under Article 1856 CCQ:

1856. Neither the lessor nor the lessee may change the form or destination of the leased

property during the term of the lease.

This Article of the code is, in most cases, used by a tenant alleging that modifications made by

the landlord substantially changed the form or purpose of the rented premises, hence allowing

the tenant to terminate its lease. Although nothing prevents a landlord from using this same

Article to force a tenant to abide by the use clause agreed to under the lease.

One of the most important decisions rendered with regards to change of form or destination is

Aéroports de Montréal v. Hôtel de l'Aéroport de Mirabel Inc., 2003 CanLII 22050 (C.A.). In this

case, a hotel was built near the Mirabel (north shore of Montreal) airport by the Canadian Pacific

Railway, who itself was renting the land from Transport Canada. In 1988, the lease was assigned

by Canadian Pacific Railway to Hôtel de l'Aéroport de Mirabel Inc. In 1992, Transport Canada

rented its airports to Aéroports de Montréal, who then assumed Transport Canada’s obligations

under its various leases. In 1996, Aéroports de Montreal decided to relocate all the international

flights from its airport located in Mirabel to the airport located in Dorval (on the island of

Montreal). Following the implementation of this decision in 1997, the consequences were

catastrophic for the hotel. A lawsuit was instituted even though there was no specific covenant or

guarantee under the lease with regards to the level of traffic at the Mirabel airport.

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Both before the Superior Court and the Court of Appeal, the tenant prevailed. Indeed, the Courts

considered that the change implemented by Aéroports de Montréal with regards to international

flights was obviously detrimental to the situation of its tenant and compared the situation to the

landlord of a shopping centre letting its vacancy rate increase without acting accordingly in order

to correct the synergy lost. In both situations, the termination of the lease was an option available

for the tenant. In this case, not only did the Courts allow the termination of the lease, but it also

compensated Hôtel de l'Aéroport de Mirabel Inc. for its damages (loss of profits, actual and

future) for an impressive amount of $17,755,000.

In Immeubles Gabriel Azzouz inc. c. Salon d'optique Fernand Ghobril inc., 2008 QCCA 135

(CanLII), the Court of Appeal concluded that the fact that the landlord let an anchor tenant, in

this case a movie theater, leave the commercial centre, was the equivalent of changing the

destination of the leased premises. Indeed, when the tenant initially accepted to lease the

premises, the shopping centre was occupied at 90%, but the loss of the movie theatre made that

number drops drastically. The tenant was allowed to terminate its lease and to obtain $11,044.33

in damages.

Conclusion

Under Quebec law, the CCQ plays a central role when a Court must decide the interpretation of a

lease or of the proper sanctions to apply. Although the parties are allowed to modify or adapt the

relevant Articles of the CCQ to their needs, if an unknown or unforeseen situation arises and the

lease was not adapted to this modification of the relevant facts, the Court will turn to the CCQ

for help. In the end, even if there is flexibility as to how the parties can draft the conditions they

agree on, for their contract to be considered a lease, the landlord needs to provide the tenant with

peaceable enjoyment of the leased property and to maintain the premises in the form and

destination initially intended.

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