Caledonia Service Station Inc. v. Cango Inc., 2011 ONCA 184

CITATION: Caledonia Service Station Inc. v. Cango Inc., 2011 ONCA 184

DATE: 20110309

DOCKET: C51770

COURT OF APPEAL FOR ONTARIO

Goudge, Sharpe and LaForme JJ.A

BETWEEN

Caledonia Service Station Inc.

Applicant (Respondent)

and

Cango Inc.

Respondent (Appellant)

Tamara Farber, for the appellant

Nicholas C. Tibollo and Lori Marzinotto, for the respondent

Heard: January 6, 2011

On appeal from the order of Justice David Price of the Superior Court of Justice dated January 28, 2010, with reasons reported at (2010) 90 R.P.R. (4th) 236.

Goudge J.A.:

[1] The appellant operated a gas bar on premises that it leased from the respondent in Mississauga, Ontario. In the spring of 2008, the appellant discovered a failure in one of the underground fuel lines on the premises. It capped the line, discontinued its use and notified the respondent in April 2008. Subsequently, in June 2008, the appellant terminated the lease and vacated the premises, leaving behind the underground tanks and lines, including the capped line.

[2] The respondent then brought an application seeking a declaration that the appellant is the owner of the underground storage tanks and fuel lines, and an order requiring the appellant to remove them. The application judge dismissed this request. The respondent has not appealed from this order. In the alternative, the respondent sought an order declaring that the lease required the appellant to repair the underground storage tanks and fuel lines. The application judge granted this order, together with an order declaring that the appellant had breached its duty of repair.

[3] The appellant appeals, arguing that its lease imposed no such repair obligation. For the reasons that follow, I agree. I would therefore allow the appeal.

[4] The appellant was the third lessee to carry on the gas bar business on the respondent’s premises. The first tenant signed its lease with the respondent in 1985. That lease explicitly required the tenant to remove its equipment and improvements at the end of the lease. The first tenant went bankrupt in March 1991 and did not remove its equipment and improvements.

[5] In June 1991 the second lessee, Pioneer, signed a new lease with the respondent. It did not contain a provision requiring the tenant to remove its equipment and improvements at the end of the lease. This lease was subsequently assigned to the appellant in 1993.

[6] The important provisions of the 1991 lease are as follows:

3. USE OF PREMISES:

a) Pioneer may at its expense and in conformity with all laws, by-laws and regulations construct and install on the Premises any buildings, structures, improvements and equipment, including advertising signs and billboards. All buildings, improvements and equipment constructed, installed or placed on this Lease and any renewal and overholding thereof shall be and remain the property of Pioneer until the termination of this Lease.

5. REMOVAL OF TRADE FIXTURES:

Pioneer may at any time during the term of this Lease and any renewal or extension thereof, and within thirty (30) days thereafter remove any of its trade fixtures and other equipment installed or placed on the Premises by it and shall repair damage caused by such removal. Any such trade fixtures and equipment not so removed and all buildings and improvements constructed, installed or placed on the Premises by Pioneer shall thereupon become the absolute property of the Landlord....

6. REPAIR AND REPLACEMENT:

Pioneer shall at its expense maintain and keep the Premises and all improvements thereon neat and clean and in good order and repair having regard to the age of such improvements and the business of Pioneer. Pioneer will permit the Landlord or its servants or agents to enter at all reasonable times upon the premises to examine the state or condition of the same.

[7] The application judge found that the underground storage tanks and fuel lines were trade fixtures belonging to the tenant, which it could restore to their character as chattels by severing their connection with the soil. The respondent conceded this finding in its factum. In oral argument in this court, although not attacking the finding as incorrect, the respondent urged that the reasons below be read as finding that these were the landlord’s trade fixtures. I cannot do so. Nowhere did the trial judge say or imply this. Rather he found explicitly that they were owned throughout the lease by the tenant.

