Stephen Posen, Stephen Messinger, and Christina Kobi co-authored the article "Property Leasing: Recent Developments of Importance" in the 2018 Lexpert/ALM Guide to the Leading 500 Lawyers in Canada with the assistance of Melodie Eng and Steven Birkin, as well as Hayley Larkin (Student-at-Law).
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Property Leasing:
Recent Developments of Importance
Principle of Immunity - Implied Releases - Trilogy Scope Widens Further
Since the 1970s, a series of three Supreme Court of Canada cases – commonly referred to as the “Trilogy” – has established a common law principle to assist landlords and tenants in allocating risk in the absence of express provisions. This principle provides that the risk of loss or damage caused by peril rests on the party who has covenanted to obtain insurance to cover such peril or who has had their cost of insurance partially reimbursed by the other party, subject to express language to the contrary. The intent being that the party should look to the insurance to fund the loss, even if the other party is negligent. In Youn v. 1427062 Alberta Ltd. (Red’s Pub), 2016 ABQB 606, the Courts further developed this principle by finding that the insurance obtained by the Landlord was for the benefit of the Tenant, even where there was no express covenant on the Landlord to obtain such insurance and even where the Tenant was not specifically paying its share of occupancy costs.
This case involved a subrogated claim by the Youns’ (“Landlord”) insurer against Red’s Pub (“Tenant”), which arose after the premises leased to the Tenant was destroyed by patrons who started a fire in the washroom. The Tenant carried liability insurance but did not carry fire insurance, while the Landlord did carry fire insurance. The Landlord’s insurer brought an action against the Tenant for damages due to negligence. The Tenant, in turn, applied for summary judgment dismissing the Landlord’s action and claiming that it was entitled to benefit from the Landlord’s fire insurance.
The lease agreement was a “gross” lease where the Tenant paid a base rental with no obligation to pay property taxes or a share of common area costs. The Tenant’s insurance obligations did not include fire insurance and the Tenant’s repair covenant expressly excluded damage by fire. There was no express covenant requiring the Landlord to obtain fire insurance but the Lease made the Tenant responsible for any increased costs if the Tenant did something to increase the Landlord’s fire insurance premiums.
Based on a reading of the agreement as a whole, the Court found that there was an inferential covenant on the Landlord to obtain fire insurance, which, even in the absence of an express covenant to obtain such insurance, was for the benefit of the Tenant. In addition, although the Lease contained an indemnity that required the Tenant to indemnify the Landlord for its negligence, the Court found that it was generic in nature and could not override the specific provisions in the Lease, such as the express exclusion of damage by fire from the Tenant’s repair covenant. The Tenant’s application to dismiss the Landlord’s claim was granted.
The authors previously reported on Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc., 2016 ONCA 246 (“Deslaurier”) in our 2016 article, which was an update on the Superior Court decision in our 2015 article. As a reminder, the Court of Appeal found that the Superior Court failed to properly apply the principles of contractual interpretation and relevant case law and erred in finding that the Landlord’s indemnity took priority over the Tenant’s obligation to insure. The Tenant’s obligation to insure against all risk of loss or damage to its own property caused by fire relieved the Landlord from liability. In addition, the Tenant should not have been able to bring a subrogated claim against the Landlord because the Tenant would not have been able to bring such a claim if it had complied with its obligation to add the Landlord as an “additional insured”.
The Tenant sought leave to appeal this decision to the Supreme Court of Canada. While the application for leave was pending, the Supreme Court released its decision in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37(“Ledcor”) and thus the Supreme Court directed the Court of Appeal to reconsider its previous decision on Deslaurier in light of the Supreme Court’s ruling in Ledcor.
Ledcor was a contractual interpretation case involving an exclusion clause in an all-risk property insurance policy, a standard form contract. The ultimate issue for the Court of Appeal was whether Ledcor mandated the application of a different standard of review (the palpable and overriding standard) and whether application of that standard, if necessary, required an alteration of the Court of Appeal’s decision. The Court of Appeal noted that the lease in question was a negotiated contract and therefore the Ledcorprinciples regarding standard form contracts had no application in this case. The Court of Appeal confirmed that they did apply the correct standard of review and affirmed their original decision. Once again the Tenant has tried to appeal this decision to the Supreme Court of Canada which, if granted, will be reported in our article next year.
