Goldman, in trust et al. v. 682980 Ontario Limited [Indexed as: Goldman (in trust) v. 682980 Ontario Ltd.]

62 O.R. (3d) 21

[2002] O.J. No. 4053

Docket No. C36861

Court of Appeal for Ontario,

Finlayson, Carthy and Laskin JJ.A.

October 24, 2002

Landlord and tenant -- Sublease -- Assignment -- Option to purchase contained in lease -- Tenant granting sublease for entirety of term -- Sublease being an assignment of lease -- Sublease not expressly including option to purchase -- Whether option to sublease assigned to subtenant a matter of intention of parties -- Parties intending to preserve option with tenant despite assignment.

682980 Ontario Limited (the "Tenant") was a tenant in the shopping centre owned by Ralph Goldman, in trust, and Blended Investments Limited (the "Landlord"). The lease contained an option to purchase and a right of first refusal to purchase the entire centre. During the term of the lease, with the consent of the Landlord, the Tenant entered into a sublease. The sublease was for the entirety of the leasehold term. The sublease did not include the option or the right of first refusal. Subsequently, the Tenant gave notice of the exercise of the option. The Landlord took the position, however, that the Tenant could not exercise the option, and the Landlord brought an application for a declaration. Hawkin J. granted the declaration on the ground that the sublease was for the entirety of the term and accordingly was an assignment of the lease. He further concluded that the assignment included the option, even without words to that effect. The Tenant appealed.

Held, the appeal should be allowed.

Hawkin J. erred in concluding that the option to purchase was assigned; rather, it remained to be exercised by the Tenant. An option to purchase does not depend upon tenure and was severable from the sublease if that was the intent of the parties. The definition of a lessee as including assigns, with nothing more, indicates intent to include an option in the general assignment, but intent, express or implied, remains an open issue. The facts before the court indicating intent were far more elaborate than the simple assignment of a lease containing an "assigns" [page22] clause. The sublease was an entirely new document setting forth its own obligations. While the lease described the leased premises as the "demised premises", the sublease referred only to the "leased premises". When the Landlord attached its consent to the sublease, there was no reason to impute an intention to implement the assigns clause in the lease except to the extent of the leased premises. In this case, the parties intended by these documents to preserve the option with the Tenant despite the sublease.

APPEAL from a judgment on an application for a declaration that an option to purchase was not exercisable.

Cases referred to Griffith v. Pelton, [1957] 3 All E.R. 75, [1957] 3 W.L.R. 522, [1958] Ch. 205, 101 Sol. Jo. 663, 170 Estates Gazette 189 (C.A.); Harpelle v. Carroll (1896), 27 O.R. 240 (Q.B.); Hicks v. Downing (1696), 1 Ld. Raym. 99; Law-Woman Management Corp. v. Peel (Regional Municipality) (1991), 1991 7383 (ON SC), 2 O.R. (3d) 567, 17 R.P.R. (2d) 62 (Gen. Div.); Milmo v. Carreras, [1946] 1 All E.R. 288, [1946] K.B. 306, 115 L.J.K.B. 278, 174 L.T. 223 (C.A.); Parc (Battersea) Ltd. v. Hutchinson, [1999] T.N.L.R. no. 222 (Eng. Ch.) Statutes referred to Commercial Tenancies Act, R.S.O. 1990, c. L.7, s. 3 Authorities referred to Harpum, C., Megarry & Wade: The Law of Real Property, 6th ed. (London: Sweet & Maxwell, 2000). Woodfall: Landlord and Tenant, looseleaf ed. (London: Sweet & Maxwell, 1978- )

Ross Murray and Tim Bates, for appellant. John S. Kelly and Katherine A. McEachern, for respondent.

The judgment of the court was delivered by

[1] CARTHY J.A.: -- This proceeding began as an application by the owner of a shopping centre for a declaration that an option to purchase the centre, contained in a lease of premises in the centre, was not exercisable by the tenant once that tenant had entered into a sublease with a subtenant. Hawkins J. granted the declaration on the ground that the sublease was for the entirety of the leasehold term, was therefore in law an assignment, and that the assignment carried with it the option, even without words to that effect. The tenant appeals from that finding.

