1290079 Ontario Inc. v. Beltsos, 2011 ONCA 334

CITATION: 1290079 Ontario Inc. v. Beltsos, 2011 ONCA 334

DATE: 20110502

DOCKET: C52783

COURT OF APPEAL FOR ONTARIO

O’Connor A.C.J.O., Laskin and MacPherson JJ.A.

BETWEEN

1290079 Ontario Inc.

Applicant (Appellant)

and

William Beltsos

Respondent (Respondent in appeal)

Leo Klug, for the appellant

Robert Trifts, for the respondent

Heard: April 1, 2011

On appeal from the judgment of Justice Thomas R. Lederer of the Superior Court of Justice dated September 10, 2010.

MacPherson J.A.:

A. INTRODUCTION

[1] The appellant, 1290079 Ontario Inc., appeals from the judgment of Lederer J. dated September 10, 2010, dismissing its application for a declaration that it validly exercised its right to renew a commercial lease with William Beltsos, the respondent landlord.

B. FACTS

(1) The lease

[2] In 1999, the appellant, through its principal Oleg Bourlatski, leased an old service station from the respondent. The lease was for a period of about 11 years. Rider Clause 2 provided the appellant with an option to renew for an additional five years on the following terms:

Provided the Tenant is not during the initial Term in default under any of the provisions or covenants of this Lease and is not in default of payment of any of the rent or additional rent reserved, then the Tenant shall have the option to renew the Terms of this Lease for a further period of FIVE (5) years provided that written notice is given to the landlord at least SIX (6) months prior to the expiry of the initial term.

[3] As part of its obligations under the lease, the appellant was responsible for insuring the property. This requirement was outlined in section 6(a) of the lease and read, in part:

The Tenant shall, during the entire Term hereof, at its sole cost and expense, take out and keep in full force and effect and in the names of the Tenant, the Landlord and the Landlord's Mortgagees, if any, as their respective interests may appear, the following insurance:

Property damage or public liability insurance including personal liability.

[4] Paragraph 6(5) obliged the appellant to indemnify and save the landlord, Mr. Beltsos, “harmless from and against any and all loss ... claims, actions, damages, liability and expense” arising out of any personal injury occurring on the property.

(2) The parties and events

[5] Upon commencement of the lease, the appellant undertook renovations of the property. A donut bar was installed and the fuel pumps were updated. The appellant operated the business for about eight months, then sub-leased the property to 1481230 Ontario Inc. (“148”) in 2001, pursuant to the terms of the head lease. 148 is not a party to these proceedings.

[6] In the associate’s lease between the appellant and 148, the latter covenanted to perform all of the appellant’s obligations under the head lease:

The Sublessee hereby assumes and agrees to keep and perform each and every one of the covenants, agreements, and obligations to be performed by the Sublessor as Lessee in the Head Lease, and hereby covenants to save harmless and keep indemnified the Sublessor ... against all proceedings, damages, costs, claims and expenses arising from or incurred by reason of the Sublessee’s failure to perform promptly any of such covenants, agreements and obligations.

[7] The appellant continued to maintain insurance on the property for at least a year. Thereafter, 148 took out its own policy of insurance for the property.

[8] Relations soured between the parties in late 2007. Tom Beltsos (Mr. Beltsos’ son) and Aleksandr Bourlatski (Mr. Bourlatski’s brother) exchanged sharp letters disputing the payment of a water bill, the timing of fuel deliveries, when and where to deliver rent cheques, the delivery of a copy of the sub-lease, and responsibility for a light pole that had fallen into disrepair.

[9] During this period of acrimony, Tom Beltsos again requested copies of any insurance policies related to the property. He did so in writing on four occasions in 2007: August 24, September 1, September 11, and October 26. The appellant did not respond.

[10] Finally, on November 2, 2007, Aleksandr Bourlatski provided Tom Beltsos with a summary of 148’s current insurance policy. The policy was defective. It did not list Mr. Beltsos as a named insured, as required by the lease. The policy was accompanied by a letter from Mr. Bourlatski to the insurer, dated September 16, 2007, requesting changes that would remedy the defect. There is no dispute that the insurance on the property was compliant with the lease as of September 16, 2007.

(3) Requests and refusals to renew the lease

[11] Pursuant to the terms of the lease, appellant’s counsel attempted to renew the lease via letter dated June 17, 2009. Respondent’s counsel rejected the request, citing “various breaches of the Lease during the term of the tenancy”, including “failure to properly insure the premises in accordance with the provisions of the terms of the Lease.” Appellant’s counsel denied the validity of the default allegations via letter dated August 31, 2009.

