Holt v. The Corporation of the City of Thunder Bay

[Indexed as: Holt v. Thunder Bay (City)]

65 O.R. (3d) 257

[2003] O.J. No. 2401

Docket No. C38897

Court of Appeal for Ontario,

Carthy, Rosenberg and Cronk JJ.A.

June 16, 2003

Landlord and tenant -- Option to renew -- Interpretation of lease -- Possible to determine duration of renewal term -- Right to renew properly exercised.

Municipal law -- Municipal contracts -- Municipality entering into lease with right to renew -- Municipality not offending principle that municipality has no power to restrict or divest itself of legislative powers -- Entering into lease renewal an exercise of ordinary proprietary or business powers -- Renewal of lease not requiring Ontario Municipal Board approval under s. 64(1) of Ontario Municipal Board Act -- Ontario Municipal Board Act, R.S.O. 1980, c. 347, s. 64(1).

The appellant was a tenant of a property on Sandy Beach, on the shores of Lake Superior. In 1964, the landlord, the predecessor to the respondent, the City of Thunder Bay, entered into a 25-year lease with 60 people, including the appellant. The appellant built a cottage on the leased land. After arbitration on the amount of rent, the 1964 leases were renewed, effective as of 1989, for a period of 13 years to expire on December 31, 2001. In July 2001, the City offered the appellant a five-year lease, and it offered to purchase her cottage if she did not wish to enter into a lease. The appellant indicated through the Sandy Beach Campers' Association that she wished to renew her lease in accordance with the terms of the 1989 lease.

The 1989 lease provided for "a renewal of the lease of the said premises for a further term of years at a yearly rental to be agreed upon". With respect to the right of renewal, the lease further provided that "in all other respects under and subject to the same covenants, provisions and agreements as are herein contained, including this present covenant and convenants contained in the paragraph next following". The paragraph next following in the lease contained a covenant that if the landlord was unwilling to renew, it shall purchase the tenant's buildings and improvements.

After some negotiations toward agreeing on the term of a new lease, the appellant sued for a declaration that her lease had not expired, that she had exercised her right of renewal, and the City's right not to renew had expired. The application judge held that the appellant had failed to effectively exercise the option and that the renewal term was missing an essential ingredient, namely the duration of the term. He concluded that the renewal term was not valid and that the lease was terminated. He held that the mandatory purchase covenant had been activated. The appellant appealed, and the City cross-appealed. On the appeal, the City submitted that it had no power to enter into the renewal because its effect would be to bind future councils and because a necessary approval of the Ontario Municipal Board had not been obtained.

Held, the appeal should be allowed, and the cross-appeal should be dismissed.

The appellant took all the necessary steps to effect a renewal of the lease in accordance with the terms of the renewal clause. Until the rental was determined, the lease continued in accordance with the terms of the renewal clause. When considering the lease as a whole, there was neither ambiguity nor absurdity. [page258] Contrary to the opinion of the application judge, it was possible to determine the duration of the renewal from the renewal covenant. First, the covenant provided that the renewal shall be for a "further term of years". Second, the new lease shall be "in all other respects under and subject to the same covenants, provisions and agreements as are herein contained". The duration of the new term could thus be determined, namely, for 13 years.

The lease renewal did not offend the principle that a municipality has no power to restrict or divest itself of its legislative powers. In entering into the lease with the appellant, the City was not divesting itself of any of its legislative powers; rather, it was exercising ordinary proprietary or business powers. Finally, the 1989 lease did not require Ontario Municipal Board approval under s. 64(1) of the Ontario Municipal Board Act, which provides that a municipality shall not proceed with any undertaking "the cost of any portion of which is to be . . . raised in a subsequent year" until the approval of the Board is obtained. Board approval is only required if the costs or any portion of the cost is to be raised in a subsequent year. There was no indication that this was the case. Since the City did not purport to exercise its right to opt out of the renewal and purchase the appellant's cottage, its right to do so expired. Accordingly, the appeal should be allowed and the cross-appeal dismissed.

