It’s not every day that matters of commercial leasing law make their way to the Supreme Court of Canada (the “SCC”). To ascend to the SCC, the case must first proceed through the initial trial level, followed by an appeal at the provincial appellate court. After that, even if one (or more) of the litigating parties is unhappy with the result, taking the case to the SCC is not guaranteed. The SCC must grant leave (i.e., permission), which it only does when it is satisfied that the case raises an important legal question of broad public importance. The question raised must transcend the parties to the case and have application to Canadians generally.
Recently, the SCC granted leave to the tenant’s appeal in the case of The Canada Life Assurance Company et al v. Aphria Inc. (“Aphria”). As we reported in our earlier News ReLeases (see “When the Tenant Wants to Dump the Lease and the Landlord Doesn’t, Whose Problem is It?” and “Top Courts in Ontario and B.C. Confirm Landlord’s Rights When Tenant Tried to Dump the Lease”), in Aphria, the tenant decided that it no longer needed the premises. It unilaterally sent the landlord a payment for a few months’ rent and advised that it considered the lease to be at an end (i.e., the tenant “repudiated” the lease).
Landlord Options
As set out by the SCC in its seminal 1971 decision in Highway Properties Ltd. v. Kelly, Douglas and Co. Ltd. (“Highway Properties”), when faced with a tenant’s repudiation, a commercial landlord has four mutually exclusive options. They are:
(1) reject the tenant’s repudiation, affirm the lease, and sue the tenant for rent as it falls due on the footing that the lease remains in force;
(2) terminate the lease, retaining the right to only sue for arrears accrued to the date of termination;
(3) sublet the premises on the tenant’s behalf; or
(4) terminate the lease, retaining the right to sue for arrears accrued to the date of termination and for post-termination damages (normally in the form of rent over the unexpired balance of the term).
The first three options pre-date Highway Properties. They are rooted in the notion that a lease is a conveyance (i.e., a transfer) of an interest in land and is therefore governed by property law. In Highway Properties, however, the SCC declared that a commercial lease is not merely a conveyance but is also a contract, and that landlords should have resort to the full armoury of contractual remedies for repudiation of a commercial lease. On that basis, in Highway Properties, the SCC expanded the remedies available to a commercial landlord to include the fourth contractually-based option (that is, terminate the lease and sue for post-termination damages).
Damages Must be Mitigated
If a landlord elects the fourth option, it is only entitled to recover damages to the extent the damages could not have been reasonably avoided. This is often referred to as the “duty to mitigate”. When terminating a commercial lease, mitigation generally means that the landlord must take reasonable steps to re-lease the premises.
However, if a landlord elects the first option (that is, reject the tenant’s repudiation and affirm the lease), then it does not need to mitigate, since its claim is not for damages (in the form of unpaid rent over the unexpired balance of the term); rather, its claim is for rent under a lease that remains in force. Canadian courts of all levels have confirmed that where a landlord elects to keep the lease in force, no duty to mitigate arises and the tenant remains obligated to pay the rent as its falls due.
Is a Lease Contract or Real Estate?
The absence of a duty to mitigate where a landlord elects to keep the lease in force is predicated on the basis that a lease is a conveyance of an interest in land. Upon a landlord granting the leasehold interest and the tenant taking possession of the premises, the interest in land vests with the tenant, and the tenant is obligated to pay the agreed amount (i.e., the rent – usually in the form of monthly installments over the course of the term). In other words, the transfer (i.e., the conveyance) occurs at the outset of the tenancy; rent over the term is the consideration for such transfer, and neither party is at liberty to undo the transfer during the term.
This stands in contrast to contract theory. The law of contract does not generally require the parties to perform their contractual obligations, but rather requires the breaching party to compensate the non-breaching party for its losses that could not have been reasonably avoided. In other words, on a purely contract law analysis, a tenant may unilaterally terminate a lease. This termination will render the tenant responsible for its landlord’s losses, but the landlord must mitigate those losses by looking for a replacement tenant.
In Aphria, the landlord elected to keep the lease in force and sued the tenant for unpaid rent as it fell due.
The tenant in Aphria argues that the law must change. It wants the SCC to impose a duty to mitigate on a landlord regardless of a landlord’s selected course of action.
According to the tenant, allowing a landlord to affirm the lease creates economic waste, as the premises sits vacant. The landlord in Aphria has pointed out that a tenant may assign the lease or sublet the premises, and that a tenant should not be able to pass the burden of finding a replacement tenant onto a landlord, as that burden was created when the tenant chose to walk away from its lease commitment.
The landlord further argues that imposing a duty to mitigate effectively nullifies the first landlord option (i.e., keep the lease alive) and disregards the conveyance of an interest in land to a tenant, since mitigation would inevitably require the landlord to retake possession of the premises in order to lease it to a replacement tenant.
According to the landlord, forcing a landlord to accept a tenant’s repudiation critically undermines the property conception of a lease, turning it into a mere contract (i.e., a license). The landlord argues that this change will have far-reaching negative implications for all parties, including on a tenant’s right of possession. If a lease were merely a contract, then the landlord would be able to force the tenant out of the premises. In such circumstances, the landlord would be responsible for the tenant’s losses, but the tenant would have to take reasonable steps to mitigate by seeking alterative space. This would be a sea change in the industry and would have widespread consequences, impacting landlord and tenant financing, and much more.
Ontario’s Superior Court and Court of Appeal both rejected the tenant’s claim for an imposition of a duty to mitigate where the landlord elects to keep the lease alive. The SCC is scheduled to hear the case in 2026
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This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.