Commercial leasing agreements: Good faith, honesty is best policy
This article was written by Aesha Patel, and was originally published by Law360 Canada (www.law360.ca) a division of LexisNexis Canada
Bhasin v. Hrynew 2014 SCC 71 was a seminal decision in Canadian contract law that led to a recognition of a common law contractual duty to act in good faith and a duty to perform contractual obligations honestly. Since Bhasin, jurisprudence around this principle has significantly developed such that good faith and honest performance are now both pronounced and ineliminable legally imposed duties upon all contracting parties. ARC Digital Canada Corp v. Amacon Alaska Development Partnership 2023 BCCA 34 is a recent Court of Appeal decision that gives teeth to Bhasin and further advances the contractual duty of good faith within a commercial leasing context.
ARC Digital Canada Corp v. Amacon Alaska Development Partnership
ARC Digital Canada Corp. was a commercial tenant which entered into a lease agreement allowing for a term expiring on Nov. 30, 2020. The lease agreement further stipulated an option to renew for an additional five-year term. In September 2017, Amacon Alaska Development Partnership purchased the commercial premises with the intention to redevelop the property, and as such, required an early termination of the lease. After lengthy negotiations, both parties agreed to a lease amendment substituting the expiry date of Nov. 30, 2020, (as well as the option to renew) with a termination date of June 30, 2019. This lease amending agreement further indicated that Amacon would compensate ARC with two separate payments of $290,000 each. The first payment would take place upon execution of the lease amending agreement by ARC, and the second payment would take place upon ARC having vacated the premises, which was stipulated to take place before 11:59 p.m. on June 30, 2019. While the lease amending agreement was delivered to ARC in anticipation of execution, ARC refused to sign it until it had secured another premises.
On Feb. 13, 2019, ARC entered into a lease agreement for the new premises and delivered an executed copy of the lease amending agreement to Amacon the same day. Unfortunately, Amacon refused to sign the lease amending agreement, nor was the first instalment of $290,000 paid. Amacon argued that the agreement required both parties to sign in order for it to take effect, and that it was unable to sign the agreement due to “market conditions.”
ARC commenced an action against Amacon but continued to occupy the premises beyond June 30, 2019. In July 2019, Amacon’s counsel delivered a copy of the fully executed lease amending agreement, a cheque of the first instalment of $290,000, along with a letter claiming that while the lease amending agreement was now binding, Amacon was not obligated to provide the second instalment of $290,000 since ARC had failed to vacate the premises on June 30, 2019. Amacon further held ARC liable for double rent as a result of overholding the premises from July 1, 2019 onwards. On Sept. 30, 2019, ARC delivered a notice of its intention to vacate the premises as of Oct. 31, 2019.
British Columbia Supreme Court
The trial judge, Justice Shelley Fitzpatrick, focused extensively on the organizing principle of good faith in her analysis. Amacon was found to have breached the lease amending agreement, and that it had breached its “duty of good faith in its performance of the Lease Amending Agreement.” At paragraph 93, Justice Fitzpatrick concluded that “the interests of justice and fairness in the context of these contractual arrangements demand that ARC have a remedy.” The remedy available to ARC included payment by Amacon of the second instalment of $290,000 and the rent which ARC was compelled to pay Amacon after June 30, 2019. Amacon’s counter-claim was dismissed.
British Columbia Court of Appeal
Amacon appealed Justice Fitzpatrick’s decision, focusing the appeal on three errors in judgment:
2. Erroneously refusing to apply “ordinary principles of contract law” and instead focusing primarily on the principle of good faith such that ARC’s contractual duties were excused; and
3. Abdicating her judicial responsibility to determine whether that the matter was suitable for summary trial, but rather erroneously assuming so, without any independent analysis of her own.
In considering erroneous factual findings of the trial judge, the court disagreed with Amacon and concluded that it could not accede to this submission as a ground of appeal.
In disagreeing with the Amacon’s second submission, the court at paragraph 68 stated, “Far from existing in a realm beyond that of basic contract law, these principles form a part of basic contract law. As Bhasin holds, quite simply, there is an organizing principle of good faith that in part recognizes a duty to perform a contract honestly … . This duty means that parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily.” The court went on, however, to find that even upon application of the “ordinary principles of contract law,” ARC’s failure to vacate the premises could nonetheless be excused because Amacon’s conduct was a continuing repudiation of the lease amending agreement.
In disagreeing with Amacon’s third submission, the court held that under the right circumstances, a summary trial judge may make credibility findings on affidavit evidence alone. However, in the case at hand, not only did the judge make credibility findings on the basis of affidavits, but also relied upon accompanying evidence of the lease amending agreement as well as correspondence that was exchanged between parties. The court concluded that there was no merit to Amacon’s submissions on this point either. Ultimately, Amacon’s appeal was dismissed.
ARC Digital essentially speaks to circumstances where the landlord’s silence misleads the tenant. The court concluded that the landlord acted dishonestly seeing as both parties had expressly agreed that the return of the signed lease amending agreement would trigger initial payment. The landlord was aware of the fact that the tenant was unable to relocate without receiving that initial payment, and yet did not advise the tenant of its intention to abandon its contractual obligations prior to the tenant entering into a new lease. The court agreed and affirmed the following principles applicable to the duty of good faith from C.M. Callow Inc. v. Zollinger 2020 SCC 45:
b. That dishonest conduct may include telling lies or half-truths in a manner that knowingly misleads another party (para. 77);
c. Dishonest conduct may also arise from a failure to act or speak out.
ARC Digital upholds the duty to act in good faith within commercial relationships in a jurisdiction that is perpetually operating to preserve a delicate balance between the desire to allow parties to contract freely and the need to offer contracting parties some degree of certainty, oversight and protection.