Court File and Parties
COURT FILE NO.: CV-20-636483 DATE: 20200714 SUPERIOR COURT OF JUSTICE - ONTARIO
RE: 10381187 Canada Inc. and Elias Markos, Applicants AND: Elena Cherny, Respondent
BEFORE: Davies J.
COUNSEL: James McReynolds, for the Applicants Irvin Schein and Samantha Schreiber, for the Respondent
HEARD: July 8, 2020
Reasons for Decision
A. Overview
[1] In July 2019, Elena Cherny bought a house in the Annex neighbourhood of Toronto. She intended to use it as an investment property. The house was zoned for use as a single-family dwelling but was divided into two or three apartments when Ms. Cherny bought it.
[2] In October 2019, Ms. Cherny agreed to lease the whole house to Mr. Markos and his company, 10381187 Canada Inc. (“103”), for 10 years. The lease required Ms. Cherny to renovate the house into a total of six units. Mr. Markos and 103 were given full authority and unfettered discretion to market and sublease the six units as short-term rentals. They were also given a right of first refusal if Ms. Cherny decided to sell the property.
[3] Ms. Cherny renovated the house and created the additional units. However, she did not get planning permission from the City of Toronto or a building permit for the work she had done.
[4] Mr. Markos took possession of the house on December 1, 2019 and started renting out units on various online platforms catering to short-term vacation rentals.
[5] On January 18, 2020, a water pipe burst on the main floor of the house, causing significant damage to several units and the furnishings. Ms. Cherny repaired the damage from the flood. However, on January 24, 2020, the City of Toronto issued an Order to Comply that required Ms. Cherny to either obtain a permit for the construction that had been done to sub‑divide the property or remove the illegal construction. The newly constructed units could not be rented until the City issued a permit, conducted an inspection and authorized occupancy. The Order to Comply required Ms. Cherny to correct the violation by February 7, 2020.
[6] Ms. Cherny did not seek a permit from the City to regularize the renovations that had been done. She believed that she would not get approval from the City to sub-divide the property into six units. She, therefore, removed the illegal construction and restored the house to a single‑family dwelling. She also changed the locks and refused to let Mr. Markos back into the property.
[7] On February 18, 2020, Mr. Markos and 103 issued a Notice of Application seeking specific performance of the lease. Mr. Markos and 103 are also seeking damages for the breach of the lease.
[8] On February 20, 2020, Mr. Markos and 103 were given leave to register a certificate of pending litigation on the property. Ms. Cherny was not given notice of the request for a certificate of pending litigation. Ms. Cherny brought a motion to discharge the certificate of pending litigation so she can lease, sell or refinance the house.
[9] The parties agreed that Ms. Cherny’s motion to discharge the certificate of pending litigation and the Application by Mr. Markos and 103 for specific performance involve similar issues and should be heard together.
[10] Mr. Markos and 103 take the position that Ms. Cherny breached the lease when she locked them out. They argue that the property is unique and damages are not an adequate remedy in this case. They recognize that Ms. Cherny cannot perform the lease right now. However, they argue that Ms. Cherny should be ordered to make best efforts to obtain the necessary zoning approval or variance to convert the house into six units as specified in the lease. Mr. Markos and 103 argue that if approval is granted, Ms. Cherny would then be required to restore the property to six units and the lease would resume.
[11] Ms. Cherny argues that the lease was illegal from the outset because the parties all knew that the City had not approved the subdivision of the house into six units. Ms. Cherny argues that the lease is, therefore, void and the application brought by Mr. Markos and 103 should be dismissed.
[12] In the alternative, Ms. Cherny argues that the certificate of pending litigation should be discharged. She also argues that even if the lease is valid and she breached the lease (which she denies), specific performance is not an appropriate remedy in this case. She argues that the property is not unique and damages would be an adequate remedy if she did breach the lease. She also argues it is not possible for her to perform the lease given the Order to Comply. Finally, Ms. Cherny takes the position that the equities of this case justify granting her motion for a discharge of the certificate of pending litigation.
