COURT OF APPEAL FOR ONTARIO

CITATION: Starrcoll Inc. v. 2281927 Ontario Ltd., 2016 ONCA 275

DATE: 20160420

DOCKET: C60689

Doherty, Epstein and Miller JJ.A.

BETWEEN

Starrcoll Inc.

Applicant (Respondent on Appeal)

and

2281927 Ontario Ltd.

Respondent (Appellant)

David C. Moore and Diana M. Soos, for the appellant

Kevin W. Fisher, for the respondent

Heard: February 1, 2016

On appeal from the judgment of Justice D.L. Corbett of the Superior Court of Justice, dated June 9, 2015, reported at 2015 ONSC 3719.

Doherty J.A.:

I

overview

[1] The respondent, Starrcoll Inc. (“Starrcoll”) agreed to sell three apartment buildings to Mr. Ken Lu. Eventually, the appellant 2281927 Ontario Ltd. (“228”), Mr. Lu’s company, became the purchaser.

[2] The parties agreed to a total purchase price of $11,860,000. The parties also agreed that $300,000 of the purchase price would be held by Starrcoll’s lawyer for three years (the “Escrow Provision”). At the end of the three years, some, none or all of the $300,000 would be paid to Starrcoll depending on the rents generated from the units in the buildings. If gross annual rentals were $960,000 or more, Starrcoll would get the entire $300,000. If gross rentals were less, 228 was entitled to a return of some or all of the $300,000 as calculated using the formula in the Escrow Provision. Under that formula, if gross annual rents were less than $900,000, 228 would be entitled to the return of the entire $300,000.

[3] The parties agreed that the Escrow Provision was designed to allow for an adjustment of the purchase price three years after closing, depending on the income generated by the rental units. The parties, however, disagreed over the interpretation of the Escrow Provision, and specifically the manner in which gross rentals were to be measured when determining whether the $960,000 threshold had been met. Starrcoll brought an application seeking an interpretation of the Escrow Provision.

[4] The application judge found that the $960,000 threshold was met if rents for any month in the three-year period reached $960,000, when annualized. On that interpretation, Starrcoll was entitled to the entire $300,000 as gross rents for the month beginning April 1, 2014 exceeded $960,000, when annualized. The application judge made an order declaring that Starrcoll was entitled to full payment of the escrow amount. 228 appeals from that order.

[5] Counsel for 228 submits that the threshold requirement in the Escrow Provision is met only if gross rents for any 12-month period during the three-year period amounted to $960,000 or more. On this approach, 228 was entitled to a return of at least part of the $300,000.

[6] Starrcoll, without abandoning entirely the application judge’s interpretation of the Escrow Provision, argued in this court that the $960,000 threshold was met if the monthly rent at the end of the three-year Performance Period (May 1, 2014) reached or exceeded $960,000, when annualized. Starrcoll argued that the rent for the period beginning May 1, 2014, when annualized, did exceed $960,000, meaning that Starrcoll was entitled to the entire $300,000 and that the order made by the application judge should stand.

[7] I would dismiss the appeal for the reasons that follow.

II

facts

[8] Dr. Daniel Perlitz, for Starrcoll, and Mr. Lu, for 228, negotiated the Agreement of Purchase and Sale. Mr. Harold Green, a real estate agent retained by Starrcoll, had some involvement in the discussions between Mr. Lu and Dr. Perlitz. He acted as Starrcoll’s and 228’s agent on the purchase. All three filed affidavits on the application as did Mr. Paul Colvin, the president of Starrcoll. None of the affiants were cross-examined.

[9] During the negotiations, the parties discussed the rental income potential of the buildings. Dr. Perlitz anticipated that rents for the units would go up in the ensuing two or three years as existing leases expired, and units were renovated and subsequently re-rented at higher rates.

[10] Mr. Lu was given a rent roll for each of the three properties for the month of February 2011. A rent roll is a document that identifies each tenant and sets out the rent being paid for each occupied unit as at the beginning of the month. According to the rent rolls, the three buildings generated total rents of just under $70,000 for February 2011. Based on the February 2011 rent rolls, the annualized rent for the three buildings was about $840,000.