Does a Landlord’s Failure to Demand Additional Rent and Deliver Statements Relieve the Tenant from Paying Additional Rent?
The principles of promissory estoppel are well settled and require the party relying on the doctrine to establish that the other party has, by words or conduct, made a promise or assurance, which was intended to affect their legal relationship and which the party, in reliance on the representation, has acted on or in some way changed their position because of it. Closely tied to the doctrine of promissory estoppel is the doctrine of waiver, which is only found when the evidence demonstrates that the party waiving had (1) full knowledge of rights; and (2) an unequivocal and conscious intention to abandon them.
These principles were applied in 2373322 Ontario Inc. v. Nolis, 2017 ONSC 1518(“Nolis”), where the Landlord only demanded additional rent from the Tenant after almost two and a half years. The applicant Tenant purchased a previous tenant’s business on October 1, 2013. The Tenant did not pay any additional rent between October 1, 2013, and February 23, 2016, and argued that the Landlord never advised it of the amounts required to be paid, never provided any supporting documentation, and never demanded payment until February 23, 2016, when the Landlord demanded arrears of additional rent and additional rent going forward.
The Tenant brought an application arguing, among other things, that the Landlord was not entitled to arrears of additional rent on the basis of (1) promissory estoppel, (2) waiver, (3) Landlord’s failure to fulfill a condition precedent to entitlement to additional rent, and (4) the claim being statute-barred.
In examining whether the doctrine of promissory estoppel applied, the Court stated that the onus was on the Tenant to establish that the Landlord had made an unambiguous representation, by words or conduct, that its strict rights under the Lease would not be enforced. The Court pointed to the fact that the Tenant failed to provide any evidence that it acted in reliance on a representation by the Landlord that it would not insist on payment of additional rent or that it changed its position. The Court found there was no evidence that showed the Landlord would not rely on the strict terms of the Lease, coupled with the Tenant’s reliance on it, and dismissed the Tenant’s waiver argument on similar grounds.
The Tenant also argued that the Lease imposed an obligation on the Landlord to provide a statement at least once a year with information to calculate the amounts payable as additional rent, and a further obligation to provide an adjusting statement within 120 days, which were pre-conditions to entitlement to additional rent. The Court pointed out that there was no reference to consequences to the Landlord in the Lease for failing to provide a statement and that any such failure by the Landlord did not relieve the Tenant of its obligation to pay additional rent once the statement was provided. Any such failure by the Landlord, as with the breach of any covenant, only gave rise to a claim for damages by the Tenant.
The lower Court in British Columbia similarly found in Bulley v. Weatherford Canada Partnership, 2016 BCSC 1955 (“Bulley”), that the Landlord’s failure to provide budget statements, as required by the Lease, was a breach of the “time of the essence” clause, which did not exempt the party who is not in breach from performance of the contract, but rather provided it with an election as to whether to keep the contract in force. Since the Tenant continued to operate under the Lease, it could not rely on this clause to avoid payment of the additional rent and was responsible for it.
How does one reconcile Nolis and Bulley with 1127776 Ontario Ltd. v. Deciem Inc., 2017 ONSC 862, where the Court found that the Tenant was not liable for adjustments in additional rent where the Landlord failed to comply with the schedule for providing reconciliation statements? In each of the cases, there was a positive obligation on the Landlord to provide a statement or budget of the additional rent to the Tenant and the Landlord’s only conduct was a failure to provide it based on the time period provided in the lease. Aside from the Court’s holding, there appears to be little difference between these cases in terms of the conduct of the Landlord and reliance by the Tenant. As of the date of writing, the Landlord has appealed this decision with the appeal scheduled for November 14, 2017. We will report on this case again in our article next year with, hopefully, a result that is more consistent with the balance of the case law.