[12] Appellant’s counsel again attempted to renew the lease via letter dated February 19, 2010. Respondent’s counsel responded on February 26, 2010, indicating that the respondent maintained his position that he was not required to honour the appellant’s request to renew the lease.

[13] The appellant brought an application in the Superior Court of Justice on March 17, 2010, seeking a declaration that its renewal request was validly exercised.

(4) The accident

[14] After the respondent refused to renew the lease and the appellant commenced this proceeding, the parties made an unhappy discovery. On September 15, 2007—the day before the insurance on the property was made good—a slip-and-fall injury was allegedly sustained on the property by one Robert Phillips. Mr. Phillips filed a Statement of Claim on May 15, 2009 (“the Phillips action”) seeking, among other things, $1,000,000 in damages from the appellant, the respondent and 148.

[15] The appellant deposed that he did not learn of the suit until April 21, 2010, when the respondent’s personal insurer forwarded the respondent’s Amended Statement of Defence in the Phillips action.

(5) The application judge’s decision

[16] The application judge considered two issues:

1. Was the appellant’s failure to properly insure the property on September 15, 2007, a breach such that the appellant lost its right to renew the lease?

2. If the right to renew was forfeited, should the application judge exercise his equitable discretion to grant relief from forfeiture?

i. Breach

[17] As a condition of its renewal, the lease required that the appellant was not “during the initial Term in default under any of the provisions or covenants of the Lease.” In the application judge’s view, the applicable case law, which considers similar but not identical wording, makes clear that a momentary or historical breach that has been rectified at the time a tenant seeks to exercise a right to renew is not a basis on which the landlord can refuse to renew. The key question was whether the breach—i.e. the lapse in insurance—was “spent” by the appellant’s rectification of the policy on September 16, 2007 combined with the appellant’s outstanding duty to indemnify, or whether the breach was “subsisting” at the renewal date because of the Phillips action.

[18] The application judge found that the breach was not spent. In his view, it subsisted at the renewal date because the Phillips action represented an “ongoing issue surrounding the failure of the [appellant] to have insurance in place on September 15, 2007 which served to protect the respondent, as the lease required.” Despite the appellant’s duty pursuant to the lease to indemnify, it could not be said that the lease was “effectively clear” on the renewal date. Therefore, the appellant’s breach of the lease was not spent and the option to renew was lost.

ii. Relief from forfeiture

[19] The application judge also found that he did not have the discretion to grant relief from forfeiture in these circumstances. He cited authority for the position that relief from forfeiture may save a tenant who diligently remedies a breach but stands to lose the remaining term of a lease. However, the remedy is unavailable where the “forfeiture” is merely of a right of renewal predicated on the tenant’s performance of a condition precedent. In the latter situation, equity would not intervene to permit a tenant who had breached a covenant to exercise a right of renewal.

[20] Even if he maintained such discretion, the application judge would not have exercised it on behalf of the appellant.

C. ISSUE

[21] The issue on the appeal is whether the application judge erred in concluding that the appellant’s 2007 breach of the insurance terms of the lease subsisted until the renewal dates in 2009 and 2010, and that the breach disentitled the appellant to renew the lease.

D. ANALYSIS

[22] This court held in Fingold v. Hunter, 1944 337 (ON CA), [1944] 3 D.L.R. 43, that a lessee does not lose his rights because, at some point in the past, prior to his reliance on those rights, there was a default that was subsequently corrected. Citing the Supreme Court of Canada’s decision in Loveless v. Fitzgerald (1909), 1909 8 (SCC), 42 S.C.R. 254, Robertson C.J.O. stated at p. 46, “[i]t is, however, well settled that to show due performance the lessee need not necessarily show punctual performance. It is enough to show that the covenants have been performed at the time when the lessor is required to observe or to perform his promise.”

[23] These authorities stand for the proposition that an historical breach of a lease covenant, once remedied, will not entitle a landlord to refuse an otherwise valid option to renew the lease. In the case law, this has become known as the doctrine of “spent breach”: see Sail Labrador Ltd. v. Challenge One (The), 1999 708 (SCC), [1999] 1 S.C.R. 265, at para. 58 (“Sail Labrador”) and 1383421 Ontario Inc. v. OLE Miss Place Inc. (2003), 2003 57436 (ON CA), 67 O.R. (3d) 161 (C.A.), at para. 58.

[24] The leading cases with respect to the doctrine of “spent breach” are the decision of the English Court of Appeal in Bass Holdings Ltd. v. Morton Music Ltd., [1987] 2 All E.R. 1001 (“Bass Holdings”), and the Supreme Court of Canada’s decision in Sail Labrador.