Facts

[2] The respondents leased the appellant two units in one building in a shopping centre, comprised overall of three buildings, the lease with renewals to expire on April 30, 2000. The lease contained a series of provisions affording an option to purchase and a right of [page23] first refusal to the lessee, both covering the entire shopping centre. During the term of the lease, the appellant entered into a sublease of the two units, the term to expire on April 30, 2000. The provisions related to the option to purchase and right of first refusal were not contained in the sublease. The landlords endorsed their consent to the sublease by a consent form attached to the sublease. Prior to April 2000, the appellant gave notice of exercise of the option to purchase the premises and following the expiry of the sublease, the parties entered into negotiations as to the price and other terms for the purchase or the selection of arbitrators in accordance with the lease terms. These negotiations were well underway when the respondents suddenly took the position that the appellant had no entitlement to the option and instituted these proceedings.

Analysis

[3] Hawkins J. concluded that since the sublease did not reserve a reversionary interest to the assignor it must be considered in law an assignment regardless of the intention of the parties. There is abundant common law authority for this conclusion, the rationale being that the leasehold interest must be supported by privity of estate and thus the assignor must reserve the last day in order to preserve the original landlord-tenant relationship. See Megarry & Wade: The Law of Real Property, 6th ed. (London: Sweet & Maxwell, 2000), pp. 808-09; Woodfall: Landlord and Tenant, looseleaf ed. (London: Sweet & Maxwell, 1978- ), para. 16.157 citing inter alia, Hicks v. Downing (1696) 1 Ld. Raym. 99; Milmo v. Carreras, [1946] 1 All E.R. 288 at p. 291, [1946] K.B. 306; Parc (Battersea) Ltd. v. Hutchinson, [1999] T.N.L.R. no. 222 (Eng. Ch.) at p. 1.

[4] Hawkins J. would not adopt the appellant's argument that s. 3 of the Commercial Tenancies Act, R.S.O. 1990, c. L.7 supersedes the common law. That section provides in part, '[t]he relation of landlord and tenant does not depend on tenure and a reversion in the lessor is not necessary in order to create the relation of landlord and tenant . . . ."

[5] The appellant traces this provision, unique to Ontario and, at one time, Ireland, through various statutes back to 1860 in Ireland. In the only Ontario case dealing with the section, Harpelle v. Carroll (1896), 27 O.R. 240 (Q.B.) and in a context of permitting distress, Meredith C.J. had this to say at p. 246 O.R.:

It is highly probable that if the framer of the Ontario Act, had had before him the caustic criticism which the Irish Act as a whole, and its several parts, including section 3, -- as would appear from the reports of the cases to which I shall afterwards refer, -- received from the Judges of the Courts of that country during the short time the Act was in force there, he would have [page24] chosen different language to express the idea which he probably had, that of doing away with the necessity of the having of the immediate reversion to entitle to distrain one who had let lands to another.

[6] I would not be so dismissive of the legislative intent but do sidestep consideration of its application to the present facts. In my view, the motions judge erred in another respect, which is sufficient to dispose of the appeal, and I leave resolution of any conflict between the statute and the common law for another day when the broader ramifications of altering the course of landlord and tenant law in Ontario alone can be adequately canvassed.

[7] The core finding of Hawkins J., with which I respectfully disagree, is as follows [at paras. 9-10]:

(2) Did the Tenant/Sublessor's Option to Purchase Pass with the Assignment or did it remain in the hands of the Tenant/ Sublessor

I consider that that question has been answered by Dennis Lane J. in Law-Woman Management Corporation v. Peel (Regional Municipality) et al. (1991) 1991 7383 (ON SC), 17 R.P.R. (2d) 62 at p. 80 where he holds:

From these authorities it appears that the benefit of an option granted to the "lessee" passes by mere assignment of the term of the lease where "lessee" is defined in the lease as including "assigns". It is also clear that this result is not dependent upon the nature of the option as an interest in land.

