Omers Realty Corp. v. Sears Canada Inc.

80 O.R. (3d) 561

Court of Appeal for Ontario,

Feldman, Armstrong and MacFarland JJ.A.

May 19, 2006

Administrative law -- Judicial review -- Statutory power of decision -- Municipal Act authorizing commercial landlords to collect municipal realty taxes from tenant beyond what is stipulated in lease in order to recoup any shortfall in landlord's taxes for any given year -- Landlords having right to determine, within legislative parameters, which eligible tenants will bear shortfall and to what extent -- Landlords not exercising statutory power of decision in doing so -- Municipal Act, R.S.O. 1990, c. M.45, ss. 447.24 and 447.25.

Municipal law -- Realty taxes -- Municipal Act authorizing commercial landlords to collect municipal realty taxes from tenant beyond what is stipulated in lease in order to recoup any shortfall in landlord's taxes for any given year -- Landlords having right to determine, within legislative parameters, which eligible tenants will bear shortfall and to what extent -- Municipal Act, R.S.O. 1990, c. M.45, ss. 447.24 and 447.25.

In 1998, amendments to the Municipal Act provided for a tenant cap which limited the amount a landlord of a commercial or industrial property could charge a tenant on account of property taxes, regardless of any lease provision to the contrary. As a result, many commercial landlords were faced with shortfalls, reflecting amounts that had previously been collected under the lease but no longer could be because of the legislative caps, but were still required to pay taxes on the full assessed value of the property. To remedy this problem, the legislation permitted landlords to recover their shortfall from two classes of tenant: protected tenants not at cap, and uncapped shortfall tenants. The respondent Landlord asked some -- but not all -- of its eligible tenants in its mall to each make an additional shortfall payment. The appellant Tenant refused to pay on the basis that the Landlord's demand was unfair, discriminatory and unreasonable. The Tenant served a notice of arbitration on the Landlord pursuant to the lease provisions. The arbitration board found that the shortfall had to be fairly distributed among all those eligible to contribute. The Landlord appealed the board's decision to a single judge of the Superior Court under s. 45 of the Arbitration Act, 1991, S.O. 1991, c. 17. The appeal was allowed. The judge held that (1) the legislation did not require a landlord to recover shortfall from all its eligible tenants, and (2) since the landlord was exercising a statutory power of decision, the decision was entitled to deference and should not be interfered with unless it was unreasonable, which it was not. The Tenant appealed.

Held, the appeal should be dismissed.

The judge erred in finding that the Landlord exercised a statutory power of decision. The authority given to landlords to recoup shortfall is narrowly defined and limited by the language of ss. 447.24 and 447.25 of the Municipal Act. The only "decision" available to the landlord is whether to collect or not and if so, from whom -- but only to the extent permitted by the statute. The issue for the arbitration board was one of statutory interpretation. Its function was to interpret the legislation and determine whether the Landlord's actions were in compliance with the legislative requirement. In this, the board was required to be correct. Any appeal from the board's determination raised a question of law, which was to be reviewed on a correctness standard. [page562]

There is nothing in the language of the legislation that requires a landlord to allocate shortfall to all eligible tenants, including uncapped shortfall tenants. Sections 447.24(5) and 447.25(1) of the Municipal Act both use the term "may" rather than "shall" to describe the landlord's ability to recover taxes in amounts that exceed those set out in the tenants' leases. If the legislature had intended to require all eligible tenants to contribute to shortfall, it would have expressly said so, and it did not. The manner in which the Landlord distributed the shortfall in this case was not arbitrary and was consistent with industry practice.

APPEAL from the judgment of Pepall J. (2005), 2005 3983 (ON SC), 74 O.R. (3d) 423, [2005] O.J. No. 634 (S.C.J.), allowing an appeal from a decision of a board of arbitration.

Cases referred to Hudson's Bay Co. v. Ontario (Attorney General) (2001), 2001 24024 (ON CA), 52 O.R. (3d) 737, [2001] O.J. No. 710, 197 D.L.R. (4th) 159 (C.A.), affg (2000), 2000 22392 (ON SC), 49 O.R. (3d) 455, [2000] O.J. No. 2203, 17 M.P.L.R. (3d) 15 (S.C.J.) Statutes referred to Arbitration Act, 1991, S.O. 1991, c. 17 s. 45 Municipal Act, R.S.O. 1990, c. M.45 [repealed by S.O. 2001, c. 25], ss. 447.24, 447.25 Municipal Act, 2001, S.O. 2001, c. 25, s. 333 Statutory Powers Procedure Act, R.S.O. 1990, c. S.22, ss. 1(1) "statutory power of decision" [as am.], 3(1) [as am.] Authorities referred to Brown, Donald J.M. and the Hon. John M. Evans, Judicial Review of Administrative Action in Canada, vol. 1 (Toronto: DJMB Publishing Inc., 2004)

Jack Walker, Q.C., and Brad Nixon, for appellant Sears Canada Inc. Phillip L. Sanford and Sarah Chesworth, for respondent Omers Realty Corporation.

