Court File and Parties

2017 ONSC 3306 Court File No.: CV-17-571368 & CV-17-573663 Date: 2017-05-30

Ontario Superior Court of Justice

Between:

North Elgin Centre Inc., Applicant – and – McDonald’s Restaurants of Canada Limited, Respondent

And

McDonald’s Restaurants of Canada Limited, Applicant – and – North Elgin Centre Inc., Respondent

Counsel: Martin P. Zarnett, for North Elgin Centre Inc. Andrew Parley and M. Robbins, for McDonald’s Restaurants of Canada Limited

Heard: May 15, 2017

Before: Akbarali J.

Overview

[1] These applications seek to determine the rights of the landlord, North Elgin Centre Inc., and its tenant, McDonald’s Restaurants of Canada Limited, under a lease agreement. The parties entered into a twenty-year ground lease in respect of lands in Richmond Hill, Ontario on which McDonald’s has built and renovated a restaurant. McDonald’s is the only occupant of the premises. The restaurant is approximately 4,690 square feet not including a 382 square foot garbage corral. It has several drive-through lanes. McDonald’s has invested significant funds into the restaurant.

[2] By way of an acknowledgement dated March 13, 1997, the parties agreed that the lease commencement date is March 11, 1997 and the original term would end on March 10, 2017.

[3] The lease includes an option to renew for two consecutive additional terms of ten years each. The provision requires McDonald’s to give notice of its intention to renew at least twelve months prior to the expiry of the original lease term. If the lease term is renewed, the renewal is on the same terms and conditions contained in the original lease,

provided that the rental to be paid during such renewal terms shall be mutually agreed upon between the parties hereto and failing such agreement, at least nine (9) months prior to the expiration of the original Term or any renewal term or terms, the Tenant at its option may either revoke its notice of intention to renew, in which case this Lease shall expire at the end of the current term, or the Tenant may elect to proceed to arbitration. If the Tenant elects to proceed to arbitration the rental shall be determined by arbitration within the next three (3) months… and shall be based upon the fair market rent of the land only as at the date of the exercise of the option to renew contained herein.

[4] The lease was drafted by McDonald’s.

[5] There is no dispute that McDonald’s gave proper notice of its intention to renew the lease. It delivered written notice to the landlord’s property manager on February 29, 2016 confirming its exercise of the option to renew for one additional ten year term, and confirmed the term would commence on March 11, 2017 and expire on March 10, 2027.

[6] However, the parties failed to agree on rent by nine months prior to the expiration of the original term. McDonald’s neither revoked its notice of intention to renew nor elected to proceed to arbitration. It states that the negotiations were ongoing with the landlord and it made little sense to trigger an expensive arbitration when the landlord was still formulating its rent proposal for McDonald’s to review.

[7] In its application, the landlord seeks a declaration that the ground lease will be terminated on May 17, 2017, a date that is not the end of the lease term [1]. The landlord also seeks a declaration that McDonald’s did not properly exercise its option to renew in accordance with the lease. Alternatively, it seeks an order declaring that McDonald’s did not comply with its obligations pursuant to the renewal provision of the lease such that the lease will be terminated on May 17, 2017.

[8] In its application, McDonald’s seeks a declaration that the lease has been renewed for the renewal term, ending on March 10, 2027, and an order that the parties proceed to arbitration to establish the fair market rental rate for the renewal term. McDonald’s also seeks an order requiring the landlord to immediately proceed to obtain the consent necessary under the Planning Act, R.S.O. 1990, c. P. 13 for the lease to run beyond a term of twenty-one years, an obligation McDonald’s argues the landlord has under the lease and which it has taken no steps to meet.

