The contractual doctrine of “fundamental breach” is both doctrinally complex and highly contextual.  In Stearman v. Powers, 2013 BCCA 206, the Court concluded that, on the facts before it, a commercial tenant had not been justified in repudiating her lease and walking away from the premises, despite the fact that the building’s HVAC system filled her store with a foul odour.

While the case ultimately turned on its unique facts, the Court in Stearman provides useful guidance regarding the threshold for categorizing a problem with rented premises as a “fundamental breach” of contract, as well as the scope of a tenant’s right of “quiet enjoyment.”

The tenant leased a storefront to carry on a retail clothing business.  With the first arrival of warm weather, she turned on the building’s HVAC system and the store quickly filled with an unpleasant “creosote-like odour.”  The tenant complained to the landlord.  She also brought in a technician who was able to reduce the problem, but only temporarily.  Claiming that the odour made it impossible for her to carry on her business, the tenant ceased paying rent, returned her keys, and abandoned the premises.

The parties sued each other.  The trial judge sided with the tenant, finding that the landlord’s inability to solve the problem had violated the covenant of quiet enjoyment and constituted a fundamental breach justifying the tenant in repudiating the lease.

The BCCA reversed on both points.

Alleged Breach of the Covenant of Quiet Enjoyment:  Addressing the covenant of quiet enjoyment — which is often explicit but will, in any event, be implied in every lease — the Court noted that “[s]uch a covenant protects against a landlord’s derogating from his own grant.”  It is designed to ensure that the landlord does nothing to “derogate from his grant [to the tenant] of exclusive occupancy without interference.”

The Court of Appeal found that no such derogation had occurred because:

  1. there was no evidence that the odour was caused by any act or omission of the landlord or his agent;
  2. the odour was not necessarily of a “grave and permanent nature”; and
  3. in any event, the terms of the lease expressly stated that “the landlord would not be responsible for any defect in or changes of condition affecting the premises, howsoever caused.”

Alleged Fundamental Breach of the Lease:  The phrase “fundamental breach” often creates confusion because it addresses two distinct legal concepts: (1) a breach of contract so significant that it goes to “the very root” of the parties’ agreement and justifies its unilateral termination; and (2) a breach of a type that limits the efficacy of an exculpatory clause.

The tenant in Stearman v. Powers alleged that there had been a breach falling into the first category — i.e., that “the existence of the odour, or the landlord’s failure to correct it, deprived the tenant of substantially the whole benefit of the lease, thus undermining the foundation of the contract.”

As with the alleged breach of quiet enjoyment, the Court of Appeal concluded that the tenant had failed to make out her case for fundamental breach:

  1. The lease required the tenant, rather than the landlord, to service and repair the HVAC system, and she had taken only minimal measures in this regard.  Thus, it was not clear that the landlord had been guilty of any breach of contract, fundamental or otherwise.
  2. Equally importantly, the existence of the odour — while clearly unpleasant — was not “fundamental” in nature.  It did not “mak[e] further performance impossible [nor] depriv[e] the tenant of substantially the whole benefit which it was the intention of the parties to the lease that the tenant should obtain as consideration for the rentals it was obliged to pay.”  The tenant did not need to shut down her business, and the odour had not been shown to present a danger to health.  Indeed, the tenant was not even able to establish that she had lost sales or profits as a result of the odour.

The key lesson for landlords is to ensure that you protect yourselves with well-drafted lease provisions.  The lesson for tenants is two-fold — i.e., insist, if possible on better lease terms, and, in any event, fully document your own due diligence efforts, along with your economic losses, before attempting to repudiate the lease.