Turning back to Nolis, the fourth argument raised by the Tenant was that the Landlord’s claim for additional rent did not constitute “rent” under the Real Property Limitations Act(“RPLA”) as the definition of “rent” in the original lease stated “Rent means the amounts payable by the Tenant to the Landlord pursuant to this Section” and struck out the words “and includes additional rent”. The Tenant took the position that the general two-year limitation period applied instead of the six-year limitation period under the RPLAbecause the Landlord’s claim did not constitute one for “rent”. Referring to the leading case of Ayerswood Development Corporation v. Western Proresp Inc., 2011 ONSC 1399, the Court held that the Landlord’s claim for common area maintenance (CAM) charges fell under the six-year limitation under the RPLA. Notably, the Court also held that even if its conclusion that the parties did not intend to exclude “additional rent” from “rent” was wrong, the Landlord’s claim for additional rent would still constitute “rent” for the purposes of the RPLA.
Fundamental Breach by Landlord
A fundamental breach is a breach that substantially deprives the innocent party of the benefit of the agreement and frees the innocent party from any future obligations. The following five factors must be considered in determining whether there is a fundamental breach:
- the ratio of the party’s obligations not performed to that party’s obligations as a whole;
- the seriousness of the breach to the innocent party;
- the likelihood of repetition of such breach;
- the seriousness of the consequences of the breach; and
- the relationship of the part of the obligation performed to the whole obligation.
In 772067 Ontario Ltd. v. Victoria Strong Manufacturing Corp., 2017 ONSC 2719, the Landlord terminated the Tenant’s lease for outstanding arrears of rent. The Landlord offered to allow the Tenant to reoccupy the premises once the rent arrears were paid. The Tenant paid the arrears but the Landlord continued to refuse the Tenant re-entry as a result of other non-rent defaults (for which no notice and cure period was provided). The Court found that the Tenant’s payment of rent arrears in satisfaction of the Landlord’s offer was a reinstatement of the lease. The Landlord’s subsequent refusal to allow the Tenant to re-enter due to other non-rent defaults amounted to a fundamental breach as it deprived the Tenant of the benefit of the contract and forced the Tenant to relocate.
Although mice, spiders, and garbage were not found to be a fundamental breach in Kenny Alwyn Whent Inc. v. J. Mao Dentistry Professional Corp., 2016 ONSC 584, this case is instructive on the importance of the conduct of the Tenant in determining whether a fundamental breach will be found. Although the Tenant complained of mice, spiders, and garbage throughout the term of the Lease, the Tenant continued to operate his dental practice from the premises, renewing the Lease twice. The Court concluded that since the Tenant continued to occupy the premises and had renewed the Lease after making complaints, the presence of mice, spiders, and garbage only constituted a mere annoyance, but did not go to the heart of the agreement such that it constituted a fundamental breach. The case seems to suggest that had the Tenant conducted itself differently, the Court may very well have come to a different result.
Is a Landlord Responsible to an Abutting Landowner for Environmental Contamination Caused by a Tenant?
In an era when environmental contamination is causing increasing concern, the need to settle a landlord’s responsibility for contamination caused by its tenant to neighboring lands becomes more and more apparent. In Sorbam Investments Ltd. v. Litwack, 2017 ONSC 706, the plaintiff landowner commenced an action for damages against an abutting landowner for the contamination of its land. It alleged that a former commercial tenant on the abutting lands operated a dry-cleaning business, which was the source of the contamination of the plaintiff’s lands, and that as a result, the defendant was liable (1) in nuisance, (2) in negligence, or (3) pursuant to the Environmental Protection Act(“EPA”). The defendant brought a successful motion for summary judgment to dismiss the action.
In considering nuisance, the Court held that the defendant would be liable for the actions of its tenants only when the nuisance-causing behavior was plainly contemplated by the lease or that the nuisance was foreseeable as inherently part of the activity to be conducted on the lands. The plaintiff failed to provide sufficient evidence to satisfy the foregoing test (including no evidence of a lease), and accordingly, the Court dismissed this head of liability.
In considering negligence, the Court noted that a Landlord will rarely owe a duty of care to third parties for the negligence of a Tenant because imposing such an obligation would change the nature of the Landlord/Tenant relationship, as it would require the Landlord to play an active role in the activities on the premises in order to protect itself from liability. The plaintiff failed to demonstrate that the contamination was a foreseeable risk that the defendant knew or ought to have known. The Court also considered whether the defendant owed a duty of care after it discovered its own lands were contaminated, but again the plaintiff could not demonstrate sufficient evidence to prove foreseeability of harm. The Court dismissed the entire negligence head of liability.