APPEAL from a judgment interpreting a lease.

Cases referred to Gourlay v. Canadian Department Stores Ltd., 1933 9 (SCC), [1933] S.C.R. 329, [1933] 3 D.L.R. 238; Hillis Oil & Sales Ltd. v. Wynn's Canada Ltd., 1986 44 (SCC), [1986] 1 S.C.R. 57, 71 N.S.R. (2d) 353, 25 D.L.R. (4th) 649, 65 N.R. 23, 171 A.P.R. 353; Pacific National Investments Ltd. v. Victoria (City), [2000] 2 S.C.R. 919, 83 B.C.L.R. (3d) 207, 193 D.L.R. (4th) 385, 263 N.R. 1, [2001] 3 W.W.R. 1, 15 M.P.L.R. (3d) 1, 2000 SCC 64 Statutes referred to Ontario Municipal Board Act, R.S.O. 1980, c. 347, s. 64(1) Authorities referred to Rogers, I.M., The Law of Canadian Municipal Corporations, 2nd ed., looseleaf (Toronto: Carswell, 1971)

Michael B. Carter, for appellant. Allan D. McKitrick, for respondent.

The judgment of the court was delivered by

[1] ROSENBERG J.A.: -- The central issue in this appeal from the judgment of Platana R.S.J. concerns the interpretation of a lease and in particular whether that lease contained a valid option to renew. The lease concerned a lot in an area of Thunder Bay known as Sandy Beach. While the City owns the land, the appellant owns the building on the land. The lease purported to grant the appellant an option to renew. If the appellant exercised that option, the respondent City had the right to enter into a new lease or purchase the appellant's building. [page259]

[2] The application judge found that there was no valid option because the lease did not specify the duration of the term to be granted by the renewal. In the alternative, he found that the appellant had failed to exercise the option. In the result, he held that the lease was terminated and that the City was entitled to possession of the property. The appellant appeals from that finding. The application judge also found, however, that the mandatory purchase covenant in the lease had become effective. The City cross-appeals from that finding.

[3] In my view, the application judge erred. I would therefore allow the appeal and grant the declaration sought by the appellant. I would not give effect to arguments made by the City before this court that the court cannot compel the City to pass a by-law to effect the renewal and that the option was invalid because the Ontario Municipal Board did not approve the lease. In view of my conclusion on the appellant's appeal, I would dismiss the cross-appeal concerning the mandatory purchase covenant.

The Facts

[4] The appellant is one of several tenants (the "campers") who lease property on a parcel of land on the shores of Lake Superior. The area, known as Sandy Beach, was acquired from the Department of Indian Affairs in 1917 and was intended for use as public parkland. The Fort William Parks Board entered into leases for summer cottages on parts of the property not immediately required for a park purpose. In 1964, the Parks Board entered into 25-year leases with about 60 people, including the appellant, for summer cottage lots on the land. The tenants, like the appellant, own the cottages they have built on the leased land.

[5] The 1964 leases expired in 1988. By that time the City of Thunder Bay had been incorporated and it assumed the leases. After arbitration on the amount of rent, the 1964 leases were renewed, effective as of 1989, for a period of 13 years.

[6] The City's intention ultimately is to return the property to parklands for the benefit of the public. To that end, the City held and used the rentals for the purpose of purchasing cottages, on a consensual basis, as they became available during the term of the 1989 renewal lease.

[7] The 1989 leases were to expire on December 31, 2001. In July 2001, City Council adopted staff recommendations to attempt to negotiate short-term leases with the Sandy Beach campers. In August 2001, the City sent a letter to the appellant offering her a five-year lease at an annual rent of $3,650, more than double the rent she had been paying under the 1989 lease. The proposed lease contained several other terms that were different from those in [page260] the 1989 lease. In the letter, the City also offered to purchase the appellant's cottage if she did not wish to enter into a lease. By this time, the appellant and her fellow campers had resurrected the Sandy Beach Campers' Association to negotiate with the City.

