Court of Appeal for Ontario

Date: June 8, 2018

Docket: C64082

Judges: Epstein, van Rensburg and Brown JJ.A.

Between

Smiles First Corporation and Union Health and Dental Centre Inc.

Applicants (Appellants)

and

2377087 Ontario Limited o/a International Union of Painters and Allied Trades District Council No. 46, Joe Russo, 2445855 Ontario Inc. and Frank Cundari

Respondents (Respondent)

Counsel:

Tanya Walker, for the appellants

Arleen Huggins, for the respondent

Heard: March 5, 2018

On appeal from: The order of Justice Peter J. Cavanagh of the Superior Court of Justice, dated July 13, 2017, with reasons reported at 2017 ONSC 4306, 87 R.P.R. (5th) 144, and reasons for costs reported at 2017 ONSC 5081.

BROWN J.A.:

I. OVERVIEW

[1] The appellants, Smiles First Corporation and Union Health and Dental Centre Inc. (collectively "Smiles First"), appeal from the dismissal of their application under s. 21 of the Commercial Tenancies Act, R.S.O. 1990, c. L.7 (the "CTA"), and s. 98 of the Courts of Justice Act, R.S.O. 1990, c. C.43 (the "CJA"). They also seek leave to appeal the costs order.

[2] The respondent, 2377087 Ontario Limited (the "Landlord"), entered into a head lease for premises at 130 Toro Road, Toronto (the "Premises") with 2445855 Ontario Inc. ("244"). In turn, on or about February 1, 2015, 244 subleased the Premises to Smiles First by letter of intent (the "Sublease"). On March 21, 2017 the Landlord gave Smiles First notice that its tenancy would end on April 30, 2017 (the "Notice of Termination").

[3] This appeal raises two main issues:

(i) 244 purported to assign its head lease with the Landlord to Smiles First by an assignment dated October 31, 2016. Did the application judge err in concluding the Landlord was not bound by that assignment?

(ii) Did the application judge err in refusing to grant Smiles First relief from forfeiture of its tenancy?

[4] For the reasons set out below, I would allow the appeal and grant a declaration that Smiles First is entitled to possession of the Premises until the end of the term of the Sublease, on the terms and conditions set out therein, including the amount of rent payable.

II. FIRST ISSUE: THE EFFECT OF THE OCTOBER 31, 2016 ASSIGNMENT OF THE HEAD LEASE

The Evidence

[5] The first issue turns on: (i) the language of the assignment of the Head Lease; (ii) the effect of certain correspondence between the parties' counsel in October and November 2016; and (iii) the acceptance by the Landlord of rent from Smiles First after November 2016.

[6] 244 initially had leased the Premises from the Landlord under a head lease dated January 12, 2015, for a term of 5.5 years, commencing on February 1, 2015. 244 subleased the Premises to Smiles First for a similar term by way of the Sublease. 244 subleased the Premises to Smiles First at a significantly higher rent than it was required to pay the Landlord under the head lease.

[7] The Landlord and 244 subsequently entered into an amended head lease dated July 31, 2015 (the "Head Lease"), with the 5.5 year term commencing on August 14, 2015.

[8] In mid-2016, disputes arose under both the Head Lease and the Sublease. On October 6, 2016, Smiles First and 244 advised the Landlord that they had entered into a tentative agreement to resolve their disputes. However, their agreement was "contingent on [the Landlord's] approval of assigning 244's [Head Lease] to [Smiles First] and/or the [Landlord] entering into a new head lease with [Smiles First]."

[9] Two events then occurred.

[10] First, 244 executed an October 31, 2016 assignment of the Head Lease to Smiles First (the "Head Lease Assignment"). By its terms, the Head Lease Assignment required "receiving the Landlord's Consent", following which 244 would transfer and assign to Smiles First all of its rights under the Head Lease. As matters transpired, neither Smiles First nor 244 ever asked the Landlord for its consent to the assignment.

[11] Second, the Landlord, 244, and Smiles First embarked on negotiations to revise the leasing arrangements for the Premises. The Landlord wanted to enter into a new head lease directly with Smiles First, and 244 wanted nothing more to do with the Premises. The Landlord circulated draft Minutes of Settlement and a new form of head lease with Smiles First in November 2016. Smiles First and 244 did not sign the Minutes at that time.

