COURT FILE NO.: CV-18-00598209-0000 DATE: 20180802 ONTARIO SUPERIOR COURT OF JUSTICE
B E T W E E N :
PURENERGY WELLNESS LOFTS CORP. Applicant – and – HOME TRUST COMPANY Respondent
Counsel: Evan Tingley for the Applicant Jeffrey Kukla for the Respondent
HEARD: July 9, 2018
FAVREAU J.
Overview
[1] The applicant, Purenergy Wellness Lofts Corp. ("Purenergy"), is a commercial tenant in a property located at 333 Bering Avenue, in Toronto. In 2016, the owner of the property defaulted on its mortgage. The mortgagee, which is now Home Trust Company ("Home Trust"), has given notice of termination to Purenergy on the grounds that the lease between the parties was a month to month lease and on the grounds that the premises are unsafe.
[2] On this application, Purenergy seeks relief from forfeiture.
[3] For the reasons that follow, I find that Home Trust is entitled to terminate the lease and that this is not an appropriate case for relief from forfeiture. However, I do not agree that the arrangement in place between Purenergy and the mortgagee following the owner's default was a month to month lease. I find that it was a year to year lease, and that the termination takes effect on October 31, 2018.
Background facts
Purenergy's Lease
[4] Purenergy operates a fitness and wellness centre located in a building at 333 Bering Avenue, in Toronto.
[5] Purenergy's evidence is that it started renting three floors in the building in August 2014. At that time, the owner of the building was 333 Bering Ave Inc.
[6] Purenergy's evidence is that, initially, there was no written lease between the parties and that the agreement between Purenergy and the owner was verbal.
[7] Purenergy asserts that it performed renovations on the premises starting in August 2014 and started carrying on business in the renovated premises in September 2015. Purenergy claims that it spent over $154,000 on renovations to the premises between 2014 and 2017.
[8] On February 1, 2017, Purenergy and the owner entered into a written lease. The lease provided that the rent payable was $2,486 per month. The lease was to run from June 1, 2017 to June 1, 2022, with an option to renew for two additional five year terms.
Mortgage on property
[9] On July 15, 2016, the owner granted a first mortgage on the property in the amount of $5,400,000 in favour of Cameron Stephens Financial Corporation ("Cameron").
[10] On November 1, 2016, the owner defaulted on the mortgage, and Cameron then commenced enforcement proceedings.
[11] On August 10, 2017, Cameron obtained judgment in respect of the mortgage, which included possession of the property.
[12] In November 2017, Cameron transferred its interest in the mortgage and property to Home Trust.
Dealings between Purenergy and mortgagee following mortgage default
[13] As part of the enforcement proceedings, on June 27, 2017, Cameron served a document titled "Notice of Change of Landlord and a Notice of Attornment of Rents Direction to Pay" on Purenergy. Purenergy acknowledged receipt of the document by signing it and returning it to Cameron on June 28, 2017. However, Purenergy delayed making any rent payments to Cameron.
[14] Purenergy's explanation for the delay is that it was concerned that it may have to pay rent to both the owner and Cameron, and also that the water had been shut off at the property from June to October, 2017.
[15] In the meantime, on September 29, 2017, Cameron served a withdrawal of its Notice of Attornment on Purenergy.
[16] In October 2017, there were communications between counsel for Purenergy and counsel for Cameron dealing with the issue of unpaid rent and Purenergy's continued tenancy. These communications are detailed further below, but resulted in an agreement that allowed Purenergy to remain in the premises on terms that are in dispute on this application.
[17] In December 2017, Purenergy was notified that Cameron had transferred the Mortgage to Home Trust, and was asked to make future payments to Home Trust. Purenergy then provided a set of postdated cheques to Home Trust up to November 2018.
[18] On March 23, 2018, Home Trust gave notice to Purenergy that "the building permit application relating to the third floor structure has not been completed, due to outstanding building code and zoning issues" and that "due to safety concerns" Purenergy was required to vacate the premises by April 1, 2018.
[19] During a subsequent course of dealings between the parties' lawyers, Home Trust returned Purenergy's postdated cheques and took the position that it was entitled to terminate the tenancy because any agreement between Purenergy and Home Trust was for a month to month tenancy and that there were outstanding building code and zoning issues.
