COURT OF APPEAL FOR ONTARIO

CITATION: 2249778 Ontario Inc. v. Smith (Fratburger), 2014 ONCA 788

DATE: 20141107

DOCKET: C58342

Blair, Pepall and Hourigan JJ.A.

BETWEEN

2249778 Ontario Inc.

Applicant (Appellant)

and

Glenn Smith carrying on business as “Fratburger”

Respondent (Respondent)

Tiffany Soucy, for the appellant

Andrew McCoomb, Timothy Fleming and Dana Carson, for the respondent

Heard: August 19, 2014

On appeal from the judgment of Justice James W. Sloan, of the Superior Court of Justice, dated January 7, 2014, with reasons reported at 2014 ONSC 93.

Pepall J.A.:

Introduction

[1] This appeal concerns the interpretation of a fast-food restaurant lease and whether the permitted use provision in the lease allows for the installation of an automatic teller machine (“ATM”).

Facts

[2] The appellant, 2249778 Ontario Inc. (the “Landlord”), owns a strip mall in Waterloo, Ontario. It leased two units in the mall to the respondent, Glenn Smith (the “Tenant”), carrying on business as “Fratburger”. The Tenant runs a fast-food restaurant that sells, among other things, hamburgers, hot dogs, chicken sandwiches, French fries and poutine. An estimated three-quarters of the Tenant’s customers are university students.

[3] The parties entered into a lease dated May 1, 2011. The Tenant stated that the lease was drafted and presented to the Tenant by the Landlord. Few, if any, amendments were made prior to its execution. In s. 10.1, which was headed “Permitted Use”, the Tenant covenanted “to use the Premises only for the purpose set out in Section 1.1(g)(v) of the Lease and for no other purpose”.

[4] Section 1.1(g)(v) described the use as:

A fast food restaurant primarily selling hamburgers, hot dogs, chicken sandwiches, french fries, poutine and individual servings of soft drinks, coffee and tea and as ancillary thereto, the Tenant may use a minor portion of the Premises for offices as reasonably required for the Tenant’s business from the Premises and for no other purpose. The Tenant shall be permitted, at its sole expense, to apply for and obtain a licence to serve alcoholic beverages with this use.

[5] The lease also contained numerous provisions under a heading entitled “Conduct and Operation of Business” including ss. 10.8(a) and (d) which stated as follows:

(a) operate its business with due diligence and efficiency and maintain an adequate staff to properly serve all customers; own, install and keep in good order and condition free from liens or rights of third parties, fixtures and equipment of first class quality; and carry at all times such stock of goods and merchandise of such size, character and quality as will produce the maximum volume of sales from the Premises consistent with good business practices;

(d) stock in the Premises only merchandise the Tenant intends to offer for retail sale from the Premises, and not use any portion of the Premises for office, clerical or other non-selling purposes except minor parts reasonably required for the Tenant’s business in the Premises.

[6] In the parties’ negotiations, the topic of an ATM was never discussed.

[7] After the lease was executed, the Tenant immediately installed and operated an ATM on the leased premises. The Landlord stated that the Tenant did not obtain the Landlord’s consent to such use nor did he seek an amendment to the lease to include the operation of an ATM as a permitted use. The Tenant stated that he did not think that anything in the lease prevented him from installing an ATM.

[8] The Tenant explained that debit card machines are problematic for his business because each transaction costs approximately 50 cents which he either has to absorb himself or charge to his cost-conscious student customers. Furthermore, customers often try to use debit machines as if they were ATMs and ask for cash back with purchases. These requests result in limited cash on hand for his business. Accordingly, the Tenant explained that he preferred not to use debit machines. In contrast, an ATM is convenient for students and other customers. The Tenant’s evidence was that he was not interested in running a bank; the ATM was nothing more than an economical way to make his business more effective and attractive to customers.

[9] About a year after it was installed, the Landlord took issue with the presence of the ATM. The Landlord stated that he attempted negotiations to resolve the issue. They were unsuccessful.

[10] The Landlord then commenced an application for a declaration that the lease did not permit an ATM on the premises and an order requiring the Tenant to remove it.

The Application

[11] Before the application judge, the Landlord argued that the operation of an ATM was not a permitted use under the lease and that, since non-fast food customers could access the ATM, the Tenant was effectively offering banking services on the premises.

[12] The Tenant countered that students often did not carry cash, and debit card transactions cost him too much money. He argued that the ATM was a tool to facilitate his business; it was convenient for customers and lowered his business costs.

[13] The application judge accepted the Tenant’s position and dismissed the Landlord’s application. He found that the use of the ATM was for appropriate business reasons: to assist the Tenant in keeping his costs low and his clients happy. The installation of an ATM that simply dispensed cash did not constitute the offering of banking services. He concluded at para. 12 of his reasons:

On the evidence before me, the installation of the ATM does not in any way change the purpose of the premises, which is a fast-food restaurant. The primary focus of the establishment and the attendance of its patrons, is for the consumption of food.

Grounds of Appeal

[14] The Landlord submits that the application judge erred in law by ignoring the plain, ordinary and unambiguous meaning of the words in the lease; failed to consider whether the ATM was a permitted use under the lease; and erred in his interpretation of s. 10.8(a) of the lease. The Landlord argues that the application judge’s interpretation resulted in a commercially absurd result and violated the fundamental principle of certainty of contract. Lastly, the Landlord submits that future planning and the ability to provide exclusivity to other potential tenants of the strip mall should not be negatively affected by use that is not contemplated by the lease it entered into with the Tenant.

