In this period of moving within the realm of residential rentals, it is important to remember that although commercial lessors do not necessarily have to negotiate and sign new leases at the same time, some advice is worth repeating...all year round!
In the course of their ongoing contractual relations, lessors can effectively protect themselves from lessees who fail to fulfil their obligations, potentially without even resorting to the cumbersome and costly legal process. By making sure to include an automatic resiliation clause in its lease, a lessor can terminate the lease before term without the intervention of a court. In exercising this option, however, the lessor must be cautious. Indeed, the wrongful or abusive use of such a clause can have serious consequences. In order to avoid such a scenario, it is very useful to consider the applicable principles.
When it comes to commercial leasing, judicial resiliation is the general rule. Thus, when lessors wish to terminate a lease and evict their lessee for breach of contractual obligations, they must in principle go to the courts. There is, however, one exception to this rule. The parties to the lease may include an extrajudicial resiliation clause, also known as an automatic resiliation clause or “ipso facto” resiliation clause. The Court of Appeal of Quebec, once again, validated the lawfulness of this type of stipulation in 2013 and confirmed its scope in commercial leasing.
In this regard, three (3) conditions must be met for a lessor to be able to conclude an extrajudicial resiliation of a commercial lease:
- The lease agreement must contain a clear and plain resiliation clause.
- Lessors must be sure not to take legal action before the lease is terminated.
- Lessors must not themselves be in default of their corollary obligations to their lessee.
Effects of the automatic resiliation clause
But what exactly are the concrete effects of such a clause? In the event of a default stipulated in the lease and following notice from the lessor, such a stipulation causes the lease to be automatically terminated. From then on, it becomes illegal for the lessee to occupy the premises. The lessor may therefore require the occupant to vacate the premises in an orderly manner and within a reasonable delay. The resiliation and recovery of the premises also do not have to be submitted for prior approval by the court, making this alternative efficient and economical for any commercial lessor.
In a recent case, a merchant evicted from her premises sued the new purchaser of the building in which she operated a convenience store. In this case, the owner wanted to demolish the building to construct rental office spaces. Since the lessee had failed to comply with several of her obligations under the lease, the lessor decided to terminate the lease by invoking the extrajudicial resiliation clause. The merchant, who alleged that the lessor only sought to terminate the lease to destroy the building without financially compensating her, was unsuccessful before the Superior Court, which dismissed her claim for damages. It is interesting to note that in this case — the lessor had taken the risk of proceeding with the building demolition despite an injunctive procedure pending before the courts, but nevertheless succeeded.
An interesting option, but requiring careful application
Such a clause is an interesting, if not essential, tool for a lessor. However, where the same clause is applied in a negligent or abusive manner, the lessor may be liable to the lessee. Thus, even when the lease contains an automatic resiliation clause, lessors must always ensure that it applies to their circumstances and that it covers the lessee’s default before being able to conclude the resiliation of the contract. Moreover, while lessors have a clear right to extrajudicial resiliation, they must ensure that they are not abusive in exercising this option. In such cases, and although such a stipulation generally avoids recourse to the courts, subsequent judicial review may be necessary if the lessee decides to challenge the alleged default or the actions of the lessor. That is why forward-looking owners must exercise caution when using this tool. In addition, lessors who are at fault may be ordered to pay damages equivalent to the losses suffered by their co-contractor or worse, lessees may even be granted the right to return to the premises from which they were evicted earlier.
In a recent decision, the owner of a convenience store had been evicted from her premises by the lessor, who claimed to be applying the extrajudicial resiliation clause for default of rent payment. The merchant, through a request for an interlocutory injunction, succeeded in being allowed to return temporarily to the premises she had occupied for more than thirty years. In this case, the Court ruled in favour of the lessee, who succeeded in opposing the lessor’s failure to comply with his correlative obligation to provide her with quiet enjoyment of the premises. One can imagine the tense relation between the parties following the merchant’s return to the premises!
Moreover, in the Court of Appeal’s benchmark decision setting out the application of extrajudicial resiliation clauses in commercial leases, a lease with an automatic resiliation clause had been signed between a lessor and a restaurant owner. Shortly after the opening of the restaurant, a disagreement arose between the parties as to the payment of the rent. The lessor then invoked the extrajudicial resiliation of the lease for default of payment and ordered the restaurant owner to vacate the occupied space within 24 hours. He then had the locks changed at the restaurant. The Court found that, with regards to the peculiar circumstances of this case, the lessor was not entitled to an ipso facto resiliation and that his conduct constituted an abuse of that power. He was therefore ordered to pay compensatory damages of more than $30,000 to the evicted restaurant owner.
Although the extrajudicial resiliation clause in commercial leases is a formidable tool for dealing with recalcitrant lessees — lessors must exercise caution when using it. In summary, as the Court of Appeal so aptly put it, [Translation] “an a posteriori judicial review is, in this context, well worth an a priori judicial review”.