Court of Appeal for Ontario
Date: July 26, 2018
Docket: C64240
Judges: van Rensburg, Brown and Miller JJ.A.
Between
Parc Downsview Park Inc. Applicant (Respondent/Appellant by way of cross-appeal)
and
Penguin Properties Inc. Respondent (Appellant/Respondent by way of cross-appeal)
Counsel:
- Anne Posno and Robert Trenker, for the appellant/respondent by way of cross-appeal
- Jonathan Lisus and Zain Naqi, for the respondent/appellant by way of cross-appeal
Heard: April 16, 2018
On appeal from: The judgment of Justice Thomas R. Lederer of the Superior Court of Justice, dated July 28, 2017, with reasons reported at 2017 ONSC 4533 and supplementary reasons reported at 2017 ONSC 7079.
BROWN J.A.:
I. OVERVIEW
[1] This appeal concerns the validity and scope of an indemnity given by the appellant, Penguin Properties Inc. ("Penguin"), to the respondent and cross-appellant, Parc Downsview Park Inc. ("PDP").
[2] In 2010, the National Squash Academy Inc. (the "Academy"), as tenant, and PDP, as landlord, entered into a lease of premises in Downsview Park, in Toronto. The Academy defaulted on its obligations under the 2010 lease.
[3] Negotiations ensued between the parties to arrive at a new lease. As described by the application judge at para. 2 of his reasons:
[PDP], as the landlord, made it known that if there was to be a further lease, it would require that a guarantor be found to indemnify the rental obligations of the [Academy]. [PDP] advised that it would not enter into an amended lease without this security. Mitchell Goldhar was approached and agreed to "backstop" the obligations of the [Academy] under a new lease. [Footnotes omitted.]
[4] Mitchell Goldhar is a developer of commercial real estate. He regularly played squash at the Academy. Goldhar is the principal of Penguin.
[5] The negotiations between the parties culminated in the execution of a lease of the premises dated July 9, 2012 for approximately eight years, although the lease actually was executed in December 2012 (the "Lease"). Contemporaneously, Penguin entered into an indemnity agreement with PDP dated July 9, 2012 (the "Indemnity"), again actually executed in December 2012.
[6] PDP is a Crown corporation and a subsidiary of Canada Lands Company Limited ("CLC").
[7] Under the Indemnity, Penguin agreed as follows:
Throughout the Term of the Lease..., the Indemnifier [Penguin] will (i) promptly pay all Rent for the area of the Premises comprising approximately 12,721 square feet only, whether to the Landlord or anyone else; and (ii) indemnify and protect the Landlord from any losses or costs incurred by the Landlord (including legal fees) if the Tenant [the Academy] fails to pay the Rent in respect of the 12,721 square feet.
… The Indemnifier is not a mere guarantor, the Indemnifier is primarily responsible for the Tenant's obligations for the payment of Rent in respect of the portion of the Premises comprising 12,721 square feet.
[8] The area of 12,721 square feet represented about one-third of the total area leased by the Academy.
[9] Starting in September 2013, the Academy defaulted on its obligations under the Lease to pay rent. As described in the application judge's reasons, extensive negotiations ensued between the parties. They proved unsuccessful. In October 2015, PDP delivered a termination notice to the Academy. The latter commenced relief from forfeiture proceedings. However, when the court granted relief on the condition that the Academy pay-up arrears of rent and pay on-going rent, the Academy made a voluntary assignment into bankruptcy in February 2016.
[10] In November 2016, PDP gave further notice of default to Penguin under the Indemnity. It then commenced this application seeking payment under the Indemnity of unpaid rent, future rent, and other costs and losses.
[11] The application judge granted the application. He found that Penguin had breached the Indemnity and ordered it to pay PDP $788,603.45 "on account of amounts owing to [PDP] up to June 12, 2017 under the terms of the indemnity agreement."
[12] By its terms, the Lease did not expire until August 31, 2020.
[13] Penguin appeals; it asks this court to set aside the judgment and convert the application into an action. PDP cross-appeals; it seeks to vary the judgment to include an order requiring Penguin to pay rent due from June 13, 2017 until August 31, 2020, less any rent it receives from new tenants during that period.
[14] For the reasons that follow, I would dismiss Penguin's appeal and allow PDP's cross-appeal.
II. FIRST ISSUE: IS PENGUIN LIABLE UNDER THE INDEMNITY?
The issue stated
[15] Penguin did not dispute that it executed the Indemnity. However, Penguin's principal, Goldhar, deposed that during the summer of 2012 two PDP employees discussed with him the steps PDP planned to take to improve the Park's public exposure, to facilitate better access to the Park, and to install prominent signage along the large public roads bordering the Park. Goldhar regarded the statements made to him by the two employees as representations.
[16] Penguin contends that since PDP never took any of the steps described by the two employees, the representations were negligently made and they turned out to be false, with the result that PDP breached pre-contractual, collateral representations upon which Penguin had relied in giving the Indemnity. Goldhar contended that had he known PDP did not intend to take those steps, Penguin would not have executed the Indemnity. Consequently, Penguin argues, its liability under the Indemnity is extinguished by reason of the misrepresentations PDP negligently made.
