Hudson’s Bay Not Entitled to Relief from Forfeiture and Rent Deferral during COVID: Ontario Court of Appeal

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By: Ben Hanuka and Anthony Pugh, Law Works

In Hudson’s Bay Company ULC v. Oxford Properties Retail Holdings II Inc., an August 15, 2022, decision of the Court of Appeal for Ontario, the court examined the remedy of relief from forfeiture of a lease, and in particular s. 20 of the Commercial Tenancies Act in Ontario, and if the courts can use this remedy to shift tenants’ losses from the pandemic to landlords. The Court of Appeal dismissed HBC’s appeal and upheld the decision of a Superior Court motion judge in favour of the landlord, Oxford Properties. It held that the tenant, HBC, was not entitled to relief from forfeiture under section 20 of the Commercial Tenancies Act by reducing or abating the rent that it owed to the landlord.

The Court of Appeal also held that the lower court’s decision to allow HBC to defer rent payments under the relief from forfeiture remedy has no basis under section 20 of the Commercial Tenancies Act, since there was no evidence that HBC was unable to pay rent.

Key facts

HBC (Hudson’s Bay) has been a tenant in the Hillcrest Mall shopping centre in Richmond Hill, Ontario, since 1978. It is also a tenant of about eight other locations owned by Oxford or its affiliates. Until the start of COVID in March 2020, HBC had never been in default of its rent obligations at the Hillcrest Mall location.

Immediately at the start of COVID, it stopped paying rent. There was no evidence that it was unable to pay the rent. Rather, HBC tried to negotiate a compromise rent with Oxford.

In September 2020, HBC gave notice to Oxford that it was in breach of its obligations under the lease as landlord, by failing to make health and safety upgrades in response to COVID. HBC alleged that Oxford was not operating the mall according to “first-class shopping centre standards”.

HBC then commenced the court action. Following that, Oxford gave notice that the lease would be terminated for failure to pay rent. At the time, HBC’s arrears amounted to over $1.3 billion.

The Superior Court motion decisions

The relevant words of section 20 of the Commercial Tenancies Act read as follows:

Where a lessor is proceeding … to enforce a right of re-entry or forfeiture, whether for non-payment of rent or for other cause, the lessee may… apply to the court for relief, and the court may grant such relief as, having regard to…the conduct of the parties under s. 19 and all the other circumstances the court thinks fit, and on such terms as to payment of rent, costs, expenses, damages, compensation, penalty, or otherwise, including the granting of an injunction to restrain any like breach in the future as the court considers just.

On an interim injunction motion pending the full hearing, a judge of the Superior Court issued an order restraining Oxford from terminating the lease. He also ordered HBC to pay 50% of the arrears, and 50% of the rent going forward.

At the full hearing of the motion in the Superior Court, the court ruled that Oxford was not in breach of the lease, but that HBC was entitled to relief from forfeiture under section 20 of the Commercial Tenancies Act by allowing rent deferral. It held that, while section 20 did not allow a reduction in the rent, it allowed a deferral in the payment of rent. Thus, the judge imposed a deferent rent payment schedule.

Both parties appealed the decision to the Ontario Court of Appeal.

The Court of Appeal’s decision

HBC took the position that the very broad language of s. 20 of the Commercial Tenancies Act contemplates a wide range of remedies, including rent reductions, abatements and deferrals, and thus gives the court the power to reduce the rent that a tenant is obligated to pay. (HBC did not appeal the finding that Oxford was not in breach of the lease.)

Oxford argued that the relief from forfeiture remedy under the Commercial Tenancies Act was not intended to permit a court to rewrite the commercial bargain made by the parties, or to take into account unforeseen events that have had a negative effect on the tenant’s business.

It took the position that the Commercial Tenancies Act does not give the court the power to rewrite the lease by reducing the rent, and that the relief from forfeiture is based on preserving the contractual relationship between the parties, not changing that relationship. It argued that relief from forfeiture serves as a shield, in limited circumstances, to protect a tenant from termination of the lease, despite the tenant’s breach of the lease, but does not extend to rewriting a new lease on more favourable terms to the tenant.

As to the rent deferral issue, Oxford took the position that the Superior Court judge erred in holding that relief from forfeiture under s. 20 permitted long-term deferrals of rent payments due under the lease, or to alter the interest rate on rent arrears under the lease.

The Court of Appeal agreed with Oxford’s arguments. The key legal elements from the decision of the Court of Appeal can be summarized as follows.

1. Section 20 gives a tenant one specific remedy – relief from forfeiture of the lease, i.e., relief from termination of the lease.
2. To make the relief from forfeiture an effective remedy, the court may grant other terms that are ancillary to the central object of relief from forfeiture of the lease.
3. Reducing or abating the rent would fundamentally alter the lease. It is inconsistent with the rationale of section 20, which is to preserve the lease.  Thus, the court has no power to reduce or abate the rent under section 20, or to otherwise rewrite the terms of the lease.

The Court of Appeal agreed with the Superior Court judge that there was nothing inequitable about ordering HBC, a highly sophisticated party, to pay all outstanding rent.  It agreed with Oxford that allowing a tenant to alter a commercial bargain through section 20 of the Commercial Tenancies Act would introduce significant uncertainty into the landlord-tenant relationship.

It also held that the deferral payment schedule was not based on HBC’s ability to pay rent, since there was no evidence that HBC could not pay the rent.  Rather, the Superior Court judge intended for the rent deferral to mitigate the economic harm of COVID.  Doing so, the Court of Appeal held, was beyond the scope of the remedy in section 20 of the Commercial Tenancies Act.  Similarly, the Court of Appeal set aside any variation of the interest rate in the lease.

Ultimately, the Court of Appeal dismissed HBC’s appeal and allowed Oxford’s cross-appeal by setting aside the deferral of rent.