The judgment of the court was delivered by

[1] MACFARLAND J.A.: -- This is an appeal from the judgment of Pepall J. dated February 18, 2005, allowing an appeal and setting aside an arbitration award. Leave to appeal was granted by order of this court dated June 16, 2005. For the reasons that follow, I would dismiss the appeal.

Overview

[2] Section 447.25 of the Municipal Act, R.S.O. 1990, c. M.45, as amended by S.O. 1998, c. 3, s. 30 of the Municipal Act, 2001, S.O. 2001, c. 25 (now s. 333), first enacted in 1998, authorizes a commercial landlord to collect municipal realty taxes from a [page563] tenant beyond what is stipulated in the lease in order to recoup any "shortfall" in the landlord's taxes for any given year. At issue in this case is whether the landlord's power under this section was correctly exercised in accordance with the statute.

[3] In 1998, Omers Realty Corporation (the "landlord") asked some of its eligible tenants in the Stone Road Mall (the "mall") -- but not all -- to each make an additional shortfall payment. The amount sought from Sears (a tenant) was $189,720. Sears refused to pay on the basis that the landlord's demand was unfair, discriminatory and unreasonable. Instead, Sears served a notice of arbitration on the landlord pursuant to the lease provisions in that behalf. An arbitration board ruled in Sears' favour and ordered the landlord to recover its shortfall from all eligible tenants in the mall. According to a majority of the board, the legislation imposed on the landlord a "duty of care to treat all tenants equitably".

[4] The landlord appealed the board's decision to a single judge of the Superior Court under s. 45 of the Arbitration Act, 1991, S.O. 1991, c. 17. Pepall J. allowed the appeal. She held: (1) the legislation did not require a landlord to recover shortfall from all its eligible tenants; and (2) since the landlord was exercising a statutory power of decision, the decision was entitled to deference and should not be interfered with unless it was patently unreasonable, which it was not. The appeal judge set aside the arbitration award and allowed the landlord's decision to stand. Sears appeals that decision to this court pursuant to leave granted.

The Facts

[5] The appeal judge fully detailed the facts in her reasons for decision, and I will simply repeat her recitation of the facts about which there is no dispute.

[6] Sears is an anchor tenant at the mall in Guelph, Ontario. The mall has about 150 tenants and is owned by the landlord. The lease between Sears and the landlord provides that disputes between them may be determined by arbitration.

[7] Pursuant to its Notice of Arbitration served, Sears complained about its apportionment of property taxes. It took the position that it had been overbilled for 1998 taxes in the amount of $189,720. The parties entered into an arbitration agreement and Messrs. Sholtack, Galardo and Cowan were appointed arbitrators. Further, the parties agreed that any award could be appealed on a question of law, fact or mixed fact and law to a single judge of the Superior Court of Justice. [page564]

[8] In 1998, the Province of Ontario enacted legislation designed to reform the municipal property tax regime. [^1] Business occupancy taxes were abolished and realty taxes for commercial and industrial properties were increased to make up for the revenue loss resulting from the elimination of the business taxes. Current value assessment ("CVA") was introduced, but mechanisms were required to manage the attendant shifts in liability for property taxes in the initial ensuing years. The amendments to the Municipal Act provided for a "tax capping and shortfall recovery" regime applicable to tenants of commercial and industrial properties. The tenant cap limited the amount a landlord could charge a tenant on account of property taxes, regardless of any lease provision to the contrary. Therefore, in some cases, tenants were not required to pay the full amount of taxes that would otherwise be charged pursuant to the terms of their leases. The calculation of the cap was based on the amount of the tenant's tax expense for the previous year. The cap only applied to tenants occupying all or a portion of a commercial or industrial property pursuant to a lease commencing on or before December 31, 1997.

