Court of Appeal for Ontario
Citation: 2017 ONCA 12 Date: January 10, 2017 Docket: C61367
Judges: Cronk, Rouleau and Huscroft JJ.A.
Between
1079268 Ontario Inc. Applicant (Respondent)
and
GoodLife Fitness Centres Inc. Respondent (Appellant)
Counsel
For the appellant GoodLife Fitness Centres Inc.: John K. Downing and Brian Whitwham
For the respondent 1079268 Ontario Inc.: Kevin D. Sherkin, Elizabeth Barrass and Carmine Scalzi
Heard: September 19, 2016
On appeal from: The order of Justice Ruth E. Mesbur of the Superior Court of Justice, dated October 5, 2015, with reasons reported at 2015 ONSC 6772.
Opinion of the Court
Huscroft J.A.:
Introduction
[1] The issue in this appeal is ostensibly a simple one: does the appellant GoodLife Fitness Centres Inc.'s ("GoodLife") lease with the respondent 1079268 Ontario Inc. ("107") of 635 Danforth Avenue, in Toronto, include the basement of the premises?
[2] One would expect the matter to be resolved by the provisions of the lease, but, as counsel acknowledged, the lease in this case is not a model of clarity. It includes inconsistent and contradictory provisions.
[3] The application judge held that the lease does not include the basement, which GoodLife has been using since its tenancy began. She declined 107's request to rectify the lease, but ordered GoodLife to pay occupation rent for its past use of the basement.
[4] GoodLife appeals from this order.
[5] I would allow the appeal. In my view, although the application judge acknowledged the need to consider the circumstances surrounding the negotiation in interpreting the lease, she erred in law in failing to consider all the relevant circumstances. Considered as a whole, the surrounding circumstances demonstrate that the lease includes the basement.
Background
The Lease
[6] The lease in question was executed by 107 with GoodLife's predecessor, Extreme Fitness ("Extreme"), on October 30, 2006, following lengthy negotiations between their lawyers and the exchange of several draft leases.
[7] The lease included the following provisions:
1.1 Basic terms
(c) Property: the development situate on the Lands legally described as Part Lot 7 to 8, Plan 200 Toronto and Part Lot 24 -27, Plan 306E Toronto as in CT782043, City of Toronto (being PIN 21062-0414 LT) and municipally known as 635 Danforth Avenue, Toronto, Ontario M4K 1R2.
(d) Premises: the entire property. The premises consist of three floors plus mezzanine, and the floors have the following areas: ground floor 11,461 square feet, second-floor 5,526 square feet, third floor 1,026 square feet, a platform area of 1,654 square feet, and a mezzanine of 4,443 square feet, which floors are shown on the plans' annexed as Schedule "A".
(e) Rentable Area of Premises: approximately 24,110 square feet, subject to Section 2.2.
(g) Basic Rent (Section 4.1):
| Period | Per Sq. Ft./Year | Per Year | Per Month |
|---|---|---|---|
| Term 1-2 | $24.786 | $597,600.00 | $49,800.00 |
| Renewal 1: 3-5 | $24.786 | $597,600.00 | $49,800.00 |
| Renewal 2: 6-10 | $25.881 | $624,000.00 | $52,000.00 |
| Renewal 3: 11-15 | $26.768 | $648,000.00 | $54,000.00 |
2.2 Measurement
[Intentionally Deleted]
5.4 Operating Costs
[Intentionally Deleted]
6.1 Payment for Utilities
The tenant shall pay promptly when due all charges, costs, accounts and any other sums payable by reason of the supply of the utilities and services to the Premises. The Landlord shall prior to the commencement date at the Landlord's cost, install a separate meter to measure consumption of hydro, washer and gas for the Premises and the Tenant shall contract with and pay the supplier directly.
6.2 Above-normal Utilization
[Intentionally deleted]
The Use of the Basement by Extreme
[8] 107 removed kitchen equipment it owned from the basement of the premises shortly following execution of the lease. In 2007, Extreme made alterations to the premises, including the basement. 107 alleged that these renovations were made in breach of the lease, but the dispute was settled with Extreme's agreement to exercise its first two renewal options and extend the term of the lease.
