From Obiter to Obligation? The Duty to Mitigate for Landlords in Commercial Leases

In December 2023, the Ontario Superior Court of Justice (“ONSC”), in The Canada Life Assurance Company et al. v. Aphria Inc., 2023, discussed key issues in commercial leasing including the duty to mitigate, contractual interpretation, and application of obiter dicta by lower-level courts. The ONSC’s decision and analysis were unanimously affirmed by the Court of Appeal for Ontario (the “COA”). With the Supreme Court of Canada (the “SCC”) granting leave to appeal, this case may very well materially alter commercial landlord-tenant relationships and leases.

Factual Background

Aphria Inc. (the “Tenant”) entered into a 10-year lease on June 16, 2018, for a 10,679 square-foot office located at 1 Adelaide Street East in Toronto. Following the sale of the building in 2019, Canada Life Assurance Company, I.G Investment Management, Ltd. as trustee for IG Mackenzie Real Property Fund and Optrust Office Inc. (collectively, the “Landlord”) became the successors in title. No longer requiring the leased space, the Tenant attempted on several occasions to amicably terminate the lease in 2021. The Tenant’s real estate broker also provided the Landlord with potential new tenants to ease the transition and provide a mechanism for mitigation. However, the Landlord refused to accept the Tenant’s repudiation of the lease, made no effort to engage with the potential new tenants shared by the Tenant, and continued to enforce the lease by sending the Tenant reminders that it remained obligated to pay the rent as it became due

Judicial History

Ontario Superior Court of Justice

At the ONSC, the court analyzed the merit of the submissions put forth by the Tenant and Landlord regarding the applicability and interpretation of Highway Properties Ltd. v. Kelly, Douglas and Co. Ltd., 1971. The court agreed with the Tenant that “(the landlord) may do nothing to alter the relationship of landlord and tenant, but simply insist on performance of the terms and sue for rent or damages on the footing that the lease remains in force” (“Scenario 1”) is obiter. However, it found that Justice Laskin’s comments reflected how the SCC understood the law revolving mitigation and a landlord’s duties upon repudiation. The ONSC agreed with a variety of the Tenant’s arguments including:

1. The evolution of the law of mitigation;
2. Judicial reform regarding leaseholds;
3. Requiring mitigation promotes economic efficiency and efficient breaches; and
4. The anomalous nature of commercial landlords not being subject to a duty to mitigate when compared to other areas of law.

Despite these arguments, the court held that it was bound by stare decisis to uphold Scenario 1 as binding due to its formal adoption in two COA decisions: Almad Investments Ltd. v. Mister Leonard Holdings Ltd., 1996 and TNG Acquisition Inc. (Re), 2011. In doing so, the court found that under current Ontario law, a landlord may refuse to accept a tenant’s repudiation of a commercial lease and insist on its specific performance, without incurring a duty to mitigate. As such, the court awarded the Landlord damages in the amount of $638,171.40, plus interest, for rent owing up to June 15, 2023.

Ontario Superior Court of Justice

The Tenant appealed the decision to the COA where the Real Property Association of Canada (“RPAC”) and the Better Way Alliance (“BWA”) joined as interveners.

• The RPAC took the position that Highway Properties is binding, there is no duty to mitigate, and complex changes should be left to the legislature.
• The BWA argued that while Highway Properties is binding, it does not free landlords of their contractual duty to mitigate, and that the Landlord’s position would result in commercially unreasonable outcomes while also sanctioning the abuse of power and bad faith conduct.

The COA held that the ONSC correctly determined that it was bound to follow Highway Properties and properly applied Scenario 1 to the facts, leading to the conclusion that the Landlord did not have a duty to mitigate. Finding no compelling reason to intervene with the ONSC’s decision, the COA further stated that “it is not for this court to change this law but for the Supreme Court or the Legislature to do so” and ultimately dismissed the appeal.

En Route to the Supreme Court of Canada – Positions of the Parties

After a convincing canvassing of the Tenant’s arguments, the SCC decided to grant its application for leave to appeal. While its factum addressed three issues, our primary focus is on the first and core issue; are commercial landlords exempt from the duty to mitigate their damages when a tenant repudiates a lease?

Aphria Inc. – Tenant’s Position

The Tenant argues that, in their interpretation, the ratio in Highway Properties stands for the proposition that contract principles ought to apply to leases which carries with it the logical conclusion that mitigation applies to commercial leases. It notes that the duty to mitigate exists in numerous legal contexts: contract, negligence, intentional interference with economic relations, breach of fiduciary duty/trust, unjust enrichment, real estate sales/purchases, residential leases, equipment leases, and even commercial leases when some step, no matter how small, is taken by the landlord to mitigate. Thus, their interpretation would be that a proper application of Highway Properties to commercial leases would serve to harmonize the law.

