COURT OF APPEAL FOR ONTARIO

CITATION: 2405416 Ontario Inc. v. 2405490 Ontario Limited, 2016 ONCA 696 DATE: 20160923

DOCKET: C62401 and C62402

Gillese, Rouleau and Brown JJ.A.

BETWEEN

2405416 Ontario Inc.

Applicant (Appellant)

and

2405490 Ontario Limited

Respondent (Respondent in Appeal)

AND BETWEEN

2405490 Ontario Limited

Applicant by Counter Application (Respondent/Appellant by Cross-Appeal)

and

2405416 Ontario Inc. and Enza Badali

Respondents to the Counter Application (Appellants/Respondents by Cross-Appeal)

Claudio Aiello, for the appellants

James Renihan, for the respondent

Heard: September 16, 2016

On appeal from the judgment of Justice Robert F. Goldstein of the Superior Court of Justice, dated June 14, 2016, with reasons reported at 2016 ONSC 3893.

ENDORSEMENT

Overview

[1] This appeal and cross-appeal involve two related issues concerning a sub-lease for commercial premises located on Dufferin St., Toronto. The appellant landlord, 2405416 Ontario Inc. (“416”), submits the application judge erred in finding the tenant, 2405490 Ontario Limited (“490”), was entitled to exercise an option contained in the sub-lease to purchase the property on which the premises are located. 490 cross-appeals arguing the application judge erred in denying it damages for rent it was required to pay the landlord after the date on which its purchase of the property should have closed.

Background facts

[2] Enza Badali owns the Dufferin Street property. As found by the application judge, her son, Salvatore Badali, operated an adult entertainment body rub business from the premises under the name Blue Pearl.

[3] On January 6, 2014, 1785535 Ontario Inc., operating as Blue Pearl (“Blue Pearl”), entered into an Asset Purchase Agreement (“ASA”) with Elliott Stone to sell Blue Pearl’s business. Stone subsequently incorporated 490 to assume the rights and obligations of the purchaser under the ASA.

[4] The ASA contained a condition precedent to closing, for the exclusive benefit of the purchaser, that the purchaser enter into a lease of the building with the property owner. It was to be a term of the lease that in the first two years of the purchaser’s occupancy of the property it would have an option to purchase the property for $800,000.

[5] On February 1, 2014 two documents were executed to give effect to this provision of the ASA. First, Enza Badali leased the building to the appellant, 2405416 Ontario Inc. (“416”), a related company. Second, 416 sub-leased the building to the purchaser, 490 (the “Sub-Lease”).

[6] Section 3.01 of the Sub-Lease deals with the term of the lease. It states:

To have and to hold the Premises for and during the Term of five (5) years to be computed from and inclusive of the 1^st day of April, 2014 (hereinafter referred to as the “Commencement Date”) and expiring on March 31, 2019. The parties hereto agree that the demise under this lease and the duty to pay rent hereunder is conditional upon the successful completion of the Asset Purchase Agreement between the Tenant and 1785535 Ontario Inc. (the “ASA”) and that should the ASA fail to be completed the Tenant and Landlord shall be relieved of their obligations hereunder.

[7] The closing date in the ASA was defined to mean “the day and date on which the Toronto Licensing Tribunal approves the sale of the Business to the Purchaser but in any event no later than March 31, 2014 or such other date as mutually agreed upon between the parties…” As matters transpired, the Toronto Licensing Tribunal did not approve the sale of the Blue Pearl until June 19, 2014. The ASA closed that day.

[8] About one year later, on June 22, 2015, the purchaser/tenant, 490, served notice under the Sub-Lease that it wished to exercise its option to purchase the property. Section 4.03 of the Sub-Lease gave 490 the option to purchase “provided that no uncured event of default under this lease exists at the time of exercise of the option to purchase hereunder.”

[9] 416 and Enza Badali took the position that 490 was not entitled to exercise the option to purchase because it was in default under the Sub-Lease. Although they identified three grounds of default, in this litigation they relied primarily on 490’s failure to pay rent when due and owing. They took the position that 490 was obligated under the Sub-Lease to start paying rent on April 1, 2014, the date s. 3.01 of the Sub-Lease described as the “Commencement Date”. Since 490 did not start paying rent until July, 2014, they contended 490 was in default.

[10] 490 took the position that s. 3.01 did not require it to start paying rent until “the successful completion of the Asset Purchase Agreement between the Tenant and 1785535 Ontario Inc.”, which did not occur until June 19, 2014. As well, 490 contended that 416, through its counsel, had agreed that the first month of occupancy would be rent-free, so rent was not due and payable until July, 2014. As a result, 490 argued it was not in default under the Sub-Lease and was entitled to exercise its option to purchase.

[11] 416 commenced an application to terminate the Sub-Lease and purchase 490’s business, as the Sub-Lease entitled it to do in the event base rent remained outstanding for over 45 days. 490 commenced a counter-application seeking a declaration that it was entitled to purchase the property pursuant to the option. In addition, 490 sought damages equal to the monthly rent it paid from August, 2015 – the date it said the purchase of the property should have closed – until the actual closing of the property purchase.

[12] The application judge accepted the interpretation of s. 3.01 of the Sub-Lease advanced by 490. He dismissed 416’s application. In the 490 application, he granted a declaration that 416 and Enza were required to sell the property to 490 under the option, but he dismissed 490’s claim for damages.