Finally, having regard to the EPA, the Court stated that the right to compensation thereunder can only be claimed against the owner or the person having control of the pollutant immediately before the first discharge. The Court held that the defendant neither owned nor controlled any alleged pollutant immediately before its first discharge and accordingly dismissed this head of liability.
Tenant Liable for Slip and Fall on Sidewalk
Under section 3(1) of the Occupiers’ Liability Act (“OLA”), an occupier of premises owes a duty to ensure the reasonable safety of persons on the premises. “Occupier” includes (a) a person who is in physical possession of premises, or (b) a person who has responsibility for and control over the condition of premises or the activities there carried on, or control over persons allowed to enter the premises.
As the owner of the sidewalk, the municipality has the primary responsibility for its condition and owes a duty of care to persons who use the sidewalk. It is not, however, liable for personal injuries caused by snow or ice except in the case of gross negligence. Although occupiers of abutting properties are often obligated by municipal by-law to clear ice and snow on public sidewalks surrounding their property, the Court has held that that obligation alone is not sufficient to make them occupiers of the sidewalk within the meaning of the OLA (Bogoroch v. Toronto (City), [1991] O.J. 1032 (Ont. Gen. Div.)). What was necessary and at issue in MacKay v. Starbucks Corp., 2017 ONCA 350 was whether the actions taken by Starbucks made them an Occupier under the OLA.
In MacKay, the plaintiff slipped and fell on a municipal sidewalk at the entrance to a patio in front of Starbucks. As part of its lease, Starbucks had exclusive use (and maintained) an outdoor patio abutting the municipal sidewalk. The patio was enclosed by a fence with a 3–4 foot opening, which effectively created a pathway from the store’s side door through the patio and out over the sidewalk.
The trial judge held that by: (i) building the fence and patio; (ii) making a path over the sidewalk leading to its side door; (iii) monitoring the condition of the pathway; (iv) cleaning, salting, and sanding it; and (v) directing ingress and egress of its customers in the manner it did, Starbucks assumed sufficient control over the sidewalk and was therefore an “occupier” (within the meaning of the OLA) of that part of the sidewalk adjoining the patio entrance and therefore owed the plaintiff a duty of care. Starbucks appealed the ruling but the Court of Appeal agreed with the trial judge and upheld the lower Court ruling.
Eligibility of Certain Operating Costs
In Trenchard v. Westsea Construction Ltd., 2016 BCSC 1752, the Landlord refused the Tenant’s request to disclose certain documents/information relating to Operating Expenses. The Tenant brought a petition and on the fourth day of the hearing, the parties reached an agreement. The Landlord sought to include the legal costs it incurred in responding to the Tenant’s petition in its Operating Expenses which would be charged back to all tenants. The Tenant argued that those legal costs were not related to the covenants in the Lease and could not be charged back.
Operating Expenses was defined under the Lease as “the total amount paid or payable by the Lessor in the performance of its covenants herein contained …” and included a non-exhaustive list of examples, one of which was “legal and accounting charges … paid or payable in connection with the Building, the common property therein or the Lands.” The Lease further provided that the Landlord was to exercise “prudent and reasonable discretion” in incurring Operating Expenses. In reading the contract as a whole, the Court stated that the Lease only authorized the Landlord to include in Operating Expenses the legal costs incurred in the performance of its covenants under the Lease. The Court held that the legal costs were not incurred in the performance of its covenants under the Lease, but rather, were incurred to interpret the terms of the Lease and accordingly, the Landlord could not include its legal costs in Operating Expenses.