[25] In Bass Holdings, Kerr L.J. referred to “spent breaches” and “subsisting breaches” and described the rationale for the doctrine of spent breach at p. 1005:

The upshot of these authorities is that spent breaches will not destroy the tenant’s right to exercise the option, but subsisting breaches will. ... [T]he reasoning is in effect as follows. First, it must be accepted that absolute and precise compliance by the tenant with every single covenant throughout the period of the lease prior to the operative date is virtually impossible of attainment. If this were required as a condition precedent, then the option would in practice be worthless or merely at the mercy of the landlord. Therefore the parties cannot have intended that the absence of spent breaches should be a condition precedent. Secondly, however, it is natural and sensible that the landlord should require that the tenant not to be in breach of any covenant on the operative date and that all outstanding claims for breach of covenant should have been previously satisfied, so that the lease is then effectively clear. The proviso is therefore to be construed as intended to apply to subsisting breaches, with the result that the relevant condition precedent is the absence of any subsisting breach. [Emphasis added.]

[26] In Sail Labrador, Bastarache J. described the doctrine of spent breach at para. 68:

One example of the flexibility courts have applied to performance in option contexts is the doctrine of spent breach. This doctrine mitigates against the severity of the application of the strict performance rule to options by preventing deficiently performed conditions precedent which have been remedied by the time the option is to be exercised from rendering the option void. For example, in Bass Holdings Ltd. v. Morton Music Ltd., a lease contract included an option to renew provided the tenant was not in breach of any of the tenant's covenants contained in the lease. The tenant was at one time in breach of this condition because his rent was overdue. However, he had remedied that breach by the time he sought to exercise the option. In its interpretation of the contract, the court found that such “spent” breaches do not prevent the exercise of the option. The language here may be somewhat confusing. In reality, this doctrine simply provides that the option clause is interpreted to mean that conditions precedent are met providing that the positive covenants of the underlying contract have been performed at the time of the exercise of the option. There is, therefore, no breach, even though some payments were made late. Late payment can be remedied because this possibility is implied in the interpretation of the option clause. [Citation omitted.]

[27] At para. 15, Bastarache J. also noted the trial judge’s reasoning in Sail Labrador, where Nadon J. cited Bass Holdings for the proposition that a breach is “spent” when it no longer gives rise “to a subsisting cause of action at the time the optionee seeks to exercise the option.”

[28] The application judge referred to these cases and concluded that, because there was an existing cause of action by Mr. Phillips against the landlord, the appellant’s breach of the lease was a subsisting, not a spent, breach. The application judge held at paras. 34-35:

The requirement that covenants in a lease shall have been duly observed and performed is “satisfied if they have been so observed and performed that there is no existing right of action” under those covenants at the time when the notice of renewal is given....

As I have already noted, in this case, there is a subsisting cause of action. The individual, who suffered the personal injury on the property on September 15, 2007, has sued. The action continues. The applicant and the respondent are both defendants to the action. Moreover, there is a crossclaim brought by the respondent against the applicant. [Citation omitted.]

[29] I agree. An historical breach, once remedied, will not preclude a tenant from exercising an option to renew so long as the lease is “effectively clear” on the renewal date. If a landlord has a subsisting cause of action against the tenant that is rooted in the breach, the lease is not effectively clear.

[30] The Phillips claim was filed on May 15, 2009, and the respondent was one of the named defendants. At the stipulated renewal date in the spring of 2010, the respondent had a cause of action against the appellant for failing to perform a term of the lease. The appellant failed to provide insurance as required, and the respondent faced expense and uncertainty that would have been avoided if the appellant had not been in breach. Therefore, the breach subsisted and the appellant forfeited its right to renew.

[31] On the issue of indemnity, I note that both indemnity and insurance are important terms of commercial leases, but they are not the same. There is a higher degree of certainty in insurance than in the promised indemnity of a numbered company with which one is already engaged in litigation. While indemnity is valuable to its beneficiary, it does not negate a freestanding obligation to provide appropriate insurance.

[32] On the issue of relief from forfeiture, the appellant was neither diligent in the performance of the covenant nor responsive in correcting it. The application judge found that the premises had been improperly insured for some three years before the events of September 2007. I would not interfere with the trial judge’s exercise of discretion in refusing to grant equitable relief.

[33] Finally, I note that the appellant tendered fresh evidence about the ultimate resolution of the Phillips action. In my view, there is nothing in that evidence that would affect the disposition of this appeal.

E. DISPOSITION

[34] I would dismiss the appeal. The respondent is entitled to its costs of the appeal which I would fix, as agreed by counsel, at $11,000 inclusive of disbursements and HST.

RELEASED: MAY 02 2011 (“D.R.O.”)

“J. C. MacPherson J.A.”

“I agree. D. O’Connor A.C.J.O.”

“I agree. J. I. Laskin J.A.”