The province’s top court has clarified the law surrounding when a tenant breaks a commercial lease.
The B.C. Court of Appeal has ruled in favour of landlords by saying they are contractually entitled to unpaid rent, and that the burden is on tenants to prove that a landlord failed to mitigate its losses.
In a Nov. 21 ruling, judge Christopher Grauer overturned a trial decision involving a tenant that leased premises to operate a fast-food franchise in Surrey. After the tenant realized the premises were unsuitable for a fast-food restaurant, it “repudiated” the lease.
The lower court ruled that the landlord waited too long to accept this repudiation, and reduced its claim for damages on the basis that the landlord failed to mitigate its damages by not finding another tenant quickly enough. Mitigation is a legal duty imposed on parties to take prompt action to try and reduce the harm caused to them.
On appeal, Grauer ruled that the lower court incorrectly applied the law. He said landlords are contractually entitled to the rent, and that once the contract comes to an end, it's up to the tenant to prove that the landlord didn’t take swift action to minimize its losses.
“Where a landlord affirms the lease after the tenant repudiates it, its claim is for rent owing under the lease, not for damages,” Grauer explained.
“The law imposes no duty on the landlord to mitigate or otherwise act to reduce that claim. It is entitled to the rent as a matter of contract. After a landlord accepts the repudiation, then the contract is at an end and the landlord is entitled to claim damages for its breach. In this event, following termination of the contract, a duty to mitigate indeed arises but the law imposes on the tenant the onus of demonstrating that the landlord has failed to mitigate.”
The case involved landlord Centurion Apartment Properties (Scott Road 1) Inc. and tenant Piquancy Enterprises Ltd.
Piquancy had signed a 10-year commercial lease with Centurion so that it could operate a fast-food restaurant in Surrey. But there was a problem. The premises were not equipped with venting for grease-laden vapours, which the tenant needed.
Due to the nature of the building, the premises could not practicably accommodate the venting required by Surrey bylaws. However, Piquancy had already waived various conditions about the property’s suitability, and it was therefore an unconditional lease.
Piquancy was supposed to take possession of the premises on May 1, 2022, and start paying rent as of July 1, 2022. However, it did not take possession and broke the lease. Centurion did not accept this, and affirmed the lease. In December 2022, it applied the security deposit toward the overdue rent.
On Feb. 3, 2023, Centurion finally accepted Piquancy’s continuing repudiation and terminated the lease. It re-leased the premises to a new tenant with a May 1, 2023, start date with payments beginning Sept. 1, 2023, at a rent about 10 per cent less than what was payable under Piquancy’s lease.
The parties sued each other, with the landlord claiming $105,679 based on the fact that it was not paid the rent it was owed, and that the new tenant it found was now paying a lesser amount than what Piquancy would have been paying.
The trial judge said the landlord should have terminated the lease three months after Piquancy’s first lease payment was due. The trial judge therefore reduced Centurion’s entitlement to $30,016.39.
On appeal, however, Grauer said this approach was legally incorrect.
“Centurion demonstrated that it did indeed re-let the premises, which, of course, reduced the losses it would otherwise sustain from Piquancy’s breach of its 10-year lease,” he said.
“The burden then fell on Piquancy to demonstrate that this was not reasonable mitigation in the circumstances: for instance, because Centurion delayed unreasonably in going to market after terminating the lease, or that the rent payable under the new lease was below market rents for similar premises in the area.”
Grauer continued: “It follows, in my respectful view, that the [trial] judge erred in reducing this part of Centurion’s claim by 50 per cent—or at all—because of the failure to mitigate. There was no evidence to support the suggestion that Centurion’s steps in re-letting the premises did not constitute reasonable efforts to mitigate its damages.”
The appeal court replaced the roughly $30,000 awarded to Centurion at trial with the approximately $100,000 that it originally sought.