[8] After the appellant and the other campers received their letters from the City, the Association gave notice by memorandum dated August 14, 2001 to the City that the campers wished to renew their leases in accordance with the terms of the 1989 lease. The terms of the 1989 lease in issue in this appeal are the following:

THE LESSOR doth hereby for itself, its successors or assigns, covenants with the Lessee that if the Lessee, his executors, administrators or assigns, shall be desirous of renewing the lease of the said premises on the expiration of the term hereby demised, or any renewal thereof hereunder, and shall, prior to the expiration of the last-mentioned term of renewal give to the Lessor, its successors or assigns, or leave at its or their last-known office or abode in Canada, three calendar months' previous notice in writing and shall pay the said rents hereby reserved, and observe and perform the several covenants and agreements herein contained on the part of the Lessee, his executors, administrators or assigns, to be observed and performed up to the expiration of the said term hereby demised or any renewal thereof, the Lessor, its successors or assigns, will upon the request of the Lessee, his executors, administrators or assigns, and upon his or their executing and delivering to the Lessor, its successors or assigns, a duplicate thereof, forthwith execute and deliver to the said Lessee, his executors, administrators or assigns, a renewal of the lease of the said premises for a further term of years at a yearly rental to be agreed upon by the said parties, or if the parties are unable to agree upon the said rental, at a rental to be fixed at any time within four months after the expiration hereof, by a single arbitrator if the parties agree upon one, or otherwise by three arbitrators of whom the Lessor shall appoint one and the Lessee one, and the two arbitrators thus appointed, shall appoint a third, and in all other respects under and subject to the same covenants, provisions and agreements as are herein contained, including this present covenant and the covenants contained in the paragraph next following.

NOTWITHSTANDING the covenant contained in the paragraphs next preceding, in the event that the Lessor, its successors or assigns, shall at the expiration of the term demised hereby or any renewal thereof, for any reason in their sole discretion, be unwilling or unable to renew the lease in accordance with the provisions of the next preceding paragraph, on the determination of the said term or any renewal thereof, the Lessor shall purchase the buildings, erections and improvements or any of them, then on the said lands, at a price to be determined, in case of dispute by a single arbitrator, if the parties agree upon one, otherwise by three arbitrators of whom the Lessor shall appoint one and the Lessee one, and the two arbitrators thus appointed shall appoint a third, and they shall have all necessary powers of valuing and appraising such buildings, erections and improvements and shall appoint a time for payment of the value thereof so ascertained, and the award of such single arbitrator, or a majority of such three arbitrators, shall be final between the said parties, and the expense of the said arbitration [page261] shall be borne equally between the parties thereto. Provided, that until the publication of the award and the payment of the amount thereby fixed as the value of the buildings, erections and improvements, the Lessee or other person in legal possession of the said lands (having committed no default in the payment of the rent or the observance of the covenants, provisos and conditions herein), may continue in possession of the said lands upon the same terms and conditions as are herein set out, subject to the payment of the said rent and the observance of the covenants, provisos and conditions herein.

(Emphasis added)

[9] The memorandum from the Association to the City states, in part, as follows:

With reference to the Sandy Beach leases in force January 1, 1989 until December 31, 2001, being binding [on] The Corporation of the City of Thunder Bay and the current Leaseholders of Sandy Beach at page 4, paragraph 5, let this memorandum serve as notice of the Lessees' intention to negotiate a renewal of the leases.

[10] The memorandum offered to provide to the City proof of the campers' authorization to the Association to conduct the negotiations. The memorandum also suggested a number of topics for negotiation including "the lease term length". In a letter dated August 17, 2001, the City responded to this memorandum. It requested proof that the Association was authorized to negotiate on behalf of the campers. As to the proposed term of the lease, the City reaffirmed its position that the new term be for five years.

