Court File and Parties

COURT FILE NO.: CV-17-585789 DATE: 20180622 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: V HAZELTON LIMITED, Applicant – AND – PERFECT SMILE DENTAL INC., OUTHERE BY MARCUS CHAVES CORP., OUTHERE BY MARCUS CHAVEZ and MARCUS CHAVES, Respondents

BEFORE: E.M. Morgan J.

COUNSEL: Michael McQuade, for the Applicant Robert Trifts, for the Respondent, Perfect Smile Dental Inc. James Quigley, for the Respondents, Marcus Chaves, Outhere by Marcus Chaves Corp., and Outhere by Marcus Chavez

HEARD: June 22, 2018

Endorsement

[1] The Applicant was the tenant under a lease of a retail unit located at 1282 Bay Street, Toronto (the “Premises”). The lease is dated October 1, 2012 (the “Lease”), with its term terminating on September 31, 2017, and with an option to renew for a further 5 year term. The landlord of the Premises is the Respondent, Perfect Smile Dental Inc. (the “Landlord”).

[2] In 2016, the Applicant sub-let the Premises to the Respondent, Marcus Chaves (“Chaves”), who now carries on business as Outhere By Marcus Chaves Corp. and/or Outhere By Marcus Chavez. The Applicant did not assign to Chaves its rights under the renewal clause of the Lease, but rather specifically reserved those rights to itself. The principal of the Landlord acknowledged in cross-examination that he was aware of the sub-lease and had no issue with it.

[3] The Landlord and the Applicant negotiated for some time over a rental rate for the renewal period, but were unable to come to an agreement. The renewal option under the Lease called for arbitration in the event that a renewal rent could not be agreed upon. The Landlord, however, did not want to proceed with arbitration, and declared the Lease to be at an end. It then approached Chaves directly, and entered into a new lease with Chaves as its direct tenant.

[4] The Premises were renovated by the Applicant when Chaves took them over. Chaves runs a high-end retail store. The Landlord now takes the position that the Applicant breached the Lease by capping off the water in the Premises when it removed a bathroom during the course of the renovations. For its part, the Applicant states that the Landlord was either sent the plans for the renovation or saw them because they were posted in the Premises during the course of the renovation, and that the Landlord was never opposed to any of the work.

[5] In any case, the Applicant and Chaves have both deposed that the Premises are in a good state of repair. Indeed, the principal of the Landlord has also stated in his affidavit that the Premises are very presentable, tasteful, and well kept up. He indicates that he did not go into the bathroom, but his affidavit confirms that the renovation, without the bathroom, has not detracted from the state of the Premises.

[6] When the end of the term of the Lease was approaching, the Landlord accepted the Applicant’s exercise of its renewal option. The Landlord also came up with certain proposals as to its view of fair market rent for the renewal term; and, indeed, when the parties appeared to be in disagreement over the proposed rent, the Landlord wrote to the Applicant stating that he will “be submitting a suggested rental rate of $135.50 to the arbitrator”. There is no question but that the Landlord understood the Applicant to have a right of renewal and that arbitration was the way to resolve an inability of the parties to agree upon a new rent.

[7] The Landlord never gave the Applicant (or Chaves) any notice of the supposed default with respect to the bathroom. It certainly knew of the renovation and the missing bathroom at least by early 2017, since its principal deposes in his affidavit that this is when he discovered the fact that the bathroom had been removed.

[8] This failure to give notice alone amounts to non-compliance with the terms of the Lease. Clause 20(1)(b) of the Lease makes it clear that notice is required to be given by the Landlord with respect to any alleged default at least insofar as the Landlord’s right of re-entry is concerned: see 1383421 Ontario Inc. v. Ole Miss Place Inc. (2003), 67 OR (3d) 161, at para 49 (Ont CA). While the Landlord here is not exactly exercising a right of re-entry in the sense that it has taken back the Premises at the end of the term of the Lease rather than terminating it early, I am doubtful that the removal of the bathroom in the course of a high-end, tasteful renovation amounts to a breach that would undermine the Applicant’s renewal option – certainly not without any notice that the Landlord was taking this view.

[9] It seems to me that the Landlord’s complaint about the state of the Premises is a position adopted late in the day in order to justify its dealing directly with Chaves. After all, if the Landlord was perturbed by the Applicant’s removal of a bathroom when it converted the Premises to an upscale retail outlet, it should be equally perturbed at Chaves, the sub-tenant in that retail unit, continuing to use the Premises in exactly the same way.

[10] On two occasions in the spring of 2017, Chaves was told by the Landlord that he could not deal directly with the Landlord over renewal but rather would have to deal with the Applicant. This changed in or around the end of August or beginning of September, when the Landlord suddenly turned to Chaves directly. Then, on September 28, 2017, the Landlord had its counsel write to the Applicant and assert for the first time that the Applicant was in default and had no right to renew its tenancy under the option clause.