[12] That led the Landlord, in February 2017, to remind Smiles First and 244 that they had not yet returned signed Minutes of Settlement or a new head lease. 244 thereupon provided the Landlord with signed Minutes, which stated that 244 had abandoned the Head Lease as of November 1, 2016. In the Minutes, 244 also agreed to pay the Landlord all outstanding rent accrued from September 14, 2016 to November 1, 2016.

[13] Smiles First refused to sign the Minutes, taking the position that it was an "official tenant" pursuant to the Head Lease Assignment. The Landlord responded that it had not consented to the Assignment and expected Smiles First to sign a new head lease directly with it. The Landlord took the position that Smiles First now occupied the Premises as "an occupant subject to a month to month term."

[14] By the March 21, 2017 Notice of Termination, the Landlord notified Smiles First that it was terminating its tenancy of the Premises effective April 30, 2017.

Analysis

[15] The application judge held that the Head Lease Assignment did not operate to assign 244's interest in the Head Lease to Smiles First and was not effective as against the Landlord for several reasons:

(i) Neither Smiles First nor 244 had sought or obtained the Landlord's consent to the Head Lease Assignment, as required by the specific terms of that assignment. As a result, they failed to fulfill a condition precedent to the assignment of the Head Lease from 244 to Smiles First;

(ii) 244 was not entitled to assign the Head Lease without the Landlord's consent. Section 7 of the Head Lease stated 244 could assign the Head Lease "[s]o long as the Tenant is not in default under the terms of the [Head Lease]." The application judge held that when 244 purported to assign the Head Lease to Smiles First, it was in default of the payment of rent to the Landlord; and

(iii) the correspondence amongst the parties in October 2016 did not constitute actual or constructive notice to the Landlord of the Head Lease Assignment.

[16] Those findings were based on a reasonable interpretation by the application judge of the terms of the Head Lease Assignment and Head Lease, informed by an appropriate consideration of the factual matrix, and they were open to the application judge to make based on the record before him: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633. I see no basis upon which to interfere with them.

[17] The application judge further held that the Landlord's acceptance of rent from Smiles First after November 2016 did not: (i) amount to its recognition of an equitable assignment of the Head Lease; (ii) constitute a waiver of its rights; or (iii) estop the Landlord from asserting those rights. At paras. 71, 75 and 76 of his reasons, the application judge wrote, in part:

I do not agree that Smiles First has shown that, by accepting rent and allowing Smiles First to remain in possession of the Leased premises, the Landlord intended that the assignment of the Head Lease to Smiles First was valid and effective. I do not agree that accepting the Assignment of Lease as an equitable assignment would give effect to the intentions of the parties. I decline to treat the Assignment of Lease as a valid assignment in equity.

The onus is on Smiles First to show, through evidence, that acceptance by the Landlord of rent paid by Smiles First reflected the Landlord's intention to treat the Assignment of Lease as [] valid and effective. Smiles First has failed to discharge its onus of proving that the Landlord, by accepting payment of rent, intended to accept the validity of the assignment of the Head Lease to Smiles First.

The acceptance of rent by the Landlord during the period when the parties were engaged in settlement negotiations does not, in these circumstances, represent an implicit assertion by the Landlord that Smiles First is in possession of the Leased Premises as an assignee of the Head Lease from 244.

[18] I see no reversible error in that analysis. The evidence showed that the Landlord's acceptance of the rent was done during a period of time when it had made clear that Smiles First needed to enter into a new head lease directly with it. Smiles First was not prepared to do so on terms acceptable to the Landlord. In those circumstances, it was open to the application judge to find that the Landlord's acceptance of rent while Smiles First continued to occupy the Premises did not amount to the recognition of an equitable assignment of the Head Lease or a waiver of its rights, or estop it from asserting its rights.

III. SECOND ISSUE: DID THE APPLICATION JUDGE ERR IN REFUSING TO GRANT SMILES FIRST RELIEF FROM FORFEITURE?

[19] Smiles First advances several grounds of appeal from the application judge's refusal to grant it relief from forfeiture either under s. 21 of the CTA [1] or s. 98 of the CJA. [2]

The Application Judge's Use of the Minutes of Settlement

[20] In considering Smiles First's request for relief from forfeiture, the application judge proceeded on the basis that 244 had agreed to abandon the Head Lease as of November 1, 2016. Smiles First submits the application judge erred in so finding because he relied, improperly, on the draft Minutes of Settlement that were protected by settlement privilege, which Smiles First had not waived. The Minutes recited 244's abandonment of the Head Lease effective November 1, 2016.

