Western Canada Business Litigation Blog

Can You Smell a Fundamental Breach? Commercial Tenancy and Quiet Enjoyment

Posted in Commercial, Real Estate
Print Comment

What happens if you lease a commercial retail space only to find, after several months of operation, that there is a pervasive and unpleasant smell in the place?  Customers are complaining.  Your employees are feeling ill.  Your inventory might be getting damaged.  The source of the smell cannot be found.  Is this your problem or the landlord’s?  Can you get out from under the lease? 

Based on a recent case, there is a strong argument that, whatever the written terms of the lease may say, the persistent presence of an unpleasant odour can be a fundamental breach of a tenant’s right to “quiet enjoyment” of the leased premises.  A fundamental breach entitles a tenant to repudiate the lease and end the relationship with the landlord.  To qualify as a fundamental breach worthy of repudiation, the conduct or problem at issue must deprive the tenant of “the very thing bargained for”.  In other words, the breach must deprive the tenant of substantially the whole of the benefit which the tenant was to obtain under the lease.

In this specific case, Ms. Powers leased retail space from an “obdurate landlord” with the intent of operating a high-end retail clothing store.  She spent money on improvements and advertising and, in the first few months, her store did very well.  In fact, the shop always made a profit.  However, over time the store began to manifest an “unpleasant odour”.  Customers shied away and employees complained.  Ms. Powers worried her stock would be permeated by the odour and get damaged.  The landlord denied the existence of the problem.  General repairs he attempted under the guise of regular maintenance did not resolve the issue.  The source of the odour was never established but was suspected to be the HVAC system.  Eventually, Ms. Powers closed her store, returned the keys to the landlord and found an alternate location.  The landlord sued her for breach of the lease which had several years to run.

The court relieved Ms. Powers of her obligations under the lease by finding that the persistence of an unpleasant odour was a breach of the covenant of quiet enjoyment.  This problem was substantial enough to entitle Ms. Powers to terminate the lease without any further obligation to the landlord.  The court found 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.”  The court also awarded her damages for the differential cost she incurred in renting another space and for her advertising and renovation expenses for the original space.

The landlord did himself no favours.  The court found him to be a “most unsatisfactory witness” as he denied the existence of the odour, despite the evidence of many that it had been a problem for a long time, and by couching his repair efforts as general maintenance rather than efforts to resolve the smell.  His refusal to “answer questions simply and directly” led the court to find his evidence unreliable and that he was making “obvious attempts to tailor his evidence in ways he thought would help the outcome he sought.” 

If you are a commercial tenant and think you are not being provided with “quiet enjoyment” of your premises, you may be able to end your lease.  However, the law relating to commercial tenancies and their termination can be quite complicated.  It would be prudent to seek legal advice before taking any precipitous steps.  This could make the difference between having to live with a lease you no longer like and being able to end it without further obligation.