In Shapes South Ltd. v. ADMNS Pembina Crossing Investment Corp., 2013 MBQB 208, 2016 MBCA 21, the Landlord renovated the façade of the shopping center and sought to recover a portion of the cost of the renovations from the Tenant. The Court found that the Landlord had the right to undertake the façade renovation, but not necessarily the right to make the Tenants share in the cost. The requirement for the Tenants to pay was due to the Tenants’ requirement to pay as additional rent their proportionate share of common area costs, which included costs for “alteration, restoration, repair, and replacement”. The only caveats were that the costs be incurred by the Landlord “acting reasonably” and that the “costs of repairs to the structural components and elements” were specifically excluded. The Court acknowledged that the façade project would not fall into the latter. However, the Lease provided that common area costs also specifically excluded (in addition to the foregoing) “the costs of structural maintenance, repair, reconstruction and/or replacement of the Common Areas or the Center or any part or parts thereof.” The Court found this provision ambiguous and stated it was unclear whether “structural” was a modifier of all four nouns or just of “maintenance”. Accordingly, the Court resorted to extrinsic evidence to determine the intention of the parties. It was on this basis that the Court dismissed this portion of the Landlord’s motion, finding that the Landlord failed to produce sufficient evidence to satisfy the Court that the agreements permitted it to allocate a share of the costs of the façade renovation to the Tenants.
Relief from Forfeiture
Where a Landlord has terminated a tenancy, an Ontario Court may grant a Tenant relief from forfeiture pursuant to subsection 20(1) of the Commercial Tenancies Act or section 98 of the Courts of Justice Act. In determining whether this relief should be granted, the Courts have begun to take a more liberal approach and to consider all the circumstances including: the history of the relationship, breaches of other covenants of the lease by the Tenant, the gravity of the breaches, the Tenant’s conduct or misconduct, its good faith or bad faith or want of clean hands, whether the object of the right of forfeiture in the lease was essentially to secure the payment of money, and the disparity or disproportion between the value of the property forfeited and the damage caused by the breach. In 2405416 Ontario Inc. v. 2405490 Ontario Ltd., 2016 ONSC 3893, 2016 ONCA 696, the Tenant had an option to purchase provided there were no uncured defaults at the time of exercise. When the Tenant sought to exercise this option, the Landlord sought to terminate the Tenant’s lease and purchase its business – a right the Landlord was entitled to in the event that base rent remained outstanding for over 45 days. The Court ultimately found that there was no default but noted that even if the Tenant was in default, it would have granted the Tenant relief from forfeiture given that the relationship between the parties was good until the Tenant decided to exercise the option to purchase. The alleged failure of the Tenant to seek written consent to the leasehold improvements was clearly mitigated by the fact that the Landlord was aware of and approved of them and the Landlord would have had to provide consent if formal consent had been sought.
The Court also granted relief from forfeiture in Velouté Catering Inc. v. Bernado, 2016 ONSC 7281, where the Tenant failed to deliver its written notice of renewal within the requisite notice period. As in 2405416 Ontario Inc., the Landlord and Tenant were friendly toward one another. Although they had some informal discussion beforehand regarding renewal, the Tenant failed to exercise its option to renew in time because it was under a mistaken belief (perpetuated by the Landlord’s misstatements) that the lease ended a year later. As soon as the Tenant realized its mistake that the notice period had expired, it took diligent steps to comply with the terms by attempting to arrange a meeting with the Landlord to discuss the renewal. In light of the foregoing and the fact that the Tenant had made significant improvements to the premises, which would be lost because it failed to provide timely written notice to renew, the Court granted the Tenant relief from forfeiture.
Is a Right of First Refusal Triggered by a Package Sale?
There have been some case authorities which appear to suggest that rights of first refusal are not triggered by package sales that include assets other than the property subject to the right of first refusal. The case of Alim Holdings Ltd. v. Tom Howe Holdings Ltd., 2015 BCSC 71, 2016 BCCA 84, examines these authorities and clarifies the Tenant’s rights under a right of first refusal in the case of package sales. In Alim, the Vendor entered into a purchase and sale agreement with Alim Holdings (“Alim”) to sell two parcels of land. Each parcel was subject to a lease containing a right of first refusal (“ROFR”) in favor of the lessee to purchase the land. The Agreement was conditional on Alim receiving notice that the lessees had not exercised their individual ROFRs. One of the lessees (“White Spot”) claimed that it validly exercised its ROFR and was also entitled to purchase both parcels of land. Alim commenced an action against the Vendor claiming breach of its purchase agreement and White Spot commenced an action against the Vendor claiming that there was a binding agreement for the sale of both parcels to White Spot. Both actions were heard together.
