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Ontario Court of Appeal clarifies the relationship between a Covenant for Operation and a Clause that sets the Tenant’s Hours of Operation

Jan 30, 2019

A recent decision by the Ontario Court of Appeal illustrates that there is a fundamental commercial difference between a provision directed at the hours of the day a tenant must operate and a provision that requires the tenant to carry on business on a continuous basis. In Vista Sudbury Hotel Inc. (Rainbow Value Centre) v. The Oshawa Group Limited, it was held that a continuous operating covenant cannot be watered-down by an ambiguous hours of operation provision. 

The Facts

Vista Sudbury Hotel Inc. (the “Landlord”) owned a shopping mall in Sudbury. Zellers Inc. (the “Tenant”) operated a retail store in the mall for many years.

In February 2004, the Tenant advised the Landlord that it intended to cease operations in the premises in May 2004. The lease did not terminate until April 2005.

Multiple provisions of the lease required the Tenant to continuously, actively and diligently carry on business in the leased premises for the term of the lease (the “Continuous Operating Covenants”).

Nonetheless, the lease also required the Tenant to remain open for business, during minimum hours of business on days when: (1) 80% of the rentable area of the commercial complex; and (2) the “Department Store”, were open for business in substantially the whole of such respective premises (the “Business Operation Provision”).

Neither condition of the Business Operation Provision was met at the time that the Tenant advised the Landlord that it intended to cease operations. The term “Department Store” in the lease referred to the Eaton’s store in the mall. The Eaton’s store had been the anchor tenant of the mall; however, it had ceased operations in 1999 when Eaton’s went bankrupt. No tenant had replaced Eaton’s in the mall. In addition, 80% of the rentable area of the commercial complex was not open for the conduct of business.

The Landlord brought a claim against the Tenant and argued that the Tenant was obligated under the Continuous Operating Covenants to operate its business until the lease ended in April 2005. The Tenant closed the store in May 2004, but the Tenant continued to pay rent and perform its maintenance and repair obligations under the lease until the termination date of the lease.

The Landlord sued the Tenant, claiming that its premature departure from the mall caused significant damages to the Landlord beyond the amounts owed for rent, maintenance and repairs.

The Tenant defended the claim and argued that the Business Operation Provision conditions were not met and the Tenant was therefore entitled to close its store.

The Landlord argued that the Business Operation Provision could not reasonably be read as overriding the expressed Continuous Operating Covenants, which appeared unqualified in two places in the lease.

The trial judge agreed with the Tenant and held that, under the terms of the lease, the Tenant was entitled to close its store when it did. The trial judge reasoned that the Tenant’s duty to continuously operate its store was qualified by the Business Operation Provision such that the Tenant was only required to open for business when the two conditions were met.

The Landlord appealed the trial judge’s decision.  The Court of Appeal agreed with the Landlord and overturned the trial judge’s decision.

On appeal, it was held that, on a plain reading, the Continuous Operating Covenants imposed an obligation on the Tenant to carry on business in the leased premises for the term of the lease.  It was also held that, on an equally plain reading, the Business Operation Provision was intended to set the Tenant’s hours of operation but did not eradicate the requirement that the Tenant carry on business.

The Court of Appeal concluded that there was a fundamental commercial difference between a term directed at the hours of the day during which a store must be open and a requirement that the store carry on business on a continuous basis. It was noted that a term that qualifies the hours of operation assumes that the store is carrying on business in the first place.

It was concluded that the trial judge’s interpretation of the lease was “clearly wrong” and the Landlord’s appeal was allowed.

The Takeaway

This case illustrates the importance of clearly expressing the intent of continuous operation obligations in a commercial lease. A provision that provides guidance on the tenant's hours of operations may not displace (or serve as) a covenant for continuous operation.  When drafting provisions dealing with operating a business, the draftsperson should be aware that the covenant to continuously operate is different than the covenant to observe certain hours of business when operating.

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