Positions of the parties
[20] Purenergy takes the position that its lease with the original owner is valid and binding on Home Trust. Alternatively, Purenergy argues that it has a year to year tenancy and that the earliest that the lease can be terminated is October 31, 2019. In the further alternative, Purenergy seeks relief from forfeiture. Purenergy also disputes that the premises were unsafe or that any building code violations warrant termination of the tenancy.
[21] Home Trust's position is that it is not bound by the lease between the owner and Purenergy because the lease was entered into after the mortgage was placed on the property. Home Trust argues that any agreement it has with Purenergy is for a month to month lease, and it is therefore entitled to terminate Purenergy's tenancy on one month's notice. In the alternative, Home Trust argues that outstanding building code violations make the premises unsafe, and Home Trust is entitled to terminate the tenancy on that basis.
Issues to be decided
[22] Based on the positions taken by the parties, the following issues are to be decided on this application:
a. Is the lease between Purenergy and the owner binding on Home Trust? b. If the lease is not binding, what, if any, agreement exists between Purenergy and Home Trust? c. Is Home Trust entitled to terminate the tenancy due to Building Code violations? d. Is Purenergy entitled to relief from forfeiture? e. Was the March 23, 2018 notice effective for the purpose of terminating the tenancy on October 31, 2018.
Analysis
[23] At the hearing of the motion, counsel for the parties did not generally disagree over the applicable legal principles. There is no dispute that, where a mortgagor defaults on a mortgage and a mortgagee takes possession of a property, the mortgagee does not necessarily step into the shoes of the mortgagor. Rather, the following principles, as reviewed for example in Guscon Enterprises Ltd. v. Andsam Masonry Co., at paras. 6 and 7; Domus Architects v. Bank of China (Canada), at paras. 30 and 31; and Goodyear Canada Inc. v. Burnhamthorpe Square Inc., [1998] O.J. No. 4426 (C.A.), at paras. 84 and 87, apply:
a. A lease is not binding on a tenant or a mortgagee who takes possession of a property following default by a mortgagor unless the mortgagee consented to and was aware of the lease at the time the mortgage was placed on the property; b. In situations where the lease is not binding because the mortgagee did not agree to the tenancy at the time the mortgage was placed on the property, the tenant and the mortgagee can nevertheless create a tenancy by agreement or conduct. c. A tenancy between a commercial tenant and a mortgagee who takes possession of a property runs year to year and can be terminated on six months' notice, unless the parties agree otherwise. The terms of the tenancy, such as the rent payable, are otherwise the same as those in the original lease, unless modified by agreement.
Issue 1 - Is the lease binding on Home Trust?
[24] In this case, the applicant argues that the lease is binding on Home Trust because it predates the date when the mortgage was placed on the property. In support of this argument, Purenergy points out that, while the formal lease was signed after the mortgage was placed on the property, Purenergy and the Owner had a verbal agreement at the time of the tenancy and Cameron would have been aware of such an agreement.
[25] The only evidence of the verbal agreement between Purenergy and the Owner is the affidavit of Purenergy’s representative, Lisa Manzo, in which she attests as follows:
Since August, 2014, Purenergy has leased three floors in the Property totaling roughly 5,000 square feet (the "Premises") from 333 Bering. Initially, the parties did not sign a written lease. From August 2014 through September 2017, Purenergy incurred costs of over $154,000 on renovations to the Premises…
Purenergy began carrying on business at the Premises in September 2015.
On February 1, 2017, Purenergy and 333 Bering signed a written lease… The total rent payable is $2,486 per month, being $2,100 per month…, plus $100 per month for hydro… (emphasis added)
[26] Notably, Ms. Manzo does not describe the terms of the verbal agreement and it is unclear whether such terms are the same as those in the lease signed by the parties in 2017.
[27] In addition, there is no evidence that Cameron was aware of this verbal agreement at the time the mortgage was placed on the property. Purenergy purports to rely on an unsigned lease Home Trust found in the file it obtained from Cameron as evidence that Cameron was aware of the verbal agreement between the Owner and Purenergy. However, the document is an incomplete unsigned draft lease. The date on the document is January 18, 2015, and the terms are very different from the lease ultimately signed by the parties in 2017; the lease is for a different unit in the building and provides for monthly rent of $14,583.33 rather than the $2,100 agreed to in the 2017 lease. Accordingly, there is no basis for finding that this draft lease constitutes evidence that Cameron was aware of any verbal agreement between Purenergy and the Owner at the time the mortgage was placed on the property in 2016.
