Reconsidering commercial landlords’ remedies after lease repudiation
In Aphria Inc. v. Canada Life Assurance Company (Canada Life)[i], the Supreme Court of Canada (SCC) is being asked to decide a question that could reshape commercial leasing across the country: when a tenant walks away from a commercial lease, does the landlord have to take reasonable steps to reduce its losses by trying to re-lease the space?
For more than fifty years, Canadian landlords have largely been viewed as exempt from that obligation, due to obiter comments in the Supreme Court of Canada’s decision in Highway Properties Ltd. v. Kelly, Douglas and Co. Ltd (Highway Properties).[ii] The Supreme Court’s decision in Canada Life may change that.
Why this matters
If the Supreme Court imposes a duty to mitigate, the implications for the commercial real estate industry could be significant. Tenants facing fewer financial consequences for repudiating leases may be more willing to walk away from long-term commitments strategically. Landlords, in turn, may respond with higher rents, stricter lease terms and reduced tenant inducements.
The decision could also affect property valuations. Commercial properties are often valued based on the reliability of long-term lease income, and a duty to mitigate could introduce greater uncertainty into that calculus. Where landlords are required to make reasonable efforts to re-lease vacant space, the predictability of future cash flows may be affected, particularly in soft markets where re-leasing proves difficult. That said, the impact may be more nuanced than it first appears. A landlord who cannot re-lease space despite reasonable efforts would remain entitled to claim the full rent as damages. The practical effect may therefore be less a reduction in landlord rights than an increase in the complexity and cost of enforcing them, as landlords would need to demonstrate the reasonableness of their mitigation efforts in order to recover their losses in full.
Existing leases also present a challenge. As the motions judge observed, commercial landlords and tenants have entered into leasing arrangements for decades based on the principles established in Highway Properties. Unlike legislative reform, a change to the common law by the Supreme Court would apply retrospectively as well as prospectively, potentially affecting agreements already in place.
The facts
In 2018, Aphria Inc. entered into a ten-year lease for office space at 1 Adelaide Street East in Toronto. Following a business merger, Aphria no longer required the premises and repudiated the lease. The landlord did not accept the repudiation and instead continued to treat the lease as remaining in force. Aphria was aware of prospective replacement tenants for the premises and referred them to the landlord, but the landlord declined to meet with those prospective tenants and maintained that it had no obligation to mitigate its damages. Although the lease permitted Aphria to sublet the premises, there was no evidence that either party took active steps to secure a replacement tenant.
Highway Properties and the modern commercial lease
In 1971, through the Highway Properties decision, the SCC established that landlords have no duty to mitigate. The case involved a grocery store tenant in a shopping mall that repudiated its lease. The landlord accepted the repudiation, retook possession and sued for damages for the balance of the lease term. The central question was whether the landlord could claim such forward-looking damages, a contract remedy or only damages to the date of termination, a property remedy.[iii]
The Court recognized that commercial leases are not purely interests in land but also contractual relationships,[iv] and expanded the remedies available to landlords by holding that, in some circumstances, a landlord could terminate a lease and still claim damages for the unexpired term. In addition to this new remedy, the decision catalogued three previously recognized options available to a landlord when a tenant repudiates a lease:
- Maintain the landlord and tenant relationship without terminating the lease, insist upon the tenant’s continued performance of the lease obligations, and pursue claims for rent or damages on the basis that the lease remains in force; or
- Elect to terminate the lease while preserving the right to claim accrued rent or damages arising from breaches of covenant up to the date of termination; and
- Notify the tenant of the landlord’s intention to re-let the premises on the tenant’s behalf and re-enter possession on that basis.
It is the first of these options that the landlord in Canada Life relied upon. However, mitigation was not an issue in Highway Properties itself. It was in obiter that Justice Laskin commented that “under the present case law the landlord is not under a duty of mitigation.”[v] That single remark shaped commercial leasing law in Canada for over fifty years and was heavily relied upon by both the motion and appellate courts in Canada Life.
