Supreme Court Judgments

Supreme Court of Canada

Douglas and Co. Ltd., Highway Properties Ltd. v. Kelly, [1971] S.C.R. 562

Date: 1971-02-01

Highway Properties Limited (Plaintiff) Appellant;

and

Kelly, Douglas and Company Limited (Defendant) Respondent.

1970: June 22; 1971: February 1.

Present: Martland, Judson, Ritchie, Spence and Laskin JJ.

ON APPEAL FROM THE COURT OF APPEAL FOR BRITISH COLUMBIA

Landlord and tenant—Repudiation by tenant of lease of certain premises and its consequent abandonment of said premises—Possession taken by landlord with contemporaneous assertion of right to full damages according to loss calculable over unexpired term of lease—Remedies of landlord—Measure and range of damages.

The respondent, a major tenant in a shopping centre, repudiated its unexpired lease and possession was resumed by the appellant landlord with notice to the defaulting tenant that it would be held liable for damages suffered by the landlord as a result of the admittedly wrongful repudiation. In an action brought by the appellant damages were claimed not only for loss suffered to the date of repudiation of the lease but also, and mainly, for prospective loss resulting from the respondent’s failure to carry on a supermarket business in the shopping centre for the full term of the lease. Both the trial judge and the majority of the Court of Appeal held that there had been a surrender of the lease by reason of the repudiation and the taking of possession by the appellant; that the principles enunciated in Goldhar v. Universal Sections and Mouldings Ltd., [1963] 1 O.R. 189, were applicable; that the lease and its covenants

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ceased to exist with the surrender; and that the appellant could recover only for breaches occurring to the date of surrender.

Held: The appeal should be allowed.

Although repudiation by the tenant gives the landlord at that time a choice between holding the tenant to the lease or terminating it, yet at the same time a right of action for damages then arises; and the election to insist on the lease or to refuse further performance (and thus bring it to an end) goes simply to the measure and range of damages. The landlord may advise the tenant that he proposes to re-let the property on the tenant’s account and enter into possession on that basis, or he 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.

It was no longer sensible to pretend that a commercial lease is simply a conveyance and not also a contract and it was equally untenable to persist in denying resort to the full armoury of remedies ordinarily available to redress repudiation of covenants, merely because the covenants may be associated with an estate in land.

Goldhar v. Universal Sections and Mouldings Ltd., supra, overruled; Buchanan v. Byrnes (1906), 3 C.L.R. 704, adopted; Attorney General of Saskatchewan v. Whiteshore Salt and Chemical Co. Ltd. and Midwest Chemicals Ltd., [1955] S.C.R. 43, distinguished; Cricklewood Property and Investment Trust Ltd. v. Leighton’s Investment Trust, [1945] A.C. 221; Kloepfer Wholesale Hardware and Automotive Co. v. Roy, [1952] 2 S.C.R. 465; Bel-Boys Buildings Ltd. v. Clark (1967) 59 W.W.R. 641; Oastler v. Henderson (1877), 2 Q.B.D. 575; Walls v. Atcheson (1826), 3 Bing. 462; Richmond v. Savill, [1926] 2 K.B. 530; Hughes v. N.L.S. Pty. Ltd., [1966] W.A.R. 100, referred to.

APPEAL from a judgment of the Court of Appeal for British Columbia[1], dismissing appellant’s appeal from a judgment of Macdonald J. Appeal allowed.

W.B. Williston, Q.C., and W.C. Graham, for the plaintiff, appellant.

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John L. Farris, Q.C., and Irwin G. Nathanson, for the defendant, respondent.

The judgment of the Court was delivered by

LASKIN J.—The issue in this appeal arises out of the repudiation of an unexpired lease by the major tenant in a shopping centre and the resumption of possession by the landlord with notice to the defaulting tenant that it would be held liable for damages suffered by the landlord as a result of the admittedly wrongful repudiation. This issue raises squarely the correctness of the decision of the Ontario Court of Appeal in Goldhar v. Universal Sections and Mouldings Ltd.[2], which was followed by the majority of the British Columbia Court of Appeal in the present case.