Issues

[9] These applications raise the following issues:

a. Did McDonald’s comply with the terms of the renewal provision? More particularly, what are the consequences of McDonald’s’ failure to either revoke its intention to renew or to elect to proceed to arbitration? b. If McDonald’s did not comply with the terms of the renewal provision, did the landlord, by its conduct, waive its entitlement to enforce strictly its rights under the lease? c. Alternatively, if McDonald’s did not comply with the terms of the renewal provision, is it entitled to relief from forfeiture? d. If the lease is not at an end, is specific performance warranted to compel the landlord to obtain the relief required under the Planning Act? e. If the lease is at an end, should a stay of the judgment be granted?

Did McDonald’s properly exercise the renewal provision?

[10] The landlord argues that, while McDonald’s gave proper notice of its intention to renew, by failing to either elect arbitration or to revoke its intention to renew nine months before the end of the original lease term, McDonald’s failed to comply with the renewal provision. It relies on 120 Adelaide Leaseholds Inc. v. Oxford Properties Canada Ltd., 1991 CarswellOnt 2200 at paras. 38-39, [1991] O.J. No. 1507 (S.C.J.), aff’d [1993] O.J. No. 2801 (C.A.) to argue that a tenant must strictly comply with the terms of an option to renew. It argues that the lease must be at an end because, having not elected arbitration, there is no way for the parties to determine rent. All that is left, the landlord argues, is an unenforceable agreement to agree.

[11] McDonald’s argues that, having given notice of its intention to renew, there was commercial certainty regarding its secure tenure for the renewal period. It would not have been entitled to revoke its intention to renew the lease after the nine month period passed. It argues that it was not compelled to revoke its intention to renew or to elect arbitration. Having done neither, it was up to the parties to determine how they wanted to proceed to settle the rental rate.

[12] In my view, the renewal provision required McDonald’s to do more than simply provide notice of its intention to renew at least twelve months before the end of the lease term. It required McDonald’s to make a choice between proceeding to arbitration or revoking its intention to renew if the parties had not agreed on a rental rate nine months before the end of the original lease term. The provision, while it uses the permissive “may”, compels McDonald’s to act because McDonald’s choices are limited to “either” revoking its intention to renew “or” electing to proceed to arbitration.

[13] Once McDonald’s failed to make either election, the parties were left with a lease agreement that was uncertain as to a material term – the rental rate. The parties may have been free to agree to a new rental rate, but any such discussions would not have been pursuant to the process set out in the lease. Negotiation is not a substitute for the exercise of a right of renewal in conformity with the terms of a lease: see Doria v. 66 Degrees Inc., 2000 CarswellOnt 86 (S.C.J.) at paras. 7-8.

[14] With incomplete material terms, the parties are left without an enforceable agreement. Rodaro v. Royal Bank, 59 O.R. (3d) 74 (C.A.) at paras. 21 and 23, rev’g on other grounds 2000 CarswellOnt 238 (S.C.J.). The court will give reasonable commercial effect to the contractual arrangements made between parties, but will not make their contract for them: Rodaro (S.C.J.) at para. 164.

[15] Accordingly, the lease between the parties is unenforceable, subject to McDonald’s’ arguments about waiver and relief from forfeiture.

Did the landlord waive strict compliance with the terms of the renewal provision?

[16] McDonald’s argues that the landlord has no right to require strict compliance with the renewal provision. It argues the doctrine of waiver applies. McDonald’s states that it initiated negotiations with the landlord in February 2016. The landlord, as is standard, was to deliver an initial proposal in due course, after it had assembled relevant information about, for example, market rates. As late as July 2016, the landlord sought CAD drawings from McDonalds, and provided those to its appraiser. The appraiser then delivered a draft report in August 2016 and the parties met on August 29, 2016 to discuss it. Only after that meeting, in an email dated August 31, 2016 – well past the nine month mark referred to in the renewal provision – did the landlord indicate that it “assume[d] that McDonald’s intends to let this lease expire”.