[9] The result of the capping legislation was that many commercial landlords were faced with "shortfalls". These reflected amounts that previously had been collected under the lease but no longer could be because of the legislative caps. A landlord, however, was still required to pay taxes on the full assessed value of the property. To remedy this problem, the legislation permitted landlords to recover their shortfall from two classes of tenants. The first class consisted of tenants whose pre-December 31, 1997 leases provided for tax payments that did not reach the legislative cap. These tenants were therefore exposed to tax payments that exceeded the amounts stipulated in their leases. Their payments, however, could not exceed the legislative cap. These tenants are referred to as "protected tenants not at cap".

[10] The second class from whom the legislation permitted shortfall recovery consisted of tenants with tenancies commencing between January 1 and December 17, 1998. This class was not entitled to a cap and was left totally unprotected by legislation. These tenants are referred to as "uncapped shortfall tenants".

[11] The amendments came into force on June 11, 1998. Tenants who entered into leases after December 17, 1998 were not [page565] subject to a cap nor liable to pay any portion of the shortfall. Their payment arrangements were governed by the terms of their leases. A landlord could only recover shortfall from protected tenants not at cap and from uncapped shortfall tenants. The landlord was also free to absorb any shortfall itself.

[12] The final 1998 taxes for the mall were $2,951,992. In 1998, the mall had tenants who were entitled to a cap and who had reached the cap threshold. Those tenancies therefore caused a shortfall of property tax for the landlord. The mall also had 31 protected tenants not at cap and 23 uncapped shortfall tenants.

[13] The landlord took the position that it had a discretion under the legislation to select who should contribute to shortfall from its protected tenants not at cap and the uncapped shortfall tenants. It decided to exclude all of the latter tenants from any shortfall contribution. Shortfall was therefore allocated to and recovered from the protected tenants not at cap. Because this group reached the cap threshold, the landlord absorbed the remaining portion of the shortfall.

The Arbitration Board

[14] The majority of the arbitration panel concluded that the shortfall must be distributed among all those eligible to contribute. It concluded that the landlord was "obliged to treat all tenants equitably" and to use a "reasonable method for allocating the shortfall . . . so that all tenants bear a fair share of the burden". The majority ordered the landlord to recover its shortfall from all eligible tenants in the mall.

[15] The dissenting member of the arbitration panel, on the other hand, held that when the landlord made a decision to recover its shortfall from only one class of tenants, the landlord was exercising a "statutory power of decision". As such, the landlord's decision was entitled to a high degree of deference. In the member's view, since the landlord's decision was not "patently unreasonable", there was no basis for interfering with it.

Superior Court Appeal

[16] In the Superior Court, the appeal judge agreed with the dissenting member of the arbitration board that the landlord was exercising a statutory power of decision that was entitled to a high degree of deference. She held that there was nothing in the legislation that required a landlord to allocate shortfall to all eligible tenants, including uncapped shortfall tenants. The legislation conferred on landlords a discretion to recoup shortfall. She allowed the appeal and set aside the decision of the majority. [page566]

[17] While I agree with the result of the appeal judge's decision, I do so for different reasons.

Analysis

[18] The relevant sections of the Municipal Act are ss. 447.24 and 447.25 as they were in 1998.

[19] Section 447.25(1) provides:

447.25(1) A landlord may require a tenant to pay an amount on account of taxes levied for municipal and school purposes that is more than the tenant would otherwise be required to pay under the tenant's lease to the extent necessary for the landlord to recoup shortfalls, within the meaning of paragraph 3 of subsection 447.24(5), for other leased premises that form part of the property.

[20] Section 447.24(5) provides:

447.24(5) A landlord may require a tenant to pay an amount on account of taxes levied for municipal and school purposes that is more than the tenant would otherwise be required to pay under the tenant's lease subject to the following:

1. The landlord may not require the tenant to pay an amount that would result in the tenant paying more on account of taxes levied for municipal and school purposes than is allowed under subsection (4).

2. The landlord may require a tenant to pay an amount under this subsection only to the extent necessary for the landlord to recoup shortfalls, within the meaning of paragraph 3, for other leased premises that form part of the property.

3. The shortfall referred to in paragraph 2 is the sum determined by,

i. determining, for each of the other leased premises with respect to which this section applies that form part of the property, the amount, if any, by which the amount that the landlord could have required the tenant to pay under the tenant's lease in the absence of subsection (4) exceeds the amount that the landlord may require the tenant to pay under the tenant's lease under subsection (4), and

ii. adding the amounts determined under subparagraph i together.