[17] The application judge did not accept Penguin's position. He found Penguin liable under the Indemnity. Penguin advances two grounds of appeal in respect of that finding: (i) the application judge erred by applying too rigorous a test in refusing to convert the application into a trial; and (ii) he applied the wrong test to determine whether PDP made a negligent misrepresentation upon which Penguin relied to enter into the Indemnity.
Disposing of the matter by way of application
[18] Penguin submits, in essence, that it was unfair for the application judge to decide the dispute by way of application. In its view, the nature of the dispute required full production by way of affidavits of documents, examinations for discovery, followed by a trial. Penguin also contends it was unfair to decide the dispute in the face of refusals by PDP to produce certain documents.
[19] I am not persuaded by this ground of appeal.
[20] The suitability of using an application, rather than an action, to decide a contractual dispute depends upon the specific facts of the case, including the nature and extent of any factual dispute.
[21] In the present case, the issue in dispute was a narrow one: Had two employees of PDP made misrepresentations to Goldhar upon which Penguin had relied in giving the Indemnity?
[22] Penguin could not point to any document that contained a written representation by PDP. Nor could it point to any correspondence with PDP prior to the commencement of the application in which Penguin had taken the position that PDP had made oral misrepresentations. Instead, Penguin relied solely on Goldhar's evidence that two PDP employees had made certain oral statements to him during two meetings in the summer of 2012 and those statements amounted to negligent misrepresentations.
[23] In assessing Penguin's argument, the application judge effectively accepted Goldhar's evidence about what he had discussed with the two PDP employees during those summer meetings. In other words, he took Penguin's case at its highest.
[24] There was no unfairness to Penguin in proceeding in that fashion. The employment of the two PDP employees had come to an end in 2013. It therefore was open to either party to call those ex-employees as witnesses on the application under rule 39.03 of the Rules of Civil Procedure. Neither did.
[25] Also, it is difficult to understand what further material evidence about the representations could emerge from a conventional discovery process when Penguin took the position it had relied on oral statements (for which there was no supporting documentation) and the application judge based his analysis on Goldhar's evidence about the content of those statements.
[26] Nor does PDP's refusal to produce certain documents on cross-examination detract from the fairness of the process. The issue was whether PDP employees had made an oral representation to Goldhar/Penguin before the execution of the Indemnity and, if they had, the content of the representation. The information PDP refused to produce on cross-examination, as described by Penguin in its factum [1], had no apparent relevance to that issue. As well, it was open to Penguin to move on PDP's refusals; it made the tactical decision not to do so.
[27] Accordingly, I see no unfairness resulting from the application judge determining the contractual dispute by way of application instead of directing a trial. As well, an application provided an expeditious and cost-effective means to determine the dispute on its merits: Maurice v. Alles, 2016 ONCA 287, 130 O.R. (3d) 452, at para. 32.
The application judge's finding that PDP did not make any representation
[28] Penguin submits the application judge applied the wrong legal test to determine whether PDP made a pre-contractual misrepresentation.
[29] At para. 37 of his reasons, the application judge set out the legal principles he applied to determine whether PDP had made a misrepresentation:
A party alleging misrepresentations must particularize the facts on which it relies. It "must set out precisely what each allegation of misrepresentation… is, when the particular incident occurred, what was alleged to have been said, by whom and to whom." A high level of specificity is required. General statements cannot give rise to a binding representation. A claim of misrepresentation should be dismissed when the plaintiff has "produced no evidence of the alleged representations, apart from the general statements." There is a need for "specific facts… as to the 'statements' allegedly made by [the defendant]".
[30] I am not persuaded this was an inaccurate summary of the legal principles applicable in the circumstances of this case. Penguin bore the burden of establishing who made a representation, when, where, and its content. The application judge required nothing more.
[31] Penguin further submits the application judge erred in finding that no misrepresentation had been made. Penguin argues that Goldhar's evidence at para. 20 of his affidavit demonstrated PDP had made a representation. There, he deposed:
[The PDP employee] acknowledged the importance of my suggested improvements and confirmed PDP's intention to add, replace and make overall improvements to inadequate signage in and around the Park as a priority.
[32] The application judge was not persuaded that that evidence established an actionable misrepresentation. Instead, he found, at para. 31, that "[t]aken on its own, the evidence of Mitchell Goldhar is not demonstrative of any negligent misrepresentation". At paras. 32, 37 and 39 of his reasons, he explained why he reached that conclusion:
All that can be drawn from the affidavit of Mitchell Goldhar is that there were meetings at which the status of the development and some general themes and ideas were discussed in order that Mitchell Goldhar could be better informed in determining whether he wished to enter into the indemnity agreement and, presumably, the arrangement under which he provided the line of credit to [the Academy].
