Law Times

Law Times • February 27, 2012 COMMENT PAGE 7 Highway Properties I n the world of Canadian commercial leasing, justice Bora Laskin's 1971 deci- sion in Highway Properties Ltd. v. Kelly, Douglas and Co. Ltd. stands out as the unrivalled seminal case on point. In Highway Properties, the Supreme Court of Canada affirmed that a commercial landlord had at its disposal three historic remedies with which to deal with a defaulting tenant. Firstly, and considerably paraphrased, the landlord could do nothing to alter the landlord-tenant relationship but instead could simply sue the tenant from time to time in "instalment litigation." Secondly, the landlord could terminate the tenancy. Thirdly, the landlord could re-let the prem- ises on behalf of the tenant. These three remedies arose as a natural consequence of a lease being a form of con- veyance of real estate. Highway Properties did not establish these traditional conveyanc- ing remedies as they are a long-standing reflection of the common law. All Highway Properties actually did was reaffirm the avail- ability of the three conveyancing remedies and introduce the now infamous fourth remedy: the right on the part of the landlord to sue the tenant, on notice, for consequen- tial damages arising from the premature loss of the lease. Prior to Highway Properties, landlords could always get their leased premises back from a defaulting tenant through an evic- tion; however, that same landlord could not then also pursue a claim against the evict- ed tenant for the full measure of damages incurred by the landlord as a result of the tenant's default. For instance, if the unexpired lease term was significant and the rent payable was well over the market rent, then a landlord would want damages for loss of profit rather than just getting the premises back. Likewise, if the tenant had been an anchor tenant whose business function was inter alia to attract other businesses to the land- lord's site, the mere return of the premises to the landlord would be cold comfort in light of the economic damage that the landlord might face as a conse- quence of the tenant's default. Highway Properties revo- lutionized commercial leas- ing by giving landlords the supplemental right to also sue any abandoning tenant for all of the consequential damages as well as the return of the premises. The addition of this right, although almost trite by today's understating of basic con- tract law, has led to the characterization of commercial leases as a hybrid of both contract and conveyancing law. It is important to note that Highway Properties did not replace the traditional real estate conveyancing remedies with the right to sue for consequential damages, but rather, left the modern commercial landlord with the option of terminating the lease and suing for consequential damages or relying on the old-school conveyancing remedy of doing nothing to the lease and just suing for arrears of rent from time to time. Although this hybrid characterization of a commercial lease has been a central tenet of Canadian landlord and tenant law since Highway Properties, it is far from a universally accepted way of looking at commercial leases. By rough count, while approximately half of American states still cling to a Highway Properties-type of hybrid characterization, the remaining states have adopted a more uni-dimensional characterization of a com- mercial lease, preferring to view it as simply another subspecies of commercial contract. Under this modern or contract approach to commercial leasing, landlords retain the right to sue for consequential damages but Jeffrey Lem The Dirt lose the right to sit back and do nothing after a tenant has attempted to repudiate the lease. There has been a consistent torrent of academic commen- tary on this subject in Canada since Highway Properties, with most academics favouring a conversion from the hybrid model posed in Highway Properties to the pure contract approach now adopted in many U.S. states. That said, no court or legislature in Canada has to my knowledge actually overturned Highway Properties. That was the case, at least, until in 2006, when the British Columbia Court of Appeal apparently sort of did so — indirectly — in Evergreen Building Ltd. v. IBI Leaseholds Ltd. Space does not permit a detailed discussion of the Evergreen decision. Suffice it to say, it was widely touted as a Highway Properties killer, the case that would shed the Canadian law of commercial lease remedies of its cum- bersome conveyancing roots and propel the law, once and for all, into the modern era of pure contract remedies. And that is precisely what the British Columbia Court of Appeal appeared to do. Evergreen was, however, granted leave to appeal to the Supreme Court of Canada, and the stage seemed set for a showdown over Highway Properties. Alas, the parties in Evergreen settled before the top court could revisit Laskin's famous analysis of the nature of a commercial lease, leaving many practitioners wonder- ing whether the B.C. Court of Appeal's take in Evergreen is now the new normal. Practitioners, at least in Ontario, need wonder no further. While Evergreen was never binding in Ontario, the recent Ontario Court of Appeal decision in Re TNG Acquisition Inc. seems to have laid to rest, at least for the time being, the nature of a commercial lease under Ontario law. Justice Eileen Gillese, writing for a unanimous panel that included Justice John Laskin, reaffirmed the characterization of the commercial lease as a hybrid or dual instrument that is both a conveyance and a contract. In TNG, the tenant had attempted to repudiate the lease, but the landlord had elected to do nothing in response, as was its right under the conveyancing remedies endorsed in Highway Properties. But after the tenant retaliated with bankruptcy and the trustee subsequently disclaimed the lease, the landlord had nothing more than a preferred claim under the Bankruptcy and Insolvency Act. In an almost counterintuitive strategy, it was the landlord that argued in TNG that Highway Properties was a dead doc- trine and the modern commercial lease had to be interpreted as a species of pure contract instead. Strategically, the