[21] The Statutory Powers Procedure Act, R.S.O. 1990, c. S.22 ["SPPA"] defines "statutory power of decision" in the following language:

"statutory power of decision" means a power or right, conferred by or under a statute, to make a decision deciding or prescribing,

(a) the legal rights, powers, privileges, immunities, duties or liabilities of any person or party, or

(b) the eligibility of any person or party to receive, or to the continuation of, a benefit or licence, whether the person is legally entitled thereto or not; [page567]

[22] The SPPA is not applicable to an exercise of a statutory power of decision unless the decision-maker is legally required to afford the parties an opportunity to be heard before making a decision. Section 3(1) of the SPPA states:

3(1) Subject to subsection (2), this Act applies to a proceeding by a tribunal in the exercise of a statutory power of decision conferred by or under an Act of the Legislature, where the tribunal is required by or under such Act or otherwise by law to hold or to afford to the parties to the proceeding an opportunity for a hearing before making a decision.

[23] There was no statutory requirement for the landlord to hold a hearing before acting pursuant to s. 447.25. Nor would there be a common law basis for requiring the landlord to hold a hearing given that the landlord has a personal financial interest in determining how the tax capping and shortfall recovery regime applies to its tenants. The landlord could not be an impartial decision-maker, as required by the rules of procedural fairness, and a court would not impose a duty to hold a hearing on the landlord in such circumstances.

[24] The authority given to landlords to recoup shortfall is narrowly defined and limited by the language of ss. 447.24 and 447.25 of the Municipal Act. The maximum amount the landlord is entitled to collect is stated, those tenants from whom the landlord is entitled to collect shortfall are defined as is the extent to which the landlord may collect from each group. The only "decision" available to the landlord is whether to collect or not and if so, from whom -- but only to the extent permitted by the statute.

[25] The landlord's decision does not come within the scope of public law and thus is not amenable to judicial review. As Brown and Evans explain, the decision in question must come within the scope of public law to engage the prerogative remedies that may be obtained by way of judicial review. [^2] They go on to explain that "the paradigm of a public body is one that exercises statutory powers in the discharge of regulatory or other governmental responsibilities in respect of persons with whom it is not in a contractual or other private law relationship". [^3] The landlord is a private actor whose relationship with the affected tenant is formed by private contract. The landlord is not a statutory body, nor is it required to serve any broad public interest. Its function is strictly commercial rather than regulatory in nature. [page568]

[26] In my view, the landlord is not exercising a statutory power of decision when it decides to seek shortfall recovery from tenants in the manner permitted by the legislation as that term is defined and understood. The "decision" has been made by the legislature in enacting these narrow and specific provisions of the Municipal Act. The legislature in enacting these provisions has determined that commercial landlords are able to override any lease provisions that conflict with the legislation but only in the manner defined by the legislation.

[27] In my view, the motions judge erred as did the dissenting member of the arbitration panel, when she determined that the landlord was exercising a statutory power of decision.

[28] In my view, the issue for the arbitration board was one of statutory interpretation. Its function was to interpret the legislation and determine whether the landlord's actions were in compliance with the legislative requirement. In this, the board was required to be correct. Any appeal from the board's determination raises a question of law, which is to be reviewed on a correctness standard.

[29] Sears takes the position that the landlord is required to allocate any shortfall among all eligible tenants. The landlord, it says, does not enjoy a discretion to pick and choose among eligible tenants.

[30] The appeal judge determined that there was nothing in the language of the legislation that required a landlord to allocate shortfall to all eligible tenants, including uncapped shortfall tenants. Sections 447.24(5) and 447.25(1) of the Municipal Act both use the term "may" rather than "shall" to describe the landlord's ability to recover taxes in amounts that exceed those set out in the tenants' leases. I agree.

[31] Further, the appeal judge observed that the legislation is "silent on any requirement to allocate shortfall to all eligible tenants and the context of the legislation read as a whole is consistent with the absence of such a requirement". If the legislature had intended to require all eligible tenants to contribute to shortfall, it would have expressly said so and it did not.

[32] In Hudson's Bay Co. v. Ontario (Attorney General) (2000), 2000 22392 (ON SC), 49 O.R. (3d) 455, [2000] O.J. No. 2203 (S.C.J.), at p. 469 O.R., affd (2001), 2001 24024 (ON CA), 52 O.R. (3d) 737, [2001] O.J. No. 710 (C.A.), the court observed:

[T]he impugned provisions were set up to ensure that a landlord was able to recover any shortfall which could occur as a result of the tenant caps. A landlord is not obligated to recoup the shortfall but is entitled to do so. The scheme is not mandatory but rather permissive. [page569]

[33] Sears also argues that the legislation does not permit the landlord to discriminate against certain tenants. As it argues in its factum:

39. Equal treatment of similar groups is a fundamental tenet of tax policy. The common law doctrine of discrimination prevents municipalities from distinguishing between or treating persons differently without specific legislative authority.