[11] On August 23, 2001, the appellant signed a form purporting to authorize the Association to act as her agent to negotiate on her behalf. However, she reserved the right to sign the negotiated lease.

[12] On January 30, 2002, that is, after expiration of the 1989 lease, counsel for the Association wrote to the City. In this letter, he took the position that the lease was renewed on the same terms as the 1989 lease including a term of 13 years. However, counsel indicated that the campers would agree to a ten-year term. In the letter, counsel proposed a formula for calculating the new yearly rent. Further, since the lease was to be identical to the 1989 lease, except for the rental, counsel proposed that new leases not be printed and the new lease arrangements be formalized through an exchange of letters.

[13] On February 28, 2002, the City wrote the Association stating that the rent would be for the amounts set out in the August letters to the campers and that there could be a five- year lease with a further option to renew for five years at the sole discretion of the City.

[14] In April 2002, the appellant launched her application seeking a declaration, among other things, that the lease had not [page262] expired, that she had exercised her right of renewal, and that the City's right not to renew had expired. In a counter-application, the City sought a declaration that the 1989 lease was no longer in effect, that the appellant was not entitled to renew the lease, that the renewal provision was void and unenforceable and that it was entitled to vacant possession.

Reasons of the Application Judge

[15] The application judge found that the renewal clause was "missing an essential ingredient, namely the duration of the term". He held that the court cannot supply this ingredient and the option to renew was therefore void for uncertainty. The application judge particularly relied upon the decision of the Supreme Court of Canada in Gourlay v. Canadian Department Stores Ltd., 1933 9 (SCC), [1933] S.C.R. 329, [1933] 3 D.L.R. 238 where it was held that for a covenant in a lease that provides for a renewal of term to be valid, the covenant must designate with reasonable certainty the duration of the term to be granted. This certainty of duration can appear from an express term in the lease or by reference to some collateral matter. The application judge held that "there is nothing in the [renewal] covenant . . . which enables the Court to determine the duration of the renewal." He also held that the duration could not be ascertained from reference to any collateral matter. To the contrary, he found that the willingness of the campers to negotiate the terms of a new lease, including the duration, was an implicit admission that the duration was uncertain.

[16] The application judge also found that the appellant failed to effectively exercise the option to renew. He appeared to accept the City's position that in various correspondence the appellant, while expressing an intention to negotiate a renewal, never actually gave notice of her intention to renew. He also held that the appellant did not at any time execute and deliver a copy of the renewal.

[17] The application judge therefore found that the lease was not valid as to a renewal term and the lease was terminated. He went on to hold: "That being the case, the mandatory purchase covenant in the lease has become effective."

Analysis

Duration of the renewal

[18] I agree with the application judge that this element of the case turns on the effect of the Supreme Court's decision in Gourlay. In that case, the covenant providing for the renewal contained three different formulae for calculating the duration of the [page263] new term; all of them turning, however, on the condition that the premises be required for a specified use. Lamont J. concluded at p. 332 S.C.R. that:

As there is nothing in the covenant which enables us to determine the duration of the lessees' need for the rooms, the covenant is too indefinite to permit of its being enforced. It is therefore void for uncertainty.

[19] It was the fact that the duration of the new term turned on the need for the premises rather than a request or demand that made the covenant uncertain. Had the language been simply that the new term be for as long as the tenant requested or demanded it would have been valid. It is thus apparent that the covenant need not set out a set number of years to be valid. It is sufficient if the certainty of duration can be ascertained by reference to the express terms of the lease or by reference to some collateral matter that is itself certain or capable of being made certain before the lease takes effect.