In this case there is no substantive content to the representations alleged to have been made to Mitchell Goldhar (Penguin Properties Inc.). There were no specific facts about the types of signage, the size or location of the signs, their design, the information they were to display, or who would pay for them. There is no evidence that any specific signage was ever discussed or agreed to.
[Penguin] cannot rely on the Corporate Plan Summaries as demonstrative of negligent misrepresentation. They are publicly available information documents about [PDP's] future plans. They are not and cannot be relied upon as enforceable representations.
[33] Ample evidence supported those findings; they are not tainted by any misapprehension of the evidence or palpable and overriding error.
[34] In addition, the application judge relied on the following evidence: (i) the parties were sophisticated – Goldhar is one of Canada's most successful developers of commercial real estate; (ii) Penguin acknowledged that the representations it alleged were made orally and not in writing; (iii) there was not a single piece of correspondence produced by Penguin that referred to any of the oral representations asserted; (iv) clause 7 of the Indemnity stated it could "only be modified in writing, signed by both the Indemnifier and the Landlord"; (v) by its terms the Indemnity was "absolute and unconditional"; and (vi) on the issue of which party relied on whom, the Indemnity began with the language, "[i]n order to induce the Landlord to sign the agreement to lease between the Landlord and [the Academy] as Tenant …, the Indemnifier agrees with the Landlord that…"
[35] Taken together, that evidence provided a sound evidentiary basis for the application judge's finding that Penguin had not established PDP made some collateral, pre-contractual representation which, if breached, would relieve it of its obligations under the Indemnity.
[36] Accordingly, I would dismiss Penguin's appeal from the judgment that it had breached the Indemnity.
III. THE APPEAL AND CROSS-APPEAL REGARDING THE QUANTUM OF LIABILITY UNDER THE INDEMNITY
The issues stated
[37] The application judge found Penguin liable to pay to PDP under the Indemnity the sum of $788,603.45, made up of net unpaid rent until June 12, 2017, together with restoration costs, legal fees, and other losses. The parties were unable to settle the application judge's order because they disagreed over how the application judge had calculated the amount payable under the Indemnity. The application judge gave supplementary reasons explaining his calculation: 2017 ONSC 7079.
[38] On appeal, both parties take issue with aspects of the application judge's calculations.
[39] Penguin submits the application judge erred in finding it was responsible for: (i) restoration costs of $272,856.34; and (ii) the full amount of the legal costs incurred by PDP as a result of the Academy's failure to pay rent when, it contends, the Indemnity limited its obligation to only about one-third of such costs.
[40] On its cross-appeal, PDP argues the application judge erred in failing to require Penguin to pay amounts for rent falling due after June 12, 2017 through the stated end of the Lease's term on August 31, 2020.
Restoration costs and legal fees
[41] After the Academy vacated the premises, PDP incurred costs to restore them to their pre-Lease condition. Penguin submits the application judge erred in awarding PDP any part of the restoration costs because the Academy's obligation to remove leasehold improvements had nothing to do with its obligation to indemnify PDP for the failure of the Academy to pay rent.
[42] I am not persuaded by this submission.
[43] Clause 1 of the Indemnity in part required Penguin, "[t]hroughout the Term of the Lease", to "indemnify and protect the Landlord from any losses or costs incurred by the Landlord (including legal fees) if the Tenant fails to pay the Rent in respect of the 12,721 square feet." The application judge held that the restoration costs were "costs incurred as a result of [the Academy's] failure to pay rent."
[44] Absent the existence of an extricable question of law or a palpable and overriding error, the application judge's interpretation and application of the Indemnity is entitled to deference: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 51-54; and Ledcor Construction Limited v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23, at para. 21. Penguin acknowledges that whether clause 1 of the Indemnity covered restoration costs is a question of mixed fact and law attracting the deferential standard of review.
[45] To answer that question, the application judge considered the events both before and after the Academy defaulted in paying rent, including its ultimate assignment in bankruptcy. At para. 47 of his reasons, he stated:
The lease required that the tenant, prior to the end of the term of the lease, remove all of its fixtures including the squash courts. If the tenant failed to comply with this requirement the landlord was free to undertake this work at the cost of the tenant. Hence the cost of this work represents a cost incurred as a result of the failure of the plaintiff to pay the requisite rent (see: Lease dated the 9th day of July, 2012, Between: Parc Downsview Park Inc. and National Squash Academy Inc. clause 9.4)
[46] I see no palpable and overriding error in that conclusion. It is a reasonable interpretation and application of clause 1 of the Indemnity to the specific facts of this case.
[47] Penguin advances an alternative submission: it argues the application judge erred in finding it liable for the full amount of restoration costs and legal fees. Penguin contends that, under the Indemnity, it should only be liable for the same proportion of those costs as it was liable for unpaid rent – that is, about one-third.
[48] I do not accept that submission.
[49] While the first part of clause 1 of the Indemnity limits Penguin's liability to "all Rent for the area of the Premises comprising approximately 12,721 square feet only" (emphasis added), the second part uses broader language, requiring Penguin to indemnify PDP for "any losses or costs incurred by the Landlord (including legal fees) if the Tenant fails to pay the Rent in respect of the 12,721 square feet" (emphasis added).