The substantial question emerging from the facts is the measure and range of damages which the landlord, the appellant before this Court, may claim by reason of the repudiation by the tenant, the respondent herein, of its lease of certain premises, and its consequent abandonment of those premises, where the landlord took possession with a contemporaneous assertion of its right to full damages according to the loss calculable over the unexpired term of the lease. It will be necessary, in dealing with this question, to consider the situations where, upon the tenant’s repudiation and abandonment, the landlord does not resume possession but insists on enforcing the lease, or takes possession on his own or on the tenant’s account. A common characterization of the problem in this appeal is whether it is to be resolved according to the law of property or according to the law of contract; but, in my opinion, this is an over-simplification.

The dispute between the parties stems from a lease of August 19, 1960, under which the landlord demised certain premises in its shopping centre to the tenant “to be used for grocery store and super market”. A term of fifteen years from October 1, 1960, was specified at a prescribed annual rent, payable monthly in advance, plus an additional rent based on a certain formula which need not be reproduced here. The tenant covenanted, inter alia, to pay rent, certain taxes and

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maintenance costs; not to do or suffer anything to be done on the demised premises without the landlord’s consent whereby insurance policies thereon might become void or voidable or the premiums increased; and to pay into a promotion fund to be used for the benefit of the shopping centre. There were covenants for repair and provisions for renewal but their terms are not germane to the disposition of this appeal. There was also a covenant by the landlord for quiet enjoyment. Clause 5 (a), so far as relevant here, provided that if the rent or any part thereof be in arrears for 15 days or if any covenant by the tenant should be unfulfilled, and the failure to pay rent or fulfil the covenant should continue 15 days after notice thereof to the tenant, then the current month’s rent and three months’ additional rent should immediately become due and the landlord might forthwith re-enter and thereupon the demise should absolutely determine but without prejudice to any right of action in respect of any antecedent breach of the tenant’s covenants.

Clause 9, which was central to the landlord’s claim for damages, was as follows:

The tenant further covenants and agrees that it will commence to carry on its business within thirty (30) days from the completion of the demised premises and will carry on its business on the said premises continuously. The demised premises shall not be used for any other purpose than as to conduct the Tenant’s business in the said premises during such hours as the Landlord may from time to time require on all business days during the term hereby created and in such manner that the Landlord may at all times receive the maximum amount of income from the operation of such business in and upon the demised premises. The Tenant shall install and maintain at all times in the demised premises first class trade fixtures and furniture adequate and appropriate for the business of the Tenant thereon. The Tenant further agrees to conduct its business as aforesaid in the said premises during such evenings and for such hours thereof during the term hereby created as permitted by the By-laws of the Corporation of the District of North Vancouver, B.C. and consistent with the practices generally acceptable by retail outlets in the area.

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The shopping centre built by the appellant consisted of eleven stores, including the supermarket premises let to the respondent. Before buying the land on which the shopping centre was later built, the appellant obtained the commitment of the respondent to lease space therein for a food supermarket to be constructed according to its specifications. This commitment was evidenced by a lease dated blank day of May, 1960, whose terms were carried into the document of August 19, 1960. The respondent went into possession through a subtenant (with the appellant’s consent) on or about October 20, 1960. By February 1961, only five other stores in the shopping centre had been let, and the venture did not prosper. The supermarket subtenant indicated its intention to close the business down on March 24, 1962, and did so. The appellant drew the respondent’s attention to clause 9 of the lease and received an assurance in a letter from the respondent of March 26, 1962, that it was standing by the lease and was endeavouring to sublet its leasehold. Nothing came of its endeavours.

The closing down of the supermarket adversely affected the other tenants in the shopping centre, and by November 22, 1963 (a date whose relevance will appear later) three of those tenants had moved out. The shopping centre began to take on a “ghost-town” appearance and suffered from petty vandalism. On April 13, 1962, following the closing down of the supermarket, the appellant’s solicitors wrote to the respondent, again drawing attention to clause 9 of the lease, complaining that the appellant was suffering damage and advising that they would seek compliance to have the business reopened or would claim damages. The appellant learned in July 1962 that the respondent was removing fixtures, and its solicitors wrote in objection on July 11, 1962, relying on clause 9 and on the covenant in clause 10 (a) permitting removal if the tenant is not in default. The letter threatened resort to an injunction unless the removal was halted.