[11] Generally speaking, where rights granted in a sub-lease are more restricted than those contained in a head lease, the result is that the rights not granted to the sub-tenant are reserved to the tenant: Letourneau Developments Ltd. v. Red Fort Realty Ltd., 1985 CarswellAlta 208, at para 6 (Alta CA). This general principle is reinforced in the present case, where the renewal option is specifically reserved to the Applicant. In negotiating the terms of the sub-lease with Chaves, the Applicant withheld from Chaves the renewal option that the Applicant itself had with the Landlord.

[12] The Landlord also takes the position that the renewal clause in the Lease is void for uncertainty since it does not set out a specific renewal rent. Counsel for the Landlord also contends that the reference to arbitration of the renewal rent is not well drafted, and does not give the arbitrator sufficient guidance to be an enforceable arbitration clause.

[13] This type of clause, however, is a commonplace one, and has frequently been enforced. I do not have any trouble understanding it, and would assume that an experienced arbitrator would likewise have no such trouble. The arbitrator is to fix the rent for the 5 year renewal of the tenancy, and in the ordinary course that rent is to be fair market value. The Landlord himself acknowledged that in correspondence with the Applicant in September 2017.

[14] An agreement to renew at a rent to be agreed upon, failing which the parties shall submit to arbitration to determine fair market value rent, is not unduly vague; the arbitration process is a well-known and acceptable mechanism for making a renewal clause enforceable: Re Tsiribis and Panopoulos, [1981] OJ No 713, at para 9. This clause does not constitute a mere ‘agreement to agree’, where there is “no agreement on the price or on any method by which the price was to be calculated”: [Courtney and Fairbairn Ltd v. Tolaini Brothers (Hotels) Ltd, [1975] ADR. L.R. 00/00 (per Lord Denning)](Courtney and Fairbairn Ltd v. Tolaini Brothers (Hotels) Ltd, [1975] ADR. L.R. 00/00). A provision in which parties agree to submit a rental value to arbitration is one which is specifically enforceable: Re Calford Properties Ltd and Kelly’s Billiards Ltd., [1973] AJ No 161, at paras 22-23.

[15] That said, counsel for the Landlord relies on ancient common law to the effect that when the tenancy expired, both the sub-lease and the Lease instantly expired and the tenant’s estate reverted to the Landlord. There is old case law that indicates that where the tenant has sub-let the tenancy but where, as here, it has not reserved for itself the last day of the term, then at the end of the term of the tenancy the sub-lease is deemed to be an assignment of the tenancy: Selby v. Robinson, [1865] OJ No 180, at para 21 (Upper Canada Ct Com Pleas). Landlord’s counsel argues that the upshot is that at the end of the tenancy there is no privity of estate as between the Applicant and the Landlord. All rights in the tenant’s estate reverted directly to the Landlord, leaving the Applicant with nothing.

[16] Although Landlord’s counsel concedes that there are few, if any, modern cases that adopt this position, he submits that the logic of landlord-tenant law remains as it always was. The Applicant’s estate in land has evaporated, leaving it with no property interest.

[17] Landlord’s counsel may well be correct in his analysis of the estate aspect of a commercial Lease, but there is also a contractual aspect to this Lease. Landlord’s counsel invokes an archaic point of estate law which, while correct as a matter of property entitlement, does not reflect the parties’ understanding of their commercial arrangement. The proof of this is that the Landlord had gone down the road of negotiating a renewal rent and preparing for arbitration on the topic as if the option clause was indeed enforceable. Even if the Landlord got the benefit of a reversion of the estate in land at the termination of the tenancy’s term, the Applicant certainly had contractual rights for which it had bargained and which it could expect the Landlord to respect.

[18] In Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 SCR 494, the Supreme Court of Canada stated that an essential element of contract is that the parties must deal with each other in good faith. It is the Applicant’s view that the Landlord has dealt with it in a way that falls well short of this obligation. The Landlord is invoking property law as a means of undermining the Applicant’s rights not only in property but in contract; that is an approach that is contrary to what the Supreme Court characterized as a principle of contemporary contract law.

[19] The conclusion to which this leads is therefore a double-barreled one, reflecting the dual nature of a commercial lease. The Landlord exercised its property rights by re-taking the Premises at the termination of the Applicant’s/Chaves’ term of tenancy; at the same time, the Landlord breached the Applicant’s contract rights by failing to negotiate or arbitrate the renewal of the tenancy in good faith. The result of this is that the Applicant cannot specifically enforce the renewal clause or have the court declare that the Applicant is a tenant under a renewed term, as that would be to grant the Applicant an estate in land to which it is not entitled. The Applicant can, however, claim damages for breach of a contractual provision contained in the Lease. The renewal clause gave the Applicant certain rights, but they were rights in contract rather than in property.

[20] This, then, raises the question of damages. Any compensation to the Applicant must place the Applicant in the position it would have been in had the breach of contract not occurred – i.e. had it been able to enjoy the benefit of a renewed 5-year term of the Lease at a fair market value rent.

[21] The Applicant contends that it could have used the Premises for its own store, or could have again sub-let it to Chaves or another sub-tenant. I am skeptical of the argument that the Applicant was going to use the Premises to run its own retail business; the evidence indicates that it had done so previously, and that it was not financially successful. It was apparently this lack of success that prompted the Applicant to sub-let the Premises to Chaves in the first place. It seems doubtful that a mere year later, after renovating the Premises for Chaves’ use, the Applicant would have been able to run a profitable retail business from the Premises.

