Although commercial real estate law has developed considerably in the past half century, at least one legal precedent has remained unchanged: where a landlord rejects a tenant’s repudiation of a lease, the landlord does not have a duty to mitigate. First established by the Supreme Court of Canada in a 1971 decision, Highway Properties v Kelly, Douglas & Co.[1], this precedent was most recently followed in a recent Court of Appeal for Ontario decision, Canada Life Assurance Company v Aphria Inc.[2]
Background:
The dispute in Canada Life concerned the early termination of a commercial lease for office space in downtown Toronto. In August 2021, the tenant served a notice of repudiation on the landlord. The landlord did not accept the repudiation. The landlord advised the tenant it was obligated to pay the remaining rent under the lease as it came due, regardless of occupancy status. In response, the tenant advised that the landlord had a duty to mitigate its damages. On January 1, 2022, the landlord sued the tenant seeking both unpaid rent and future rent.
Lower Court Decision:
In its motion for summary judgment, the landlord argued that since Highway Properties was applicable, it had no obligation to mitigate and was therefore entitled to the rent owing under the lease. The tenant argued that the court should reconsider the Highway Properties precedent as in all other areas of contract law, an innocent party is expected to take reasonable steps to mitigate its losses and failure to do so results in a corresponding reduction in any damages award.
The motion judge granted summary judgment for the rent owing but declined to grant an award for future rent.[3] Even if a landlord does not have a duty to mitigate, it is still obligated to account for any mitigation that occurs.[4] Since future mitigation is an incalculable unknown variable, the motion judge held that the landlord may require a further action for any future unpaid rent.[5]
Appeal Decision:
The tenant appealed, arguing that the requirement to mitigate should apply to commercial landlords based on the duty of good faith as an organizing principle of contract law, the doctrine of efficient breach, and the development of real estate law since Highway Properties.
The Court of Appeal rejected the appeal and upheld the motion judge’s decision.[6] It held that the Supreme Court had definitively dealt with repudiation of commercial leases and the duty of mitigation in Highway Properties.[7] The Court of Appeal was unwilling to entertain the tenant’s attack on that precedent based on arguments of duty of good faith, doctrine of efficient breach, and development of real estate law.[8]
Conclusion:
The events in Canada Life are not uncommon.[9] Where commercial tenants seek to repudiate their lease, they should remain mindful of potential financial implications where landlords elect to keep the lease in effect. While that result may seem harsh, the Court of Appeal held that a change to the law would have to come from the Supreme Court or the Ontario Legislature.[10] For now, the Highway Properties precedent remains authoritative jurisprudence.
Footnotes
[1] [1971] SCR 562 [“Highway Properties”].
[2] 2024 ONCA 882 [“Canada Life”].
[3] Ibid at para 8.
[4] Ibid.
[5] Ibid.
[6] Ibid at para 20.
[7] Ibid at para 22.
[8] Ibid at para 28.
[9] The British Columbia Court of Appeal recently considered similar circumstances and decided the same way. See Centurion Apartment Properties (Scott Road 1) Inc. v Piquancy Enterprises, Ltd., 2024 BCCA 387.
[10] Canada Life at para 31.
David Yun is an associate at Theall Group LLP and is developing a broad commercial litigation and insurance coverage practice. Prior to joining Theall Group LLP, David completed a summer term at a national Canadian charity in addition to completing a summer and articling term at a mid-sized full-service firm in downtown Toronto.
For more information, visit https://theallgroup.com/
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