Clause 32 of the lease before me provides:

THIS INDENTURE and everything herein contained shall enure to the benefit of, and be binding upon, the parties hereto and their respective heirs, executors, administrators, successors and assigns (emphasis mine) as the case may be, subject to the consent of the lessor being obtained as hereinbefore provided to any assignment of the lease by the lessee.

I am unable to distinguish the case before me from the Law- Woman case and I find that the option to purchase passed to the (so-called) Sub-Tenants.

[8] In my view, the error is in moving from the conclusion that the sublease becomes an assignment by operation of law to the assumption that the option necessarily follows it. The option does not depend upon tenure and is severable from the sublease if that is the intent of the parties. The definition of "lessee" as including "assigns", with nothing more, indicates intent to include the options in a general assignment of the lease. That is the extent of the finding in Law-Woman [Law-Woman Management Corp. v. Peel (Regional Municipality) (1991), 1991 7383 (ON SC), 2 O.R. (3d) 567, 17 R.P.R. (2d) 62 (Gen. Div.)].

[9] The root authority on this point comes from the English Court of Appeal, Griffith v. Pelton, [1957] 3 All E.R. 75, [1957] 3 W.L.R. 522 (C.A.). In that case, the lessee (having first obtained a [page25] licence to do so from the lessor) assigned "all that property comprised in and demised by the lease". Jenkins L.J. delivered the reasons of the court and stated at p. 85 All E.R.:

The first of the two questions stated above therefore seems to us to come down to the narrow issue whether the assignment of August 3, 1948, being on the face of it a mere assignment of the term, without any reference to the benefit of the option, operated, in view of the terms of the proviso, or, in other words, the contract creating the option, as an assignment of the benefit of the option; or whether an express reference to the benefit of the option in the assignment of the term was necessary to produce that result. We think that, on the true construction of the proviso, including the definition to be read into it of the term lessee as including the lessee's assigns, the original parties to the lease must be taken to have agreed that the option should be exercisable by Miss Blaker herself or by any assignee of the term to whom she might assign the benefit of the option, and that a mere assignment of the term should operate as an assignment of the benefit of the option to the assignee of the term.

[10] Thus intent, express or implied, remains an open issue relating to the option. The facts before this court indicating intent are far more elaborate than the simple assignment of a lease containing an "assigns" clause. The sublease is an entirely new document setting forth its own obligations between sub-landlord and subtenant. While the lease describes the leased premises as the "demised premises" by reference to a schedule and the optioned premises as the "lands", separately described, the sublease refers only to the "leased premises". When the owner attached his consent to the sublease there is no reason to impute an intention to implement the "assigns" clause in the lease except to the extent of the leased premises. In fact, the landlord consent was explicitly to the "terms and conditions in that sublease". This is not a case of there being simply no mention of the option and having it pushed down the stream by an assignment clause. The much larger buildings and land subject to the option were clearly excluded from the sublease document covering the two units of some 3,000 square feet. The subtenant covenanted to perform the tenant's obligations under the lease but was not afforded any of the owner's covenants, including, of course, those associated with the option and arbitration provisions related thereto.

[11] In my view, if this case had not been enshrouded in the mist of the law of reversionary interests it would be unarguable that those parties intended by these documents to preserve the option despite the sublease. And indeed that was the view of the parties as they negotiated for some months as to terms of arbitration. This consensus of intent cannot affect what flows by force of law -- the conversion of sublease to assignment -- but is certainly relevant to the issue of the intent of the same parties when [page26] the documents were drawn and signed on an issue which is governed by intent.

[12] For these reasons I would allow the appeal and set aside the judgment of Hawkins J., and dismiss the application for a declaration that the option was not exercisable by the appellant with costs here and below to the appellant.

[13] The appellant filed a bill of costs for the appeal. One should now be filed for the application. Filing to be within ten days and the respondent to have seven days thereafter to make submissions in writing and the appellant to have a further seven days to reply.

Order accordingly.