DATE: 20050224

DOCKETS: C41222 and C41223

COURT OF APPEAL FOR ONTARIO

RE:

ZELLERS INC. (Plaintiff/Respondent) -and- 942125 ONTARIO LIMITED (Defendant/Appellant)

BEFORE:

LABROSSE, WEILER and LaFORME JJ.A.

COUNSEL:

F. Scott Turton

for the appellant

Wolfgang Kaufmann

for the respondent

HEARD AND RELEASED ORALLY:

February 22, 2005

On appeal from the judgment of Justice Janet M. Wilson of the Superior Court of Justice dated December 12, 2003.

E N D O R S E M E N T

[1] Zellers Inc. ("Zellers") and 942125 Ontario Limited ("the landlord") were in a long-term lease for a store of some 87,500 square feet in a shopping mall. In December 1991, before the expiry of the term, Zellers entered into an assumption agreement to terminate the lease effective June 30, 2002 on payment of $4 million.

[2] Zellers closed its store in early February 2002, kept keys, maintained an alarm system, performed periodic checks and continued to pay rent, utilities, insurance and taxes for the premises.

[3] On May 13, 2002, the landlord entered into a new lease for some 34,000 square feet with a new tenant which occupied the store starting May 21, 2002.

[4] In these actions, Zellers was seeking damages of $86,265.90 for rent payment from May 21 to June 30, 2002, and the return of $46,212.50 paid by Zellers to the landlord by mistake.

[5] At trial, Zellers was successful on both claims.

[6] The trial judge reviewed the original lease and agreement in detail and concluded that, effective May 21, 2002 when the new tenant took possession, the landlord effectively evicted Zellers and terminated the agreement with respect to paying rent and expenses. She found the breach to be of grave and permanent import, depriving Zellers of the use of the premises. The appellant argued that if it breached the parties' agreement, the breach was not a fundamental breach entitling the respondent to terminate the agreement. We note that fundamental breach was not raised in the pleadings. The trial judge found that the appellant's lease with the new tenant deprived the respondent of its right to use the space and that, in the circumstances, the appellant was not entitled to the rent. We agree with the trial judge.

[7] On the second issue, on December 1, 2002 – five months after the early termination of the lease and one month after Zellers started the eviction action – Zellers' accounting department mistakenly issued a cheque to the landlord in the amount of $46,219.50. This amount represented the rent payment to another landlord.

[8] The landlord refused to return the money, claiming the right to set-off against taxes possibly owing at some future time by Zellers.

[9] On this issue, the trial judge held that the amount owing to the landlord had not crystallized at the time the money was paid under mistake of fact and, as a result, the claim for set-off must fail.

[10] Moreover, the landlord had not altered its position in a fundamental way as a result of the payment.

[11] We also agree with the trial judge.

[12] In the result, the appeals are dismissed with costs to the respondent fixed at $10,000, all inclusive.

Signed: "J.-M. Labrosse J.A."

"K.M. Weiler J.A."

"H.S. LaForme J.A."