[17] McDonald’s argues that it would have been rash and inconsistent with good faith negotiations to elect to proceed to an expensive arbitration before the landlord had even provided its initial proposal. McDonald’s argues that if a landlord can delay negotiations to bypass a renewal option that has been properly exercised, it would be unfair to the tenant who relied in good faith on the landlord’s actions and words.

[18] The landlord argues that the conduct of the parties as a whole must be reviewed to determine if waiver applies. It relies on a non-waiver provision in the lease. It argues that by August 31, 2016 it had made its position clear, and McDonald’s has still not elected to proceed to arbitration (unless one counts its application, issued on April 20, 2017).

[19] The landlord argues that McDonald’s is a sophisticated party and understood its obligations under the lease, which it drafted. The landlord states that, at its most generous, if the lease term expired on May 17, 2017, and the lease allowed the parties to arbitrate a rent by six months prior to the end of the term, McDonald’s had until November 17, 2016 to elect to arbitrate but it failed to do so, even after knowing the landlord was insisting on strict compliance with the renewal provision.

[20] I find this argument of the landlord to be disingenuous. The term of the lease expired on March 10, 2017. The lease provided that the arbitration process would resolve by six months prior to the end of the lease term but that the election to arbitrate had to be made at least nine months prior to the end of the lease term. That date is June 10, 2016, more than two months before the August 31, 2016 letter in which the landlord first raises the possibility that the lease is at an end.

[21] Thus, if the landlord waived its right to insist on strict compliance with the terms of the renewal provision, it did so before June 10, 2016.

[22] The doctrine of waiver prevents a party from enforcing its strict rights where, by its words or conduct, it demonstrated an intention to affect legal relations which leads a counter-party to believe the party’s strict rights will not be enforced: Singh v. Three King’s Head Inn, [1999] B.C.J. No. 1811 at paras. 17, 21.

[23] Discussions about rental rate began even before McDonald’s delivered written notice of its intention to renew the lease. Twice in February 2016 and twice in March 2016, the landlord’s representative told McDonald’s that the landlord was working on a lease renewal proposal and would have something to McDonald’s shortly. In April 2016, McDonald’s enquired again as to how things were progressing. McDonald’s continued to wait for the landlord’s proposal.

[24] June 10, 2016 came and went. McDonald’s’ witness deposed that McDonald’s did not exercise its right to arbitrate the rental rate at this time, because arbitration was premature, since the landlord was still working on its proposal.

[25] I find that by its conduct, the landlord demonstrated its intention not to strictly enforce its rights under the lease. The lease provides for a three-month negotiation period, but because the landlord had yet to deliver its rent proposal, negotiations had not been able to commence in any meaningful way. I accept that McDonald’s understood that negotiations should have a chance to succeed before the parties would incur the costs of an arbitration.

[26] That this was also the landlord’s understanding is apparent from its behaviour after June 10, 2016. When the nine month time period contemplated by the renewal provision passed, the landlord did not allege that the lease was at an end [2]. It continued to tell McDonald’s that it was working on its proposal for the new rental rate. In July 2016 it asked for and received from McDonald’s the CAD drawings of the rental premises to assist it with its proposal.

[27] On August 22, 2016, the landlord received a draft appraisal prepared by its realty advisors. On August 23, 2016 it advised McDonald’s that it was ready to meet to discuss the rental rate for the renewal term. That meeting took place on August 29, 2016.

[28] My finding that the landlord waived its right to insist on strict compliance with the terms of the renewal provision is thus grounded on its actions up to June 10, 2016 and supported by its actions thereafter, up to and including August 29, 2016. However, it is necessary to consider what happened after August 29, 2016 to determine if the waiver was revoked.

Was the waiver revoked?

[29] On August 31, 2016 the landlord’s representative wrote to McDonald’s’ representative stating that, at the August 29, 2016 meeting, McDonald’s representative “confirmed” that McDonald’s did not “wish” to go to arbitration. It advised that, since McDonald’s had not elected to proceed to arbitration, it assumed McDonald’s intended to let the lease expire. The landlord’s “assumption” was inconsistent with every communication the landlord had had with McDonald’s up to that time. It closed its email by asking “does McDonald’s now want the Tenant (sic) to agree to submit the issue of fair market rent for the renewal term to binding arbitration?”

