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Continuous-Operation Clauses: Longwood v. Coast Capital

It is not uncommon to find a continuous-operation covenant in a commercial lease, particularly in a lease for retail space. Typical drafting requires the tenant to operate its business in the premises continuously, actively and diligently throughout the Term.

 

Canadian courts have traditionally been unwilling to enforce such clauses as to do so would require the court to perform an ongoing supervisory role. However, some American decisions, as well as a British Columbia case, suggest that in certain circumstances, the courts’ position on the availability of mandatory injunctions to enforce such clauses could change.

 

The issue recently came before the British Columbia Supreme Court in Longwood Station Ltd. v. Coast Capital Savings Credit Union (2007 BCSC 1564). There, the plaintiff was the landlord of a commercial mall and the defendant a credit union tenant at the mall (a non-anchor tenant). The tenant had abandoned the leased premises but had undertaken to pay rent due under the lease until its termination. The landlord sought an interlocutory mandatory injunction requiring the tenant to continue its business in the premises until the expiration of the lease.


The lease between the parties required the tenant to “continuously, actively and diligently” carry on business in the Premises, and further stated:

 

The tenant acknowledges […] any failure to so continuously operate will entitle the landlord to obtain an injunction or order compelling the tenant to continuously operate its business in the premises, and the tenant hereby consents to such injunction or order in addition to any other remedies to which the landlord may be entitled at law or in equity.

 

The test to be satisfied on an interlocutory application requires (i) a preliminary assessment of the merits of the case to ensure there is a serious issue to be tried, (ii) a determination of whether the applicant would suffer irreparable harm if the application were refused, and (iii) an assessment as to which of the parties would suffer greater harm from the granting or refusal of the remedy pending a decision on the merits.

 

The court also noted the line of cases which have consistently refused to make orders requiring a business to be carried on and holding damages to be an acceptable remedy. A number of them involved financial institutions as did Longwood.

 

In Longwood, the court found that as the tenant had ceased operations at the premises with express knowledge of the lease, the first aspect of the test noted above was met.  However, the landlord’s arguments failed on the second and third rungs of the test. The court was not convinced that any harm could not be compensated for in damages and further concluded that the balance of convenience did not favour the landlord.  On the basis of these conclusions, as well as a consideration of the supervision necessary to enforce a mandatory injunction, the court held that such an order was not appropriate.

 

The Longwood decision is important because it is a recent affirmation that continuous-operation clauses will not be enforced by the courts. This was true even though the lease contained a consent provision entered into freely by sophisticated parties.

 

However, Justice Bauman does not entirely close the door on enforcing continuous-operation clauses. The court notes the invitation of Justice Esson in A.L. Sott Financial (Newton) Inc. v. Vancouver City Savings Credit Union (2000 BCCA 143) to revisit the enforceability of such clauses (though not finding this the case to do so). The claim in Longwood was dismissed because it failed the test for an interlocutory injunction but also because the landlord’s proposed order was flawed, in that the tenant had not carried out the permitted use in its entirety during the term and the landlord may therefore have waived strict compliance.

Bob Fraser

October 24, 2008 | Permalink

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