[50] I see no reversible error in the application judge's interpretation of the second part of clause 1 as covering the full amount of "any losses or costs" (emphasis added), not a pro rata share. The application judge's interpretation is one reasonably available on the language of clause 1 of the Indemnity: Atos IT Solutions v. Sapient Canada Inc., 2018 ONCA 374, 140 O.R. (3d) 321, at paras. 85-86. Accordingly, I see no basis for appellate intervention.
[51] I would dismiss Penguin's appeal.
Future rent
[52] On its cross-appeal, PDP submits that the application judge erred by failing to award it amounts for rent due under the Lease from June 12, 2017 until the end of the stated term of the Lease, on August 31, 2020. PDP argues the application judge erred by failing to give effect to the plain language of the Indemnity. Instead, he examined PDP's entitlement to future rent from the perspective of its obligations under the Lease as a landlord to its tenant, the Academy, rather than its rights under the Indemnity as against its indemnifier, Penguin. According to PDP, that mistaken approach led the application judge to find, erroneously, that PDP owed Penguin a duty to mitigate its losses for rent due after June 12, 2017. The application judge's failure to give effect to the plain language of the Indemnity constituted an extricable error of law. Alternatively, PDP submits it amounted to a palpable and overriding error.
[53] I am not persuaded the application judge committed an error of law. However, I do accept that he made a palpable and overriding error. I would set aside his conclusion that Penguin is not required to pay the rent due until the end of the stated term.
(a) Standard of review
[54] Although PDP submitted in broad terms that the application judge erred in respect of an extricable question of law, it did not specifically identify the extricable legal question. However, its factum appears to suggest the question of law concerns whether PDP had a duty under the Indemnity to mitigate its lost rent.
[55] As the Supreme Court of Canada reminded courts in Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32, [2017] 1 S.C.R. 688, at para. 47, "characterizing the nature of the specific question before the court requires delicate consideration of the narrow issue actually in dispute." That is because "[t]here is no bright-line distinction between questions of law and those of mixed fact and law": Ledcor Construction, at para. 41. The "key difference" between a question of law and one of mixed fact and law is the degree of generality or precedential value of the question at issue: Sattva, at para. 51; and Ledcor Construction, at para. 41.
[56] However, "[i]n general … contractual interpretation remains a mixed question, not a legal question, as it involves applying contractual law (principles of contract law) to contractual facts (the contract itself and its factual matrix)": Teal Cedar Products, at para. 47. As a result, while legal questions are those about what the correct legal test is, courts must be alive to the efforts of counsel "to strategically frame a mixed question as a legal question": Teal Cedar Products, at para. 45.
[57] I regard the question of whether PDP's claim under the Indemnity is subject to an obligation to mitigate rental losses as a question of mixed fact and law. The resolution of the question primarily requires a consideration of the language of the Indemnity, read within the "factual matrix" of, amongst other matters, the circumstances surrounding the concurrent execution of the Lease. That is an issue specific to the facts of the case, lacking any degree of generality. As a result, the deferential standard of review applies.
(b) Analysis
[58] When that standard of review is applied, I regard the application judge's conclusion that PDP was not entitled under the Indemnity to rent until the end of the term as a palpable and overriding error. Let me explain why.
[59] The application judge started his analysis by considering the provisions of the Indemnity dealing with Penguin's obligation to pay rent. He recognized that under the first part of clause 1, Penguin was required "[t]hroughout the Term of the Lease" to "promptly pay all Rent" for the 12,721 square foot portion of the premises. He also acknowledged that the absolute nature of the Indemnity was supported by the language of clause 2, which states:
Even if there is an Early Termination, the Indemnifier will remain obligated under this Agreement throughout the Term as though the Early Termination had not occurred. An 'Early Termination' means a disaffirmance, disclaimer, repudiation, rejection or termination of the Lease (as a result of court proceedings or otherwise), or a surrender of the Lease which the Landlord did not accept in writing, which occurs prior to the originally specified expiry date of this Term.
[60] The application judge then turned to consider whether PDP was obligated under the Indemnity to mitigate its losses for rent due after June 12, 2017. In so doing, the application judge considered another term of the Indemnity – the last part of clause 3 – which provides:
The Indemnifier's obligations will not be affected by any repossession of the Leased Premises by the Landlord, except that if the Landlord re-lets the Leased Premises then the payments received by the Landlord (after deducting all costs and expenses of repossessing and reletting the Leased Premises) will be credited by the Landlord against the Indemnifier's obligations under this agreement.
[61] The application judge held this language, taken on its own, did not demonstrate an obligation owed by PDP to mitigate.