[28] While I do not have to resolve the issue, I also have some concerns, given the prohibition in the Statute of Frauds, R.S.O. 1990, c. S.19 on unwritten and unsigned agreements relating to the purchase or lease of real property, that any verbal agreement between Purenergy and the owner could be binding on Cameron and, subsequently, on Home Trust.
[29] Accordingly, I find that the lease is not binding on Home Trust.
Issue 2 - What agreement exists between the parties?
[30] Given that the lease between Purenergy and the Owner is not binding on Home Trust, the next issue is what, if any, agreement exists between the parties.
[31] Purenergy's position is that, in accordance with the principles reviewed above, if the lease is not binding on Home Trust, the arrangement with Home Trust is now a year to year tenancy that can only be terminated on six months' notice.
[32] In contrast, Home Trust takes the position that a year to year tenancy is not in place in this case because the parties agreed to a month to month lease. In support of this position, Home Trust relies on an October 20, 2017, email exchange between a law clerk working for the firm representing Cameron and counsel for Purenergy.
[33] Purenergy disputes the existence of a month to month lease. In her evidence Ms. Manzo states that she never agreed to a month to month tenancy. Her lawyer also argues that the exchange of emails offends the Statute of Frauds.
[34] Looking at the chain of emails upon which Home Trust relies, I am not convinced that an agreement for a month to month tenancy was reached between Purenergy and Cameron.
[35] The communications between the parties in this time period arose following an eviction notice Cameron had sent to Purenergy for non-payment of rent in October 2017. On October 17, 2017, counsel for Cameron wrote to counsel for Purenergy, setting out a proposed resolution to the notice of eviction and rent arrears. The proposal was as follows, and notably did not make any reference to a month to month tenancy, but rather made reference to rent being payable at the beginning of each month:
Further to our telephone conversation on October 16, 2017, we have reviewed matters with our client.
We confirm that an eviction of the occupants of the subject premises is scheduled to occur during the week of October 23, 2017. Our client is prepared to allow your client to remain in occupation of the premises on the following terms and conditions:
No later than October 19, 2017, your client must deliver a bank draft to this office payable to Cameron Stephens Financial Corporation in the amount of $20,000.00, representing four months rent from July 2017 to October 2017, in the amount of $5,000.00 per month.
Your client must pay $5,000.00 on the 1st of each month for rent commencing on November 1, 2017, until the property is sold under power of sale or until the matter is otherwise resolved.
Your client must co-operate fully with our client's property manager, realtors, appraisers, or agents, regarding the listing and marketing for sale of the subject property.
Should your client fail to comply with any of the above terms and conditions, our client will be at liberty to secure possession of your client's unit without notice.
[36] There were evidently some telephone communications and email exchanges that took place between the October 17, 2017 letter and the October 20, 2017, email Home Trust relies on in support of its position that the parties agreed to a month to month tenancy. These exchanges focused on the amount of rent payable on a monthly basis.
[37] In an email dated October 19, 2017, counsel for Purenergy responded to the October 17, 2018 letter, addressing the discrepancy between the parties with respect the monthly rent amounts owed:
I received your letter of even date. For ease of reference, I have attached it hereto.
There seems to have been some misunderstanding/miscommunication back in June of this year. My client's rent is $2,100.00 plus $100.00 (for hydro) plus HST per month. The other amounts that my client pay monthly are for business related construction costs (i.e., to build out and fixture the subject premises) and for equipment leases (e.g. gym equipment and trade fixtures). These latter amounts are not in lieu of rent.
I am not sure if you have reviewed the lease, but attached is a copy for your reference. As you will notice, there is no language regarding fixed rent reduction in consideration for any [sic] the other monthly payments my client makes. Rather, as per section 7(i), my client made payments to a contractor of the landlord and in exchange received a lengthy rent free fixturing period.
I trust that this will assist in resolving this rent discrepancy, but please let me know your thoughts.
My client wishes to remain in possession of the premises and operate the business. As such, my client would like to resolve this as quickly as possible and is prepared to do whatever is necessary. In this regard, attached is a copy of a bank draft payable to your client in the amount of $9,944.00 representing 4 months rent at $2,200.00 (inclusive of hydro payment) plus HST. Should we be able to resolve this and agree upon all necessary terms, I have instructions to forward this bank draft to you.