[9] A second dispute arose in 2008. On April 4, 2008, 107's lawyer, Mr. Singer, wrote to Extreme claiming that it had made extensive renovations to the basement level as well as the ground, second, third floors and mezzanine of the building. He stated that Extreme had converted the basement from a storage area to a functional area for use by Extreme's fitness club business and that the alterations had increased the usable rental area of the building by approximately 4,600 square feet.
[10] Extreme's lawyer, Mr. Westwood, replied in an email dated April 22, 2008. He asserted that Extreme was not in breach of the lease because the lease included the basement and Extreme was under no obligation to pay additional rent for using it.
[11] Extreme continued to pay the rent due under the lease and 107 took no further action.
[12] Three years later, Extreme was in financial difficulty and as part of its banking arrangements required an estoppel certificate from 107. In May, 2011, 107 signed a certificate stating that its lease with Extreme:
is in full force and effect; the Lease has not been amended or modified; no default exists under the Lease; and, to the best of its knowledge, all rent and other charges have been paid to the extent payable … .
Assignment of the Lease from Extreme to GoodLife
[13] Extreme attempted to restructure its business under the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 ("CCAA") in 2013. 107 advanced a claim against Extreme while it was under CCAA protection, among other things, for back rent for Extreme's use of the basement from 2007-2013. In the course of the CCAA proceedings, and with knowledge of 107's claim, GoodLife entered into an asset purchase agreement pursuant to which it took an assignment of Extreme's lease with 107.
[14] The asset purchase agreement required court approval. 107 opposed the sale to GoodLife on the basis that Extreme was in breach of its obligations under the lease. 107 reiterated its earlier position that the lease did not include the basement and that Extreme owed back rent for its use of the basement. In addition, 107 asserted that the square footage had been understated in the lease and that the premises were significantly larger.
[15] The asset purchase agreement was approved in a vesting order dated March 27, 2013. 107's claims against Extreme were settled subsequently, and the court ordered that 107's claims against GoodLife (post-March 27, 2013) should be adjudicated by way of a separate application.
[16] 107 then brought an application for rectification of its lease with GoodLife and a determination of the amount of back rent, if any, that GoodLife owed under the lease.
The Application Judge's Decision
[17] On the main point – whether the lease included the basement – the application judge noted that the lease is internally inconsistent: it describes the property both in terms of the whole property and a portion of the property that includes specified elements. The application judge could not give meaning to all the terms of the lease because some terms contradicted others. Thus, she considered "some of the features of the negotiations" surrounding the formation of the lease in order to inform her interpretation of its terms.
[18] The application judge noted that, although Extreme had required approximately 30,000 square feet for its operations, the figure in the lease was only slightly more than 24,000 square feet and the lease referred only to the upper floors and mezzanine. The application judge noted, further, that 107 owned a building next door that had 6,000 square feet available to lease and that the parties had entered into a letter of intent for Extreme to lease that space (although no lease of this space was ultimately concluded).
[19] The application judge concluded that the lease did not include the basement. She reasoned as follows, at paras. 49-51:
When I look at the lease as a whole, the square footage referred to in it, and the description and schedules describing only the upper floors and mezzanine, I conclude the basement was not included in the leased premises.
I say this because the approximate square footage referred to in the lease is not nearly large enough to include the basement. The schedules setting out what is leased do not include the basement floor plan. The lease itself says the premises consist of three floors plus a mezzanine. It does not refer to the basement as being part of the leased premises. While I recognize parts of the lease refer to the whole property, and require the tenant to pay all the utilities rather than a proportionate share of them, I see the lease, taken as a whole, as excluding the basement.
Other factors support this conclusion as well, including the parties' continued negotiations for Extreme to take additional space next door that would bring its premises to about 30,000 square feet. Those negotiations continued over a long period of time, with Extreme continually promising 107 it was going to go ahead and lease the additional space.
[20] The application judge went on to conclude that 107 was not entitled to rectification of the lease and that 107's claim for rent arrears was not barred by the estoppel certificate or its delay in bringing the claim. She calculated rent GoodLife owed for its use of the basement based on the rate per square foot set out in the lease.