[62] However, at this point in his analysis, the application judge shifted the focus of his analysis. He brought into play the second part of clause 1 of the Indemnity dealing with "any losses or costs" incurred by PDP, other than rent. From that, he segued into PDP's duty, as landlord, to mitigate its losses under the Lease. The application judge's reasoning can be seen in the following portion of para. 13 of his supplementary reasons:
As noted above the intention of the Indemnification Agreement is to "indemnify and protect the Landlord for any losses or costs" incurred as a result of the Tenant's failure to pay rent. There is nothing that suggests an intention that the Landlord is to gain from the default by being able to collect rent from two sources attributable to the same property. I return to the idea that is at the centre of the decision in Highway Properties Ltd. v. Kelly, Douglas and Co. Ltd., [1971] S.C.R. 562: a lease is a commercial contract. In a commercial setting where a contract is breached there is an obligation to mitigate. In the circumstances of this Indemnity Agreement, where the Landlord is asserting a right to collect damages beyond the termination of the lease and beyond the repossession of the property (the return of the estate) it is appropriate and consistent with the Indemnity Agreement that the Landlord is obliged to mitigate.
[63] With respect, that analysis discloses a palpable and overriding error. In para. 12 of his supplementary reasons, the application judge interpreted clause 3 of the Indemnity as disclosing no obligation on PDP to mitigate its rental losses. By then proceeding to depart from the plain language of the Indemnity's provisions dealing with rent, the application judge incorrectly imported into his consideration of Penguin's liability under the Indemnity the quite separate issue of any mitigation duties PDP might owe the Academy, as tenant, under the concurrently executed Lease.
[64] There was no language in the Indemnity that supported making such a link. As well, the language of the Indemnity did not impose a duty on PDP to mitigate lost rent. On the contrary, its terms provided otherwise: the Indemnity was "absolute and unconditional"; the "Early Termination" of the Lease did not relieve Penguin of its obligations as indemnifier; and those obligations continued "throughout the Term as though the Early Termination had not occurred." With respect, the application judge erred by, in effect, reading into the Indemnity a duty to mitigate its claim for lost rent which ran counter to the express language of the Indemnity.
[65] The application judge's reasoning appeared driven, in part, by a concern that PDP might "gain from the default by being able to collect rent from two sources attributable to the same property." However, clause 3 specifically contemplates such an eventuality: it contains language limiting the risk of double-recovery by providing that payments from a new tenant are to be credited "against the Indemnifier's obligations under this agreement." As well, the extensive evidence filed by PDP about its efforts to re-let the premises included an explanation of the credit it had given to Penguin for rent received from a new tenant of part of the premises.
[66] I conclude, respectfully, that the application judge made a palpable and overriding error when interpreting the Indemnity by reading into it a limitation on PDP's entitlement that ran counter to the document's plain language.
[67] In her dissent, my colleague disagrees with this result. Her disagreement is based on the view that under the Indemnity Penguin should not be liable for amounts of future rent "if they are avoidable by PDP": Dissent, at para. 91. I have reached a different conclusion. I would venture that our disagreement rests on our contrasting assessments of the factual matrix in which the Indemnity's language must be interpreted.
[68] As the application judge stated in his reasons, following the Academy's default under the initial 2010 lease, PDP advised that it would not enter into an amended lease without the security of a guarantor to indemnify the Academy's rental obligations. PDP's insistence on such an indemnity, in light of the Academy's initial default, is reflected in the Indemnity's opening language, which states: "In order to induce the Landlord [PDP] to sign the agreement to lease … [Penguin] agrees with [PDP] that …"
[69] The prior default by the Academy is a key element of the factual matrix in which the Indemnity arose. It explains why the terms of the Indemnity – accepted by Penguin, a sophisticated commercial actor – impose on the indemnifier broad, strict, and onerous obligations. To use the vernacular, having been burned once by its tenant, PDP was not prepared to be burned again. The onerous language of the Indemnity operated as the means by which PDP could ensure that it would not be left holding the proverbial bag in the event the Academy defaulted a second time, which it did. To interpret the language of the Indemnity as subjecting PDP to an implied duty to mitigate future rent would fail to give effect to that key aspect of the factual matrix. It could result in a situation where PDP is left holding the bag – a result contrary, in my view, to the express language of the Indemnity.
[70] Accordingly, I conclude that PDP is entitled under the Indemnity to payment by Penguin for rent due during the period from June 12, 2017 until August 31, 2020, subject to the credit that clause 3 requires be given for rent obtained from a new tenant.
IV. DISPOSITION
[71] For the reasons set out above, I would dismiss the appeal. I would allow the cross-appeal to the extent of varying para. 3 of the Judgment to include an order requiring Penguin to pay PDP future amounts in respect of Rent until August 31, 2020, subject to the credit for rent received from any other person as provided for by clause 3 of the Indemnity.
[72] In accordance with the amounts agreed upon by the parties, I would award PDP its costs of the appeal and cross-appeal fixed in the amount of $20,000, inclusive of disbursements and applicable taxes.
"David Brown J.A." "I agree. B.W. Miller J.A."
van Rensburg J.A. (Dissenting):
[73] I have read the reasons of Brown J.A. and agree with the result and his reasons for dismissing the appeal. With respect, I do not agree with my colleague's proposed disposition of the cross-appeal. I would dismiss the cross-appeal for the following reasons.