[13] This matter proceeded on affidavit evidence. The parties disagree on several significant factual issues including, most importantly: (a) whether Mr. Markos knew the house was zoned as a single-family dwelling and the City had not approved the further sub-division of the property before the lease was signed; (b) whether Mr. Markos or his sub-tenants turned off the heat in the property, thereby causing or contributing to the burst pipes; and (c) whether Mr. Markos obtained contents and liability insurance as required under the lease. The answers to these questions are relevant to the legality of the lease and whether Ms. Cherny breached it and will turn entirely on an assessment of Ms. Cherny and Mr. Markos’s credibility and the reliability of their evidence.
[14] I recognize that I have the power to make factual findings, evaluate the credibility of witnesses and draw reasonable inferences from the evidence filed on this Application. [^1] Where the written record permits the court to make a fair and just determination of the case on its merits, including resolving conflicts in the evidence, the court can and should decide the application without ordering a trial of the issue. [^2] In this case, however, I cannot conduct a fair assessment of the credibility of Ms. Cherny and Mr. Markos or the reliability of their evidence from their affidavits and cross-examinations. They gave diametrically opposed evidence on the crucial issues and remained firm in their positions during cross-examination. For example, Ms. Cherny was adamant that Mr. Markos knew that the house was zoned as a single-family dwelling based on discussions they had before the lease was signed. Mr. Markos was adamant that he did not find out about the issues with the zoning until after the lease was signed. In light of the conflicting evidence on this and other issues, I am unable to decide on the record before me whether the lease was illegal as Ms. Cherny argues, or whether Ms. Cherny breached the lease as Mr. Markos and 103 argue. I am, therefore, directing a trial of those issues under r. 38.10(1)(b).
[15] Despite the conflicts in the evidence, I am in a position to decide whether the certificate of pending litigation should be discharged pending the trial. [^3] For the reasons that follow, I am prepared to exercise my discretion to discharge the certificate of pending litigation. I have reached this conclusion for two reasons. First, I am satisfied that damages will be an adequate remedy if Ms. Cherny is found to have breached the lease. Second, I am also satisfied that the prejudice that would be caused by maintaining the certificate of pending litigation outweighs the prejudice that would be caused by its discharge. Ms. Cherny’s motion to discharge the certificate of pending litigation is, therefore, granted with conditions as set out below.
[16] In light of my finding that damages would be an adequate remedy, I also find that specific performance is not an available remedy in this case even if Ms. Cherny breached the lease. The trial in this case will, therefore, focus on whether the lease was void or voidable because of illegality and, if not, whether Ms. Cherny breached the lease.
B. Are damages an adequate remedy for any breach of the lease in this case?
[17] Whether monetary damages would be an adequate remedy in this case is highly relevant to both the motion to discharge the certificate of pending litigation and the application for specific performance.
[18] Because significant hardship can result from the registration of a certificate of pending litigation, I have wide discretion to discharge a certificate of pending litigation under the Courts of Justice Act. [^4] For example, if I find that damages would be an adequate remedy for any breach of the lease, that would be a basis to discharge the certificate of pending litigation. I could also make an order discharging the certificate of pending litigation if the applicant claims damage in lieu of or as an alternate to specific performance. [^5] The focus should be on the equities as between the parties, having regard to all the circumstances.
[19] Specific performance is also a discretionary, equitable remedy. In a case of a contract to lease property, the special character of the property is relevant, but the key factors will be (a) whether damages will afford an adequate and complete remedy; (b) whether there is a fair and substantial justification for granting specific performance; and (c) whether the equities favour granting specific performance. [^6]
[20] There is considerable overlap in the test for ordering the discharge of a certificate of pending litigation and for granting specific performance. My assessment of whether damages would fairly and adequately compensate Mr. Markos and 103 if Ms. Cherny breached the lease will influence the outcome of both issues. If I find that damages would provide an adequate and complete remedy, that would be a basis to discharge the certificate of pending litigation under s. 106(3)(a)(i) of the Courts of Justice Act. [^7] That finding would also support a finding that specific performance is not an appropriate remedy in this case. [^8] On the other hand, if damages alone would not adequately remedy the breach of the lease, specific performance will be available and that would weigh heavily against discharging the certificate of pending litigation.
[21] Whether damages are an adequate remedy is a fact-specific inquiry. It turns on a number of factors, including whether the contract or property is unique, whether monetary damages are readily calculable and whether it is possible for the lease to be performed. [^9]
a. Is the contract or property unique?
