365 Bay New Holdings Limited v. McQuillan Life Insurance Agencies Limited, 2008 ONCA 100

CITATION: 365 Bay New Holdings Limited v. McQuillan Life Insurance Agencies Limited, 2008 ONCA 100

DATE: 20080213

DOCKET: C46700

COURT OF APPEAL FOR ONTARIO

LASKIN, MOLDAVER and FELDMAN JJ.A.

BETWEEN:

365 BAY NEW HOLDINGS LIMITED

Respondent (Plaintiff)

and

McQUILLAN LIFE INSURANCE AGENCIES LIMITED

Appellant (Defendant)

Counsel: Martin Teplitsky, Q.C. and Matthew Sokolsky for the appellant Geoff R. Hall and Sarah-Jane Martin for the respondent

Heard: January 15, 2008

On appeal from the judgment of Justice Paul Perell of the Superior Court of Justice dated February 9, 2007.

ENDORSEMENT

[1] The principal issue on this appeal is whether the trial judge committed a palpable and overriding error by concluding that the appellant tenant and the respondent landlord reached a binding lease agreement outside the terms of the Offer to Lease that they had signed. In our view he did. Therefore, we set aside the judgment in favour of the landlord and dismiss the action.

Background

[2] On July 9, 2002, the parties entered into a binding Offer to Lease the 11th floor of the respondent landlord’s building commencing April, 2003. That Offer provided in Paragraph 30 that within ten days, the landlord would deliver its standard lease agreement incorporating the terms and conditions contained in the offer; that the tenant could seek reasonable further minor non-financial amendments; and that the parties would use their best efforts to execute the lease within twenty days of the completed offer.

[3] After the landlord delivered its standard form lease, the parties began to negotiate a host of new or amended terms, including significant financial changes to the Offer to Lease. The negotiations continued into December, 2002. Following the last set of requested changes from the tenant, many of which the landlord did not accept, the landlord instructed its representative, a law clerk from the McCarthy Tetrault firm, to finalize the lease and send the execution copies to the tenant. These were sent on January 7, 2003. A principal of the landlord testified it was his understanding that at that point, the parties had come to an agreement on the terms of the lease.

[4] The tenant did not agree. It had a lawyer respond with further requests for changes, including significant changes to financial aspects of the lease that the tenant had not agreed to and that were not in the Offer to Lease. The landlord maintained that it would not make any further changes to the final lease document it had tendered for execution. When the tenant would not sign the final form of lease, the landlord declared the tenant in default of the agreement and terminated the lease, claiming damages.

[5] For over a year, the landlord was unable to re-rent the space. Finally, in early 2004, it rented the space to a new tenant at a lower rent but for a longer term. In the spring of 2005, during the term of the lease, the landlord sold the building.

Findings of the Trial Judge

[6] The trial judge found that the final form of lease sent by the landlord on January 7, 2003 differed significantly from the Offer to Lease. These differences included the operating hours of business in the building, the requirement of a security deposit, and the inclusion of a management or administration fee. The final form of lease also did not include an obligation, previously agreed by the landlord, to rectify a vibration problem on the 11th floor.

[7] The trial judge further found that the parties had negotiated the form and content of the lease outside the terms of paragraph 30 of the Offer to Lease, and that they had reached an agreement on its form and content. He concluded that the tenant breached the agreement when it failed to enter into the lease in the landlord’s final form of lease and was liable to the landlord for damages.

Issues and Analysis

[8] The appellant argues that the trial judge made a palpable and overriding error by finding that the parties had agreed to the form and content of a lease outside the terms of paragraph 30 of the Offer to Lease. We agree.

[9] Respectfully, it appears to us that although the witness for the landlord testified he understood that the January 7, 2003 final form of lease reflected terms agreed to by the parties, there is no evidence in the record to support that understanding. This witness played no role in the lease negotiations. In contrast to his understanding, the written and e-mail correspondence between the representatives of the parties shows an ongoing disagreement regarding significant substantive terms that the landlord was insisting upon and had included in the January 7 final form of lease. These terms were not in the Offer to Lease and had not been accepted by the tenant.

[10] The trial judge bolstered his finding of an agreement by drawing an adverse inference against the tenant, who called no evidence on the issue. However, in our view, an adverse inference was not available on this record. The landlord’s claim of an agreement was undermined by the documentary record, which showed that there was no agreement. An adverse inference cannot add weight to evidence of a belief or understanding that is belied by the record on which it was said to be based.

[11] Because the parties had not come to an agreement on new terms of the lease, the landlord could have insisted that the tenant sign a lease in the form of the Offer to Lease to which the tenant was bound. The landlord did not do so. Instead it insisted that the tenant enter into a lease in the form of the January 7, 2003 document. That form contained significant terms to which the tenant had not agreed. Accordingly, the landlord was not entitled to take the position it did. By refusing to sign the lease in that form, the tenant did not breach its agreement with the landlord. The landlord, therefore, had no cause of action against the tenant.

[12] We recognize that, unknown to the landlord, the tenant was looking for other space, and therefore likely was looking for a way out of its agreement with the landlord. However, the landlord could not impose on the tenant a new lease, which the tenant had not agreed to and which was not in accordance with the Offer to Lease. For that reason the landlord’s action must fail.

[13] Both parties challenged aspects of the trial judge’s approach to the calculation of damages. One aspect is the method the trial judge used for calculating the present value of the unpaid future rent for the unexpired term of the lease. Another aspect is the effect of the sale of the property by the landlord during the currency of the lease term. Because we are setting aside the finding that the tenant was in breach of the lease, the issue of the proper calculation of damages is now moot. As a result, we will not address these issues. We should not, however, be taken as affirming the trial judge’s approach to the issue of damages or the conclusion he arrived at.

[14] For the above reasons, the appeal is allowed, the judgment is set aside and judgment is granted in favour of the appellant dismissing the action with costs. The appellant is entitled to its costs of the appeal, fixed at $22,000 inclusive of disbursements and G.S.T. The costs of the trial should be fixed by the trial judge.

Signed: "John Laskin J.A."

"M. J. Moldaver J.A."

"K. Feldman J.A."