DATE: 200300402
DOCKET: C38060
COURT OF APPEAL FOR ONTARIO
MACPHERSON, SIMMONS AND ARMSTRONG JJ.A.
B E T W E E N :
PALETTA INTERNATIONAL CORPORATION
Les J. O’Connor and Michael R. Swartz for the respondent
Plaintiff (Respondent)
- and -
CANADA LIFE MORTGAGE SERVICES LTD. and CANADA LIFE ASSURANCE COMPANY
Geoff R. Hall and Genevieve Currie for the appellant
Defendants (Appellant)
Heard: March 14, 2003
On appeal from the judgment of Justice Ted Matlow of the Superior Court of Justice dated March 18, 2002, reported at [2002] O.J. No. 1018.
MACPHERSON J.A.:
A. INTRODUCTION
[1] Paletta International Corporation (“Paletta”) is an Ontario company with headquarters in Stoney Creek. It is engaged in the business of land development, contracting and property management throughout Ontario.
[2] Canada Life Assurance Company (“Canada Life”) is also an Ontario company. It engages in a broad range of commercial and financial activities, including the provision of loans by way of mortgages secured on land holdings.
[3] In 1991, Paletta and Canada Life entered into negotiations about a large commercial loan. Paletta was to be the borrower; Canada Life would be the lender. The mortgage in question was to be a long‑term mortgage for $6.9 million secured by a charge on a shopping centre in Burlington.
[4] The proposed transaction had two features which are typical of such arrangements: (1) upon entering into the mortgage commitment, Paletta paid Canada Life a ‘commitment fee’ of $138,000 to compensate Canada Life for its risk of entering into the commitment; and (2) the parties specified a ‘rental achievement figure’, a minimum rental income that the shopping centre had to generate to support the loan before the mortgage would be advanced.
[5] The transaction did not proceed. Canada Life kept the commitment fee. Paletta sued to get it back.
[6] After a five day trial, Matlow J. ordered Canada Life to return the commitment fee to Paletta. Canada Life appeals from that decision. The appeal relates entirely to the interpretation of the two contracts entered into by the parties, the Commitment Agreement and the Commitment Fee Agreement.
B. FACTS
(1) The contracts
[7] Paletta and Canada Life entered into two agreements on June 7, 1991. By the terms of the Commitment Agreement (the “CA”), Canada Life agreed to loan Paletta $6.9 million secured by a 25 year mortgage on a shopping centre in Burlington. Paragraph 24 of the CA set out what is commonly referred to as a ‘rental achievement figure’:
- The property shall be producing annualized rental income, from tenants in occupancy, with leases in full force and effect, and paying rent, of at least $1,038,878.00 . . . .
[8] The parties also executed a second contract on the same day, the Commitment Fee Agreement (the “CFA”). Paletta paid $138,000 to Canada Life on the execution of this agreement.
[9] Paletta never met the rental achievement figure. In February 1991, the shopping centre was yielding rent of $997,380. By September 1991, the projected closing date of the mortgage transaction, the rent level had dropped to $921,000.
[10] From September 1991 to February 1992, the parties engaged in extensive negotiations to restructure the agreement. The negotiations failed. On February 18, 1992, Canada Life advised Paletta that it would not fund the loan.
[11] Canada Life decided to keep the commitment fee. It did so on the basis of paragraph 29 of the CA and paragraph 2 of the CFA which provided in relevant parts:
Commitment Agreement
- If the full advance under the mortgage has not been made by September 1, 1991 . . . the Commitment Fee will be retained by the Lender as liquidated damages and as compensation for the commitment . . . .
Commitment Fee Agreement
- If, for any reason, including, without limiting the generality of the foregoing, any failure or inability of the Borrower to satisfy any of the terms and conditions contained in the said First Mortgage Loan Approval,
(a) the mortgage has not been registered by the 1st day of September, 1991, or by such later date as CLMS, in its sole and unfettered discretion, may agree to in writing, or
(b) the first advance under the mortgage has not been made by the 1st day of September, 1991, or by such later date as CLMS in its sole and unfettered discretion, may agree to in writing . . .
then and in any of such events the Commitment Fee will be . . . retained by CLMS . . . as liquidated damages and as compensation for the commitment . . . .
[12] Canada Life took the position that these provisions made it clear that it could retain the $138,000 commitment fee. The borrower, Paletta, had failed to satisfy the rental achievement figure in paragraph 24 of the CA and, as a result, Canada Life had not advanced the mortgage funds by the middle of February, the extended closing date for the transaction to be completed.
[13] Paletta took a different view. It relied on paragraph 15 of the CA, which it had insisted be added to the agreement:
- . . .