[22] Where the subject matter of a contract is unique in the sense that its substitute is not readily available, a strong case can be made for specific performance. [^10] Whether the property Mr. Markos and 103 leased from Ms. Cherny is unique depends on both the nature of the contract and the characteristics of the property. [^11]
[23] The parties all entered into the lease for a commercial purpose. Ms. Cherny bought the house with the intention of using it as an investment property.
[24] Mr. Markos is in the business of managing short-term vacation rental properties. In the last 10 years, he has owned or managed 17 short-term rental units in various locations in Toronto, not including the units in question on this Application. Mr. Markos is also the director of another company (8705771 Canada Corp.) that rented six units and subleased them as short‑term rentals.
[25] In addition to the lease with Ms. Cherny, 103 is the tenant on two other leases for apartments that it subleases as short-term vacation rentals.
[26] By leasing the property from Ms. Cherny, Mr. Markos and 103 were simply expanding their existing business by adding six units to their inventory of short-term rental properties. Although the lease involved a residential property, Mr. Markos and 103 intended to use it for a purely commercial purpose. Mr. Markos did not intend to live in the house he leased from Ms. Cherny.
[27] Counsel for Mr. Markos and 103 argued that the property is unique because it is a Victorian house located in an attractive neighbourhood that is close to transit, the University of Toronto and tourist attractions. Mr. Markos and 103 also argue that it is unique because there are no other houses in the area with six units available for use as short-term rentals.
[28] Ms. Cherny takes the position that the property is not unique. She filed evidence of several properties in the same neighbourhood (or neighbourhoods with similar characteristics) with multiple units for rent, including the house directly across the street from Ms. Cherny’s property. The alternate property identified had two, three or four units for rent. None of them contained six units.
[29] The question is whether the number of units makes this property unique. In the context of this commercial lease and the legal framework that regulates short-term rentals in Toronto, I am not persuaded that the number of units makes this property unique in the sense that damages would be an inadequate remedy.
[30] Mr. Markos is in the business of owning and managing short-term rentals. Under Chapter 547 of the Toronto Municipal Code, someone who engages in the business of short-term rentals is either a short-term rental business or a short-term rental operator.
[31] A short-term rental business is defined as any person (or company) who facilitates short‑term rental reservations through an on-line platform and receives payment for the rental. A short-term rental operator is someone who rents out their primary residence or the primary residence of an immediate family member on a short-term basis. [^12] A short-term rental business requires a license from the City to carry on business and advertise short-term rentals. [^13] A short‑term rental operator is only required to register with the City.
[32] Given Mr. Markos and 103’s business model, it seems clear that they are a short-term rental business and require a license to operate. They cannot rely on the exemption from licensing requirements in place for people who want to rent out their own home on a periodic basis. The regulatory framework for short-term vacation rentals simply reinforces the commercial nature of this lease.
[33] In my view, given the nature of the business, the issue is whether Mr. Markos and 103 could lease out six comparable units in the same or similar neighbourhood. In my view, they could. Mr. Markos and 103 could achieve the same business objective by renting six units in more than one building in that area. Ms. Cherny has adduced that other units that are comparable to the units leased from Ms. Cherny are available in the same neighbourhood.
[34] I did not hear any evidence about whether Mr. Markos or 103 had a license to operate a short-term rental business in Toronto. Of course, if Mr. Markos and 103 do not have a license to run a short-term rental business, that would also weigh against them in terms of the equities of the matter. This Court would likely not be persuaded to revive their lease with Ms. Cherny to permit them to resume operations without a license. Given my finding that the property is not unique, I do not need to rely on the absence of a license to support my finding that specific performance is not an appropriate remedy in this case.
[35] In the end, I find that Ms. Cherny’s property is not unique in the context of the lease she signed with Mr. Markos and 103. I further find that monetary damages can be calculated and would adequately compensate Mr. Markos and 103 for the breach of a contract, if proved at trial. Monetary damages will allow Mr. Markos and 103 to acquire six other, comparable units to sublease as short-term rentals or will compensate them for lost revenue.
b. Is it possible for Ms. Cherny to perform the contract?
[36] In deciding whether specific performance is an available remedy, which will inform whether the certificate of pending litigation should be discharged, I must consider whether it is even possible for Ms. Cherny to perform the contract.