[20] It seems to me that this is hardly an exacting test. The contract should be construed as a whole, giving effect to all of its terms, so long as it does not result in an absurdity. Where there is no ambiguity, the contract is to be given its literal meaning. As Le Dain J. wrote in Hillis Oil & Sales Ltd. v. Wynn's Canada Ltd., 1986 44 (SCC), [1986] 1 S.C.R. 57, 25 D.L.R. (4th) 649 at p. 66 S.C.R., p. 655 D.L.R.:

The general principle was stated by Estey J. in Consolidated- Bathurst Export Ltd. v. Mutual Boiler & Machinery Ins. Co. (1979), 1979 10 (SCC), 112 D.L.R. (3d) 49 at p. 58, [1980] 1 S.C.R. 888 at p. 901, [1980] I.L.R. 1-1176, where he said"the normal rules of construction lead a Court to search for an interpretation which, from the whole of the contract, would appear to promote or advance the true intent of the parties at the time of entry into the contract". Also particularly apposite are the words of Dickson J. (as he then was) in McLelland & Stewart Ltd. v. Mutual Life Ass'ce Co. of Canada (1981), 1981 53 (SCC), 125 D.L.R. (3d) 257 at p. 259, [1981] 2 S.C.R. 6 at p. 19, [1981] I.L.R. 1-1393, where he said:

Taken alone and read without consideration of the policy the kindred language of the self-destruction clause and the declaration undoubtedly create a formidable argument in support of the case of the assurance company. It is plain, however, these cannot be read in an isolated and disjunctive way. The question before us is not to be determined on a mechanical reading of two phrases set apart, but rather on a reading of the policy and the declaration in entirety.

[21] In my view, when considering the contract as a whole, there is neither ambiguity nor absurdity. The express terms of the contract establish the term of the lease renewal. I cannot agree with the application judge that "there is nothing in the [renewal] covenant . . . which enables the Court to determine the duration of the renewal". First, the covenant provides that the [page264] renewal shall be for a "further term of years". Second, aside from the amount of the rental, the new lease shall be "in all other respects under and subject to the same covenants, provisions and agreements as are herein contained". One of those provisions is, of course, that the lease was for 13 years.

[22] The duration of the new term can thus be determined, namely, for 13 years. This was the position taken by the solicitor for the campers during the negotiations with the City. The fact that the campers were prepared to accept a shorter term of ten years does not mean that the duration of the renewal called for by the lease itself could not be ascertained. As counsel for the appellant put it in oral argument, the appellant and the other campers should not be penalized because they were willing to enter into negotiations with the City.

Exercise of the option

[23] The clause providing for the renewal is written in somewhat archaic language. However, I believe that the steps to be taken to effect a valid renewal are as follows. If the tenant gives written notice three months before expiration of the current lease of a desire to renew the lease and in the interim continues to pay the rent and observe the other covenants then the City, upon request of the tenant, will execute in duplicate a renewal of the lease at a yearly rental to be agreed upon. If the parties are unable to agree on a rental, the rent is to be set by an arbitrator. The clause sets out a formula for appointing the arbitrator. It appears that the renewal is to be prepared by the tenant.

[24] I cannot agree with the application judge that the appellant did not give written notice of a desire to renew the lease. The renewal clause does not contemplate any particular formality on the part of the tenant; merely written notice that he or she is "desirous of renewing the lease". The memorandum of August 14, 2001 fulfills that requirement. It serves notice of the campers' "intention to negotiate a renewal of the Leases". That was a sufficient indication of the appellant's desire to renew the lease.

[25] The application judge held that the renewal had not been exercised because the appellant never executed and delivered a duplicate of the renewal to the City. In my view, the application judge has misapprehended the process for renewal set out in the renewal clause. The renewal could only be executed after the parties had either agreed on the rent or the rent had been determined through arbitration. The appellant's solicitor attempted to set this process in motion in his letter of January 30, 2002 by suggesting a formula for the rental. The City frustrated this process [page265] by refusing to accept that the lease had been renewed on the same terms and conditions as the previous lease. As a result, the City made no attempt to agree on a rental in accordance with the renewal clause and the arbitration process was never commenced. Instead, the parties resorted to litigation.