[11] Mr. Lu wanted some protection against the possibility that rental income would not increase as Dr. Perlitz expected it would. The Escrow Provision in Article 3.2(c) of the Agreement of Purchase and Sale gave that protection:

(c) payment by the Purchaser of the sum of $300,000.00 payable to the Vendor’s solicitors and to be held in an interest bearing escrow account with a Canadian chartered bank (the “Escrow Amount”) to secure the performance of the Property for the three year term commencing at closing (the “Performance Period”). At the end of the Performance Period, to the extent the rent roll of the Buildings, (in the same format as set out in Schedule “C” hereto) reveals gross rental of no less than $960,000.00 (the “Gross Rental Threshold”), and upon being presented with a Statutory Declaration of the Purchaser or an authorized agent of the Purchaser, or a representative of the Manager, the Vendor’s Solicitors in trust shall pay the Escrow Amount to the Vendor and the Vendor’s solicitors shall require no further direction to pay out the Escrow Amount. To the extent that at the end of the Performance Period, the Gross Rental Threshold has not been achieved, on the evidence of a Statutory Declaration of the Purchaser or an authorized agent of the Purchaser, or a representative of the Manager, the Vendor’s Solicitors, without the need of a further written direction, shall pay from the Escrow Amount the Purchaser the sum of $5.00 for every dollar that the Rent Roll of the Buildings is less than the Gross Rental Threshold (the “Capitalization Payment”) and pay to the Vendor any balance remaining after making the Capitalization Payment. Interest on the Escrow Amount shall be paid to the Vendor as earned.

[12] The Escrow Provision provided that if gross rents reached $960,000, Starrcoll would get the entire $300,000 being held in escrow. If gross rents were below $960,000, 228 would be entitled to the return of some or all of the $300,000 being held in escrow. The $960,000 figure was about $125,000 above the annualized rental income from the buildings based on the February 2011 rent roll given to Mr. Lu before closing.

[13] Schedule “C”, referred to in the Escrow Provision, was a blank page with the heading “Rent Roll”. As indicated above, a rent roll is a document that sets out monthly rents paid for each rented unit as at the start of any given month. It may also reflect certain small additional revenues, e.g. parking fees. According to Mr. Green, rent rolls are commonly used in the purchase and sale of rental income buildings when assessing rental income potential, going forward.

[14] The transaction closed on May 2, 2011. The three-year “Performance Period” referred to in the Escrow Provision ran from May 2, 2011 to May 2, 2014. The Rent Rolls for each month during that period showed variable gross rents. Rents for the first year (May 2011-April 2012) totalled $860,956.01. In the second year (May 2012-April 2013) the gross rents rose to $915,686.00. In the third year (May 2013-April 2014) gross rents amounted to $904,362.90. The final rent rolls for the month commencing May 1, 2014 showed a total monthly rent for the three buildings of $81,327.72. This was slightly below the monthly rate for April 2014 ($82,880.85). April and May 2014 were the only two months in which the income shown on the rent rolls exceeded $80,000. $80,000 is the minimum monthly rent needed to achieve an annualized rent of $960,000.

[15] Under the terms of the Agreement of Purchase and Sale, Linwood Management Corporation, a company controlled by Dr. Perlitz, managed the properties after the sale. At the end of the three-year “Performance Period”, Dr. Perlitz, in his capacity as property manager, provided the statutory declaration contemplated in the Escrow Provision. Schedule “A” to Dr. Perlitz’s statutory declaration had two parts. The first part identified the monthly rental income generated by each of the three buildings as of May 1, 2014. It also identified the total amount ($81,327.72) and the “annualized” amount ($975,932.64). The annualized amount was simply the monthly total multiplied by 12. The second part of Schedule “A” consisted of the actual rent rolls for each building identifying the tenant, the unit and the rent paid as of May 1, 2014.

III

the reasons

[16] The application judge described the applicable principles of contractual interpretation as follows:

[9] Where there is no ambiguity in a written contract, it should be given its literal meaning. Words should be construed in their plain and ordinary sense unless to do so would result in a commercial absurdity. In construing particular words and provisions, they should be placed within the context of the entire contract, construed as a whole, to the extent that is possible.

[11] The court may consider “objective evidence of the factual matrix underlying the negotiation of the contract” to resolve any ambiguity in the contract. However, where a party claims that the literal, plain-meaning reading of the contract leads to a commercial absurdity, the court may look at objective extrinsic evidence to assess the commercial reasonableness of the plain meaning. [Emphasis added. Footnotes omitted.]

[17] The application judge erred in law in his approach to contractual interpretation. The words of an agreement, and the context in which those words are used, cannot be separated and approached at different stages of the interpretative process. Words in an agreement have no meaning without context. The contemporary approach to contractual interpretation is set out in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 47-48:

[A] decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of the formation of the contract. Consideration of the surrounding circumstances recognizes that ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning.

