Across Ontario, tenants are reviewing their commercial lease agreements and trying to determine whether a global pandemic will qualify as a force majeure event.
*Disclaimer: this guide is for informational purposes only. It does not constitute legal advice nor create a solicitor-client relationship between the author and reader. As with all legal matters, a lawyer should be properly retained and consulted where legal advice may reasonably be considered necessary.
This blog post will cover the basics of force majeure and Ontario commercial lease agreements, including:
1. What is force majeure?
2. When can you use a force majeure clause?
a) The trigger for the force majeure event
b) The impact of the force majeure event on the agreement
3. What happens if I use the force majeure clause?
Ready? Here we go!
1. What is Force Majeure?
The Force Majeure Provision Generally
When someone is talking about “force majeure” they are referencing a standard contract clause found in many commercial agreements (especially lease agreements). The purpose of the force majeure clause is to provide instructions for what should happen to the agreement if a party is prevented from fulfilling their contractual obligations as a result of an intervening event.
Unlike other contractual remedies, force majeure is not implied or deemed included in an agreement. A force majeure provision must be written into the contract for a party to be able to rely on it. Where included, these clauses serve to maintain the agreement, by providing a remedy for unforeseeable circumstances, and preventing the agreement being nullified due to the principal of frustration.
Force Majeure or Breach of Contract
Not all force majeure provisions are the same, and whether it may be properly invoked must be determined by reviewing the wording of the agreement in light of the circumstances the parties are now facing. When looking to rely on a force majeure clause, you must be careful to ensure there are valid grounds. This is because a party seeking to invoke the clause may be found in breach of contract in the event of a disagreement between the parties and subsequent determination by the courts that relying on the force majeure clause was improper.
2. When can you use the Force Majeure Clause?
If you’re looking to make use of your force majeure provision, there are two primary factors to consider:
a) the trigger for the force majeure event, and
b) the impact of the force majeure event on the agreement
Let’s look at these in greater depth.
a) The Trigger for the Force Majeure Event
In order to rely on the force majeure provision, you first need to demonstrate the clause has been triggered by some intervening event (we’ll call this the “force majeure event”). Whether a force majeure event has in fact occurred, will need to be determined by reviewing the agreement to assess if the event falls under one or more of the force majeure events listed in the agreement.
A typical commercial lease agreement will include some or all of the following force majeure events:
- landslide, flood, tempest, washout, fire, lightning, disaster, earthquake and storm
- military action, naval or civil authority, the Queen’s or public enemy, war, revolution, political disturbance and terrorism
- civil disturbance, sabotage, rebellion, vandalism, riot, blockade, insurrection, strike, lockout and explosion
- unusual delay by common carriers
- expropriation, acts, or restraints, of a governmental body or authority
- failure to obtain a requisite permit or authorization from a governmental authority
- power failure, non-availability of labour, materials, service, equipment, goods or utilityand:
- epidemic and quarantine (although this is less common)
Standard catch-all provisions
While there are many specific events included in the standard force majeure clause, drafters will typically also include “catch-all provisions” in an attempt to provide complete coverage for the unforeseeable. Catch-all provisions often take the form of:
- acts of God, or
- any other cause of any kind beyond the reasonable control of the party
Catch-all provisions must be read with the principles of expressio unius and ejusdem generis in mind
Expressio unius means to exclude those not included so, if the event does not fall within the enumerated events, by default it should not be deemed a force majeure event. Ejusdem generis is a principle that means “of the same kind” and holds where a list of things is given alongside a general catch-all provision such as, “any other cause of any kind beyond the reasonable control of the party”, the list as a whole should be used to clarify the types of events that will be captured by the general clause. As an example, if an insurance contract refers to coverage over automobiles, trucks, tractors, motorcycles, and “other motor-powered vehicles”, a court might use ejusdem generis to hold that motor vehicles would not include airplanes because the list included only land-based transportation. The use of specifically enumerated events and catch all provisions are intended to capture much of the foreseeable and unexpected.
b) The impact of the force majeure event on the agreement
In addition to specifying the events which will trigger the force majeure clause, it is not enough that the event simply occurred, a party seeking to rely on the clause must have suffered some consequence as a result of the intervening event. The consequence is typically that the party was, “delayed, hindered, or prevented from the performance of an obligation they are required to perform under the contract.” For instance, if a commercial lease agreement specifies, “at all material times the tenant shall maintain business operations at the premises” (a term often inserted by landlords to avoid the eyesore of a vacant unit) the tenant may argue the government mandated shutdown due to COVID-19 is a force majeure event under, “restraints, of a governmental body or authority” which hindered or prevented the obligation to maintain business operations so that an unscrupulous landlord may not take advantage of the situation and try to evict the tenant for being in breach of the lease.
3. What happens if I use the Force Majeure?
When there is a valid force majeure event and that force majeure event has had some impact on your ability to perform in accordance with your lease agreement the agreement will need to be reviewed to determine the effect on the parties’ contractual relations. In most cases, the force majeure event will not relieve a party from their obligations outright (as the point of the force majeure is to preserve the agreement) but will instead simply delay or temporarily suspend the obligation until the event has passed.
Force Majeure Must be Read in the Context of the Entire Agreement
It is important to remember, the force majeure clause must be read within the context of the entire agreement. In the case of a commercial lease, the force majeure clause will almost certainly not apply to excuse the tenant from paying rent, and even where rent is not excluded, the landlord may turn to other sections of the agreement to attempt to refute the tenant’s claim performance has been hindered. For instance, the landlord may try to rely on the tenant’s obligation to maintain business interruption insurance to argue, as the tenant should be insured for such an event, they cannot be hindered or prevented from paying rent. Further, most force majeure clauses will impose an obligation on the parties to actively mitigate from the consequence of the force majeure event. If this is the case, the tenant may have a positive obligation to find some way of paying the rent by for instance, liquidating its inventory for less than market rates.
You need to be very careful when seeking to rely on a force majeure provision. This includes giving proper notice to the other party if provided for in the agreement. A party not complying with the force majeure or improperly invoking the clause may very well find themselves facing a claim from breach of contract.
If you need legal advice from an Ontario commercial lease lawyer, book your free legal consultation with Supply Law today.