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Evergreen Case Opens Doors for Redevelopment

By James Speakman and William Holder                            June 15, 2006 

James Speakman

William Holder

An ongoing battle between the landlord and a major tenant of West Penderís landmark Evergreen Building has produced a court case which may assist developers looking to redevelop commercial sites.

In a decision rendered in late 2005 and reported this week, the B.C. Court of Appeal expanded the rights of landlords wishing to redevelop existing commercial properties but facing the problem of existing long term tenancies.

The court overturned an earlier decision which granted the tenant an injunction preventing the landlord from terminating its lease and re-entering the premises. The court held that, depending on the circumstances of each case, a tenantís remedy may be limited to damages for breach of contract, rather than an ongoing right to possession of its premises.

In legal terms, the decision reflects a movement by the courts towards greater emphasis of the contractual elements of a lease. While a lease has traditionally been viewed as a special agreement providing a tenant with an interest in land, the Evergreen decision gives hope to owners of under-developed sites who would like to redevelop but have been unable to negotiate lease terminations with their tenants.

The decision arose out of the proposed redevelopment of the Evergreen Building on West Pender Street in Vancouver. The landlord proposed to demolish the existing 10-storey office building and re-develop the site with a 21-storey residential tower, in order to take advantage of the current strong residential market in downtown Vancouver.

The building was 74% vacant at the time of the hearing. The tenant in question leases an entire floor, and has nearly three years remaining on its lease term, with a right to renew. The tenant is not in default and the lease does not contain a "demolition clause" allowing the landlord to terminate the lease in the event of the buildingís redevelopment.

The landlord notified the tenant that it was going to take possession of the premises on December 30, 2005, thereby breaching the landlordís obligation under the lease to provide the tenant with "quiet enjoyment" of the premises.

The tenant applied for and was granted a permanent injunction preventing the landlord from taking possession. In granting the injunction, the B.C. Supreme Court applied the traditional view of a lease, which is that it represents a "demise" (or interest in land) for a specified period of time. Without a right of re-entry under the lease, it followed that the landlord was not entitled to simply compensate the tenant for a breach by payment of damages.

The landlord appealed.

The B.C. Court of Appeal ruled that in these types of cases, courts should "balance the equities" between the landlord and the tenant on the basis that a lease is both a demise of land and a contract. It relied on earlier cases which chose to emphasize the contractual aspects of the lease in order to take advantage of a broader range of remedies than would have been available if the lease were viewed only as a demise. Therefore, rather than allowing the tenant the almost automatic right to an injunction so as to prevent the landlord from dealing with its land, the Court ordered that the Supreme Court re-consider the circumstances of the case with a view to whether the tenant could be adequately compensated by damages for the proposed breach of the lease.

Note that Court of Appeal did not find that tenants are not entitled to injunctions in these situations, but rather, held that each circumstance must be considered on a case-by-case basis.

Courts are to consider the equities between the parties, particularly "the 'uniqueness' of the property in question and the relative hardship, if any, of holding the landlord to the strict terms of the lease". That is, rather than simply defaulting to the granting of an injunction, a court should look at the circumstances and see if damages would adequately compensate the tenant. This may still prove to be problematic for the landlord of the Evergreen Building, as the tenant might successfully argue, for example, that as an Arthur Erickson design, the Evergreen Building is unique in terms of design and profile.

The result of Evergreen is that landlords who own under-developed sites have more options for dealing with tenants in possession under long term leases. Although landlords should be aware that re-entering the premises will constitute a breach of the lease contract, they may decide that it is economically more efficient to take over the premises and take the chance that the profit from redevelopment will exceed the damages awarded to the tenant. Reasonable steps should, of course, be taken by the landlord in providing for an orderly take over.

Although Evergreen may serve to expand a Landlordís options for redevelopment, it must be kept in mind that tenants may still successfully argue for an injunction so as to uphold their right to occupy their premises. Each case will depend on its own facts with the Courts being required to examine and balance the equities as between landlord and tenant.

James Speakman

William Holder

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