Commercial Leasing: Landlord’s Duty to Mitigate revisited by Ontario Court of Appeal

Written by Howard Sniderman, KC, Liam Kelly and Spencer Marks

The Ontario Court of Appeal recently upheld a significant ruling in Aphria Inc. v. Canada Life Assurance Company, reaffirming a long-standing principle in commercial leasing law. This case re-examined the issue of whether landlords have a duty to mitigate damages when a commercial tenant repudiates a lease.

Background

Aphria Inc., a commercial tenant, entered into a ten-year lease for premises in downtown Toronto. Over time, ownership of the building changed hands, with the respondents (Canada Life Assurance Company, LG Investment Management Ltd., and OPTrust Office Inc.) becoming the landlords and successors to the lease. A few years into the lease, Aphria Inc. issued a notice of repudiation and vacated the premises. The landlords, however, refused to accept the repudiation, maintained the lease as valid, and demanded ongoing rent payments. Aphria Inc. argued that the landlords had a duty to mitigate their losses by seeking a replacement tenant. Despite the tenant's efforts to provide leads through a real estate broker, the landlords took no steps to re-let the premises. Eventually, the landlords sued Aphria Inc. for $638,171.40 in unpaid rent, plus interest and future rent.

Court Decisions and Key Findings

The Motion Judge, Callaghan J., relied on the Supreme Court of Canada's precedent in Highway Properties v. Kelly, Douglas & Co. (1971), which established that landlords have no duty to mitigate in cases where they elect to keep the lease in good standing after a tenant's fundamental breach. The Motion Judge granted summary judgment in favor of the landlords but declined to award future rent, acknowledging that the lack of a duty to mitigate is an "anomalous" legal principle. On appeal, the Ontario Court of Appeal (Pepall, Nordheimer, and Zarnett JJ.A.) dismissed Aphria Inc.'s challenge. The Court refused to depart from Highway Properties, emphasizing the importance of stare decisis and the potential instability that could result from overturning established legal principles. The Court noted that any departure from this rule should come from the Supreme Court of Canada or the Ontario Legislature.

Significance of the Decision

This case underscores the longstanding principle that, in the absence of legislative changes, commercial landlords in Ontario are not obligated to mitigate losses when they elect to keep a lease in effect following a tenant's repudiation. The Court of Appeal's decision leaves two potential paths forward:

1. Seeking leave to appeal to the Supreme Court of Canada.
2. Legislative amendments to the Commercial Tenancies Act to introduce a mitigation requirement, similar to the Residential Tenancies Act.

While the Motion Judge referred to the absence of a duty to mitigate as an "anomaly," it serves an important practical purpose. Without it, tenants could unilaterally shift the burden of finding a replacement tenant to landlords whenever they decide to walk away from a lease. Typically, landlords prefer to backfill vacant spaces and terminate the lease, which then triggers a duty to mitigate. However, in rare cases such as this one, the landlord may choose to keep the lease in effect, particularly if they believe the tenant remains financially liable and capable of fulfilling the lease obligations.

Future Implications and Alberta Context

The Ontario Court of Appeal's decision highlights a critical distinction between provinces. In Alberta, there is no equivalent legislation imposing a duty to mitigate, meaning the courts would have to depart from precedent to impose such an obligation on landlords. Whether Ontario's Legislature will take action or whether Aphria Inc. will seek leave to appeal to the Supreme Court remains to be seen.

For now, landlords who choose to keep a lease in effect can hold tenants accountable for the full lease term without an obligation to mitigate their losses. This serves as a crucial reminder for both landlords and tenants to carefully consider their lease agreements and the potential consequences of lease repudiation.

Do not hesitate to reach out to Witten LLP’s Commercial Leasing team?for any questions you may have and for personalized advice regarding leases in Alberta.