[38] In another email dated October 19, 2017, counsel for Purenergy confirmed his understanding of an anticipated agreement based on a telephone discussion with counsel for Cameron, again without reference to a month to month tenancy:
I confirm that I am anticipating written confirmation from you regarding your verbal advice to me that your client has agreed to accept the sum of $9,944.00 from my client representing four months rent (including HST) from July 2017 to October 2017, and that your client has also agreed to accept monthly rent payments from my client in the amount of $2,200.00 (plus HST) commencing on November 1, 2017, and otherwise upon the terms set out in your letter to me dated October 17, 2017 …, save and accept [sic] the deadlines referred to therein.
[39] It was following this exchange of correspondence, emails and telephone conversations that, on October 20, 2017, a law clerk from the office of Cameron's counsel sent an email containing the following to Purenenergy's counsel, which for the first time made reference to a “month-to-month” agreement:
We confirm your conversation with Amanda Jackson this morning. Our client is prepared to accept your client's payment of $9944.00 on the basis that she continues her tenancy on a month-to-month basis with monthly rent of $2200.00 plus HST, until sale. We do not guarantee that any new purchaser will assume your client's tenancy.
[40] In response, Purenergy's counsel sent an email, with a notation following that paragraph that states "ACKNOWLEDGED, THANK YOU."
[41] Having reviewed the chain of communications, it is not evident to me that the parties reached agreement that this was meant to be a month to month tenancy. Rather, what is clear is that Purenergy agreed to pay its rent on a monthly basis. In this regard, I note that the email from the law clerk is meant to confirm a telephone conversation to which she was not privy. Neither of the participants in the telephone conversation have sworn an affidavit in these proceedings. I also note that Home Trust's affiant has no firsthand knowledge of this course of negotiations because they took place prior to Home Trust acquiring the mortgage from Cameron. In these circumstances, given that the "month to month" reference appears for the first time in the last email and that it is not specifically referred to elsewhere in the communication of negotiations, I am not prepared to find that Purenergy agreed to this term.
[42] My conclusion is bolstered by the fact that Purenergy's counsel wrote "ACKNOWLEDGED, THANK YOU", after the last sentence in the paragraph in which the law clerk stated that Home Trust could not guarantee that a new owner would assume the tenancy. This could be read as an acknowledgement of Home Trust's position, rather than an agreement by the applicant to the reference to a month to month lease.
[43] Purenergy argues that the Statute of Frauds precludes a finding that the arrangement between Purenergy was meant to be a month to month tenancy. Having found that there was in fact no agreement on this issue, I do not need to decide whether such an agreement could be made via an exchange of emails between a lawyer and a law clerk.
[44] Accordingly, given my finding that no agreement was reached for a month to month tenancy, I find that the arrangement between the parties is a year to year tenancy that can be terminated on six months’ notice.
Issue 3 - Is Home Trust entitled to terminate the lease due to Building Code Violations?
[45] Home Trust argues that, regardless of whether the tenancy is meant to be month to month or year to year, it is entitled to terminate the tenancy immediately due to Building Code violations. In support of this argument, Home Trust originally relied on hearsay evidence in its representative's affidavit setting out information received from the City of Toronto in verbal discussions. For the purpose of the motion, Home Trust produced an affidavit attaching a written communication from the City of Toronto. What is clear from those communications is that, while some building permits have not yet been closed out at the property, there is no indication that the property is unsafe or poses any imminent danger. On the contrary, the City of Toronto representative states that “With regards to Unsafe conditions, this must be determined by inspection of the site”.
[46] I agree with the applicant that this issue does not give Home Trust a unilateral right to terminate the tenancy. At most, pursuant to section 19(2) of the Commercial Tenancies Act, it entitled Home Trust to give the applicant notice and an opportunity to remedy the deficiency. However, the March 23, 2018 notice purported to terminate the tenancy immediately due to unsafe conditions, and in my view was not effective for that purpose.
Issue 4 - Is Purenergy entitled to relief from forfeiture?
[47] In the event that I were to find that Home Trust is entitled to terminate the tenancy, Purenergy seeks relief from forfeiture.
