The Duty of Good Faith in Commercial Tenancy Disputes

Articles

The recent decision of ARC Digital Canada Corp. v. Amacon Alaska Development Partnership, 2021 BCSC 1612 (“ARC Digital”) demonstrates that the doctrine of good faith continues to be a strong cause of action in disputes between commercial parties.

The Facts

In ARC Digital, Amacon Alaska Development Partnership (the “Landlord”) leased commercial premises to ARC Digital Canada Corp. (the “Tenant”). At the time of the events, the lease between the parties had over 1.5 years remaining on it, with an option for a five-year renewal. As the Landlord planned to redevelop the property, the parties agreed to amend the lease to provide for an early termination date (the “Termination Date”) in exchange for the Landlord providing financial assistance to the Tenant to move to the new premises.

Shortly after the parties reached this agreement, the Landlord sent the Tenant a Lease Amendment (“Lease Amendment”) for signature. The Tenant confirmed that the agreement was acceptable, but that it had to secure a new location before giving up its rights under the original lease. The Tenant then leased new premises and returned the signed Lease Amendment to the Landlord. The Landlord responded that it was no longer willing to honour the terms of the Lease Amendment.

The Termination Date came and went, with the Tenant continuing to incur obligations under both leases. Shortly thereafter, the Landlord delivered a signed Lease Amendment along with half of the promised payment to the Tenant. The Landlord took the position that the Tenant breached the Lease Amendment by failing to vacate by the Termination Date and was not entitled to the second half of the promised payment. The Tenant continued paying rent to the landlord until it was able to relocate to the new premises.

The BC Supreme Court Affirms the Duty of Good Faith

At trial, the Tenant sought specific performance of the Lease Amendment and damages for breach of contract, including rent paid to the Landlord after the originally agreed Termination Date.

The Landlord centered its argument around traditional contract law, arguing that the Tenant affirmed the Lease Amendment in the face of the Landlord’s breach and was therefore required to vacate by the Termination Date. The Tenant, on the other hand, took a broader view and argued that the Landlord’s performance of the Lease Amendment was in breach of its duty of good faith. The Court agreed and affirmed the following principles applicable to the duty of good faith from C.M. Callow Inc. v. Zollinger, 2020 SCC 45:

[87]        In Callow, the following principles were set out:

  1. The dishonest or misleading conduct – the breach of the duty of good faith – must be directly linked to the performance of the contract. It is the link to the performance of obligations under the contract, or to the exercise of rights, that controls the scope of the duty (paras. 49 and 51);
  2. That dishonest conduct may include telling lies or half-truths in a manner that knowingly misleads another party (para. 77);
  3. Dishonest conduct may also arise from a failure to act or speak out.

The Court found the circumstances overwhelmingly established that the Landlord acted dishonestly. The parties expressly agreed that return of the signed Lease Amendment to the Landlord would trigger the initial payment. The Landlord was aware that the Tenant was unable to relocate without financial assistance, and did not advise the Tenant that it would not abide by the Lease Amendment prior to the Tenant entering into the new lease.

The lack of legitimate business rationale for the Landlord’s actions led to an inference that the Landlord took advantage of the Tenant’s situation through its own breach of the Lease Amendment. In the result, the Landlord’s conduct constituted a breach of its duty of good faith in its performance of the Lease Amendment. The Tenant was awarded damages for the payments promised by the Landlord and the additional rent paid under the original lease.

This decision confirms that a breach of good faith in contractual performance remains a strong cause of action in commercial relationships, particularly in circumstances where traditional contract or tort law may not provide a just result.