40. The Award states "there is nothing in the legislation to justify discriminatory treatment". Sections 447.24 and 447.25 are unique sections within the Municipal Act, an act which defines the ambit of delegated powers to municipalities. It is submitted that the intrusion by the capping and shortfall legislation on the existing landlord and tenant relationship should initially interfere as little as possible in contractual relations, but insofar as such interference is required, it should be completed on as objective a basis as possible, without arbitrarily increasing the extent to which landlords can pass their tax burdens on to tenants. In considering landlord's discretion, in these circumstances, any form of discriminatory treatment should be clearly authorized in the enabling section and not implied.

[34] The flaw in Sears' argument in this respect is that it presumes unequal treatment between the protected tenants not at cap and the uncapped shortfall tenants, solely on the basis that the landlord sought recovery of shortfall from the former and not the latter. The evidence belies this argument.

[35] The evidence discloses that the landlord elected not to allocate any shortfall to the uncapped shortfall tenants because the amounts these tenants were already paying, without any contribution to shortfall, were at or above the level of the tax-related obligations of similarly situated tenants in the mall. For this reason, the landlord determined that the uncapped shortfall tenants already bore a fair share of the mall's realty taxes.

[36] The shortfall provisions constitute statutory intervention with private contract. As Archibald J. noted in Hudson's Bay Co. v. Ontario (Attorney General), supra, at para. 72, this case concerns "statutory interference with normal market and economic forces and the renegotiation of closed private contracts". In these circumstances, there would need to be clear language in the statute to empower a landlord to allocate shortfall to tenants in an arbitrary manner. No such language exists in the statutory provisions at issue here.

[37] However, the manner in which Omers distributed the shortfall in this case was not arbitrary. Pepall J. gave convincing reasons to support this conclusion, albeit she did so in the context of considering whether Omers' decision was patently unreasonable. Pepall J. observed (at para. 24):

As to the Landlord's decision not to charge any shortfall to the uncapped [page570] shortfall tenants, its evidence was that it elected not to do so given that these tenants generally already bore a fair share of the Mall's realty taxes. The Landlord considered that the tax obligations of the uncapped shortfall tenants were in line with the final obligations, after shortfall allocation, of other tenants in the Mall. Furthermore, its model was consistent with industry practice in the shopping centre industry. The exercise of discretion by the Landlord in this regard cannot be said to be patently unreasonable or indeed unreasonable. As to the Landlord's methodology, without embarking on a detailed discussion of the Landlord's and Sears' respective methodologies, suffice it to say that Sears' own expert acknowledged that any methodology selected would favour some tenants to the disadvantage of others. There was no single methodology that always could be said to be correct. Not every tenant would be satisfied regardless of the methodology used. In addition, the witness for Sears appeared to acknowledge that the ratio methodology used by Omers and other shopping center landlords was not always inappropriate. Sears and the majority took issue with the Landlord's creation in its methodology of an artificial tenant's cap for uncapped shortfall tenants. The Landlord advanced compelling reasons for employing the methodology it did and certainly its decision in this regard could be rationally supported . . .

[38] For the reasons advanced by Pepall J., the landlord's distribution of shortfall was not arbitrary and I would not interfere with it on that basis.

[39] In addition, the evidence disclosed that the methodology employed by the landlord was consistent with industry practice in the Shopping Centre industry. There was no contradictory evidence.

[40] In my view, the landlord has the right to determine, within the legislative parameters, which of the eligible tenants will bear the shortfall and to what extent and in so doing is not exercising a statutory power of decision.

Disposition

[41] For these reasons, I would dismiss the appeal.

[42] In accordance with the agreement of counsel, the costs of this appeal are fixed in the sum of $10,000 plus disbursements and GST and are awarded to the respondent.

Appeal dismissed.

Notes

[^1]: For a history of this legislation, see the decision of Archibald J. in Hudson's Bay Co. v. Ontario (Attorney General) (2000), 2000 22392 (ON SC), 49 O.R. (3d) 455, [2000] O.J. No. 2203 (S.C.J.), affd (2001), 2001 24024 (ON CA), 52 O.R. (3d) 737, [2001] O.J. No. 710 (C.A.).

[^2]: Donald J.M. Brown and the Hon. John M. Evans, Judicial Review of Administrative Action in Canada (Toronto: DJMB Publishing Inc., 2004), vol. 1 at pp. 1-21.

[^3]: Ibid., at pp. 1-23.