THE DECISION BELOW
[74] In its application PDP claimed the following against Penguin: rent and interest due and owing under the Lease and Indemnity; an amount for losses incurred by it which were subject to indemnification under the Indemnity; and an order that Penguin pay all future amounts in respect of rent pursuant to the Lease and Indemnity as such amounts become due.
[75] The application judge, in his first set of reasons, addressed the first two claims. He awarded an amount for rent up to June 12, 2017 (the date of judgment), less rent received, for the 12,721 square feet, an amount for restoration costs in respect of the entire leased premises, and legal and bailiff costs. He did not address the claim for future amounts of rent which would fall due under the Indemnity after June 12, 2017 for the balance of the eight year Term. Indeed, the parties did not argue the question of future rent at the time of the original hearing, and the application judge heard additional submissions on that issue in the context of an attendance to settle the terms of the application judge's order.
[76] The application judge refused to make an order that Penguin pay all future amounts in respect of rent pursuant to the Indemnity, as such amounts become due. He rejected the argument that this was implicit in his first set of reasons. According to his interpretation of the Indemnity, PDP could not recover avoidable losses – it had a duty to mitigate its claim for ongoing rent by taking reasonable steps to re-let the space. He concluded that the evidence did not permit him to determine whether PDP had mitigated its claim for rent for the balance of the Term, and that it was "impossible" for him to go further.
[77] Contrary to what PDP argued in its cross-appeal, the application judge did not dismiss its claim for ongoing rent under the Indemnity. The application judge refused to make an open-ended order that would require Penguin to pay the monthly rent irrespective of what PDP chooses to do with the premises, and only subject to a credit for any payments PDP may receive (if any) from re-letting. The effect of his decision is that Penguin's obligations under the Indemnity in respect of rent continue for the balance of the Term (until August 31, 2020), but subject to a duty on the part of PDP to take reasonable steps to mitigate its damages.
[78] I will explain why I have concluded that the application judge's determination of the claim for ongoing rent, as part of PDP's claim under the Indemnity, reveals no reversible error.
DISCUSSION
(1) The conclusion that PDP has a duty to mitigate its claim for rents
[79] After rejecting PDP's contention that he had already determined the issue in its favour, the application judge began his analysis by discussing the question of mitigation in the context of a lease. He referred to Highway Properties Ltd. v. Kelly, Douglas and Co., [1971] S.C.R. 562, and its recognition that a lease is a commercial contract, as well as a grant of an estate in property. He referred to a passage in that case that "mitigation is involved where there is a re-letting on the tenant's account". He concluded this part of his reasons, at para. 10, by stating that "a re-letting of the property subsequent to retaking possession may be to the benefit of the tenant and demonstrative of mitigation". There can be no quarrel with this statement or the summary of the law that precedes it.
[80] The application judge then went on to consider the terms of the Indemnity itself. He referred to clause 3 of the Indemnity, and accurately noted, at para. 12, that, "taken on its own this does not demonstrate an obligation to mitigate. It suggests only that if the damage to the Landlord is mitigated by re-letting that benefit is to accrue to the tenant." Again, there is no error. The fact that PDP is given a credit for amounts it receives if it re-lets the space is distinct from whether it has a duty to do so. And I did not understand PDP to argue that this clause is determinative of the issue.
[81] The substance of the application judge's analysis of whether there was a duty to mitigate in respect of rents under the Indemnity is contained in para. 13 of his reasons where he stated:
The lease includes a provision requiring the tenant at the end of the term to remove all of the fixtures "including without limitation the squash courts" at its expense or to pay the Landlord its costs of doing so. The Landlord has removed the squash courts and returned the facility to a state where it can be leased for another purpose. The award made on the application includes those costs. This being the case the position of the Landlord is that having repossessed the property and having recovered the cost of returning it to a leasable state it is now able to re-lease the property to another tenant and at the same time collect the rent on the pre-existing lease from the Respondent. As noted above the intention of the Indemnification Agreement is to "indemnify and protect the Landlord for any losses or costs" incurred as a result of the Tenant's failure to pay rent. There is nothing that suggests an intention that the Landlord is to gain from the default by being able to collect rent from two sources attributable to the same property. I return to the idea that is at the centre of the decision in Highway Properties: a lease is a commercial contract. In a commercial setting where a contract is breached there is an obligation to mitigate. In the circumstances of this Indemnity Agreement, where the Landlord is asserting a right to collect damages beyond the termination of the lease and beyond the repossession of the property (the return of the estate) it is appropriate and consistent with the Indemnity Agreement that the Landlord is obliged to mitigate. The Landlord cannot step away from the proposition that it seeks damages beyond the return of the estate. It has reduced the amount claimed for rent after the termination of the lease and the repossession of the property by the value of the rent it has received from new tenants. It has obtained an award of such damages being the cost of restoring the property. Those costs extended beyond the end of the lease…
[82] Here, the application judge considered the duty to pay rent under the Indemnity in the context of the Indemnity as a whole and the factual matrix of the Lease, PDP's conduct in terminating the lease and retaking possession, and its claim under the Indemnity for restoration costs. He was clearly motivated by the commercial unreasonableness or "double recovery" that would occur if PDP were permitted to obtain both the cost to restore the entire premises so that it could be re-let as part of its indemnified losses, and rent for the balance of the Term without having to re-let the premises. This is the substance of his conclusion that there was a duty to mitigate.
