Court of Appeal for Ontario

Date: 2018-12-21 Docket: C65185 Judges: Doherty, Miller and Paciocco JJ.A.

Between

Vista Sudbury Hotel Inc. carrying on business as Rainbow Value Centre and Vista Sudbury Complex Inc.

Plaintiffs (Appellants)

and

The Oshawa Group Limited, Oshawa Holdings Limited and Zellers Inc.

Defendants (Respondent)

Counsel

Barry Weintraub and Kristjan Surko, for the appellants

Nicole Henderson and Justin Manoryk, for the respondent

Heard

December 14, 2018

Appeal

On appeal from the judgment of Justice John S. Poupore of the Superior Court of Justice, dated February 20, 2018, with reasons reported at 2018 ONSC 1164.

Reasons for Decision

[1] The appellants ("Vista") own a shopping mall referred to as the Sudbury Rainbow Value Centre. The respondent ("Zellers") rented space in the mall and operated a Zellers retail store in the mall for many years.

[2] In February 2004, Zellers advised Vista that it intended to cease operations in May 2004. Zellers's lease did not terminate until April 2005.

[3] Vista sued Zellers claiming that Zellers was obliged under the "continuous use" clauses in the lease to operate the store business until the lease ended in April 2005. Zellers proceeded as planned and closed the store in May 2004. Zellers paid rent, maintenance, and repair obligations under the lease until the termination date in the lease.

[4] Vista pursued its claim against Zellers alleging that Zellers's premature departure from the mall had caused significant damages to Vista beyond the amounts owed for rent, repair, and maintenance under the lease. The trial was eventually ordered bifurcated. The liability phase proceeded in late 2017. The trial judge found that, under the terms of the lease, Zellers was entitled to close its store when it did. He also rejected the other arguments advanced by Vista. Those arguments are not germane to the outcome of the appeal.

[5] Vista appealed from the trial judge's dismissal of its action. At the conclusion of oral argument, the court advised the parties that the appeal would be allowed with reasons to follow. These are our reasons.

Lease Interpretation

[6] The dispute over the interpretation of the lease focused mainly on the interaction of the "uses" clause in s. 8.01, and the "hours of operation" clause in s. 8.01.1.

[7] Section 8.01 reads in part:

Section 8.01 Use of Premises

The Tenant covenants and agrees that throughout the Term, either it or its successors or permitted assigns will continuously, actively and diligently carry on the business in the whole of the Leased Premises (but subject to this Section 8.01) of the provision of such services and the sale of merchandise as is sold in any department store, it being understood that while the Tenant is not required by this Section 8.01 to sell all lines as are sold in any department store, it will operate a multi line store.

[8] Section 8.01 expressly requires Zellers to "continuously, actively and diligently carry on [business]" in the leased premises for the term of the lease. The continuous use obligation spelled out in s. 8.01 is repeated in very similar language in s. 8.05, which is headed "Continuous Use". Unless modified by some other provision in the lease, the language of ss. 8.01 and 8.05 could leave no doubt that Zellers was obliged to carry on business on the leased premises throughout the term of the lease.

[9] The trial judge held that the continuous use obligation was qualified by the "hours of operation" clause in s. 8.01.1: see Vista Sudbury Hotel Inc. v. The Oshawa Group Limited, 2018 ONSC 1164, at para. 11. That section reads in part:

Section 8.01.1 Hours During Which Tenant to Remain Open

The Tenant shall remain open for the conduct of business with the public during at lease [sic] those minimum hours of business, on those days when

(1) eighty percent (80%) (by area and number) of the Rentable Area of the Commercial Complex (excluding all premises leased to the Tenant or to any Person described in Sections 11.01(b)(1), 11.01(b)(2) and 11.01(b)(3) below), and

(2) the Department Store, as it exists on the 21st day of February, 1986,

are open in substantially the whole of such respective areas for the conduct of business with the public.

[10] Section 8.01.1 required Zellers to be open for business during "minimum hours of business" on any day when 80 per cent of the rentable area of the commercial part of the mall was open and the "Department Store" was open. The term "Department Store" in the lease referred to the Eaton's store in the mall.