[15] In addition, the Landlord asks this court to admit fresh evidence consisting of an affidavit of one of the Landlord’s employees. In the affidavit, the employee states that he attended Fratburger for the sole purpose of using the ATM. The ATM charged him a $2.00 fee payable to a non-party. The Landlord’s motion to admit fresh evidence is unopposed. While of questionable relevance, given that the Tenant is unopposed and that the fresh evidence provides additional context, I would grant the Landlord’s motion to admit fresh evidence: Katokakis v. William R. Waters Limited (2005), 2005 CanLII 4090 (ON CA), 194 O.A.C. 353, at para. 5.

Analysis

(a) Applicable Law

(i) Standard of Review

[16] In Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, 373 D.L.R. (4th) 393, the Supreme Court recently addressed the appropriate standard of review to be applied to the interpretation of a contract. Absent an extricable question of law, questions of interpretation are no longer to be treated as pure questions of law reviewable on a correctness standard. Rather, as Rothstein J., writing for the court, stated at para. 50: “Contractual interpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix.”

[17] Rothstein J. recognized that extricable questions of law would continue to include “‘the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor’”: Sattva at para. 53. However, he cautioned appellate courts not to be too quick to identify extricable questions of law, stating at para. 55:

[T]he goal of contractual interpretation, to ascertain the objective intentions of the parties, is inherently fact specific. The close relationship between the selection and application of principles of contractual interpretation and the construction ultimately given to the instrument means that the circumstances in which a question of law can be extricated from the interpretation process will be rare.

[18] Accordingly, questions of contractual interpretation will generally attract a deferential standard of review: Sattva, at para. 52 and Martenfeld v. Collins Barrow Toronto LLP, 2014 ONCA 625, 116 O.R. (3d) 401 (C.A.), at para. 41.

(ii) Principles of Contractual Interpretation

[19] As stated in Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205, 85 O.R. (3d) 254 (C.A.), at para. 24, a commercial contract is to be interpreted:

(a) as a whole, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective;

(b) by determining the intention of the parties in accordance with the language they have used in the written document and based upon the “cardinal presumption” that they have intended what they have said;

(c) with regard to objective evidence of the factual matrix underlying the negotiation of the contract, but without reference to the subjective intention of the parties; and (to the extent there is any ambiguity in the contract),

(d) in a fashion that accords with sound commercial principles and good business sense, and that avoids a commercial absurdity.

[20] In Sattva, the Supreme Court addressed the issue of surrounding circumstances. Rothstein J. wrote, at para. 57:

While the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement. The goal of examining such evidence is to deepen a decision-maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract. The interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract. While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement. [Citations omitted.]

[21] Evidence of surrounding circumstances should consist only of objective evidence of the background facts at the time of execution of the contract: knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting: Sattva, at para. 58.

[22] Finally, the rule of contra proferentum applies in cases where the contractual terms are ambiguous: Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888, at p. 900 and Manulife Bank of Canada v. Conlin, 1996 CanLII 182 (SCC), [1996] 3 S.C.R. 415, at pp. 425-426.

(b) Analysis

[23] In this appeal, the Landlord challenges the application judge’s interpretation of the lease and his finding that the installation and operation of an ATM did not change the fast-food restaurant purpose of the premises and therefore was a permitted use under the lease.

[24] The application judge found that the use of the ATM was for appropriate business reasons, to assist the Tenant in “keeping his costs low and his clients happy.” The application judge considered the language of the lease. He found that the ATM fell within the definition of permitted use because it was the tool used to achieve the business objectives of running the fast-food restaurant: “the installation of the ATM does not in any way change the purpose of the premises, which is a fast food restaurant.” Furthermore, the application judge found that the use of an ATM was not a “purpose” for which the Tenant was using the premises. Specifically, the application judge rejected the suggestion that the Tenant was offering banking services.

[25] These are findings of mixed fact and law which are entitled to deference.

[26] The lease did not define fast-food restaurant; was silent on other equipment and business tools such as a cash register and a debit terminal that are critical to a fast-food restaurant and implicitly included in the permitted use of the premises; and nothing in the lease prohibited the installation and operation of an ATM. Lastly, the application judge did not base his decision on s. 10.8(a) of the lease as alleged by the Landlord.

[27] Applying the principles articulated in Sattva, I am unable to conclude that there was any error of law or mixed fact and law that would justify appellate intervention.

[28] From a practical perspective, I also reject the Landlord’s submission that such a result produces uncertainty in the law. First, this case is confined to these parties and interpretation of this particular lease. Second, it is open to parties to a commercial lease to specifically include the installation and operation of an ATM as a prohibited activity in the lease.

Disposition

[29] I would therefore dismiss the appeal and order that the Landlord pay the Tenant its costs of the appeal fixed in the amount of $15,000 inclusive of disbursements and applicable taxes.

Released:

“NOV -7 2014” “S.E. Pepall J.A.”

“RAB” “I agree R.A. Blair J.A.”

“I agree C.W. Hourigan J.A.”