[37] Ms. Cherny argues that it is not possible for her to obtain the necessary zoning variances to lawfully convert the property into six living units. If it is no longer possible for Ms. Cherny to perform the lease, specific performance is not an available remedy, which would weigh heavily in favour of granting her motion to discharge the certificate of pending litigation. [^14]
[38] There is, of course, a general obligation on parties to a commercial contract to carry out their agreement honestly and in good faith. [^15] In some cases, that will require one party to the contract to make best efforts to obtain regulatory or planning permissions necessary to complete the contract. [^16]
[39] Here, Mr. Markos and 103 argue that Ms. Cherny signed a lease for six units and had an obligation to take the necessary steps to obtain approval for the construction in the fall of 2019. They further argue that once the City issued the Order to Comply, Ms. Cherny was required to apply for a permit to regularize the renovations so the lease could continue. Mr. Markos and 103 argue that it is possible for Ms. Cherny to comply with the lease and she should be ordered to apply for a permit and for a variance, if necessary.
[40] I received conflicting expert reports on whether the City is likely to grant Ms. Cherny the necessary permissions to divide the house into six units if she were to apply for them. Ms. Cherny filed reports from two experts, Paul Demczak of Batory Urban Planning and Christian Chan of C2 Planning, who both said that it is unlikely that she would get permission from the City to convert the property into six separate units. Mr. Markos and 103 filed two reports from Michael Bissett and Joshua Butcher of Bousfield Inc. They are of the opinion that Ms. Cherny is likely to get the required permits and zoning variances from the City. None of the experts were cross‑examined on their reports.
[41] The experts agree on a number of facts: Ms. Cherny’s property is zoned as a single‑family dwelling. If the house is divided into six units, it will be considered an “apartment building” under the applicable Zoning By-law. Apartment buildings are allowed in the Official Plan for the Annex but they must comply with different regulations and building standards than single-family homes or properties with fewer than five units.
[42] The experts also agree that to the extent the plans to sub-divide Ms. Cherny’s property do not comply with the existing zoning requirements, she would apply to the Committee of Adjustment for a variance. For example, apartment buildings are required to have a certain number of parking spots on the property based on the number of units. There are currently no parking spots on Ms. Cherny’s property and no space to create the necessary parking. She would, therefore, have to apply to the Committee of Adjustment for relief from the parking space regulation.
[43] The experts also agree that there may be other areas of zoning non-conformity that would require an application to the Committee of Adjustment for a variance. One of Ms. Cherny’s experts opined that she would also have to apply for variances to convert the basement into a separate living space because that would increase the total usable living space beyond the density allowed in the neighbourhood. She may also have to apply for relief from the requirement for exterior exit stairs and additional fire exits as required by the Ontario Fire Code.
[44] A hearing before the Committee of Adjustment is a public process. Neighbours and local residents can make submissions in support of or opposing the application. The local City Councillor is also entitled to make submission to the Committee.
[45] The experts disagree about whether the Committee of Adjustment is likely to grant a variation in relation to the number of parking spots required for a six-unit property or the density created by the additional living units. The experts retained by Mr. Markos and 103 take the position that density variance requests are common and such a request by Ms. Cherny “likely would not be contentious”. They also opine that the Committee of Adjustment is likely to approve a variance to the parking requirements for Ms. Cherny’s property. They rely on 13 decisions in which the Committee of Adjustment granted parking variances for multi-unit dwellings in the Annex. They also rely on existing City of Toronto policies, which are focused on increasing available housing options in the city.
[46] I have two significant concerns about the reports authored by Mr. Bissett and Mr. Butcher, the experts retained by Mr. Markos and 103. First, the reports do not address the fact that Ms. Cherny wants to build the six units for a purely commercial purpose, not a residential purpose. In my view, this distinction is likely very relevant to whether the neighbours or the Committee of Adjustment will, in fact, consider her application contentious.
[47] Second, the intended use of the property for short-term vacation rentals seems to be inconsistent with the City’s policies aimed at increasing available housing, which Mr. Bissett and Mr. Butcher relied on to support their opinion. The lease contemplated that the units could be sublet without Ms. Cherny’s consent for no more than 28 days at a time. In my view, allowing Ms. Cherny to divide her property into six units would not provide any additional housing as the City’s policy contemplates. Given my concerns with their report, I am not prepared to rely on their opinion that Ms. Cherny is likely to get all the variances required to legally convert the property into a six-unit apartment building.