[11] The Eaton's store had been the main store in the mall. It had, however, ceased operation in November 1999, when Eaton's went bankrupt. No tenant had replaced Eaton's in the mall as of February 2004.

[12] When Zellers told Vista that it was ceasing operations, neither condition in s. 8.01.1 existed. Eighty per cent of the rentable area was not open, and the long gone Eaton's store was not open.

[13] The trial judge reasoned that Zellers's duty to continuously operate its store was qualified by s. 8.01.1 such that Zellers was only required to be open for business when the two conditions in that section were met. If Zellers was not required under the terms of the lease to be open for business, it could not have an obligation to continuously carry out its business on the rented premises. The trial judge said, at para. 23:

The lease contains a clause that expressly confers discretion on Zellers to set its hours, subject to certain conditions, and it would contradict the lease to impose an obligation of continuous use even after Eaton's departure (an event that was, as already outlined, foreseeable to the parties).

Court of Appeal's Analysis

[14] We agree with counsel for the appellants that s. 8.01.1, which addresses hours of operation and gives Zellers a discretion as to the hours it chooses to remain open if, for example, Eaton's is not open, cannot reasonably be read as overriding Zellers express continuous use obligation which appears in an unqualified form in two places in the lease (ss. 8.01 and 8.05).

[15] On a plain reading, s. 8.01 imposes an obligation on Zellers to carry on business in the leased space for the term of the lease. On an equally plain reading, s. 8.01.1 is directed at setting Zellers's hours of operation of its business and not at the requirement that Zellers carry on business. There is a fundamental commercial difference between a term directed at the hours of the day during which a store must open and a requirement that the store carry on business on a continuous basis. A term which speaks to hours of operation assumes that the store is carrying on business.

[16] Zellers points to the phrase "but subject to s. 8.01" in s. 8.01 to support its submission that the continuous use obligation in s. 8.01 is qualified by all of the provisions in s. 8.01.1, including the hours of operation provision. The reference to s. 8.01 in the phrase "subject to s. 8.01" appears to be a drafting error. Read literally, the phrase makes s. 8.01 subject to itself. Counsel accepted that the reference to s. 8.01 is meant to be a reference to s. 8.01.1.

[17] Section 8.01 is subject to s. 8.01.1 in that the latter section speaks to certain particulars of Zellers's obligation to carry on business throughout the term of the lease. The first part of s. 8.01.1 speaks to hours of daily operation. The remaining provisions in s. 8.01.1 speak to circumstances which justify temporary interruptions in the carrying out of Zellers's business. We see no contradiction between the two provisions. Consequently, reading s. 8.01 as subject to s. 8.01.1 does not require reading s. 8.01 – much less s. 8.05 – out of the agreement.

[18] In February 2004, by virtue of the earlier closing of the Eaton's department store, Zellers had the discretion to set its hours of operation.[1] Zellers was however, obliged to carry on business through to the end of the lease under the continuous operation provisions in ss. 8.01 and 8.05.

[19] For the reasons set out above, we conclude that the trial judge's interpretation of s. 8.01 was clearly wrong. That error was material, in that it determined the result. The error is therefore palpable and overriding and requires appellate intervention.

[20] Given our determination on the contractual interpretation issue, it is unnecessary to address the other grounds of appeal raised by the appellant.

Decision

[21] The appeal is allowed, the judgment below is set aside, and judgment is granted in favour of Vista declaring that Zellers breached its obligation of continuous operation when it closed its store in May 2004. The matter is remitted to the trial court for a determination of the damages, if any, suffered by Vista as a result of that breach.

[22] Vista is entitled to its costs of the appeal on a partial indemnity basis. We fix those costs at $20,000, inclusive of disbursements and applicable taxes. We leave the costs of the proceedings in the trial court to the judge hearing the damages phase of the trial.

"Doherty J.A."

"B.W. Miller J.A."

"David M. Paciocco J.A."

Footnote

[1] The scope of that discretion need not be decided in these proceedings. It may be important at the damages phase of the trial.