[26] In my view, the appellant took all the necessary steps to effect a renewal of the lease in accordance with the terms of the renewal clause. As I read the renewal covenant, until the rental has been determined, the lease continues on the same terms.

The by-law issue and lack of OMB approval

[27] As I understand it, the City submits that it had no power to enter into the renewal covenant in the lease because its effect is to bind future councils and no approval was obtained from the Ontario Municipal Board. It also argues that it could not be compelled to pass a by-law to renew the lease or purchase the buildings if it opted out of the renewal. I cannot accept any of these submissions.

[28] I accept that when dealing with a municipality a party cannot rely upon the indoor management rule and that the burden of ensuring that the municipality has exercised its powers in compliance with statute is upon the party contracting with the municipality. I also accept that a municipality has no power to restrict or divest itself of its legislative powers. The 1989 lease, however, did not offend these principles.

[29] The leading case on this issue is Pacific National Investments Ltd. v. Victoria (City), 2000 SCC 64, [2000] 2 S.C.R. 919, 193 D.L.R. (4th) 385 where LeBel J., speaking for the majority, at para. 51 held that while a municipality has no power to restrict or divest successor councils of legislative powers, the municipality does have "an implied power to bind successor councils by a contract in the exercise of ordinary proprietary or business powers". At para. 55 he made the same point accepting what is said in I.M. Rogers, The Law of Canadian Municipal Corporations, 2nd ed., looseleaf (Toronto: Carswell, 1971), that the restriction on a municipality "does not mean that a council acting in its proprietary or business capacity cannot make contracts". In entering into the lease with the appellant the municipality was not divesting itself of any of its legislative powers. Rather, it was simply exercising ordinary proprietary or business powers.

[30] I am also not persuaded that the 1989 lease required OMB approval. Section 64(1) of the Ontario Municipal Board Act, R.S.O. 1980, c. 347 provides as follows: [page266]

64(1) Notwithstanding the provisions of any general or special Act, a municipality shall not,

(a) authorize; or

(b) exercise any of its powers to proceed with; or

(c) provide any moneys for,

any undertaking, work, project, scheme, act, matter or thing, the cost or any portion of the cost of which is to be,

(d) raised in a subsequent year or years; or

(e) provided by the issue of debentures, until the approval of the Board has first been obtained.

(Emphasis added)

[31] As the emphasized portion shows, OMB approval is only required if the cost or any portion of the cost is to be raised in a subsequent year. The evidence shows that the campers pay rentals that are held in a special fund to be used to buy out the cottages. There is no indication that the renewal of the lease would entail any costs that would have to be raised in the future.

[32] As to the question of whether the City can be compelled to pass a by-law, in my view, that issue does not arise. The lease sets out a procedure for renewal. It is not clear that if the procedure for the renewal in accordance with the lease is followed, any legislative action from the City is required. However, I need not make that determination. The appellant sought a declaration in these terms:

(a) that the lease has not expired,

(b) that the lessee has exercised the right of renewal contained in the lease,

(c) that any right of the respondent lessor under the lease to declare itself unwilling or unable to renew has, for the term of renewal referred to in (b) above expired.

[33] I have found that the lease has not expired and that the appellant has exercised the right of renewal contained in the lease. Since the City did not purport to exercise its right to opt out of the renewal and purchase the appellant's cottage its right to do so has expired. Any other question as to what would occur if the City refused to comply with the renewal clause is speculative.

Disposition

[34] Accordingly, I would allow the appeal, set aside the judgment of Platana R.S.J. and make a declaration in the terms [page267] sought by the appellant in paras. 1 and 2 of the Notice of Application. The appellant is entitled to her costs of the application to be assessed and the costs of the appeal. In accordance with the submissions made by counsel at the hearing of the appeal, I would fix the costs of the appeal at $8,500, inclusive of disbursements and GST.

Appeal allowed with costs.