[48] One of Ms. Cherny’s experts, Mr. Demczak, states in his report that it has been more difficult to get approval to convert existing detached dwellings into multiple units and apartments since 2018, when the Official Plan was amended to focus on maintaining the prevailing character of the neighbourhood. He expressed the opinion that converting a single‑family home into a multi‑unit apartment building would not respect the existing character of the neighbourhood given its impact on the density, use and potential impact on open space. On this basis, he concludes that the Committee of Adjustment would not permit the proposed conversion.
[49] I do have some concerns about Ms. Cherny’s other expert, Christian Chan. Mr. Chan acknowledges that the Committee of Adjustment has granted parking space variances in 13 cases in the Annex. [^17] He also says that only 13 percent of the requested parking variances were approved. However, at another point the report seems to say that there were 15 cases involving a request for a parking space variance, of which 13 were granted. If this is true, that would mean that 87 percent of parking space variance applications in the Annex have been approved. This is an important discrepancy.
[50] Having considered the expert evidence as a whole, I accept that there is a good chance that Ms. Cherny would be granted a parking variation. However, the experts agree that the Committee of Adjustment process is unpredictable. I accept there is a possibility that Ms. Cherny might be granted the necessary permits and variances. However, I am not satisfied that it is likely in this case. Even if I accepted that the City is likely to relieve against the requirement for on-site parking, other zoning issues are likely to arise. I am not satisfied that those other issues are likely to be resolved in Ms. Cherny’s favour given the intended use of the property as a short-term rental business and the focus on preserving the prevailing character of the neighbourhood. In fact, Mr. Chan notes that he is not aware of any case where the City has approved a conversion from a single-family home in the Annex into a six unit dwelling and granted permission for no parking.
[51] A mere possibility of obtaining planning permission is not sufficient to justify granting specific performance and requiring Ms. Cherny to make an application. [^18] I find that it is not possible for Ms. Cherny to perform the lease now and it is not likely she will ever be able to perform the lease. I, therefore, find that specific performance is not an appropriate remedy in this case. This again weighs heavily in favour of my decision to discharge the certificate of pending litigation.
C. The Equities favour Discharging the Certificate of Pending Litigation with conditions
[52] I must also consider whether an order discharging the certificate of pending litigation would be fair and equitable as between the parties. If I do make an order discharging the certificate of pending litigation, I can impose any conditions that I consider just in the circumstances. [^19]
[53] Ms. Cherny financed the purchase of the property in question through a vendor take‑back mortgage and a line of credit. Ms. Cherny states in her affidavit that without income from the property, she cannot afford to meet her obligations under the mortgage and line of credit, which amount to $7,000 per month. She has an offer to refinance the property and reduce her monthly payments by $2,500. However, she cannot refinance the property while the certificate of pending litigation remains on title. If the certificate of pending litigation is not discharged, Ms. Cherny is at risk of losing the property altogether. That would not be in Ms. Cherny’s interests. It would also not be in the interests of Mr. Markos or 103 for Ms. Cherny to default on her mortgage or line of credit and lose the property.
[54] If the certificate of pending litigation is discharged, Ms. Cherny will be free to refinance, lease or sell the property in question. Having found that damages would be an adequate remedy in this case should the Court find that the lease was legal and Ms. Cherny breached it, it would not be just for Ms. Cherny to encumber the property or otherwise dissipate her assets in a manner that will frustrate any damages awarded to Mr. Markos and 103.
[55] On balance, I am prepared to discharge the certificate of pending litigation to allow Ms. Cherny to refinance and generate income from the property. However, I will impose conditions to protect the equity in the property from dissipation. First, Ms. Cherny cannot use the property as collateral to secure any debt beyond the refinancing agreement currently available to her. Second, if Ms. Cherny decides to sell the property, she is required to pay the proceeds from the sale into Court pending the trial of the issues in this case. Finally, Ms. Cherny cannot transfer title to the property other than through a bona fide sale to a third party.