The evolution of contract and mitigation law
Since Highway Properties was decided, Canadian contract law has evolved significantly. Courts have increasingly emphasized good faith[vi], economic efficiency and the general obligation of parties to take reasonable steps to reduce their losses.[vii]
In the real property context, the Supreme Court of Canada has substantially expanded the law of mitigation, confirming in cases such as Semelhago v. Paramadevan,[viii] and Southcott Estates Inc. v. Toronto Catholic District School Board[ix] that real property is not presumptively unique and that specific performance is not an automatic entitlement in property sale disputes. Despite these developments, however, Canadian courts have not extended the same approach to landlord-tenant relationships. Landlords continue to be treated as a distinct category, such that no duty to mitigate arises where the landlord elects to keep the lease alive following a tenant’s default.
The competing arguments
Proponents of change in the law argue that commercial landlords are now an exception to the ordinary rules of contract law. Aphria, and the interveners supporting its position, argue that there is no principled basis for exempting commercial landlords from the duty to mitigate. They say requiring mitigation would reduce economic waste,[x] is consistent with the court-approved principle of “efficient breach”[xi] and would prevent repeated lawsuits for ongoing rent claims.[xii]
They also point out that similar obligations already exist in other contexts. Québec has long imposed a duty to mitigate on commercial landlords.[xiii] Ontario imposed the duty to mitigate on residential landlords in 2006.[xiv] Many American jurisdictions have adopted similar approaches without significant disruption to commercial leasing markets.[xv]
The landlords and supporting interveners take a very different view. They argue that the landlord’s right to insist on performance of a lease has been recognized for centuries and was preserved by Highway Properties.[xvi] They also argue that a lease differs from an ordinary commercial contract because the tenant’s interest in the property continues unless and until the lease is terminated.[xvii] As long as the lease remains in effect, the tenant retains the right to possession and remains obligated to pay rent as it comes due.[xviii] On that view, the landlord is not claiming damages for a terminated contract, but is instead enforcing the tenant’s ongoing obligations under the lease, leaving no “loss” or future damages to mitigate.[xix] The landlords also argue that any major change should come from legislatures rather than the courts, particularly given the potential economic impact on existing commercial leasing arrangements.[xx]
One of the intervenors, BOMA BC, advances a related argument grounded in contract law. It argues that a claim for rent under an ongoing lease is a debt claim, not a damages claim, and debt claims are generally not subject to mitigation obligations.[xxi] Another intervenor, the Real Property Association of Canada, further argues that tenants are often better positioned to mitigate because they can assign or sublet the premises and may have greater knowledge of the timing and reasons for their departure.[xxii]
Looking ahead
Whatever the outcome, Canada Life is likely to become one of the most important Canadian commercial leasing decisions in decades. The Supreme Court’s decision may determine whether Canadian commercial leasing law continues down the path set by Highway Properties or exits the highway entirely in favour of a more modern contractual approach.
For more information on this topic, please reach out to Sophie Lorefice.
The author would also like to thank Annalise Boytinck, articling student, for her contributions to this insight.
[i] Aphria Inc. v Canada Life Assurance Company, et al. (SCC File No. 41665).
[ii] Highway Properties Ltd. v Kelly, Douglas and Co. Ltd., [1971] SCR 562.
[iii] Supra note 2, at 564.
[iv] Ibid, at 567.
[v] Ibid, at 572.
[vi] Bhasin v Hrynew, 2015 SCC 71.
[vii] Southcott Estates Inc. v Toronto Catholic District School Board, 2012 SCC 51.
[viii] Semelhago v Paramadevan, [1996] 2 SCR 415.
[ix] Southcott Estates Inc. v Toronto Catholic District School Board, 2012 SCC 51.
[x] Appellant’s Factum para 52.
[xi] Appellant’s Factum para 54.
[xii] Appellant’s Factum para 55.
[xiii] Appellant’s Factum para 78.
[xiv] Appellant’s Factum para 72.
[xv] Appellant’s Factum para 59.
[xvi] Respondent’s Factum paras 2-3.
[xvii] Respondent’s Factum para 65.
[xviii] Respondent’s Factum para 65.
[xix] Respondent’s Factum para 65.
[xx] Respondent’s Factum para 128.
[xxi] BOMA’s Factum paras 12-14.
[xxii] Real Property Association of Canada’s Factum paras 14-16.