The action, out of which this appeal arises, was commenced on July 16, 1962, and an interlocutory injunction was sought but refused. Rent

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was paid by the respondent to June 1963. The statement of claim, which was delivered on May 31, 1963, asked for a declaration that the lease was binding upon the respondent, asked for a decree of specific performance and for a mandatory order and an injunction, and also sought damages. The respondent delivered a defence and counterclaim on September 12, 1963. Paragraph 8 of the counterclaim said flatly: “The Defendant hereby repudiates the said agreement dated August 19, 1960”. As a result of this repudiation, the appellant’s solicitors wrote to the respondent’s solicitors on November 22, 1963 (a date mentioned earlier in these reasons) in these terms:

Dear Sirs: Re: Highway Properties Limited and Kelly Douglas & Co. Ltd.

This is to advise you that in view of your pleadings, our client takes the position that your client has repudiated the lease in question.

Our client, therefore, intends to take possession of the premises and will attempt to lease these upon the same terms and conditions as set out in the lease of the 19th of August, 1960.

We would further advise you that our client intends to hold your client responsible for any damages suffered by them as a result of your client’s breach and wrongful repudiation of the said lease.

Following this letter the appellant took possession of the supermarket premises and attempted, without success, to re-let them for the unexpired term of the lease of the respondent. Subsequently, the appellant subdivided the premises into three stores which were eventually rented, two under a lease of March 1, 1965, and the third under a lease of November 1, 1965. At the opening of trial on November 29, 1966, the appellant obtained leave to amend its statement of claim. The amendment referred to the respondent’s repudiation of the lease and to the consequent rescission of the agreement thereunder in accordance with the letter of November 22, 1963, and claimed damages not only for loss suffered to the date of the so-called rescission but also, and mainly, for prospective loss

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resulting from the respondent’s failure to carry on a supermarket business in the shopping centre for the full term of the lease.

The theory upon which the appellant claimed damages was rejected by the trial judge, Macdonald J., and by the majority of the Court of Appeal, Davey C.J.B.C. dissenting. The holding both at trial and on appeal was that there had been a surrender of the lease by reason of the repudiation and the taking of possession by the appellant; that the principles enunciated in the Goldhar case were applicable; that the lease and its covenants ceased to exist with the surrender; and that the appellant could recover only for breaches occurring to the date of surrender. The damages on this footing totalled $14,256.38, composed of five months’ rent; the decline in rental income in 1962 and in 1963 to the date of surrender by reason of the closing of other stores; a portion of the taxes payable for 1963; a sum for increased insurance premiums for 1963; and a portion of maintenance costs for 1963 to the date of surrender.

It is common ground, as appears from the reasons of Davey C.J.B.C. in the Court of Appeal, that if it should be determined that damages must be assessed on the basis claimed by the appellant, the assessment should be remitted to the trial judge to be made on the evidence adduced before him.

I approach the legal issue involved in this appeal by acknowledging the continuity of common law principle that a lease of land for a term of years under which possession is taken creates an estate in the land, and also the relation of landlord and tenant, to which the common law attaches various incidents despite the silence of the document thereon. For the purposes of the present case, no distinction need be drawn between a written lease and a written agreement for a lease. Although by covenants or by contractual terms, the parties may add to, or modify, or subtract from the common law incidents, and, indeed, may overwhelm them as well as the leasehold estate by commercial or business considerations which represent the dominant features of

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the transaction, the “estate” element has resisted displacement as the pivotal factor under the common law, at least as understood and administered in this country.

There has, however, been some questioning of this persistent ascendancy of a concept that antedated the development of the law of contracts in English law and has been transformed in its social and economic aspects by urban living conditions and by commercial practice. The judgments in the House of Lords in Cricklewood Property and Investment Trust Ltd. v. Leighton’s Investment Trust Ltd.[3] are illustrative. Changes in various states of the United States have been quite pronounced, as is evident from 1 American Law of Property, 1952, # 3.11.

