When two parties enter into a lease for a commercial property, they typically sign a lease agreement that reflects the terms of the deal in terms of how much rent must be paid each month and how long the lease will last. Such contracts also often include clauses with respect to the use to be made of the property and the kind of business the lessee (the entity renting the premises) intends to run on the premises. But what happens if it turns out that the rented premises are not appropriate for the business the lessee seeks to conduct? And what happens if the lessee refuses to take possession of the property because it is not suited to their purpose despite having signed a rental agreement for a specific period? The Supreme Court of British Columbia helpfully addresses all those questions in the recent decision Piquancy Enterprises Ltd. v Centurion Apartment Properties (Scott Road 1) Inc.
Two Parties Negotiate a Commercial Lease
On February 15, 2022, the plaintiff, Piquancy Enterprises (“Piquancy”), entered into a commercial lease agreement with the defendant, Centurion Apartment Properties (Scott Road 1) Inc. (“Centurion”), to lease Centurion’s commercial property located in Surrey, British Columbia. The lease agreement term was from July 1, 2022, until June 30, 2023. Before the parties signed the lease agreement, Centurion knew that Piquancy intended to open a fast-food restaurant. As such, Centurion advised Piquancy before the lease was signed that the premises did not have the venting necessary to operate a food service establishment and that Piquancy may have to obtain an ecological device to facilitate the use of the premises as a restaurant. Despite this warning and advice, Piquancy entered into the lease without conducting any further due diligence regarding the ventilation of the premises. Each of the directors of Piquancy signed the lease as an indemnifier.
The Lease is Broken on Day One of the Lease Term
After it had signed the lease, Piquancy realized that the premises needed to be more suited to their purpose, given that they could not operate a restaurant in that location. As such, Piquancy declined to take possession of the premises and never made a single rent payment to Centurion in accordance with the terms of the commercial lease. Centurion terminated the lease on February 3, 2023, and re-letted the premises to another client on May 1, 2023. Centurion obtained rent for the new lease, which was less than Piquancy had agreed to pay.
Failure to honour the contract between the parties prompted Centurion to sue Piquancy to seek enforcement of the lease; Centurion took the position that Centurion had improperly induced it into signing the lease or, in the alternative, that the lease was unenforceable because of mistake or frustration. As of April 1, 2023, rent unpaid by Piquancy amounted to $51,203.71.
How Does the Court Determine Who Broke the Lease?
In deciding whether damages are due for breach of a commercial lease, the court must first determine whether either party did breach the contract. In this respect, courts typically begin with a review of the contract in question – in this case, the commercial lease between Piquancy and Centurion. In this case, the commercial lease dictated that the “permitted use” of the premises was for operating a fast-food restaurant. The lease further stated, “The Tenant acknowledges having inspected the Premises and accepts the same on an “as is” basis.” The court noted that Piquancy did not raise any issues with Centurion with respect to the use of the property until after they had already signed the lease.
Moreover, the court noted that, when interpreting the terms of a commercial lease, “the court may review the terms of the offer to lease, including the waiver of the tenant conditions by Piquancy and the reference to indemnifiers contained therein.” To that end, the court noted that, before execution of the lease, Piquancy had waived a number of conditions, including that it be satisfied with Centurion’s form of lease, the condition of the premises, the availability and suitability of the premises for its use, and whether the City of Surrey would approve Piquancy’s proposed use of the property. As noted by the court, these “tenant conditions operated solely for the benefit of Piquancy. Piquancy failed to perform due diligence prior to waiving the tenant conditions and signing the lease. It is therefore liable for its breach of the terms of the lease”.
The Legal Doctrines of Mistake and Frustration
Concerning Piquancy’s argument that they should not be found to be in breach of the lease due to a mistake, the court noted that Piquancy had had ample opportunity between negotiation and execution of the lease to conduct an evaluation of the premises and assess its suitability for their purpose. The failure of Piquancy to take the appropriate steps to conduct the necessary due diligence “are not the function of a mistake”. Furthermore, the court was satisfied that the lease had not been frustrated by the refusal of the municipality to allow a restaurant to be operated on the premises, as that possibility had been contemplated by one of the tenancy conditions that Piquancy had decided to forego. As such, “Piquancy’s failure to confirm that the premises could be used as a restaurant prior to waiving the relevant tenant condition and executing the lease is its failure and its responsibility.” As a result, there was no doubt that Piquancy had breached the commercial lease and was liable to pay damages for that breach.
Assessment of Damages for Breach of the Commercial Lease
Centurion terminated the lease on February 3, 2023, at which point the unpaid rent pursuant to the lease for the period from July 1, 2022, to April 1, 2023, was $51,203.71. Centurion was able to re-let the premises to a different tenant with payments to commence on September 1, 2023, with the anticipated lease payments constituting $54,475.68 less, over the course of the lease term, than the amount that Piquancy would have owed under the terms of its lease with Centurion. Centurion sought $105,679 in damages, which is the total of the rent unpaid by Piquancy and the rent money Centurion lost by renting the premises to another tenant at a lower rate of rent.
In assessing damages, the court noted that Piquancy never took possession of the premises. Rather, in early May of 2022, Piquancy had advised Centurion that the premises could not be operated as a fast-food restaurant unless substantial, expensive, time-consuming renovations were undertaken. Given the inconvenience this would have caused other tenants, the court was satisfied that neither party “seriously considered” it an option to undertake such renovations. As such, the court found it unreasonable for Centurion to wait until February of 2023 to terminate the lease. Rather, the court concluded that Centurion should have ended the lease “no later than October 1, 2022, three months after the date on which Piquancy was required to make its first lease payment and five months after the fixturing period commenced. This is because as of May 12, 2022, Centurion knew that Piquancy could not use the premises for the restaurant”. Furthermore, Centurion failed to provide any evidence of its attempts to mitigate its losses, other than finding a new tenant to occupy the premises. The court found, therefore, that Centurion had failed to take appropriate steps to mitigate their losses in that it had provided no evidence of efforts undertaken to re-let the premises nor of market conditions and lease terms available at the time. As such, Centurion’s claim for $54,475,68 (the difference between the amount Centurion earned under its new lease agreement and that payable under the contract with Piquancy) was unsupported by the evidence, so the court discounted the claim by 50 per cent, to $27,237.84.
The court also concluded that Piquancy was liable for its failure to pay rent for the first three months of the lease term, July, August and September of 2022, which amounted to $20,770.57. After reduction of the security deposit, which amounted to $17,992.02, the net rent owed by Piquancy to Centurion was established as $2,778.55. All told Piquancy was ordered to pay Centurion $30,016.39 for its breach of the lease agreement with Centurion.
Contact Meridian Law Group Today for Your Commercial Litigation Needs
If you are involved in commercial litigation of any kind, whether related to a business dispute, a real estate transaction gone awry, a disagreement with respect to construction, or insurance litigation, you are in need of knowledgeable legal assistance. Fortunately, the commercial litigation team at Meridian Law Group are here to help. From our offices in downtown Vancouver, British Columbia, Meridian Law Group is proud to provide British Columbians from all over the province with competent, capable, savvy assistance for their commercial litigation matters.
Contact Meridian Law Group online or by telephone at (604) 687-2277 to schedule a confidential consultation. One of our friendly, knowledgeable staff will be pleased to listen to your concerns and help you plan a strategy for advancing and protecting your interests.