land- lord was likely better off financially in the tenant's bankruptcy as a creditor with an unsecured claim for damages from a breached lease rather than as a land- lord with a valid lease and a preferred, but statute-limited, claim. Therefore, it was necessary for the landlord to argue that the lease, as a pure contract, would have been automatically terminated upon repudiation by the tenant. By endorsing the effectiveness of the historic conveyancing remedies, even when faced with a landlord pleading that it does not want the benefit of them, the Court of Appeal in TNG has fended off, yet again, another attempt to erode one of the most fundamental tenets of Canadian commercial leasing law. Long live Highway Properties. LT uJeffrey Lem is a partner in the real estate group at Miller Thomson LLP. His e-mail address is jlem@millerthomson.com. BY ED MORGAN For Law Times changed during the past century. Th is time around, the challenge to Canada's constitutional system comes not because our newest senator is a woman but because the voters elected her. An Alberta-wide ballot in 2004 led to Unger's selection A as a senator-in-waiting up until now. Her appointment makes her, along with fellow Albertan Bert Brown, the second current member elected to the Senate. It repre- sents one more incremental step in Prime Minister Ste- phen Harper's Senate reforms. During the past year, Harper's proposals have been subject to two diff erent constitutional objections: one from the offi cial Opposition and the other from the prov- ince of Quebec. Last spring, Jack Layton announced that the NDP supports putting the Senate's very existence to a national referendum. At the same time, Quebec's former intergov- ernmental aff airs minister Pierre Moreau proclaimed that Harper's reforms require a formal constitutional amend- ment. Both objections cast themselves as viable legal alter- natives to the Conservatives' incremental and unilateral reforms. Th e NDP invokes grassroots democracy as the ultimate source of authority, while Quebec makes a point of adhering strictly to the formal amending process. From a constitutional law point of view, however, both objec- tions are misguided. For all of its posture of correctness, Quebec appears to ignore one of Canada's most renowned doctrines of constitutional interpretation. And for all of its populist Appointment of elected senator moves with tide of history u SPEAKER'S CORNER lberta's Betty Unger made history recently when she received a call from the prime min- ister appointing her to the Senate. Th e appointment shows how things have rhetoric, the NDP appears never to have read the Con- stitution at all. Th e NDP's resort to direct democracy will not legally fl y. In 1916, the Manitoba legislature attempted to devolve governmental powers directly to the people by using a ref- erendum process instead of legislation for enacting bills. Th e province's highest court struck the move down. In the process, it explained that a power given by the Constitu- tion to one body cannot be delegated to another, includ- ing to the population at large. Moreover, the Supreme Court of Canada has specifi - cally disqualifi ed the NDP's position. Th e court, respond- ing in 1980 to former prime minister Pierre Trudeau's proposal to replace the Senate with a new house of the federation, stated that to outright abolish the upper cham- ber would need proper constitutional enactment. A refer- endum will not do the trick. To formally amend the Constitution today would take a political miracle as it would require seven provincial leg- islatures, including Ontario and Quebec, and the federal Parliament to all vote in favour. Th is diffi culty, of course, is the very source of its attraction to the government of Quebec. What better way is there to block all change than to insist on the most unattainable method of achieving it? Quebec's position, however, raises signifi cant issues about constitutional reform. How does a country's foun- dational law adapt in the face of an amending formula de- signed to thwart any movement forward? As Unger's appointment reminds us, the question of electing senators is remarkably close to Canada's most famous constitutional case. It asks whether the Constitu- tion is a rigid document or a "living tree." Is it incapable www.lawtimesnews.com of change except via formal amendment or is it able to adapt to the times through reinterpretation? In 1929, the courts addressed the meaning of that part of the British North America Act that authorizes the appointment of "qualifi ed persons to the Senate." Until then, there had been an assumption that the word "persons" referred to men only. Aſt er all, the Confedera- tion debates of the mid-19th century had taken place not long aſt er English legal scholar William Blackstone notori- ously proclaimed that the husband and wife are one per- son in law: the husband. When the Persons Case fi nally made its way to the Privy Council, it encountered a legal system that had greatly changed in the century and a half since Black- stone's famous comment and the 60 years since Con- federation. Lord John Sankey pronounced his arboreal metaphor and confi rmed the appointment of women by explaining that the Constitution, although rooted in its text, must be a fl exible instrument that bends with the winds of change. In the result, the authority to appoint a woman as Sena- tor was pronounced by means of an updated interpreta- tion; no amendment required. Th e living tree and its no- tion of organic, principled change became the interpretive watchword and has remained the most enduring expres- sion of Canadian constitutionalism. Th e government of Quebec and other critics may insist that a formal amendment is necessary for any change to appointments to the Senate, but the courts know better. If a "person" can go from meaning a man in 1867 to sig- nifying a man or woman in 1929, it can likewise go from meaning an appointed person at Confederation to an elected individual in 2012. Unger, then, is on the side of history. LT Ed Morgan is a professor of constitutional law at the Uni- versity of Toronto. Court thankfully reaffirms

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