In commercial leasing in British Columbia, a recent case has shed light on the legal ramifications of breaching a lease agreement. The Court of Appeal decision released on November 21, 2024 in Centurion Apartment Properties (Scott Road 1) Inc. v. Piquancy Enterprises Ltd., provides valuable insights for both landlords and tenants of commercial properties, underscoring the importance of understanding one’s rights and obligations.

What Is a Commercial Lease?

A commercial lease is a legally binding contract between a landlord and a tenant, granting the tenant the right to use commercial property for a specific purpose and period.

Unlike residential leases, which are heavily regulated by the Residential Tenancy Act, commercial leases have less statutory protection.

This means the terms of the lease are paramount, and the landlord has greater freedom to negotiate terms and conditions.

Repudiation of a Commercial Lease

Repudiation occurs when one party to a contract demonstrates, through words or conduct, a clear intention not to perform their obligations.

In the context of a commercial lease, this could be the tenant’s refusal to pay rent or the landlord’s failure to maintain the property in a habitable condition.

The Centurion Apartment Properties Case

The case involved a 10-year commercial lease between Centurion Apartment Properties (landlord) and Piquancy Enterprises Ltd. (tenant).

The tenant intended to operate a fast-food franchise on the premises. However, a significant issue arose when the tenant discovered the premises lacked the necessary ventilation for grease-laden vapours, a requirement for their business operation and mandated by the City of Surrey’s bylaws.

Despite waiving several conditions precedent in the lease agreement, including satisfaction with the premises’ “as-is, where-is” condition and approval of their intended use by the City of Surrey, the tenant refused to take possession or pay rent.

On the part of the tenant, this constituted a repudiation of the lease.

The Landlord’s Remedies

When a tenant repudiates a lease, the landlord has two primary remedies:

• Accept the Repudiation: This terminates the lease, and the landlord can sue for damages, including unpaid rent and future losses. Based on the common law principle of mitigation in breach of contract, the landlord here has the responsibility to mitigate its losses.
• Affirm the Lease: The landlord can keep the lease in effect and sue for the unpaid rent as a debt. In this scenario, the landlord is not obligated to mitigate losses by finding a new tenant.

In this case, the landlord initially chose to affirm the lease; it was not until February 2023 that the landlord accepted the tenant’s ongoing repudiation and terminated the lease.

The landlord then re-let the premises to a new tenant at a lower rent.

Mitigation of Losses

Mitigation of losses refers to the legal principle that a party harmed by a breach of contract must take reasonable steps to minimize its losses.

In the context of a commercial lease, after accepting the repudiation, the landlord has a duty to mitigate losses by making reasonable efforts to re-let the premises.

Justice Grauer, writing for the Court of Appeal, clarified in Centurion Apartment Properties (Scott Road 1) Inc. v. Piquancy Enterprises Ltd. that when a landlord affirms a lease after repudiation, there is no duty to mitigate. The rationale is that in this event, the landlord’s claim is for the rent owed under the contract, not damages.

However, once the landlord accepts the repudiation and terminates the lease, a duty to mitigate arises.

Onus of Proof

The court emphasized that the onus of proving a failure to mitigate lies with the tenant, not the landlord. In this case, the tenant failed to meet this burden.

Lessons Learned

The Centurion Apartment Properties case offers several key takeaways:

• Due Diligence: Tenants must conduct thorough due diligence before entering into a commercial lease to ensure the premises are suitable for their intended use.
• Conditions Precedent: Tenants should carefully consider the implications of waiving conditions precedent in a lease agreement. Business owners need to bear in mind that in commercial dealings, whether it is commercial property purchases or leasing, conditions precedent are a main source of contention, and the law in certain aspects is unsettled.
• Repudiation: Both landlords and tenants should be aware of the consequences of repudiating a lease.
• Mitigation: Landlords have a duty to mitigate losses only after accepting repudiation and terminating the lease.
• Onus of Proof: The onus of proving a failure to mitigate, when it was raised by the tenant as a defence, rests with the tenant.

Landlord’s Right to Damages

It’s important to reiterate that when a landlord affirms a lease after repudiation, they are entitled to recover the unpaid rent, not damages.

This distinction is crucial because it means the landlord does not have to take steps to reduce their losses (mitigation) during the period they choose to keep the lease in effect.

Landlord’s Steps to Take to Reduce Risks

The Centurion Apartment Properties case serves as a timely reminder of the complexities of commercial leasing in British Columbia.

By understanding the legal principles surrounding repudiation, mitigation, and the onus of proof, both landlords and tenants can better protect their interests and navigate the challenges that may arise during the life of a commercial lease.

Roland Luo: Offering Experienced Advice in Vancouver Commercial Lease Disputes

For the past two decades, our firm developed knowledge in commercial disputes involving leasing, financing and purchasing. Should you encounter such a dispute, contact Roland Luo.

Located in downtown Vancouver, Roland Luo proudly represents clients throughout British Columbia, as well as clients across Canada and the United States. To schedule a confidential discussion, contact us online (the more efficient method) or by phone at 604-800-4628.