In the event that this commitment is terminated by the Lender for any reason whatsoever, save and except for default by the Borrower as defined in this Commitment, then the Commitment Fee . . . shall be immediately returned to the Borrower in full without deduction.
[14] Paletta’s position was that it had not defaulted under the CA. It acknowledged that the rental achievement figure of $1,038,878 had never been reached. However, the failure to meet this term of the agreement was the result of market forces, not any failure or defect in its own performance.
(2) The litigation
[15] Paletta brought an action for the return of the commitment fee. It advanced four arguments in support of its claim. Matlow J. heard the action during five days in March 2002. He first considered two issues raised by Paletta in an amendment to its Statement of Claim made in the course of the trial, namely, a claim for rectification of the CA and a claim for its rescission based on an alleged misrepresentation by Canada Life concerning the importance of the rental achievement figure of $1,038,878. The trial judge rejected these claims. Neither issue is relevant to this appeal.
[16] The trial judge then turned to the central issue, the interpretation of the CA and the CFA. He referred to the three relevant provisions in these documents (set out above). He concluded that neither paragraph 29 of the CA nor paragraph 2 of the CFA supported Paletta’s position: “There is nothing in either of these provisions that would expressly relieve the plaintiff from their consequences if it were not responsible for the failure . . . to make the full advance by the specified deadline or the extended deadline in February, 1992.”
[17] The trial judge then considered paragraph 15 of the CA. He observed that the word “default” was not defined in the CA. He invoked the definition in The Concise Oxford Dictionary (8th ed.) – “failure to fulfil an obligation, esp. to appear, pay, or act in some way”. He then reasoned:
It is my view that the failure to achieve the rental target figure specified in the commitment agreement cannot be attributed to any default on the part of the plaintiff . . . . [It] was the result of prevailing economic conditions over which the plaintiff had no control and for which, in my view, it should not be held responsible.
[18] The result of this analysis was that Canada Life was entitled to refuse to advance the mortgage funds and to terminate the transaction. However, Canada Life could not retain the commitment fee because “there is no reason why it should not assume the consequences of the risk that it, too, incurred that the rental target figure would not be achieved.”
[19] The trial judge then considered a final issue. Throughout the period of negotiations, the parties disagreed about whether Paletta was required to deliver to Canada Life notices of assignments of existing leases so that they could be registered on title. The trial judge regarded this as a deal‑breaker on Canada Life’s side. He concluded that “even if the rental target figure had been achieved, the plaintiff (sic) would not have advanced the mortgage funds.” This provided “a second reason why the transaction failed through no fault or “default” on the part of the plaintiff.”
[20] Canada Life appeals the trial judge’s decision.
C. ISSUES
[21] There are two issues on this appeal:
(1) Did the trial judge err in his interpretation of the contracts and, in particular, paragraphs 15 and 29 of the Commitment Agreement and paragraph 2 of the Commitment Fee Agreement?
(2) Did the trial judge err in his determination that Canada Life would not have advanced the mortgage funds in any event because Paletta would not deliver to Canada Life notices of assignments of leases which could be registered on title?
D. ANALYSIS
(1) The ‘default’ issue
[22] The rental achievement figure of $1,038,878 was never achieved at any point in the May 1991 to February 1992 time frame. Much of the evidence at trial related to Paletta’s assertion that it had been assured by Canada Life that it could ignore this figure because it was being included for internal Canada Life purposes. The trial judge rejected this argument. He specifically rejected Angelo Paletta’s evidence on this issue, concluding that “the rental target figure was a critical component of the agreement and it defies belief that Dane [a Canada Life representative] would tell Paletta in effect that it was of no legal consequence.”
[23] The trial judge then analyzed the failure to meet the rental achievement figure in light of the three provisions in the CA and the CFA that related to the potential retention of the commitment fee by Canada Life. He determined that both paragraph 29 of the CA and paragraph 2 of the CFA supported retention. I agree with this component of his analysis and conclusions.
[24] The trial judge then considered paragraph 15 of the CA. Since the pivotal word of the provision, “default”, was not defined in the CA, the trial judge properly turned to a dictionary definition. He used the meaning ascribed to “default” in The Concise Oxford Dictionary (8th ed.) – “failure to fulfil an obligation, esp. to appear, pay, or act in some way.”
[25] The trial judge then applied this definition. He concluded that “the failure” to meet the rental achievement figure was not Paletta’s fault; rather, it flowed from the neutral (from the perspective of the contract) factor of deteriorating economic conditions which caused a diminution in the tenant base at the shopping centre.
