Commercial Landlords: Supreme Court to Decide on Your Duty to Mitigate

However, the Supreme Court of Canada has recently agreed to hear an appeal from an Ontario Court of Appeal which will challenge this long-standing principle. As a result, this fundamental rule of commercial leasing may soon change.

The Current Legal Landscape

When a tenant abandons the premises and stops paying rent, a landlord generally has two options:

Treat the lease as subsisting. The landlord can refuse to accept the tenant’s repudiation of the lease and continue to treat all tenant obligations as ongoing, including the obligation to pay monthly rent. In this case, the tenant also retains the right to occupy the premises, and the landlord has no obligation to find a new tenant.

Terminate the lease. The landlord can accept the tenant’s repudiation by terminating the lease and reserving its right to pursue the tenant for all amounts owing for what would have been the balance of the lease term. In this scenario, the landlord must make reasonable efforts to find a new tenant.

The issue before the Supreme Court is whether commercial landlords should continue to have the first option, the ability to keep the lease alive without any obligation to find a new tenant for the premises.

The Arguments for and Against Change

Proponents of changing the law argue that the current rule is outdated and inconsistent with modern commercial law. Generally, in commercial contracts, a party suffering a loss has a duty to take reasonable steps to mitigate that loss. Requiring landlords to seek new tenants, they argue, would promote fairness and economic efficiency, preventing commercial properties from sitting vacant unnecessarily, and discourage landlords from keeping unproductive leases alive.

Supporters of the existing law emphasize the importance of stability and predictability in commercial leasing. They note that tenants who default already have options to protect their interests, such as subletting or assigning their lease. They argue that imposing a new duty to mitigate would create additional burdens on landlords and disrupt the established balance of rights between parties.

Stay Tuned for a Potential Change

The Supreme Court’s willingness to hear the appeal suggests that a shift may be under consideration. Therefore, it is prudent for landlords to prepare for the possibility that the law may change.

In the meantime, landlords dealing with tenants who have abandoned or are at risk of abandoning their premises can take steps to protect their interests, including:

• Logging all communications. Maintain copies of emails and notes from any discussions with the defaulting tenant. When treating the lease as subsisting, landlords should send written notice confirming this position and avoid any actions that could be interpreted as terminating the lease, such as re-entering the premises, changing the locks, or advertising the space for rent.

• Reminding the tenant of their right to sublet or assign. Tenants may mitigate their own losses by finding a suitable subtenant or assignee. This shifts the responsibility for finding a replacement tenant back to the tenant. Any proposed replacement should be evaluated through a clear and defensible approval process. 

• Remaining open to new tenants. Even in the absence of a legal duty to find a new tenant, it is often in a landlord’s commercial interest to have a paying tenant rather than pursue a lawsuit against a defaulting one. If a qualified replacement is identified, the lease may be terminated to allow for a new tenant.

Looking ahead, if the Supreme Court overturns the current law and imposes an obligation on landlords to mitigate in all circumstances, it is unclear how such a ruling would affect existing matters where landlords have relied on the current legal standard. Ideally, the Supreme Court will also provide guidance on this point.

HOW WE CAN HELP

RAR Litigation’s lawyers have decades of experience advising commercial landlords and tenants on lease defaults, rights and remedies, risk management and related matters.

Contact us to discuss how RAR Litigation can support and protect your commercial leasing interests.