• Tenant Successful in Dispute Over Lease Deposit
  • July 8, 2013 | Authors: Natasha L. Jimeno; Anne-Marie Widner
  • Law Firm: Cassels Brock & Blackwell LLP - Toronto Office
  • The British Columbia Court of Appeal decision in Shanahan v. Turning Point Restaurant Limited1 explores the Landlord’s right to terminate a lease for non-payment of rent when the Landlord is holding the Tenant’s deposit. The case also addresses the appropriate quantum of compensatory and punitive damages to be awarded on the unlawful termination of a lease agreement.

    The Initial Decision

    At trial, Turning Point Restaurant Ltd. (the “Landlord”) was ordered to pay $92,900.00 plus costs to Michael Shanahan (the “Tenant”) for terminating a lease of premises mid-term for non-payment of rent. The Tenant ran a restaurant in the rental premises that was not profitable, and as a result defaulted on its monthly rent payment. The Landlord delivered notice of default to the Tenant in accordance with the lease, and eventually terminated the lease for non-payment of rent. The central issue in this case was the characterization of a $7,600.00 deposit paid by the Tenant to the Landlord. The Tenant argued that the Landlord erred in terminating the lease as the $7,600.00 payment was a general deposit and he was entitled to have it applied to rent mid-term when he was late in paying rent. The Landlord took the position that the deposit was to be applied to first and last months’ rent by virtue of an oral agreement made between the Landlord and the Tenant.

    The trial judge found in favour of the Tenant, noting the lease contained an entire contract clause, which excluded any oral agreements, and did not expressly provide that the deposit was to be applied towards first and last months’ rent. The judge found that the Landlord was not entitled to terminate the lease because it was obliged to apply the deposit to rent arrears when requested by the Tenant. The $92,900.00 cost award reflected $100,000.00 in damages less $7,100.00 owing by the Tenant for the purchase of equipment and damage to property.

    The Decision of the Appeal Court

    On appeal by the Landlord, the Court of Appeal upheld the trial judge’s findings of liability and found that there was no reversible error in the decision of the trial judge as to the contents of the lease.

    The Court of Appeal did reduce the trial judge’s assessment of damages for the wrongful termination of the lease. The judge, citing Bradshaw Construction Ltd. v. Bank of Nova Scotia2 stated that the Tenant must prove the existence of any loss on a balance of probabilities. Additionally, the judge noted that even if a claim is probable the claim may be discounted by uncertainties and negative contingencies.

    Applying the approach from Bradshaw Construction to this case, the judge was of the view that the scale of the loss in relation to lost opportunity (relating to the personal guarantees given by the Tenant) should be reduced to properly reflect the significant possibility that the business would not have continued long past the date that the lease was terminated, and the Tenant’s financial position would not have recovered. Additionally, the loss of the right of first refusal and the loss of the right to quiet enjoyment did not attract significant damages. Discounting the amount of the Tenant’s liabilities to reflect the likelihood that the business would not have survived, the judge assessed damages at $12,500.00. The Court also reduced the punitive damages award to $2,500.00 and found that this amount would properly deliver the Court’s expression of disapproval of the Landlord’s behaviour here.

    The takeaway from this case is that when drafting the deposit clause in a lease, ensure the language is clear as to how a deposit is to be applied in the event of default. Further, a Landlord who wishes to exercise its right to terminate for non-payment of rent should read the Lease carefully to ensure it is not obliged to apply any deposit towards arrears of rent.

    1 2012 BCCA 411
    2 1989 BCJ No. 1329