In the various common law Provinces, standard contractual terms (reflected, for example, in Short Forms of Leases Acts) and, to a degree, legislation, have superseded the common law of landlord and tenant; for example, in prescribing for payment of rent in advance; in providing for re-entry for non-payment of rent or breaches of other covenants exacted from the tenant; in modifying the absoluteness of convenants not to assign or sublet without leave; and in blunting peremptory rights of termination or forfeiture. The contractual emphasis, even when reinforced by commercial clauses testifying to the paramount business considerations in a lease of land, has hitherto stopped short of full recognition of its remedial concomitants, as, for example, the principle of anticipatory breach and the principle governing relief upon repudiation. I note that this Court had no hesitation in applying the doctrine of anticipatory breach to a contract for the sale of land, even to the point of allowing an immediate suit for specific performance (but, of course, at the time fixed for completion): see Kloepfer Wholesale Hardware and Automotive Co. v. Roy[4]. I think it is equally open to consider its application to a contractual lease, although the lease is partly executed. Its anticipatory feature lies, of course, in the fact that instalments of rent are payable for future periods, and repudiation of the lease raises the question whether an immediate remedy cover-

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ing the loss of such rent and of other advantages extending over the unexpired term of the lease may be pursued notwithstanding that the estate in the land may have been terminated.

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 convenant. 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. Another element would be the loss, so far as provable, resulting from the repudiation of clause 9. I say no more about the elements of damages here in view of what has been agreed to in that connection by the parties.

There is no need to discuss either the first or second of the alternatives mentioned above other than to say, in respect of the second, that it assumes a situation where no prospective damages could be proved to warrant any claim for them, or even to warrant taking the third alternative. I wish, however, to examine the underpinnings and implications of the third course because they have

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a decided bearing on whether the additional step proposed by counsel for the appellant should be taken in this case.

Where repudiation occurs in respect of a business contract (not involving any estate in land), the innocent party has an election to terminate the contract which, if exercised, results in its discharge pro tanto when the election is made and communicated to the wrongdoer. (I agree with the opinion of such text writers as Cheshire and Fifoot, The Law of Contract, 7th ed., 1969, at p. 535, that it is misleading to speak of the result as rescission when there is no retrospective cancellation ab initio involved.) Termination in such circumstances does not preclude a right to damages for prospective loss as well as for accrued loss.

A parallel situation of repudiation in the case of a lease has generally been considered in the language of and under the principles of surrender, specifically of surrender by operation of law or implied surrender. It is said to result when, upon the material breach or repudiation of a lease, the innocent party does an act inconsistent with the continued existence of that lease. The Goldhar case applied the doctrine where, upon a tenant’s repudiation of a lease, the landlord re-let the premises. The further consequence of this was said to be not only the termination of the estate in the land but also the obliteration of all the terms in the document of lease, at least so far as it was sought to support a claim thereon for prospective loss.

The rule of surrender by operation of law, and the consequences of the rule for a claim of prospective loss, are said to rise above any intention of the party whose act results in the surrender, so long as the act unequivocally makes it inconsistent for the lease to survive. Even if this be a correct statement of the law, I do not think it would apply to a case where both parties evidenced their intention in the lease itself to recognize a right of action for prospective loss upon a repudiation of the lease, although it be followed by termination of the estate. There are cases in other jurisdictions which have recognized the validity of covenants to this effect: see 11 Williston on Contracts (Jaeger) 3rd ed., 1968,

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# 1403. One of the terms of the lease in Bel-Boys Buildings Ltd. v. Clark[5] was in the nature of such a covenant applicable to a guarantor, and the dissenting judgment of Allen J.A. of the Alberta Appellate Division recognized the enforceability of the guarantee notwithstanding the termination of the obligation to pay rent. I should add that the reasons proceeded on the ground that the guarantee obligation arose before there had been an effective surrender.