[83] I disagree with my colleague that the application judge made a palpable and overriding error in his analysis in this paragraph by "incorrectly [importing] into his consideration of Penguin's liability under the Indemnity the quite separate issue of any mitigation duties PDP might owe the Academy, as tenant, under the concurrently executed Lease."
[84] First, I do not read the application judge as in any way saying that PDP's obligation to mitigate its claim for rents under the Indemnity followed from the fact that it may have had an obligation to mitigate under the Lease vis-à-vis the tenant. The application judge did not fail to recognize that there was a difference between the mitigation duties owed under the Lease and the Indemnity. His attention was firmly on the question of whether, under the Indemnity, PDP had a duty to mitigate by making reasonable efforts to re-let the subject space.
[85] Second, there was nothing wrong with the application judge considering the terms of the Lease in his interpretation of the Indemnity, which provided for the indemnification of PDP for the tenant's defaults under the Lease. I would go so far as to say that it would have been an error for the application judge to have ignored the Lease.
[86] The Indemnity was provided to PDP as an accommodation [2], expressly to induce PDP to sign the Lease with the Academy. The Lease and the claims available to PDP under the Indemnity after the tenant's default, were part of the "factual matrix" relevant to the determination of whether PDP was required to mitigate, by attempting to re-let the space, in its claim for rent under the Indemnity. The application judge noted that PDP was seeking damages "beyond the return of the estate", that it had terminated the Lease, repossessed the property, received rent from new tenants, and that "it [had] obtained an award of such damages being the cost of restoring the property". These factors informed his conclusion that "in the circumstances of this [Indemnity], where the Landlord is asserting a right to collect damages beyond the termination of the lease and beyond the repossession of the property (the return of the estate) it is appropriate and consistent with the [Indemnity] that the Landlord is obliged to mitigate".
[87] The application judge's analysis gave effect to the whole of the Indemnity. His prior determination that PDP was entitled to the cost of restoring the whole of the leased property as part of its indemnity for "losses" was an important consideration. In his first set of reasons, the application judge concluded that the losses that PDP was entitled to recover as damages under the Indemnity included $272,856.34 in restoration costs it had incurred under article 9.4 of the Lease. These had been characterized by PDP's deponent as "costs and expenses incurred in order to re-possess and re-let the Leased Premises", and "removal and restoration work…necessary to enable PDP to lease the space to a new tenant". It would be inconsistent for PDP to claim and recover its restoration costs as "losses" under the Indemnity, and, if it so chose, to leave the premises vacant while continuing to collect "rent" under the Indemnity. This was the central point of the application judge's analysis which resulted in an interpretation of the Indemnity that was both internally consistent and commercially reasonable.
[88] I also disagree with my colleague that the application judge's interpretation of the Indemnity is contrary to its express language. The Indemnity does not expressly provide for PDP to recover rents that it might avoid through mitigation. The application judge recognized that there is typically a duty to mitigate in a commercial contract. The "duty to mitigate" recognizes the rule in breach of contract cases that "the defendant cannot be called upon to pay for avoidable losses which would result in an increase in the quantum of damages payable to the plaintiff: Michaels v. Red Deer College, [1976] 2 S.C.R. 324, at para. 9. See also 410784 Ontario Limited v. Little Zinger Inc. (Corktown Esso), 2016 ONCA 90, at para. 48.
[89] The reference in clause 3 to the Indemnity being "absolute and unconditional" does not itself preclude a duty to mitigate or, said otherwise, authorize PDP to recover avoidable losses under the Indemnity. See, for example, Midland Plaza Inc. v. Midland Medical Services Inc., 2015 ONSC 7608, at paras. 9 and 54, where the indemnified landlord had a duty to mitigate under an "absolute and unconditional" indemnity and Jens Hans Investment Co. v. Bridger, 2004 BCCA 340, 29 B.C.L.R. (4th) 1, where conduct of the landlord that materially increased the risk of default under the lease was a defence under an indemnity that was "absolute and unconditional."