Issues
[21] GoodLife submits that the application judge erred in five ways:
By finding that the lease was only for three floors plus a mezzanine, and did not include the basement;
By finding the rent was based on cost per square foot;
By finding that occupation rent is owed;
By failing to find that 107's claims were barred by estoppel and waiver; and
By drawing an adverse inference against it for failing to call evidence about what transpired prior to the proceedings under the CCAA involving Extreme and for failing to examine anyone from Extreme.
[22] The first issue – whether the lease includes the basement – is key to the appeal. The remaining issues need to be determined only if the application judge's conclusion that the lease does not include the basement is upheld.
Analysis
The Standard of Review
[23] As the Supreme Court of Canada explained in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, contractual interpretation is properly characterized as a mixed question of fact and law and is subject to deferential review on appeal. Although the court has since held that standard form contracts are an exception to this rule and are subject to review on the standard of correctness, that exception does not apply here: see Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37. The provisions of the lease in question were negotiated by the parties and their interpretation is subject to the Sattva principles.
[24] Sattva makes clear that the standard of review is palpable and overriding error, unless it is possible to identify an extricable question of law, in which case correctness review applies. Sattva emphasizes that questions of law are relatively rare; courts must be cautious in identifying extricable questions of law, lest contractual interpretation collapse into correctness review. Nevertheless, the Supreme Court identified three examples of legal errors that may be made in the course of contractual interpretation: "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 (citing King v. Operating Engineers Training Institute of Manitoba Inc., 2011 MBCA 80, 270 Man. R. (2d) 63, at para. 21).
[25] GoodLife submits that the application judge made a palpable and overriding error in overlooking critical evidence in the circumstances surrounding the negotiation of the lease. 107 submits that the application judge's decision reveals no such error and that her decision is supported by her factual findings and is entitled to deference.
[26] Although I agree with GoodLife that the application judge erred in overlooking critical evidence, I would characterize the error as an error of law. In my view, although the application judge referred to some of the circumstances surrounding the negotiation of the lease, she failed to interpret the lease having regard to the circumstances as a whole. The evidence, and in particular email correspondence between the parties' lawyers, confirms that the parties intended to lease the entire premises, including the basement, on a lump sum basis.
The Surrounding Circumstances
[27] As the Supreme Court explained in Sattva, the court must "read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract": Sattva, at para. 47.
[28] The circumstances surrounding the formation of the lease take on particular importance in a case such as this, given the inconsistent and contradictory provisions that were included in the lease in its final form.
[29] The application judge referred to several of the draft leases exchanged by the parties during the negotiation process, but her consideration of the surrounding circumstances is incomplete. Although she refers to some of the email correspondence between the parties, she does not consider the key correspondence that took place early in the negotiations – correspondence that makes clear the parties' intention to lease the entire premises, including the basement, on a lump sum basis.
[30] On September 1, 2006 Mr. Westwood asked specifically whether the rent was an agreed amount or was based upon a cost per square foot, and whether the tenant was leasing the entire property. Mr. Singer replied in an email dated September 18, 2006. His answer was categorical:
The Tenant will accept 635 Danforth on an "as is basis" and the rent will be the rent negotiated per year and not based on actual square feet. The Tenant will lease the entire building (other than the kitchen area in the basement which will be used by the Landlord for its storage area). [Emphasis added.]
[31] Thus, early in the negotiation process, 107 acknowledged that the lease was not based on the actual square footage being rented. The entire building was being leased for a lump sum rent, albeit that 107 was to retain a portion of the basement that included a kitchen, for future purposes.
[32] This understanding is also confirmed by evidence given by Mr. Singer on cross-examination on his affidavit concerning his September 18, 2006 email:
Q: If I go on at paragraph number 3 in your e-mail message of September 18, you say right after the sentence we've reviewed, "The Tenant will lease the entire building other than the kitchen area in the basement, which will be used by the landlord for its storage area."
A: That's correct.
Q: And you're indicating to the tenant at this time that the tenant is going to lease the entire building other than that kitchen area in the basement, fair?
A: That's correct, that's what it says.
Q: You indicate to the tenant that because those were the instructions you were receiving from the landlord.
A: I would assume that's the case, yes.