English and Canadian case law has given standing to a limitation on the operation of surrender, although there is repudiation and repossession, if the landlord, before repossessing, notifies the defaulting tenant that he is doing so with a view to re-letting on the tenant’s account. No such notice was given in the Goldhar case; and although it was argued in the present case that the letter of November 22, 1963, asserted that position, neither the trial judge nor the Court of Appeal accepted the argument. I agree that the letter is not sufficiently explicit to that end, but I would think that the recognition of such a modifying principle would suggest a readiness to imply that a re-letting was on the repudiating tenant’s behalf, thus protecting the landlord’s rights under the lease and at the same time mitigating the liability for unpaid rent. Some of the views expressed in Oastler v. Henderson[6] point to a disposition to such an implication; and there is authority in the United States to that effect: see 11 Williston on Contracts, supra. I know that under the present case law the landlord is not under a duty of mitigation, but mitigation is in fact involved where there is a re-letting on the tenant’s account.

Since the limiting principle under discussion is based on a unilateral assertion of unauthorized agency, I find it difficult to reconcile with the dogmatic application of surrender irrespective of intention. One of the earliest of the cases in England which gave expression to this limiting principle was Walls v. Atcheson[7]. I read it as indicating that a landlord upon an abandonment or

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repudiation of a lease by his tenant may qualify his re-entry to make it clear that he is not foregoing his right to insist on continuation of the tenant’s obligation to pay rent. Since rent was regarded, at common law, as issuing out of the land, it would be logical to conclude that it ceased if the estate in the land ceased. But I do not think that it must follow that an election to terminate the estate as a result of the repudiation of a lease should inevitably mean an end to all covenants therein to the point of denying prospective remedial relief in damages.

I appreciate, however, that this principle of denial has been carried into modern doctrine from the older cases that were founded on the relation of surrender to a continuing claim for rent. Woodfall on Landlord and Tenant, 27th ed., 1968, vol. 1, at p. 869 cites only the Goldhar case for the proposition, but it is evident from other English cases such as Richmond v. Savill[8], that the English law is to the same effect. I have the impression from a reading of the cases that the glide into this principle was assisted by translating repudiation or abandonment into an “offer” of surrender and by compounding this legal solecism by a further lapse into the language of rescission.

Nothing that was decided by this Court in Attorney General of Saskatchewan v. Whiteshore Salt and Chemical Co. Ltd. and Midwest Chemicals Ltd.[9] bears on the issues now before it. That case was concerned with whether certain unexpired mining leases of Saskatchewan land, granted under federal authority before the 1930 transfer to Saskatchewan of its natural resources by Canada, must be taken to have been surrendered when in 1931 the leases were replaced by others granted by the Province, these being in turn replaced in 1937. On the answer to this question depended the liability of the lessees to increased royalties prescribed under provincial law. If there was no surrender, the lessees were protected by a provision of the Natural Resources Agreement of 1930. Kellock J., who spoke for the

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majority, was not addressing himself to any issue of damages such as is involved here when he referred generally to the proposition that on a surrender “the lease is gone and the rent is also gone” (a proposition which brooks no disagreement); or when he referred to Richmond v. Savill, supra, as standing for the principle that the lessee remains liable for rent accrued due or breaches of covenant committed prior to surrender. These observations were unnecessary for the determination of the question before him, and I do not regard them in any event as controlling for the present case.

As long ago as 1906, the High Court of Australia in Buchanan v. Byrnes[10] held that upon an abandonment by a tenant, in breach of covenant, of the hotel property which he had leased, the landlord was entitled to claim damages over the unexpired term of the lease notwithstanding a surrender. It is coincidence that the lease in that case was for fifteen years and that it also included a covenant by the tenant, similar to the covenant here, to carry on the business for which the lease was given, for the full term of the tenancy. I quote two passages from the various reasons for judgment, one from those of Griffith C.J. and the second from those of Barton J., as follows (found, respectively, at pp. 714 and 719):

In this case he convenanted to carry on [the business] for fifteen years, and on 30th June he not only left the place, but he did so under such circumstances that he could not carry it on, and he sold the furniture. That was as complete a breach of the covenant to carry on the business as it was possible for him to commit, and under these circumstances the plaintiff had at once a complete cause of action against him. He was entitled to bring an action forthwith for the breach of that covenant, and he was entitled to such damages as would properly flow from such a breach of covenant. The surrender, therefore, if accepted at all, took place after breach, and the defence is not proved.