[48] Subsection 20(1) of the Commercial Tenancies Act, R.S.O. 1990, c. L.7, provides:
- (1) Where a lessor is proceeding by action or otherwise to enforce a right of re-entry or forfeiture, whether for non-payment of rent or for other cause, the lessee may, in the lessor's action, if any, or if there is no such action pending, then in an action or application in the Superior Court of Justice brought by the lessee, apply to the court for relief, and the court may grant such relief as, having regard to the proceeding and conduct of the parties under section 19 and to all the other circumstances, the court thinks fit, and on such terms as to payment of rent, costs, expenses, damages, compensation, penalty, or otherwise, including the granting of an injunction to restrain any like breach in the future as the court considers just.
[49] Section 98 of the Courts of Justice Act, R.S.O. 1990, c. C.43, provides:
A court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just.
[50] The courts have established that the three criteria to be considered in determining whether a party is entitled to relief from forfeiture are:
a. The conduct of the applicant and gravity of the breaches; b. Whether the object of the right of forfeiture in the lease was essentially to secure payment of money; and c. The disparity or disproportion between the value of the property forfeited and the damage caused by the breach.
See for example: North York Family Physicians Holdings Inc. v. 1482241 Ontario Limited, 2011 ONSC 1773, aff’d 2012 ONCA 36.
[51] The applicant's request for relief from forfeiture is premised on an assumption that it had a valid lease, and that any defaults under the lease were minor. On this basis, it argues that it would be disproportionate to expect Purenergy to forego the benefit of its $150,000 worth of renovations due to this minor breach of its obligations to pay rent.
[52] The difficulty with this argument is that it rests on the assumption that Purenergy's lease is binding on Home Trust. However, as reviewed above, I have found that Purenergy is in a year to year tenancy.
[53] In my view, having found that the lease is not binding on Home Trust and that the parties are in a year to year tenancy, the doctrine of relief from forfeiture does not apply. Home Trust's ability to terminate the lease does not flow from Purenergy's breach of the terms of the lease, but rather from the fact that the agreement between the parties is a year to year tenancy. Under the circumstances, with proper notice, Home Trust is entitled to terminate the lease and the doctrine of relief from forfeiture has no relevance.
[54] As held in Maverick Professional Services Inc. v. 592423 Ontario Inc., [2001] O.J. No. 1877 (C.A.), at paras. 6 to 9, relief from forfeiture is meant to address circumstances where a tenant is in default under a lease; not a situation, such as here, where a landlord seeks to terminate a lease pursuant its right to terminate with notice. In this case, given my finding with respect to the nature of the agreement between the parties, relief from forfeiture cannot serve to protect the applicant from Home Trust’s right to terminate the year to year tenancy on six months’ notice.
Issue 5 - Was the March notice effective and when is Home Trust entitled to terminate the tenancy?
[55] Purenergy argues that, if the lease is not binding on Home Trust and the parties are in a year to year tenancy, the earliest the tenancy can be terminated is October 31, 2019. Purenergy argues that the tenancy goes year to year starting on November 1 of each year and ending on October 31 of the following year, and that notice must be given at least six months in advance of termination. Purenergy argues that the March 23, 2018 notice is not effective for an October 31, 2018 termination because the notice improperly relied on the unsafe conditions of the premises and purported to terminate the tenancy immediately rather than on October 31, 2018.
[56] Home Trust argues that it gave notice on March 23, 2018, which is more than six months’ notice and that the tenancy can therefore be terminated on October 31, 2018.
[57] Purenergy did not provide any authorities in support of its position. In fact, in Goodyear, at para. 89, the Court of Appeal warned against being overly technical in respect of the contents of a notice of termination of a commercial lease. In this case, it is clear from the March 23rd notice that Purenergy would have understood that Home Trust was seeking have the applicant vacate the premises.
[58] In my view, Purenergy was given notice of termination six months in advance of October 31, 2018. Accordingly, I find that Home Trust is entitled to terminate the tenancy on that date.
Conclusion
[59] Originally, Purenergy framed this proceeding as an application for relief from forfeiture. Ultimately, the arguments focused on the nature of the agreement between the parties and their respective rights under the agreement. For the reasons above, the application for relief from forfeiture is dismissed. However, I find that the parties are in a year to year tenancy, and Purenergy is entitled to remain in possession of the property until October 31, 2018.
[60] Home Trust seeks approximately $10,000 in costs. While Purenergy was not successful in obtaining relief from forfeiture, the respondent was not entirely successful in seeking to immediately terminate the lease. Accordingly, I find that Home Trust is entitled to a portion of its costs, and that $5,000 plus HST is a fair and just amount. Costs payable within 30 days.
FAVREAU J.