D. Conclusion and Order
[56] Having found that it is not possible for Ms. Cherny to perform the lease and that damages are an adequate remedy in this case, I am prepared to exercise my discretion to grant an order discharging the certificate of pending litigation on the property on the following conditions, which will remain in effect until the trial and any appeals in this matter are completed:
(a) Ms. Cherny cannot use the property as collateral to secure additional credit beyond the refinancing that is currently available to her through the Royal Bank of Canada;
(b) Ms. Cherny cannot transfer title to the property to anyone other than through a bona fide sale to a third party for all cash proceeds; and
(c) If Ms. Cherny sells the property before this matter is complete, the proceeds from the sale (net of mortgage repayment, real estate commission and legal fees to close) are to be paid into the Court.
[57] Given my finding that damages would be an appropriate remedy for any breach, I also find that specific performance is not an available remedy in this case. However, I cannot resolve the credibility issues necessary to decide on the written record whether Mr. Markos and 103 are entitled to damages. I am, therefore, ordering a trial on the following issues:
(a) Is the lease between Ms. Cherny, Mr. Markos and 103 void or voidable because it is illegal?
(b) If the lease was legal, did Ms. Cherny breach the lease?
[58] I am seized of this matter for the trial of the issues. Counsel are to contact my assistant, Lorie Waltenbury (lorie.waltenbury@ontario.ca), to arrange a case conference to discuss the schedule for the trial in this matter.
[59] Costs of this motion are reserved to the end of the trial.
Davies J. Date: July 14, 2020
COURT FILE NO.: CV-20-636483 DATE: 20200714 ONTARIO SUPERIOR COURT OF JUSTICE
B E T W E E N: 10381187 Canada Inc. and Elias Markos Applicants AND: Elena Cherny Respondent
REASONS FOR DECISION Davies J. Released: July 14, 2020
[^1]: BlackBerry Limited v. Marineau-Mes, 2014 ONSC 1790 at para. 2; Rubner v. Bistricer, 2018 ONSC 1934 at paras. 104 - 108 [^2]: Rubner, at para. 107; Hryniak v. Mauldin, 2014 SCC 7 at para. 49 [^3]: Clock Investments Ltd. v. Hardwood Estates Ltd. (1977), 16 O.R. (2d) 671 at p. 674 (S.C.) [^4]: Courts of Justice Act, R.S.O. 1990, c. C.43, s. 103(6); G.P.I. Greenfield Pioneer Inc. v. Moore (2002), 58 O.R. (3d) 87 (C.A.) at paras. 15 - 17 [^5]: Courts of Justice Act, s. 103(6)(a)(i) [^6]: Matthew Brady Self Storage Corp. v. InStorage Limited Partnership, 2014 ONCA 858 at para. 40; Landmark of Thornhill Ltd. v. Jacobson (1995), 25 O.R. (3d) 628 (C.A.) at p. 636 [^7]: R.S.O. 1990, c. C.43 [^8]: Erie Sand and Gravel Limited v. Seres’ Farms Limited, 2009 ONCA 709 at para. 110 [^9]: Di Millo v. 2099232 Ontario Inc., 2018 ONCA 1051 at paras. 66 – 67; Semelhago v. Paramadevan, [1996] 2 S.C.R. 415 at para. 22; Matthew Brady Self Storage Corp. at para. 35 [^10]: Semelhago, at para. 22; R. Sharpe, Injunctions and Specific Performance (Carswell, 2018), §7.210 – 7.220 [^11]: Matthew Brady Self Storage Corp. at paras. 36 - 37 [^12]: Toronto Municipal Code, Chapter 547, Licensing and Registration of Short-Term Rentals, §547-1.1 [^13]: Toronto Municipal Code, Chapter 547, §547-1.2(A) [^14]: Sharpe, Injunctions and Specific Performance, §10.650 [^15]: Bhasin v. Hrynew, 2014 SCC 71 at para. 60 [^16]: Dynamic Transport Ltd. v. O.K. Detailing Ltd., [1978] 2 S.C.R. 1072 at p. 1086 [^17]: Mr. Chan did not provide citations for the cases, but I infer they are the same 13 cases relied on by the experts retained by Mr. Markos and 103’s expert. [^18]: Van v. Qureshi, 2013 ONSC 3179 at paras. 63 - 66, appeal dismissed 2014 ONCA 243 [^19]: Courts of Justice Act, s. 103(6)