[22] The Applicant could have again sub-let the Premises to a sub-tenant. Of course, I do not know whether this would have been a profitable venture for the Applicant as I do not know what rent an arbitrator would have fixed for the 5-year term. I do note, however, that the rent has not changed with the new lease between the Landlord and Chaves. That is, Chaves is paying the identical rent to the Landlord now as he was under the sub-lease with the Applicant. That, of course, is not particularly surprising. The sub-lease between the Applicant and Chaves was entered into in mid-2016, and the new lease between the Landlord and Chaves was entered into in mid-2017. Given the short passage of time, it stands to reason that rents had neither escalated nor de-escalated.

[23] The Landlord and Chaves are arm’s length businesses and, one can presume, economically rational actors. The value that they put on the Premises in entering their new lease is the only evidence of a current value for the leased Premises, and it can be taken as reflecting fair market value. I have no reason not to assume that the current rent paid by Chaves is equivalent to what an arbitrator would have awarded had the arbitration process been engaged to fix the rent.

[24] Likewise, one can assume from the evidence that Chaves was perfectly aware of the fair market value of the Premises, having been paying rent at that rate every month for a year and having agreed to a renewal at the very same rental rate. There is nothing in the evidentiary record that would lead one to conclude that Chaves would have paid the Applicant any more rent than he is paying the Landlord (or that he paid the Applicant before the new lease was entered into). For that matter, since Chaves is as rational an actor as the next person in the rental market, there is nothing to suggest that another tenant would have paid any higher rent than Chaves is paying.

[25] Accordingly, the Applicant would have been paying the Landlord precisely the same amount each month as it would have been receiving from its sub-tenant. While the Landlord may have breached its contract with the Applicant by failing to honor the renewal clause, it did not cause any monetary damages by doing so. There is no basis in the record for me to conclude that the Applicant would have been able to profit from a renewal of the Lease.

[26] Based on what is before me, the Applicant would have at best broke even on the arrangement. The Landlord owes the Applicant nothing.

[27] Chaves paid a $10,000 deposit to the Applicant upon signing the sub-lease. The Applicant continues to hold those deposit funds, and takes the position that the deposit has been forfeited under the terms of the sub-lease. In its response to the Application, Chaves seeks repayment of this amount.

[28] The Applicant concedes that Chaves was up to date in rental payments and was not in default of the sub-lease at time of its expiry. Rather, the Applicant submits that Chaves’ failure to vacate the Premises at the end of the term constitutes a default under the sub-lease, and that the deposit funds therefore go to the Applicant as compensation for losses occasioned by that breach.

[29] In furtherance of this position, the Applicant complains that Chaves was on notice of the existence of the renewal option in favor of the Applicant. Counsel for the Applicant contends that Chaves interfered with the Applicant’s rights in dealing directly with the Landlord rather than waiting for the Applicant to renew and entering into a new sub-lease with the Applicant.

[30] As with the Landlord, it appears to me that Chaves breached the duty of good faith it owed to the Applicant as a contracting party. It knew of the Applicant’s renewal option and deliberately engaged in a course of conduct that undermined the Applicant’s rights by dealing directly with the Landlord as the expiry of its sub-tenancy approached.

[31] Having said that, the damages question in respect of Chaves’ breach of contract can also be analyzed in a way that parallels the Landlord’s breach of contract. That is, Chaves could have – indeed, should have – vacated the Premises at the end of the term of his sub-tenancy. That would have left the Applicant with an empty unit to return to the Landlord. Had the Landlord and the Applicant then in good faith achieved a fair market value rent for renewal of the tenancy in the Premises, they presumably would have done so at a similar rent to that currently paid by Chaves.

[32] Again, the Applicant would have been no further ahead and no further behind. The Applicant would have been obliged to pay the same rent to the Landlord as Chaves paid to the Applicant.

[33] Thus, although Chaves, like the Landlord, notionally breached the Applicant’s contractual rights, the breach caused no economic loss. Chaves owes the Applicant nothing.

[34] Although the Applicant is correct that his contractual rights were breached, it did not suffer any loss. Accordingly, the deposit monies are not to be kept by the Applicant as they do not represent any compensation owed to the Applicant.

[35] The Applicant shall pay Chaves $10,000 as repayment of the deposit funds it has been holding. Otherwise, the Application is dismissed.

[36] Costs are always discretionary under section 131 of the Courts of Justice Act. Given the way the matter has come out, with the Applicant’s contractual rights violated by both of the other parties, but with no damages payable, the result has been mixed.

[37] While the Applicant ends up receiving no payment (and, indeed, is to disgorge the deposit funds that it has continued to hold), I cannot blame it for bringing this Application in the first place. Its contractual expectations were undermined and its rights, at least notionally, were denied. Under the circumstances, I will exercise my discretion to refrain from awarding costs. No costs are payable by or to any party to this proceeding.

Morgan J. Date: June 22, 2018