At issue was whether White Spot’s ROFR allowed it to match an unsegregated offer for both parcels of land or whether it was limited to making an offer for only the one parcel of land which was leased to it (“Parcel A”). The summary trial judge dismissed Alim’s action against the Vendor and granted specific performance to White Spot. The Court of Appeal affirmed the summary trial judge’s decision.
The Court of Appeal judge stated, “Rights of first refusal are creatures of contract…The rights of the grantor and the grantee are determined by the wording of the right of first refusal…Each case turns on the wording of the right of first refusal, the circumstances of the offer made to purchase the property subject to the right of first refusal, and the exercise of the right by its holder.” Further, the Court of Appeal held that a ROFR will be triggered by a package sale unless the wording of the ROFR is to the effect that it will only be triggered by an offer to purchase the property subject to the ROFR and no other assets.
The judge held that White Spot did not have the right to purchase both parcels of land through its ROFR. However, White Spot provided notice of its intent to exercise its ROFR and elected to purchase both parcels. Though the Court found that the two parcels could not be purchased under the ROFR, White Spot’s letter nevertheless constituted a valid exercise of the Lessee’s ROFR to purchase Parcel A. The Court further concluded that White Spot’s right to exercise its ROFR was separate from its offer to purchase the other parcel (“Parcel B”).
Consequently, White Spot’s valid exercise of its ROFR made Alim’s original offer null and void because the condition precedent was not satisfied. This, in turn, allowed White Spot to make an offer to purchase the other parcel of land which the Vendor could then, at its option, accept.
Termination
In M. Thompson Holdings Ltd. v. Haztech Fire and Safety Services, 2016 SKQB 294, 2017 SKCA 56, the Landlord terminated the Lease as a result of a breach by the Tenant and subsequently began efforts to find alternate tenants. At issue was whether (1) the Landlord failed to mitigate its losses and (2) an award for future losses was appropriate on summary judgment. On the first issue, the Court found that the Tenant did not satisfy its obligation to establish the Landlord’s failure to mitigate. On the second issue, the Court concluded that on summary judgement the Court may award pre-breach and post-breach (i.e., from breach until the date the premises are re-let) losses, but cannot award future losses because future losses are a triable issue to be decided on a periodic basis that should be periodically returned to the Court to be assessed. The Tenant appealed the lower Court ruling. The Court of Appeal affirmed the Chamber judge’s reasoning regarding failure to mitigate. However, the Court of Appeal found that the Chamber judge erred in the manner in which she granted the Landlord leave to go back to Court to assess future damages.
According to case law, because the Landlord terminated the lease, it cannot periodically assess its future losses but has to prove all its damages as of the date of adjudication. The Court of Appeal referred to Highway Properties as establishing that future losses are “to be assessed at the present value of the unpaid future rent for the unexpired period of the Lease less the actual rental value of the premises for that period.”
The issue of future losses was a triable issue because there was no evidence at summary judgment as to its amount. The Court of Appeal allowed the appeal and referred the issue of future losses to trial.
Landlord’s Remedies
The authors provided an update on Pickering Square Inc. v. Trillium College Inc., 2016 ONCA 179 in last year’s article concerning limitation periods. As a reminder, the case involved a breach of the Tenant’s continuous operating covenant which the Tenant argued was time-barred.
The Court of Appeal decision is important as it relates not only to limitation periods but also to the Landlord’s remedies and how the remedy selected by the Landlord will affect the running of the applicable limitation period. Referring to Highway Properties, the Court stated that in the face of the Tenant’s breach of its continuous operating covenant, the Landlord had an option to either cancel the lease or affirm it and require performance. If the Landlord (the innocent party) elected to cancel the lease, the parties are relieved from any further obligation, but the innocent party may sue for damages for breach of contract. If the innocent party elects to affirm the lease, the contract remains in force, the parties are required to perform their obligations, and the innocent party retains the right to sue for past and future breaches. Since the Landlord elected not to cancel the Lease in this case, both parties were required to perform their obligations under the Lease and each day that the Tenant failed to perform its obligations (i.e., continuously operate its business), a new cause of action arose.
Special acknowledgment and thanks to Melodie Eng, Steven Birken, and Hayley Larkin (Student-at-Law), for their assistance in preparing this article. Reprinted from The Lexpert/American Lawyer Guide to the Leading 500 Lawyers in Canada.