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  • Writer's pictureAnisa Arra

Commercial Lease: Property or Contract?

Summary of Article published in the Alberta Law Review by Jason Brock and Jim Phillips, (2000) 38 Alta L Rev 989 - 1039.

While a commercial lease is a contract for the ongoing use of land, at common law the commercial lease has long been seen to create a property relationship between the lessor and lessee once the tenant goes into possession. The commercial lease conveys an interest in land not simply a licence to occupy the land.

The authors explain that the property elements of leases originate from contingent historical circumstances:

"In medieval civil procedure, actions relating to property were divided into real actions, whereby a plaintiff could get recovery of the land, and personal actions, whereby a plaintiff would be awarded only damages. The conceptual division between realty and personalty - land and chattel -- stems from this procedural distinction. Under a "beneficial lease," the lessee's interest was not protected by a real action. If the lessee was ejected, an action lay against the lessor alone for damages for breach of covenant. There was no action against the ejector as such. Some commentators attribute this restriction to a medieval antipathy towards money lending, or to the application of the Roman legal doctrine of possession. It is more likely, however, that it stemmed from the problem of double liability. The third party ejector would otherwise have been subject to actions by both the lessee and the lessor" [para 64].

The historical conceptualization of the lease as property, rather than as contract, has many practical implications for both parties, such as the tenant's right to sub-let and assign the lease and security of tenure, as well as the landlord's remedy of distress, i.e. the right to seize and sell the goods and chattels of the tenant located at the premises to satisfy arrears of rent.

Brock and Phillips demonstrate that judicial innovation in Canada, and other common law jurisdictions, has moved toward a contractualization of the commercial lease law. The hybridization has resulted from the changing conditions of modern economies. The change began with the landmark Supreme Court of Canada decision, Highway Properties v Kelly, Douglas and Co, [1971] SCR 562. The Court enunciated the general principle that commercial leases are contracts as well as conveyances which make landlords able to sue for damages on repudiation of the lease by the tenant. This is a principle on which damages in contract are awarded. Laskin J suggested at page 576 of the decision that it is "untenable to persist in denying resort to the full armoury of remedies ordinarily available to redress repudiation of covenants, merely because the covenants may be associated with an estate in land." Before Highway Properties, the authors argue, the law on mitigation in landlord-tenant relationships simply did not apply, being a principle of contract law. Although the decision was inconsistency interpreted by subsequent decisions in lower courts, it began a change in judicial thinking of commercial leases. Few years later, the House of Lord, in UK, held in National Carriers v Panalpina (Northern), [1981] AC 675, that the contract law doctrine of frustration is also applicable to leases.

In this article, the authors argue that leasehold law needs to shift toward complete contractualization to allow for application of contractual remedies and permit the parties to leases the freedom to bargain for their own regime. They recognize however that complete contractualization could destroy the valuable attribute of the tenant's security of tenure in the term. Yet, they counter, contract law as principles and remedies available within the law, such as specific performance, equitable estoppel, and contractual licence doctrines, can provide security of tenure.

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