The meaning of words is often derived from a number of contextual factors, including the purpose of the agreement and the nature of the relationship created by the agreement. [Emphasis added. Citations omitted.]

[18] The court in Sattva quoted with approval Lord Hoffmann in Investors Compensation Scheme Ltd. v. West Bromwich Building Society, [1998] 1 All E.R. 98 (H.L.), at 115:

The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. [Emphasis added.]

[19] Although I am satisfied the application judge erred in law in his approach to the interpretation of the Escrow Provision, I would nonetheless dismiss the appeal. In my view, on a proper interpretation of the provision, Starrcoll remains entitled to the entire $300,000. The application judge’s order should therefore stand.

[20] As explained in Sattva, contractual interpretation is a search for the objective intention of the parties as discerned from the language of the relevant provision considered in the context of the entirety of the agreement, the purpose of the provision, the nature of the relationship created by the agreement, and any other relevant surrounding circumstances. An application of that approach to the Escrow Provision leads me to conclude that gross rental as at the end of the Performance Period (May 1, 2014) was to be determined by annualizing the amount of rental income shown on the rent rolls setting out the rents as of May 1, 2014. On that interpretation, the $960,000 threshold was met and Starrcoll is entitled to the $300,000.

[21] The purpose of a provision is an important contextual feature in contractual interpretation. I begin with the purpose behind the Escrow Provision. The value of the properties, to 228, at least in part, lay in the properties’ ability to produce rental income on an ongoing basis. The parties were aware of the monthly income being generated at the time of purchase (about $70,000). Dr. Perlitz had represented that the rental incomes would increase over time as leases expired, and the units were renovated and re-leased. Given the variables that could impact on the increase in rental income, one could not predict exactly how or when increases would occur. The Escrow Provision provided the means by which the agreed upon purchase price could be varied, albeit in a relatively minor amount (up to about 2.5 per cent of the purchase price), depending on the increase in income producing performance of the apartment buildings during the three-year Performance Period.

[22] In the Escrow Provision, the parties agreed that the “performance of the Property” would be measured by testing rental income against “a Gross Rental Threshold” of $960,000. Although the language in the Escrow Provision did not specifically identify $960,000 as annual rental income, the rents being earned on the properties at the time of the sale make it clear that $960,000 was a reference to gross annual rents earned by the properties.

[23] The “performance of the Property” as reflected in rental incomes generated could be measured in a variety of commercially reasonable ways. For example, counsel for the appellant’s submission that actual rental incomes for a 12-month period should be used, is certainly a commercially reasonable way in which to measure the “performance of the Property”. The language of the Escrow Provision, however, provides the best insight into the method intended to be used in this particular agreement.

[24] Two features of the language used in the Escrow Provision are important. First, income was to be measured “[a]t the end of the Performance Period”. May 1, 2014 marked the end of the Performance Period. Second, income was to be determined at the end of the Performance Period by reference to gross rents set out in the rent roll. A rent roll reflects rental income at a specific point in time and is a predictor of rental income going forward. Under the terms of the Escrow Provision, the May 2014 rent roll was the rent roll applicable at the “end of the Performance Period”.

[25] Accordingly, having regard to the language of the Escrow Provision, I conclude that the parties chose to measure income performance as at the end of the three-year Performance Period and not over a period of time during the Performance Period (e.g. one year). I further conclude that the parties intended that performance would be measured by reference to the rent rolls for May 2014. The terms of the Escrow Provision considered as a whole can only reasonably be understood to mean that the determination of whether rental income met the $960,000 “Gross Rental Threshold” required an annualization of the amount reflected in the last rent roll (May 2014) for the Performance Period. This interpretation achieves the purpose of the Escrow Provision by providing 228 with some security for Dr. Perlitz’s representations that the income from the properties would increase over the Performance Period.

[26] The rent roll provided evidence of the income potential of the properties going forward. A forward looking assessment of income potential would be important to 228 as the new owner of the properties. There is nothing commercially unreasonable in interpreting Escrow Provision to provide for the full payment of the $300,000 to Starrcoll, if at the end of the Performance Period, the rental properties were in fact performing up to the Gross Rental Threshold identified in the Escrow Provision.

IV

conclusion

[27] I would dismiss the appeal. Starrcoll is entitled to costs of the appeal in the amount of $15,000, inclusive of disbursements and relevant taxes.

Released: “DD” “APR 20 2016”

“Doherty J.A.”

“I agree Gloria Epstein J.A.”

“I agree Bradley W. Miller J.A.”