A recent decision of the British Columbia Court of Appeal is a useful caution for commercial landlords when they are considering whether there is a right to terminate a lease and what the risk might be if the termination is wrongful.
In Shanahan v. Turning Point Restaurant Ltd. [Shanahan], the tenant paid the landlord two months' base rent at the commencement of the term as a deposit (the "Deposit"). The tenant's business was not profitable and the tenant subsequently defaulted on its monthly rental payment. In response, the landlord delivered notice of default to the tenant advising that the landlord had the right to terminate the lease when the arrears reached 30 days, and advising the tenant to bring the rent up to date immediately. The tenant responded by asking the landlord to apply the Deposit it held to the rent in arrears. The landlord did not do so and purported to terminate the lease for non‐payment of rent.
At trial, the landlord argued that the Deposit was implicitly for first and last month's rent while the tenant claimed it was a general deposit which it was entitled to have applied mid‐term to any rent that might be in arrears. While the landlord could have expressly asked that the first and last month's rent be paid in advance in the course of lease negotiations, the trial judge found that the executed lease agreement made no mention of such a requirement. The tenant was therefore well within its rights to request that the Deposit be applied to the mid‐term rental arrears. The trial judge then assessed damages against the landlord as a remedy for wrongful termination of the lease. On appeal, the BC Court of Appeal upheld the trial judge’s findings but reduced the trial judge’s assessment of damages for wrongful termination.
Shanahan underlines the importance of clear drafting and carefully reviewing the terms of the lease to ensure it accurately reflects the intent of the parties. When a problem arises, it is equally important to carefully review the terms of the lease to determine whether there is a precise right to terminate. If the landlord wrongfully terminates the lease, as did the landlord in Shanahan, the landlord could be found in breach of the lease thereby entitling the tenant to terminate the lease, avoid future obligations and potentially claim damages.
In assessing the potential risks of wrongful lease termination, Shanahan also serves as a caution against assuming that the tenant has no claim for damages for wrongful termination simply because its business is not profitable at the time of termination. When assessing the quantum of damages, the court will look at a number of factors, including the potential loss of opportunity and assess the strength and weaknesses of various possibilities. Consequently, the opportunity, however remote, that but for the landlord’s wrongful termination the tenant’s business could have recovered from difficult financial circumstances and become profitable, may be considered by the court in assessing damages.
Landlords should therefore exercise caution and consider all potential factors before terminating a lease as the analysis of whether damages may be assessed against the landlord for wrongful lease termination does not end at whether the tenant’s business is profitable at the time.