[8] The application judge then focused on paragraph 5 of the 1991 lease, which gave the appellant the right, although not the obligation, to remove any of its trade fixtures at the end of the lease. This paragraph states that any trade fixtures not so removed become the property of the respondent. Since the appellant did not remove the underground storage tanks and fuel lines when it vacated, this paragraph provides that they now belong to the respondent. Paragraph 5 necessarily serves as the underpinning for the application judge’s dismissal of the respondent’s request for a declaration that the appellant is the owner of these tanks and lines and an order requiring the appellant to remove them from the premises. As I indicated, the respondent has not appealed the dismissal order.

[9] The application judge then turned to the appellant’s duty to repair. It is governed by paragraph 6 of the 1991 lease. He found that “improvements” in that paragraph include the underground storage tanks and fuel lines. That was the only issue before him concerning the repair obligation. In this case the respondent did not allege that the failure to repair caused damage to the premises. The damage alleged was only to the trade fixtures themselves.

[10] The application judge concluded that paragraph 6 imposed an obligation to repair the underground storage tanks and fuel lines, and that the appellant breached its duty by failing to repair the fault that it reported in April 2008.

[11] I am inclined to agree with the appellant’s alternative argument that the application judge had no basis to conclude that the capping of the failed fuel line constituted a breach of the duty to repair. However, it is unnecessary to finally decide that question because I agree with the appellant’s primary argument, namely that the application judge erred in finding that the duty to repair applied to the underground storage tanks and fuel lines at all.

[12] The lease clearly distinguishes between the tenant’s trade fixtures and improvements. Paragraph 5 refers to both explicitly and treats them differently. The tenant is given the right to remove any of its trade fixtures during or at the end of the lease. If it chooses not to do so, they become the property of the landlord on termination of the lease.

[13] On the other hand, the tenant is given no right to remove improvements that it constructs on the premises. While paragraph 3(a) provides that such improvements are the property of the tenant during the term of the lease, paragraph 5 provides that they become the property of the landlord on the lease’s termination.

[14] This distinction accords with the ordinary meaning of improvements and trade fixtures in the law of real property: improvements refer to things constructed on and attached to the realty that are intended to become part of it; trade fixtures refer to things placed on and connected to the realty but in a way that the connection can be severed, restoring their character as chattels. See Stack v. T. Eaton Co. (1902), 4 O.L.R. 335 (Div. Ct.); Fas Gas Oil Ltd. v. J. H. Automotive Ltd. (2004), 2004 ABCA 120, 31 Alta. L.R. (4th) 197 (C.A.); Beloit Sorel Walmsley, Ltd. v. New Brunswick (1976), 1976 CanLII 1216 (NB CA), 71 D.L.R. (3d) 240 (N.B.C.A.).

[15] Paragraph 6 of the lease sets out the tenant’s repair obligation. It clearly applies to improvements. It does not refer to the tenant’s trade fixtures. This not only reflects the ordinary distinction that is drawn between the two in the law of real property, but it also reflects the distinction that is explicitly drawn in this lease. It reflects the fact that, because they cannot be removed, improvements made by the tenant will inevitably become the property of the landlord, giving the landlord an interest in ensuring their repair. On the other hand, a tenant’s fixtures may be removed by the tenant, in which case the landlord has no stake in their state of repair. A landlord wishing to protect itself against unrepaired trade fixtures left behind by the tenant can do so by requiring the tenant to remove its trade fixtures at the end of the lease, as this landlord did in the 1985 lease, but did not in the 1991 lease.

[16] I therefore conclude that, having found the underground storage tanks and fuel lines to be tenant’s trade fixtures, the application judge erred in concluding that they were improvements for the purposes of the tenant’s repair obligation. The appellant had no obligation to the landlord to repair them.

[17] I would therefore allow the appeal, set aside the order below and substitute an order dismissing the application in its entirety.

[18] The appellant is entitled to partial indemnity costs here and below, which I would fix at $10,000 and $25,000 respectively, each inclusive of disbursements and applicable taxes.

RELEASED: MAR 09 2011 (“S.T.G.”)

“S. T. Goudge J.A.”

“I agree. Robert J. Sharpe J.A.”

“I agree. H. S. LaForme J.A.”