The Tenant supports it position by referencing commercial leasing law in several jurisdictions, including Quebec, Alberta, and 26 U.S. states based on common law and even a greater number of states if legislative provisions are considered. The Tenant also cites Globe Convestra Ltd. v. Vucetic, 1990, an Ontario case which holds that there is a duty to mitigate. However, the ONSC found it to not be consistent with prevailing Ontario jurisprudence. While not advocating for “successful” mitigation, the Tenant argues that there needs to be at least “reasonable efforts” by the landlord to mitigate.

From a public policy perspective, the Tenant argues that commercial landlords should have a duty to mitigate as it:

• Avoids economic waste;
• Supports the concept of efficient breach;
• Discourages a multiplicity of actions;
• Promotes fairness and balances tenant-landlord relationships; and
• Prevents absurd outcomes.

On the issue of fairness, the Tenant argues that the power imbalance between landlords and tenants is further entrenched by the decisions of the ONSC and COA. The Tenant argues that the power dynamic, coupled with fact that only a tenant must go to court to seek specific performance if a landlord repudiates a commercial lease, and not the other way around, exemplifies a legal framework that disproportionately favours landlords.

Finally, in response to the Landlord’s argument that subletting is a self-help remedy available to tenants, the Tenant argues that this is not a solution. Subletting, the Tenant notes, does not even constitute a repudiation of the original lease. The Tenant argues that, on the contrary, landlords are in a significantly better position to find a new tenant as not only are they in the business of finding tenants, they are also able to combine available premises to increase space available to lease, offer a longer lease term, and permit different uses than the ones originally negotiated.

Canada Life Assurance Company – Landlord’s Position

The Landlord’s key argument is that there is no reason to disturb settled law. The Landlord submits that the law on mitigation in the realm of commercial leases is clear, has been consistently applied across Canada, and should not be changed. It suggests that for the last 50 years, landlord-tenant relations have been governed by Scenario 1 in Highway Properties andimplementing a duty to mitigate on commercial landlords would be destabilizing, fundamentally alter commercial relationships, and change the remedies available.

The Landlord refutes the Tenant’s claim that the suggested Canadian provinces, apart from Quebec, enforce a duty to mitigate. Beyond disagreeing with the Tenant’s position, the Landlord further cites Nova Scotia, New Brunswick, and Manitoba as positive examples of provinces where no such duty exists. While maintaining that the Tenant’s argument concerning American states is “irrelevant and unavailing”, the Landlord nonetheless cites New York, Massachusetts, and Pennsylvania as states that do not require mitigation.

In response to the Tenant’s fairness argument, the Landlord takes the position that Highway Properties in fact protects landlords and tenants simultaneously. Taking it one step further, the Landlord maintains that it would be unfair for parties who have relied on this case when negotiating their leases to change the law. The Landlord argues that because of the proprietary interest in land that is created through the lease, the current law as it is understood protects tenants from being displaced by landlords who choose to terminate a lease in pursuit of one with better terms for itself.

As mentioned in the Tenant’s position section above, the Landlord’s position is that tenants can avail themselves of what it considers to be a self-help remedy, subleasing. It argues that this option is embedded within existing commercial leases and does not require any change to the current legal framework.

Implication of the Anticipated Supreme Court of Canada Decision

If the Tenant is Not Successful: Status Quo

If the SCC rejects the Tenant’s appeal, then the status quo remains intact: landlords will not have a duty to mitigate after a tenant repudiates a commercial lease. In fact, the SCC’s decision would elevate Scenario 1 in Highway Properties from persuasive obiter to binding precedent. Consequently, it would entrench the idea that tenants are still financially liable to fulfill their obligations under the lease if they unilaterally repudiate it, and landlords may pursue damages for unpaid rent without taking any steps to re-let the premises.

If the Tenant is Successful: Recognition of a Duty to Mitigate

If the Tenant is successful at the SCC, there are a few key implications:

1. It would confirm that commercial leases are subject to general contract law principles, including the duty to mitigate.
2. While existing leases may not require redrafting, due to severability clauses, the profound nature of this principle would likely prompt future leases to include detailed provisions addressing mitigation, remedies, and the respective obligations of the parties in the event of repudiation.
3. Tenants may have stronger bargaining power regarding rent and lease terms. If landlords have a duty to mitigate, then landlords would be incentivized to ensure competitive pricing and terms as to not lose their tenants to other landlords.
4. A landlord’s failure to mitigate could reduce or eliminate their entitlement to certain damages following tenant repudiation.

The SCC may also adopt a middle-ground approach in the form of partial mitigation. This would align with the Tenant’s position that landlords should, at minimum, be required to make reasonable efforts in response to repudiation. For example, the SCC may create a new obligation that the landlord must show qualified prospective tenants the premises if their contact information is provided by the tenant. While not perfect or a complete departure from the existing legal framework, this would uphold the wider ratio in Highway Properties, help rebalance the commercial landlord-tenant relationships, and provide the tenants a practical self-help remedy.