Commercial Litigation and Dispute Resolution Blog

Last year I blogged about a Nanaimo commercial tenant who defeated her landlord’s claim for unpaid rent on the grounds the lease had been fundamentally breached as a result of a pervasive odour. Neither the landlord, nor the tenant could find the source of the smell though it was related to the HVAC system. The odour was adversely affecting the tenant’s retail clothing business to the point she stopped paying rent. The landlord sued. At trial, the court found that the persistence of an unpleasant odour was a breach of the covenant of quiet enjoyment. The court held that the presence of “a strong and unpleasant odour” defeated the purpose of leasing the space “entirely by discouraging clientele from entering the Premises and ruining the product for sale.” It was substantial enough to entitle termination of the lease on the grounds of fundamental breach. 

The landlord appealed. In a setback for commercial tenants, the Court of Appeal recently overturned to the trial decision. They did so essentially on two grounds. First, the lease terms outlined that the leased retail space was provided to the tenant “on an ‘as is, where is’ basis” with no representations as to fitness. In addition, the lease made the tenant responsible for keeping the premises in good repair, including the HVAC system. These types of terms meant that the trial judge’s finding of breach of a term of implied fitness was unsustainable. 

Second, the Court of Appeal turned to the issue of quiet enjoyment and “fundamental breach”. Such a breach means that substantially the whole benefit of the contract has been lost as a result. The trial judge had found that “the odour breached the landlord’s covenant of quiet enjoyment,” which deprived the tenant “of the whole benefit of the contract.” 

The Court of Appeal began by reviewing what “quiet enjoyment” means as a matter of law. The gravamen of “quiet enjoyment” is to be able to exclusively occupy premises without interference by the landlord or his agents. Only a substantial interference in a tenant’s occupancy by the landlord will infringe quiet enjoyment. The infringement must be “grave and permanent” in nature. 

The Court of Appeal noted there was no evidence the landlord caused the odour or that the odour was of a “grave and permanent nature”. As such, its existence was not an infringement of the right to quiet enjoyment. The Court of Appeal then turned to the question of whether the odour was a fundamental breach of the lease. A fundamental breach must make further performance of the lease impossible or deprive the tenant of substantially the whole benefit of the lease. The presence of the odour, while unpleasant, did not prevent the tenant from carrying on business. She had not proven any loss of sales or profits. She had not tried to determine the source of the smell, instead simply ceasing to pay rent. In any event, the lease terms made it the tenant’s responsibility to service and repair the HVAC system.

For tenants, this result is an illustration of the need to review and understand your lease terms before you sign it and to fully test and inspect the premises you intend to lease.  While there are factual scenarios, supported by court decisions, which support a claim for fundamental breach based on a breach of the right to quiet enjoyment, this recent decision illustrates that such cases must be quite extreme to succeed. The lesson is to look before you leap: review and understand your lease; inspect and be confident about the quality and fitness of the premises you intend to occupy.