Q: You were aware at that time that the kitchen area in the basement was only a portion of the basement, not all of it.
A: That's correct.
Q: You were indicating to the tenant that the entire building would be leased including that portion of the basement that was not occupied by a kitchen, fair?
A: Correct.
Q: And that was your instructions from the landlord.
A: Correct.
[33] Subsequent drafts of the lease confirm this understanding.
[34] Extreme was concerned about the presence of a kitchen in the basement and the possibility that odours from the kitchen would adversely affect its fitness business, and further correspondence between the parties' solicitors ensued. On September 20, 2006, Mr. Westwood wrote to Mr. Singer that he understood that 107 no longer required the use of the kitchen, and that: "This space will now become part of the Leased Premises."
[35] Mr. Singer neither confirmed nor rejected Mr. Westwood's assertion concerning the kitchen in either his September 26 or 28 email correspondence. However, Mr. Singer deleted the provision excluding the kitchen from the leased space from the next draft of the lease he provided to Mr. Westwood on October 6, 2006, and the provision remained deleted from the lease as finally executed.
[36] In the result, the only limitation on the scope of the leased premises set out in Mr. Singer's September 18, 2006 email no longer applied: the entire premises, including the basement, were being leased by Extreme.
[37] This understanding – that the lease was for the entire premises – was not altered by the parties' subsequent negotiations. On the contrary, the deletion of several provisions from subsequent drafts of the lease confirms the conclusion that the lease was for the entire premises, including the basement. For example, the "proportionate share" provision, which required the tenant to pay only the utilities for the portion of the premises it was leasing, was deleted from the October 6, 2006 draft and, as a result, Extreme was required to pay the utilities for the entire premises. The "above normal utilization" clause, which would have permitted the landlord to charge additional rent for above-normal utility use, was deleted from the October 11, 2006 draft. The measurement clause, which would have permitted the landlord to measure the premises and adjust the rent if the stated measurements in the lease were inaccurate, was deleted from the October 23, 2006 draft.
[38] In each case, these provisions were deleted in response to comments from Mr. Westwood on previous drafts of the lease indicating they were inconsistent with the understanding that the tenant was leasing the entire premises on a lump sum basis. Finally, the definition of premises in the October 27, 2006 draft was shortened to refer simply to "the entire property".
[39] Although the application judge acknowledged the deletion of these provisions, she did not consider their deletion in the context of the e-mail exchange setting out the agreement reached by the parties. She considered that other provisions in the lease – in particular, provisions referring to the square footage and the description of the premises as consisting of three floors plus a mezzanine – had the effect of excluding the basement.
[40] With respect, that conclusion was negated by the evidence of the surrounding circumstances outlined above. The problem in this case is not that the application judge simply failed to refer to all the material evidence in the reasons for her decision; indeed, she was not required to do so. The problem is that the application judge failed to consider all the material evidence before reaching her decision. The result is an interpretation of the lease that was inconsistent with the intention of the parties.
[41] Plainly, some inconsistent provisions remained in the lease. However, when the interpretation of the lease is informed by consideration of all the surrounding circumstances – and in particular, the email correspondence and the evidence of Mr. Singer – the parties' intention that the entire premises, including the basement, were to be leased on a lump sum basis is clear and must be given effect. That some inconsistent provisions remained in the lease does not, without more, provide a basis for concluding otherwise.
[42] The application judge considered it significant that 107 appears to have assumed that Extreme would agree to lease additional space in adjoining premises that it owned, but this did not come to pass. It may be that Extreme's use of the basement – which was known to 107 for some time – rendered the leasing of additional premises unnecessary. Be that as it may, 107 is entitled only to the rent GoodLife is required to pay under the lease, and in my view the lease includes the basement.
[43] This conclusion is determinative of this appeal, and as a result I do not reach the other issues raised by GoodLife.
Disposition
[44] I would allow the appeal.
[45] I would award GoodLife its costs on the appeal, fixed by agreement of the parties at $20,000, inclusive of taxes and disbursements. I would reverse the costs award on the application.
"Grant Huscroft J.A."
"I agree E.A. Cronk J.A."
"I agree Paul Rouleau J.A."
Released: January 10, 2017