In a recent decision, the Ontario Court of Appeal confirmed the longstanding legal principle that landlords do not have an obligation to mitigate when they do not accept the repudiation of their tenants. However, the Court left the door open for the Supreme Court of Canada or the Ontario legislature to address this issue in the future, meaning that we may not have heard the last word on this prickly legal issue.
In Canada Life Assurance Company v. Aphria Inc.,1 in 2018, the tenant Aphria entered into a ten-year lease with the landlord (Canada Life) for commercial office space in Toronto. However, in 2021, Aphria served a notice of repudiation of the lease on the landlord and vacated the premises. The landlord declined to accept the lease repudiation, and instead took the position that lease remained in effect that that the tenant was obligated to fulfill its covenants, including the payment of rent. Aphria took the position that it had vacated the space, and the landlord was obligated to mitigate. Eventually, the landlord sued Aphria for rents owed since the space was vacated (January 2022).
The parties brought cross-motions for summary judgment on their dispute. The motions judge granted summary judgment to the landlord in respect of the rent arrears but declined to grant judgment for future rent given that the landlord would still have to account for its potential future mitigation. The motions judge also rejected a tenant argument that the specific language of the lease capped damages at two years of rent owing.
Aphria appealed to the Ontario Court of Appeal, which agreed with the lower court’s assessment of the case. Relying on the Supreme Court of Canada’s decision in Highway Properties v. Kelly, Douglas & Co.,2 the Ontario Court of Appeal confirmed that there is no obligation on a landlord to mitigate if it kept the lease in good standing.
Aphria argued that:
“Mitigation is a doctrine based on fairness and common sense. Such a duty exists in the context of residential and equipment leases and in other jurisdictions such as Quebec and many of the states in the United States.
The landlord countered by relying on the established law in Highway Properties and warning:
“The proposed change is fundamental and not incremental and would have complex and far-reaching effects. Moreover, the Tenant’s position would shift the burden of default onto the innocent party in circumstances where the tenant has the option of subletting the premises. Neither the duty of good faith nor the doctrine of efficient breach affords a basis for change. In addition, imposing a duty to mitigate would come at the expense of the property and possessory rights inherent in a commercial lease and would dilute the value of a commercial tenant’s interest from a lease to a license.”
In accepting the landlord’s argument, the Court recognized the principle of stare decisis and held that the motion judge was correct to abide by the existing authoritative law on the matter. The Court instead commented that if there was to be a change in the law, it would have to come from the Supreme Court of Canada, which authored the decision in Highway Properties, or the Ontario legislature:
“[I]t is not for this court to change this law but for the Supreme Court or the Legislature to do so. We note that the law on mitigation in Quebec is found in the Civil Code and that at least some of the American authority is based on statutory changes. In that regard, it would be open to the Ontario Legislature to amend the Commercial Tenancies Act, R.S.O. 1990, c. L.7 to provide for mitigation as it did with the Residential Tenancies Act, 2006, S.O. 2006, c.17.”
The takeaway from this decision is that a landlord’s right to decline a tenant’s repudiation, keep the lease alive, and seek damages for unpaid rent, remains in place in the province of Ontario. This right can lead to significant damages arising from franchisor or franchisee lease breaches. When dealing with franchise-related lease terminations, franchise parties should keep in mind the risk of a serious damages award. That said, the Ontario Court of Appeal’s commentary on the issue leaves open the possibility that the Supreme Court of Canada or the Ontario Legislature could address the issue to change the playing field for leasing parties in respect of repudiation rights.
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1 Canada Life Assurance Company v. Aphria Inc., 2024 ONCA 882 (CanLII), <https://canlii.ca/t/k8937>
2 Highway Properties v. Kelly, Douglas & Co., 1971 CanLII 123 (SCC), [1971] S.C.R. 562, specifically p. 570 per Laskin J.: “The developed case law has recognized three mutually exclusive courses that a landlord may take where a tenant is in fundamental breach of the lease or has repudiated it entirely, as was the case here. He 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. Second, he may elect to terminate the lease, retaining of course the right to sue for rent accrued due, or for damages to the date of termination for previous breaches of covenant. Third, he may advise the tenant that he proposes to re-let the property on the tenant’s account and enter into possession on that basis. Counsel for the appellant, in effect, suggests a fourth alternative, namely, that the landlord may elect to terminate the lease but with notice to the defaulting tenant that damages will be claimed on the footing of a present recovery of damages for losing the benefit of the lease over its unexpired term. One element of such damages would be, of course, the present value of the unpaid future rent for the unexpired period of the lease less the actual rental value of the premises for that period. [Emphasis added.]”