Sovereign Immunity and the Challenge of Leasing to Foreign State Tenants
Leasing real property to foreign states presents a unique challenge to landlords. The operation of the doctrine of sovereign immunity, if not properly addressed in the lease instrument, can severely impact a landlord’s ability to seek recourse from the courts when faced with a problematic tenant. The aim of this article is to concisely set out the principal issues that should be considered by landlords whose portfolios include consulates, embassies or other foreign state tenants.
i. The application of sovereign immunity to lease agreements
As set out in the State Immunity Act (“SIA”), the Foreign Missions and International Organizations Act and the few cases within which these legislative instruments have been considered, the doctrine of sovereign immunity applies to leases in favour of consulates and other foreign state tenants. The 2008 Superior Court of Quebec decision in Teitelbaum v. 9093-8119 Quebec Inc. and the 1980 Ontario Supreme Court decision in Royal Bank of Canada v. Corriveau are particularly helpful in illustrating the application of sovereign immunity in this context. In both of these cases, the courts specifically remarked that the operation of a consulate or embassy is a sufficiently “governmental activity” to capitalize on the protection offered by the SIA.
ii. What if the foreign state tenant fails to plead immunity
Section 3 of the SIA establishes a presumption of sovereign immunity that operates notwithstanding a state’s failure to plead it. The onus of defeating this presumption falls on the party that is opposing the foreign state. This may be achieved by persuading the court that the opposing party should be able to rely on one of the exceptions to sovereign immunity set out in the SIA (e.g. that the foreign state is actually operating a purely commercial entity out of the premises). For greater clarity, sovereign immunity is presumed to apply notwithstanding a state's inaction unless the opposing party establishes that an exception is available or the state submits to the jurisdiction of the Canadian court.
iii. Landlord remedies in the face of sovereign immunity
Although the SIA establishes a presumption of immunity from the court's jurisdiction, it does not expressly contain prohibitions preventing private parties from exercising their contractual rights when doing so does not require the court’s intervention (e.g. re-entering and changing locks). Accordingly, landlords may have some latitude in exercising self-help remedies. While self-help does not appear to be restricted by the SIA, there is debate within the legal community as to how much protection the doctrine of sovereign immunity will afford to the foreign state tenant if the landlord elects to re-enter the premises. Some commentators have suggested that it may be possible for a tenant to rely on the provisions of the Foreign Missions and International Organizations Act as a way to restrain the landlord from exercising its right of re-entry, although this does not appear to have been litigated as a live-issue.
In addition to the potential for self-help, landlords may be able to turn to section 6 of the SIA. This provision provides an exception to the presumption of immunity in circumstances where a foreign state is a party to a proceeding that concerns “damage to or loss of property that occurs in Canada”. While the judicial definition of “property” in this context means tangible property and therefore does not extend to pure economic loss, this is an exception that landlords may be able to leverage in circumstances where it the tenant’s conduct has resulted in damage to or loss of the leased property.
iv. Voiding the application of sovereign immunity in the future
It is possible for landlords with substantial bargaining power to avoid the operation of sovereign immunity. Subsection 4(2)(a) of the SIA allows foreign states to explicitly submit to the jurisdiction of Canadian courts by written agreement. While this may be difficult for landlords to secure, the inclusion of such a clause in a lease agreement ensures that the foreign state will be subject to the same judicial reach as the typical Canadian tenant. Such a waiver may take the following form:
The Tenant hereto unconditionally and irrevocably:
agrees that the execution, delivery and performance by it of this Lease and all other agreements, contracts, documents and writings relating to this Lease shall be deemed to constitute private and commercial acts and not public or governmental acts for all purposes related to this Lease;
agrees that should any proceedings be brought against it or its assets in any jurisdiction, in relation to this Lease or any transaction contemplated by this Lease, no immunity, sovereign or otherwise, from such proceedings, executions, attachment or other legal process shall be claimed by or on behalf of itself or with respect to any of its assets;
consents generally in respect of the enforcement of any judgment against it in any proceedings in any jurisdiction to the giving of any relief or the issue of any process in connection with such proceedings including without limitation the making, enforcement or execution against or in respect of any property irrespective of its use or intended use subject to subclause 2 above.
By being aware of the doctrine of sovereign immunity from the onset of the negotiation process, landlords will be better positioned to successfully navigate the unique challenges of leasing to foreign state tenants.