[30] I place little reliance on the purported confirmation that McDonald’s did not “wish” to go to arbitration. McDonald’s evidence and its conduct indicates that it wanted to renew its lease. It might not have “wished” to go to arbitration, but that does not mean it was not prepared to do so if negotiations failed. McDonald’s reasonably expected that the parties would first attempt to reach an agreement on the rental rate. Up until August 31, 2016, the landlord demonstrated it shared that expectation. I find that at the meeting on August 29, 2016, McDonald’s communicated its intention to engage in negotiations to establish a rental rate.

[31] In response to the August 31, 2016 email, McDonald’s advised that the landlord’s position was incorrect. It confirmed it did not intend to let the lease expire. The landlord indicated it was maintaining its position.

[32] McDonald’s’ witness deposes that McDonald’s believed the landlord clearly understood its intentions, so it proceeded to review the landlord’s appraisal to advance negotiations of the rental rate. In late November 2016, McDonald’s advised that it would provide its counter-proposal the following week. The landlord’s counsel responded immediately, reiterating its position that the lease had not been renewed.

[33] McDonald’s eventually delivered a counter-proposal for the rent in December 2016, but the landlord refused to engage in rent negotiations with McDonald’s unless it accepted the landlord’s position that the original lease was at an end, and the parties were negotiating a new lease. This, of course, would put the landlord in a stronger bargaining position than it enjoys under the lease, which limits the rent to the fair market value of the land only, in circumstances where McDonald’s has invested significant funds into the restaurant.

[34] The question is whether the August 31, 2016 email, and the events thereafter, evidence the landlord’s intention to return to its original position under the lease. A party who has waived its rights can revert to its original position on giving reasonable notice by making it plain that he will thereafter insist upon them unless it cannot be done without an injustice to the other party: Petridis v. Shabinsky et al., (1982), 35 O.R. (2d) 215 (H.C.J.).

[35] I find that the landlord’s communications as of August 31, 2016 evidence a clear intention to revert to its original position under the lease. From that point, McDonald’s had a reasonable period of time to elect to proceed to arbitration. It did not do so. Its application was not issued until April 2017. The landlord’s application, which also puts the rights of the parties to the lease in issue, was not issued until March 2017.

[36] In the face of clear communication from the landlord of its position that the lease was at an end, McDonald’s proceeded to prepare for rent negotiations, without triggering the arbitration. McDonald’s sole explanation for its actions is that it believed the landlord understood its intentions. The question, however, is whether McDonald’s understood the landlord’s intentions. I find that it did. The landlord was clear.

[37] I see no injustice that arises by permitting the landlord to return to its original position under the lease within a reasonable time of giving notice of its intent to do so. McDonald’s is a sophisticated party. It drafted the lease. All it had to do was elect to proceed to arbitration, but inexplicably, it did not do so within a reasonable period of time.

[38] As a result, the doctrine of waiver does not save the lease. I note that in reaching this conclusion, I do not rely on the non-waiver provision of the lease. In my view, it does not apply for the reasons set out by Frank J. in Firkin Pubs Metro Inc. v. Flatiron Equities Limited, 2011 ONSC 5262 (S.C.J.) at paras. 48-49. The provision does not foreclose waiver of a right under the lease, but rather provides that a party’s waiver of a default or breach does not waive that party’s rights in respect of any continuing or subsequent default or breach.

Relief from Forfeiture

[39] Relief from forfeiture is a discretionary, equitable remedy which may protect a party from the loss or interest of a right because of a failure to perform a covenant or condition in an agreement.

