It has been generally thought that a tenant who has a lease for a specific term (without the landlord holding any early termination rights) would be able to have the courts protect that term from any actions by the landlord to end the lease early. However, a recent abandonment of an appeal to the Supreme Court of Canada of a British Columbia case has resulted in uncertainty over how secure a commercial tenant can be in relying upon its right to quiet enjoyment of its premises under a lease.
The Evergreen Case
In the case of Evergreen Building Ltd. v. IBI Leaseholds Ltd.,  BCCA 583 (B.C.C.A.), Evergreen Building Ltd. (“Evergreen”), a landlord of an office building in downtown Vancouver, wished to redevelop its premises in order to improve the economic viability. It sought to demolish the existing building and replace it with high-end residential strata units.
IBI Leaseholds Ltd. (“IBI”) was a tenant in the subject property and was in the first year of a five year lease which contained an option to renew for a further five year renewal term. IBI was one of the last remaining longterm tenants in the building. Evergreen gave notice to IBI that it would not be able to comply with the terms of the lease and advised IBI that it expected them to seek alternative space and mitigate their damages. The lease did not contain a clause that allowed for early termination or for termination due to demolition of the building. When IBI refused to vacate, Evergreen commenced proceedings in the Supreme Court of British Columbia for reentry and a declaration that damages were an appropriate remedy. IBI sought interim and permanent injunctions to enjoin Evergreen from breaching the covenant of quiet enjoyment in its lease, both of which were granted.
Evergreen appealed to the British Columbia Court of Appeal, where the Court overturned the permanent injunction and held that the lease was more akin to a contractual arrangement than an interest in land. In its decision, the Court held that the lower court failed to consider the equities of Evergreen and IBI, which included the relative hardship of holding Evergreen to the strict terms of the lease as compared to the uniqueness of the premises.
The Theory of Efficient Breach
The reasoning of the Court of Appeal was based on a theory of “efficient breach.” This theory, which evolved in the U.S. in the early 1970’s, is based on the idea that on certain occasions the outcome of a breach can actually improve the situation of both parties. An example of a case of efficient breach is as follows:
Party A and Party B have a contract whereby Party A is to supply widgets to Party B for $100. A third party approaches Party A and offers $200 to buy the same widgets. Under the theory of efficient breach, Party A could breach its agreement with Party B so as to sell the widgets to the third party and compensate Party B in damages.
If it costs Party B an additional $50 to obtain replacement widgets all parties “benefit” from the breach. Party B would obtain its widgets and Party A would end up with an additional $50 (the $100 increase less the additional amount required by Party B for re place ments). Under the theory of efficient breach everyone benefits or is at least in the same position as prior to the breach.
In the Evergreen case, the Court of Appeal held that Evergreen would be able to make a greater profit by building the residential tower and IBI could be compensated by its loss of the lease with an award of damages. The Court stated that specific performance of the lease should not be granted, as it would result in a needless loss of profit for Evergreen. The case was sent back to the lower court for an assessment of IBI’s damages.
In reaching its decision on applying the efficient breach theory, the Court of Appeal relied upon the Supreme Court of Canada decision of Bank of America Canada v. Mutual Trust Co.,  2 S.C.R. 601. However, the Bank of America case was not a case dealing with a lease or land issues, but instead was a determination of damages due to a breach of contract. In fact, the Supreme Court of Canada, at paragraph 61, held:
This is not a case of efficient breach. The respondent’s gains have come at the appellant’s expense. An award of compound interest will prevent the respondent from profiting by its breach at the expense of the appellant.
The Court of Appeal in the Evergreen case has now taken the theory of efficient breach beyond the pure contractual setting and has applied it to a real property setting, treating all leases as identical in nature to that of a basic contract (and seemingly ignoring that leases have historically been held to be interests in land as well as contracts). This is also somewhat disturbing as the extension of this theory was based on a Supreme Court of Canada decision that expressly stated that it was not an efficient breach case. Due to the abandonment of the appeal to the Supreme Court of Canada by IBI, com mercial tenants in British Colum bia can no longer comfortably rely upon their right to quiet enjoyment of their premises for the term of their lease and any rights to renewals thereof. Land - lords now arguably have the ability to unilaterally terminate a lease, regardless of the terms, in order to generate the maxi mum profits from the property, as long as the tenant can be compensated in damages.