[26] With respect, I disagree with this final component in the trial judge’s reasoning. In the dictionary definition set out above, the concept of failure is not linked to fault. The rental income at the shopping centre was Paletta’s responsibility; the amount of projected rental income would serve as the principal basis for calculating the security Paletta could, and would, advance to obtain the mortgage loan from Canada Life. As expressed by Goldie J.A. in Prudential Insurance Co. of America v. Cedar Hills Properties Ltd. (1994), 100 B.C.L.R. (2d) 312 at 319 (C.A):
The final determination of, amongst other things, the amount of the loan; the term; the interest rate; the amortization period, if not coincidental with the term, together with other variables more specific to the circumstances of the parties is the product of negotiation in which market forces are at work. The lender seeks a trouble‑free investment. The terms he offers reflects his appraisal of the risk and the availability of investment opportunities. The borrower seeks terms which reflect his appraisal of the security he can offer and his need.
[Emphasis added.]
[27] Paletta agreed to a rental achievement figure of $1,038,878 which was inserted into paragraph 24 of the CA. Paletta knew its shopping centre operation, and its tenants and their rents, and was a large and experienced player in Ontario commerce. By agreeing to a provision which stated that the property “shall be producing” annual rents of $1,038,878, Paletta was accepting responsibility to ensure compliance with that provision as a term of receiving the $6.9 million loan it desired.
[28] Interestingly, in a different portion of his reasons, the trial judge cogently described the purpose of the rental achievement figure, and did so in terms that clearly indicated that the responsibility rested with Paletta:
The obvious purpose of including the provision with respect to the rental target figure was to ensure that at the time of the advance of the mortgage proceeds the plaintiff would have the specified flow of rental income with which to fund its obligations pursuant to the mortgage.
[29] I agree with this passage. The $1,038,878 figure in paragraph 24 of the CA reflected, as Goldie J.A. expressed it in Prudential, Paletta’s “appraisal of the security” it could offer.
[30] In summary, although I agree with much of the trial judge’s reasoning on this issue, in my respectful view he erred by injecting an element of fault into the meaning of “failure”. In a commercial transaction between two sophisticated parties, the reasons for Paletta’s failure to meet a condition of the agreement which was its responsibility is irrelevant. Default was failure, period. Paletta failed and, therefore, was in default.
[31] As the trial judge said, the rental achievement figure was “a critical component of the agreement”. Paletta’s default concerning it entitled Canada Life to decline to advance the mortgage funds and to retain the commitment fee.
(2) The notices of assignments of leases issue
[32] There can be no question that the principal issue at trial was the rental achievement issue. The primacy of that issue is reflected in the space and attention devoted to it in the trial judge’s reasons. However, the trial judge did advance a second, and independent, reason for deciding the action in favour of Paletta.
[33] In the very early stages of the negotiations, the parties disagreed about whether Paletta should provide notices of assignments of leases capable of being registered on title. Paletta was of the view that Canada Life’s position on this issue was not supported by the terms of the CA. It is clear that this issue was never resolved in the extended negotiation period from September 1991 to February 1992.
[34] In brief reasons, the trial judge stated that Canada Life “never resiled from its position that it would not advance the mortgage funds unless the plaintiff complied with its demand.” Accordingly, he concluded that “even if the rental target figure had been achieved, the plaintiff (sic) would not have advanced the mortgage funds.” This constituted “a second reason why the transaction failed through no fault or “default” on the part of the plaintiff.”
[35] With respect, the trial judge’s conclusion on this issue is speculative. The evidence at trial made it clear that the central issue throughout the five month extended negotiation period was the rental achievement figure. The testimony of the two Canada Life witnesses, Brien Dane and Robert Barnes, established that, in February 1992, it was Paletta’s inability to meet its responsibility on this matter that triggered Canada Life’s final decision to terminate the transaction. Moreover, in his testimony, Richard Applebaum, Paletta’s solicitor throughout the transaction, acknowledged that the assignment of lease issue was still a live one which, based on his past experience with similar transactions, he hoped to resolve in Paletta’s favour.
[36] In short, the transaction never got past the rental achievement figure issue. As a result, the parties did not address themselves to the question of whether the transaction would proceed despite the notice of assignment of lease issue. In these circumstances, what might have happened had the rental achievement figure issue been resolved is speculative and irrelevant.
E. DISPOSITION
[37] I would allow the appeal, set aside the judgment of the trial judge and dismiss the action. I would order that the appellant receive its costs of the trial, to be assessed, and its costs of the appeal fixed at $15,000 inclusive of disbursements and GST.
RELEASED: April 2, 2003 (“JCM”)
“J. C. MacPherson J.A.”
“I agree Janet M. Simmons J.A.”
“I agree Robert P. Armstrong J.A.”