[40] Relief from forfeiture has limited application. The Court of Appeal has made clear that one of the conditions necessary for the jurisdiction to relieve from forfeiture to be exercised is that the tenant has made diligent effort to comply with the terms of the lease which are unavailing through no default or his or her own: 120 Adelaide (C.A.) at para. 9.

[41] That precondition to the exercise of my jurisdiction to relieve from forfeiture is not present here. McDonald’s has not made diligent effort to comply with the terms of the lease. All it had to do was elect to proceed to arbitration within a reasonable time after it received the August 31, 2016 email but it failed to do so. It has offered no explanation for its default and certainly none that would establish that compliance with the terms of the lease is unavailing through no default of its own.

Planning Act Issue

[42] Section 50(3) of the Planning Act provides that there can be no conveyance of land, including a lease, which directly or by way of renewal exceeds 21 years. Section 50(3)(f) provides for an exception where consent is given by the appropriate municipality. Had McDonald’s been successful on its application, it would have sought an order directing the landlord to obtain consent under s. 50(3)(f) of the Planning Act. In the circumstances it is not necessary to deal with this issue. If the parties enter into a new lease, no consent under the Planning Act is required.

Stay

[43] At the hearing of the application, counsel for McDonald’s asked that if I find the lease to be at an end, I provide for a period of time within which the parties can sort out the best way to move forward. McDonald’s seeks 90 days. The landlord did not dispute that some period of time was necessary but suggests 30 days is appropriate.

[44] I am mindful of the fact that McDonald’s is operating a business with employees at the premises. I am also mindful of the fact that the landlord has yet to enter into serious rent negotiations with McDonald’s despite McDonald’s efforts. In my view, a stay should be for sufficient time to both, address the issues related to the employees and to allow the parties to attempt to enter into meaningful negotiations if they choose to do so.

[45] Accordingly, I grant a stay of this judgment for 90 days.

Costs

[46] Had it been successful, McDonald’s would have sought its substantial indemnity costs which, inclusive of disbursements and HST, amount to $28,352.89. On a partial indemnity scale, its costs, including disbursements and HST, amount to $19,375.83.

[47] The landlord seeks its partial indemnity costs of $10,000 inclusive of disbursements and HST.

[48] There is no reason to depart from the usual rule that costs follow the event. These applications were moderately complicated, and raised issues of the interpretation of the lease, waiver, relief from forfeiture and specific performance. In my view, $10,000 for costs is fair and reasonable. It is an amount that McDonald’s would reasonably have expected to pay in view of its own costs.

Conclusion

[49] I grant the landlord’s application for an order declaring that McDonald’s did not comply with the terms of the renewal provision in the lease and declaring that the lease came to an end on March 10, 2017.

[50] I dismiss McDonald’s application for declaratory relief.

[51] I grant McDonald’s request for a stay of this judgment for a period of 90 days from the release of these reasons.

[52] I order McDonald’s to pay $10,000 in costs, inclusive of HST and disbursements, to the landlord.

[53] Neither party sought any relief with respect to rent owing to the landlord by McDonald’s for the period of time from March 10, 2017 to the date on which this judgment shall no longer be stayed. Accordingly, I make no such order in respect of rent over this time period.

Justice J. T. Akbarali Released: May 30, 2017

Footnotes

[1] The landlord’s affiant deposed that the lease commenced not later than May 18, 1997. It is unclear to me from where this date originates. The lease was signed in September 1996. The lease provides that the parties would execute an acknowledgement of the actual commencement date. As I have noted, the acknowledgement clearly states that the lease term commenced on March 11, 1997.

[2] The landlord argues that it was mistaken as to the date of termination of the lease. When McDonald’s gave notice of its intention to renew the lease, it specifically referred to the correct date on which the lease would end. In addition, the parties signed a Second Lease Amending Agreement dated May 22, 2015 which clearly refers to the correct end of lease term. The landlord is a sophisticated party. I do not accept that it did not know when the lease expired.