Specific Performance: Not Extraordinary in Commercial Leasing

Written By Simon Crawford and Meg Tweedlie

In light of recent caselaw, and despite popular belief, it may be time to reframe specific performance as a perfectly ordinary remedy rather than an extraordinary one. The decision of Justice Rees in The Decorators Choice Paint Store Ltd. v Innes Crossing Inc.¹, reaffirms what we recently saw in Bellwoods Brewery Inc. v 1896841 Ontario Limited², which is that the remedy of specific performance should not be a surprising outcome in the context of leasing disputes.

Key Facts

Decorators Choice Paint Store Ltd. (Decorators) was a tenant of Innes Crossing Inc. (Innes) in Ottawa's east end since 1993, leasing a retail store of 3,600 square feet. In 2018, when Decorators began to outgrow its then current premises, it was approached by Innes with an offer to lease new premises of 7,160 square feet in the same shopping complex. On February 1, 2022, the parties entered into a commercial lease agreement with a 10-year term for the new premises. Following the execution of the lease, Decorators completed plans for the space, retained contractors, and ordered additional inventory, all based on the understanding, as set out in the lease, that possession of the new premises would be granted by June 1, 2022, following Innes' completion of the landlord's work, in order for Decorators to complete the tenant's work. The lease term would then commence on September 16, 2022.

Months passed, and it was not until November 2022 that Innes took steps to hire a contractor to begin the landlord's work. However, progress was quickly halted when Innes failed to pay the contractor, ultimately leading to the termination of the construction contract. Innes did not attempt to retain a new contractor nor take any steps to allow Decorators to take possession of the premises. Despite repeated demands by Decorators for Innes to rectify the situation, Innes failed to act. 

In response to Innes' inaction, including its failure to respond to Decorators' statement of claim, Decorators ultimately brought a motion for default judgment seeking a declaration that the lease was validly executed, specific performance of the lease, and damages to be adjourned until such damages had fully crystallized.

Specific Performance: An Ordinary Remedy

As a preliminary point, Justice Rees found that the lease had been validly executed, and that Innes had indeed breached the lease. Innes had failed to take reasonable steps to complete the landlord's work, failed to provide Decorators with possession by the June 1 possession date, and had deprived Decorators of the whole benefit of the lease and use of the new premises. This led to the question, and the purpose of this blog, of whether specific performance was an available and appropriate remedy.

While damages are the more commonplace remedy for breach of contract, specific performance is available where the plaintiff shows that the land itself rather than the monetary equivalent is the more appropriate remedy.  In other words, a plaintiff must demonstrate that monetary damages would be inadequate compensation. In completing its analysis, the court will consider the nature of the property involved, including whether the property is unique, the adequacy (or inadequacy) of damages, and the behavior of the parties. When considering the uniqueness of the property, one must evaluate whether the property can be readily duplicated elsewhere, the proposed use of the property, and whether the property is particularly suitable for the proposed use. The property being one-of-a-kind and unique from all others is not a necessity.

Justice Reese considered these three factors—the nature of the property, the adequacy of damages, and the behavior of the parties—in rendering his decision.

1. The Property

The court found that the premises were unique in that they could not be readily duplicated elsewhere. The court cited the following qualities of the premises in making such determination:

(a) the premises were within the geographic boundaries in which Decorators could sell Benjamin Moore products pursuant to a distribution agreement with Benjamin Moore and the premises were specific to the terms of an exclusivity agreement with Pure & Original;

(b) the premises were in the same shopping center as the current store, allowing for a smooth transition to the new space with minimal disruption to business and customers;

(c) the premises were near a highway allowing for easy access for customers and suppliers;

(d) the premises contained an additional 3,560 square feet in space, which would permit Decorators to not only redesign the store but expand its contractor volume, retail offerings and online sales;

(e) the surrounding area was a home improvement and home decorating hub; and

(f) the shopping center had ample dedicated parking for customers.

As further evidence of the uniqueness of the premises, Decorators was unable to find alternative space that would meet its business needs and fulfil its obligations pursuant to the respective agreements with its suppliers.

2. The Inadequacy of Damages

The court found that monetary damages would be inadequate compensation for the loss of the premises. The court focused on the lost opportunities and profits that would have been gained from the new premises, including the ability to implement Benjamin Moore's "Store of the Future Program", increase overall sales, build a new wallpaper design center and interactive display showcase for wallcoverings from various suppliers as well as custom drapery, have an interactive display for Farrow and Ball products, become the exclusive retailer for an increasingly popular Pure & Original product, which exclusivity was based on the location and design plans of the new premises, and develop an Amazon Storefront for custom drapery products. These opportunities would only be gained from the new premises and could therefore not be adequately covered by monetary damages alone.

3. The Behavior

Finally, the court found that Decorators had acted in good faith and that there was no evidence of conduct that would disentitle it to equitable relief. Decorators had consistently demanded that Innes meet its obligations under the lease and had attempted to engage with Innes despite its continued failures and unresponsiveness. The court found that Decorators was ready to perform its side of the deal.

4. Additional Considerations

In addition to completing the analysis of whether the case at hand met the requirements for specific performance to be an appropriate remedy, the court also considered whether a long-term commercial lease was ineligible for such a remedy. The court considered the case of Co-operative Insurance Society Ltd. v Argyll Stores (Holdings) Ltd.³, where the House of Lords had declined to order specific performance on the basis that such a remedy would have required the defendant, a failing supermarket chain, to carry on its business and operate at a loss, which would ultimately lead to issues with ongoing enforcement.

Justice Rees drew a distinction between requiring a defendant to carry on a business over the long term and ordering a defendant to achieve a specific result or to perform specific acts. The decision in Argyll focused on the policy and practicality of requiring a failing business to continue operations in the long term, while in the case at hand, Innes was a going concern as a commercial landlord with an active real estate portfolio, which included the current lease to Decorators at the existing premises. There was no evidence to suggest that specific performance would lead Innes to operate at a loss. Justice Rees also noted that the terms of the lease were precise enough to permit the court to adjudicate whether the defendant was in fact complying with the order of specific performance.

The court granted an order for specific performance for the full 10-year term of the lease. In doing so, it ordered that Innes give Decorators immediate possession of the premises in order to complete the landlord's work and tenant's work and that Innes cooperate in all aspects to facilitate such possession. Additionally, while the court recognized that it had the power to order damages in addition to specific performance, it adjourned the issue until such time that Decorators took possession of the premises, and its damages would fully crystalize.

Takeaways

The case of Decorators Choice confirms what was previously established in Bellwoods, which is that "it is inaccurate to describe the remedy of specific performance as an extraordinary remedy”⁴, or, as Justice Rees puts in his own words, that it is "an exaggeration to say that specific performance is an extraordinary remedy."⁵ There is generally no principle in Ontario against ordering specific performance in the context of a long-term commercial lease when it is shown appropriate to do so. In light of these recent decisions, landlords and tenants should be attuned to the fact that specific performance is a perfectly ordinary remedy in the world of commercial leasing and that they may very well be ordered by the court to hold up their end of the bargain.

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