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COVID-19 Legal Considerations for Franchisees and Franchisors: Force Majeure Clauses and Frustration of Contracts

October 7, 2021

In the first installment of Hoffer Adler LLP’s Legal Insight Series concerning COVID-19 considerations for franchisees and franchisors, we discussed the availability of “force majeure” clauses and the doctrine of frustration as possible means by which a franchisee or franchisor could escape its lease obligations due to restrictions put in place as a result of COVID-19. A recent Ontario Superior Court decision, Braebury Development Corporation v Gap (Canada) Inc., now provides guidance on whether commercial tenants, such as franchisees and franchisors, can rely on force majeure clauses and/or the doctrine of frustration of contract for rent relief to account for long periods of limited business operations during the multiple lockdown periods of 2020 and 2021. 

Summary:

The case involved a Gap store that operated in a leased retail location owned by the landlord, Braebury. In response to the COVID-19 pandemic, the Government of Ontario ordered the shut-down of all non-essential businesses. The Gap store remained closed from 24 March 2020 to 19 May 2020. The Gap did not pay rent for April and May, and made partial payments from June 2020 to September 2020. Although its lease was due to expire on 31 December 2020, the Gap unilaterally closed the store and vacated the premises in September 2020.

In response to Braebury’s claims for rent arrears, the Gap argued that it was relieved of its rent obligations because the purpose of the lease was frustrated by COVID-19-related government restrictions that had made it commercially unreasonable for the Gap to continue operating its business.

The court considered two possibilities:

  1. The force majeure clause and its effects on the Gap’s rental obligations; and
  2. The doctrine of frustration of contract.

The Court's Analysis:

Force Majeure:

Force majeure clauses are contractual provisions designed to discharge one or both of the contracting parties when a supervening event, beyond the control of either party, makes contractual performance impossible.

The force majeure clause in the lease contract between Braebury and the Gap set out a list of supervening events that would excuse the parties from performance of their obligations under the lease One of those supervening events was the issuance of “restrictive governmental laws or regulations” ; however, the force majeure clause also included the common stipulation that the tenant was not excused from the prompt and timely payment of rent notwithstanding the occurrence of any of the listed supervening events.

The deciding issue became whether the Gap’s non-payment of rent was caused by “restrictive governmental laws and regulations” – specifically, government measures taken to reduce the spread of COVID-19 – or whether they were caused by the pandemic itself. The former was one of the supervening events specifically listed in the force majeure clause, whereas the latter was not.

The court in Braebury agreed with the Gap that the force majeure clause was triggered by the government-imposed business-shutdown and not by the pandemic; however, the court agreed with the landlord that, because the force majeure clause expressly did not excuse payment of rent, the Gap remained obligated to pay rent notwithstanding the occurrence of a specifically-listed supervening event.

Frustration of Contract:

“Frustration” occurs when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes “a thing radically different from that which was undertaken by the contract”. The occurrence of such an unanticipated event serves to relieve the parties of their obligations under the contract.

The force majeure clause in the Braebury lease already accounted for the pandemic, meaning that the parties had anticipated it; accordingly, the court held that the Gap could not rely on frustration of contract to relieve itself of its rent obligation. The court also held that, in order for a party to be able to characterize a contract as having been frustrated, the supervening event must be permanent and not temporary. Since the COVID-19 pandemic is temporary, frustration was, again, held to be unavailable to the Gap.

The court also found that, since the Gap was not actually required under the terms of the lease to operate a business on the premises, its inability to open during the lockdown did not radically alter the lease’s terms. As such, frustration of contract again could not apply to the facts at hand.

Key Takeaways:

  • Force majeure clauses need not directly reference a pandemic or public health emergency if they refer to restrictive government action. The courts are willing to characterize the government action of declaring a state of emergency as the supervening event capable of triggering a force majeure clause that contains such language, instead of characterizing the underlying COVID-19 pandemic itself as being the supervening event.
  • The force majeure clause in many cases will nonetheless not excuse the tenant’s rent obligations, even on the occurrence of a supervening event that would excuse other contractual obligations. Franchisee and franchisor tenants should carefully examine their leases to better understand which of their obligations, if any, are excused when a force majeure clause is triggered.
  • Where the force majeure has already accounted for a supervening event, frustration of contract is not available to relieve a franchisee or franchisor tenant of its lease obligations.