[13] 416 appeals the dismissal of its application; 490 cross-appeals the dismissal of its claim for damages.

The interpretation of s. 3.10 of the Sub-Lease

[14] 416 submits that the correctness standard of review applies to the application judge’s interpretation of s. 3.01 of the Sub-Lease because he failed to interpret the contract as a whole, thereby committing an extricable legal error warranting appellate intervention: Sattva Capital Corp. v. Creston Molly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 53. We do not agree. The application judge identified and applied the relevant principles of contractual interpretation set out in Ventas Inc. v. Sunrise Senior Living Real Estate Investment Trust (2007), 2007 ONCA 205, 85 O.R. (3d) 254 (C.A.), including the obligation to interpret the contract as a whole.

[15] The key issue of interpretation concerned when 490 was required to start paying rent. In considering that issue, the application judge interpreted s. 3.01 of the Sub-Lease as expressing the parties’ intention that 490’s obligation to pay rent would not start until it obtained the transfer of the licence for the business it was purchasing under the ASA. That did not occur until June 19, 2014, when the Toronto Licensing Tribunal approved the sale and the ASA closed. The application judge’s conclusion was reasonable: it accorded with the specific language of 3.01 – “the duty to pay rent hereunder is conditional upon the successful completion of the [ASA]” – which modified the general rent obligation contained in s. 5.01. As well, it was consistent with the structure and purpose of the overall commercial transaction between the parties as set out in the ASA and the Sub-Lease.

[16] The appellant argues the application judge erred in his interpretation of s. 3.01 because he ignored the last phrase of the provision – “that should the ASA fail to be completed the Tenant and the Landlord shall be relieved of their obligations hereunder.” That provision, the appellant contends, shows that the Sub-Lease came into force on the Commencement Date, and not the date of regulatory approval of the licence transfer. We do not accept this submission.

[17] First, the application judge’s reasons do not disclose that he treated the Sub-Lease as an agreement under which no obligation arose until the approval of the licence transfer.

[18] Second, it is true the concluding language of s. 3.01 shows the Sub-Lease came into effect before the licence transfer approval date. However, the immediately preceding language of s. 3.01 stipulates the obligation of 490 to pay rent did not start on the Commencement Date, but on the “successful completion of the Asset Purchase Agreement.” That portion of s. 3.01 specifically addressed the issue of whether the tenant was required to pay rent during the transitional period between the Commencement Date and the closing of the ASA. Section 3.01 stated the tenant was not.

[19] Finally, the appellant submits the application judge erred in taking into account evidence of the parties’ conduct after the execution of the Sub-Lease in order to interpret its terms. We do not agree. Para. 26 of the application judge’s reasons show he reached his conclusion about the interpretation of 3.01 before he considered the evidence of post-execution conduct. That evidence, in turn, was relevant to whether 416 had agreed to waive the first month’s rent under the Sub-Lease and therefore the application judge properly considered it.

[20] Consequently, we see no basis to interfere with the application judge’s interpretation of s. 3.01 of the Sub-Lease and his conclusion that 490 was entitled to exercise the option to purchase. Accordingly, we dismiss 416’s appeal.

490’s cross-appeal regarding damages

[21] On its cross-appeal, 490 submits the application judge erred by dismissing its claim for damages in the amount of the monthly rent it paid following the date on which its option to purchase should have closed. Section 4.03 of the Sub-Lease provides that within 10 days of the delivery of the Purchase Option Notice, the parties should negotiate a purchase agreement transferring the premises “no later than 30 days after” execution. Given that 490 delivered its Purchase Option Notice on June 22, 2015, 490 contends the property should have been transferred to it by August 1, 2015, after which it would have no obligation to pay rent.

[22] The application judge dismissed 490’s claim for damages stating: “[i]f I were to give effect to that submission, it would amount to granting [490] a very long period of rent-free occupation. That would be unfair to the Landlord [416].” 490 submits the application judge erred in so concluding because, having found 490 was entitled to exercise the option to purchase, he had no discretion to refuse to award damages.

[23] We do not agree. In seeking monetary relief on its application, 490 bore the burden of identifying for the application judge the correct legal principles governing its claim and adducing the evidence required to establish and quantify its claim. The record discloses 490 did neither.

[24] 490 argues the application judge erred by refusing its claim for damages for breach of contract, but the relief it seeks in its cross-application is more akin to specific performance coupled with equitable compensation for the delay in closing the transaction than to damages for breach of contract. We are not persuaded that the application judge applied a wrong principle of law to 490’s claim.

[25] Further, 490 has not adduced evidence to justify interfering with the application judge’s finding regarding unfairness. It has not filed evidence that would enable a court to calculate the net loss it suffered by reason of the delayed closing or the off-setting opportunity cost to 416 of not receiving the purchase price at the time the property sale should have closed.

[26] In those circumstances, we see no reason to interfere with the application judge’s dismissal of 490’s claim for compensation, and we dismiss the cross-appeal.

Disposition

[27] For the reasons set out above, we dismiss the appeal and cross-appeal.

[28] Although each party’s appeal is dismissed, the bills of cost the parties submitted disclose that they incurred the greater portion of their costs in relation to 416’s appeal. Accordingly, we award 490 costs fixed in the amount of $4,000, inclusive of disbursements and HST.

“Eileen E. Gillese J.A.”

“Paul Rouleau J.A.”

“David Brown J.A.”