* * *

It must not be forgotten that a right of action had arisen on the termination of the correspondence on

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the 28th June, as the defendant had given distinct notice of his intention not to perform his covenant. There was at that time a renunciation which, at the plaintiff’s option, amounted to a breach of the covenants that throughout the term he would carry on a licensed victualler’s business upon the premises and keep them open and in use as an inn, &c., and of the covenant not to do anything which might entail forfeiture of the licence (Licensing Act 1885, sec. 101), as well as of the subsidiary covenants. The plaintiff was then entitled to claim in an immediate action, prospectively, such damages as would be caused by a breach at the appointed time, subject to any circumstances which might operate in mitigation of damages: Leake on Contracts, 4th ed., 617-618, and cases there cited, especially Hochster v. Delatour, 2 E. & B., 678; 22 L.J.Q.B., 455, and Johnstone v. Milling, 16 Q.B.D., 460. But it is said that the conduct of the plaintiff in resuming possession under the circumstances estops him from suing upon the covenants. I must not be taken to hold that it has that effect as to the covenant to pay rent. But, however that may be, can it estop him as to the other covenants which relate to the keeping the premises as an inn throughout the term, and the doing of the other things necessary for that purpose? Conduct, to constitute an estoppel, must have caused another to believe in the existence of a certain state of things, and have induced him to act on that belief so as to alter his own position. How can that be said to be the effect of the plaintiff’s conduct, when the act of the defendant, so far from having been induced by it, has preceded it? In my judgment the doctrine of estoppel cannot be applied against the plaintiff, and I am driven to the conclusion that the learned Judge who tried the case, and who held that the plaintiff was bound by estoppel, has based his judgment on facts which do not entitle a Court to apply that doctrine.

I note that Buchanan v. Byrnes was applied a few years ago by the Supreme Court of Western Australia in Hughes v. N.L.S. Pty. Ltd.[11].

The approach of the High Court of Australia commends itself to me, cutting through, as it does, artificial barriers to relief that have resulted from overextension of the doctrine of surrender

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in its relation to rent. Although it is correct to say that repudiation by the tenant gives the landlord at that time a choice between holding the tenant to the lease or terminating it, yet at the same time a right of action for damages then arises; and the election to insist on the lease or to refuse further performance (and thus bring it to an end) goes simply to the measure and range of damages. I see no logic in a conclusion that, by electing to terminate, the landlord has limited the damages that he may then claim to the same scale that would result if he had elected to keep the lease alive.

What is apparently the majority American view is to the same effect as the view taken in Australia and that I would take: see 4 Corbin on Contracts, 1951, # 986, at p. 955. The American Law of Property, 1952, vol. 1, pp. 203-204, states that “If the lessee abandons the premises and refuses to pay rent, the cases quite generally hold, in accordance with the doctrine of anticipatory breach, that the lessor may sue for complete damages without waiting until the end of the term”; and I may add that, under the case law, this is so at least where the suit is for damages and not for rent as such.

There are some general considerations that support the view that I would take. It is no longer sensible to pretend that a commercial lease, such as the one before this Court, is simply a conveyance and not also a contract. It is equally untenable to persist in denying resort to the full armoury of remedies ordinarily available to redress repudiation of covenants, merely because the covenants may be associated with an estate in land. Finally, there is merit here as in other situations in avoiding multiplicity of actions that may otherwise be a concomitant of insistence that a landlord engage in instalment litigation against a repudiating tenant.

Lest there be any doubt on the point, clause 5 (a) of the lease (previously referred to in these reasons) does not preclude the claim made

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herein for prospective damages. The landlord did not invoke the clause, and hence no question arises of an irrevocable election to rely on it.

I would, accordingly, allow his appeal, with costs to the appellant throughout, and remit the case to the trial judge for assessment of damages. It follows that I would overrule the Goldhar case.

Appeal allowed with costs.

Solicitors for the plaintiff, appellant: Sutton, Braidwood, Morris, Hall & Sutton, Vancouver.

Solicitors for the defendant, respondent: Farris, Farris, Vaughan, Wills & Murphy, Vancouver.