[90] Here, the "absolute and unconditional" language of the Indemnity is followed by a number of specific circumstances involving dealings between PDP and the tenant, which would not affect the Indemnifier's obligations, and would remove some of the usual defences Penguin might otherwise raise as a surety for the tenant's obligations. Interpreting the Indemnity as precluding the duty to mitigate because of the "absolute and unconditional" language would be inconsistent with the expressio unius est exclusio alterius principle of interpretation. The principles of interpretation applicable to indemnity clauses, which entail a party's assuming responsibility and giving up defences that might otherwise be available, work against broad application and against general, wide scopes of protection: Harvey M. Haber, Kenneth A. Beallor, Landlords' Rights and Remedies in a Commercial Lease: A Practical Guide, 2nd ed., (Toronto: Thomson Reuters, 2017), at p. 319. Sureties, including indemnitors, are favoured creditors in the eyes of the law, whose obligations should be strictly examined and strictly enforced: Manulife Bank of Canada v. Conlin, [1996] 3 S.C.R. 415, at para. 10; Guarantee Co. of North America v. Resource Funding Ltd., 55 B.L.R. (4th) 68; and Richview Investments Inc. v. Dynasty Social Club, 29 B.C.L.R. (3d) 348, at para. 33.
[91] I also do not regard the obligation under the Indemnity to pay rent "throughout the Term as though the Early Termination had not occurred" as clear wording that rules out a duty to mitigate. This wording simply sets out the scope of the obligation to indemnify for lost rent and provides that PDP has an ongoing right to demand rent from Penguin even after Early Termination has occurred. It does not however answer the question of whether Penguin, as indemnifier, would be liable for such amounts if they are avoidable by PDP. And the fact that there were separate obligations to indemnify for "rent" and "losses" does not aid in the analysis. Although characterized as "rent" what PDP is claiming here is its future cash flow. Both obligations – to pay rent for the balance of the Term, and to pay PDP's losses – are part of the same Indemnity which requires Penguin to respond in the place of the tenant.
[92] For these reasons I would not interfere with the application judge's conclusion that PDP had and continues to have a duty to mitigate by making reasonable efforts to re-let the subject space, in respect of its claim for rent under the Indemnity. His interpretation took into consideration all appropriate factors including the character of the Indemnity as a commercial agreement which ordinarily would be subject to a duty to mitigate, the language of the Indemnity, the factual matrix (including the Lease and the circumstances leading to the claim under the Indemnity), and the fact that PDP had claimed and was entitled under the Indemnity to its costs to restore the premises for the express purpose of re-letting.
(2) The application judge's determination of the mitigation issue
[93] PDP also argues in its cross-appeal that the application judge erred in his determination of the mitigation issue. PDP says that the application judge unreasonably rejected its evidence on mitigation with respect to the claim going forward, when he had accepted, based on the same evidence, that reasonable mitigation had occurred in relation to the claim for rent up to June 12, 2017.
[94] There are two points to make here. First, PDP's position on this issue again appears to reflect a misunderstanding of the application judge's decision. He did not dismiss PDP's claim for future rent under the Indemnity after rejecting its mitigation evidence. Nor did he preclude PDP from continuing to demand and to recover such amounts. He simply refused to determine the issue. When the application was heard, the space was rented, and some rental income was applied to reduce Penguin's obligations to pay rent under the Indemnity. As the application judge noted, at para. 15, it would be impossible for him to "go further" to determine whether, going forward, the loss of rent to the end of the Term would be unavoidable.
[95] Second, it is not for this court to reassess the evidence that was before the application judge. Typically, a judge's decision with respect to mitigation is a finding of fact entitled to deference absent a palpable and overriding error: Hav-a-Kar Leasing Ltd. v. Vekselshtein, 2012 ONCA 826, at para. 57. Here, PDP put forward evidence of steps taken in an effort to re-let the space, which had to date only resulted in limited rental income from use of part of the space. The fact that there was adequate mitigation in the past did not necessarily determine mitigation going forward. The application judge was entitled to conclude that he did not have enough evidence on this point to determine whether PDP had mitigated its claim for future rent for the next five years. Indeed, in argument on the appeal, PDP's counsel asserted that it was "impossible" to prove future mitigation and that it would have been "speculative" for the application judge to require evidence of further mitigation. That is the very reason the application judge refused to determine the issue.
[96] For these reasons I would dismiss the cross-appeal. I would award costs in the amounts agreed between the parties: costs of the appeal to PDP in the sum of $15,000 and costs of the cross-appeal to Penguin in the sum of $5,000, both amounts inclusive of disbursements and applicable taxes.
Released: July 26, 2018
"K. van Rensburg J.A."
Footnotes
[1] The information consisted of: the files of the two former PDP employees concerning the development of the Park; PDP's signage study; minutes of meetings of the board of directors; and documentation relating to the assumption of management of the Park by CLC.
[2] Here I use the term "accommodation" in its legal sense to refer to a surety "provided in the expectation of little or no remuneration and for the purpose of accommodating others or of assisting others in the accomplishment of their plans", as distinct from a compensated surety "whose business consists of guaranteeing performance and payment in return for a premium". It is accommodation sureties whose obligations are strictly construed: Manulife Bank of Canada v. Conlin, [1996] 3 S.C.R. 415, at paras. 12 and 13. There can be no question that Penguin provided the Indemnity as an accommodation to the Academy, and not for a premium or other compensation.