[21] I am not persuaded by this submission. As the application judge noted in his reasons, as part of its evidence on the application Smiles First filed the Minutes of Settlement. As a result, the application judge was entitled to consider that evidence.

The Effect of the Surrender of the Head Lease

[22] Before the application judge, the Landlord took the position that upon 244's abandonment of the Head Lease, the Sublease came to an end. It contended that after the November 1, 2016 effective date of abandonment, Smiles First occupied the premises on a monthly tenancy, which the Landlord properly terminated by the Notice of Termination.

[23] The application judge appeared to accept the Landlord's submission. At para. 85, he wrote: "Smiles First does not take the position that it is currently a subtenant … At the time that the Notice of Termination was given on March 21, 2017, Smiles First was no longer a subtenant." Nevertheless, the application judge went on to conclude that even if Smiles First was a subtenant, it would not be entitled to relief from forfeiture under s. 21 of the CTA or s. 98 of the CJA because the Landlord was not attempting to enforce any right of re-entry or forfeiture under the Head Lease, which 244 had abandoned. As a result, Smiles First was not entitled to an order allowing it to remain in possession of the premises "as a subtenant on the terms and conditions of the Head Lease": para. 86.

[24] For the reasons that follow, I conclude that the application judge erred in not granting Smiles First a remedy from the Landlord's attempt to enforce the Notice of Termination and evict Smiles First from the Premises. Smiles First is entitled to possession of the Premises until the end of the term of, and on the terms and conditions contained in, the Sublease.

[25] I start my analysis by recognizing that the parties placed the application judge in a difficult position. The argument advanced below by Smiles First lacked precision. Although Smiles First's factums on the application below clearly show that it sought alternative relief pursuant to the Sublease, its focus on securing new terms for its subtenancy understandably could lead the application judge to conclude that Smiles First was taking the position it was not currently a subtenant on the terms of the Sublease. Further, the parties did not provide the application judge with assistance on the key legal question: What legal effect did 244's abandonment of the Head Lease have on Smiles First's Sublease of the Premises? Following the hearing of the appeal, the panel called for and received submissions from the parties on that issue.

[26] Nevertheless, I conclude, with respect, that the application judge erred in holding that Smiles First was not entitled to continued possession of the Premises under the Sublease.

[27] The application judge found that 244 abandoned the premises as part of its settlement with the Landlord. I see no reversible error in that finding. It follows that 244's abandonment amounted to a surrender of the Head Lease by the tenant: Daulat Investments Inc. v. Ceci's Home for Children (1991), 85 D.L.R. (4th) 248 (Ont. Gen. Div.), at para. 26.

[28] Having found that 244 abandoned the Head Lease, the application judge erred by accepting the Landlord's submission that the surrender of the Head Lease resulted in the termination of the Sublease. As a matter of law, it did not. Where the tenant surrenders a head lease to the landlord, the subleases created by the surrendering tenant survive until the end of their stated terms: Kowalski and Shoota v. Gale, [1947] 1 D.L.R. 354 (Ont. C.A.), at paras. 32-33; Shapiro v. Handelman, [1947] O.R. 223 (C.A.), at paras. 6-7 and 16; Royal Bank v. Loeb Inc., [1995] O.J. No. 1702 (Gen. Div.), at paras. 12-13; and CTA, s. 17. [3]

[29] Accordingly, the application judge erred in finding that Smiles First was not a subtenant when the Landlord gave its Notice of Termination.

[30] That said, the application judge properly refused Smiles First's request for a declaration that pursuant to the Sublease it was entitled to remain in the Premises "on the same terms and conditions as the Head Lease": para. 80. Smiles First was only entitled to remain in the Premises on the terms and conditions contained in its Sublease.

[31] Nor was Smiles First entitled to relief under s. 21 of the CTA because the Landlord was not proceeding to enforce a right of re-entry or forfeiture under any covenant, proviso or stipulation in the Head Lease, which 244 had surrendered: Maverick Professional Services Inc. v. 592423 Ontario Inc. (2001), 147 O.A.C. 209 (C.A.), at para. 4. Nor was this a case for relief from forfeiture under s. 98 of the CJA as the Landlord was not trying to enforce a right of re-entry or forfeiture by reason of Smiles First's breach of the Sublease.

[32] However, Smiles First is entitled to relief against the Landlord's attempt to terminate its possession of the Premises on the basis that it was merely a monthly tenant. When the Landlord delivered the Notice of Termination, Smiles First was entitled to possession of the premises under the terms of the Sublease. The Notice of Termination was of no effect. Consequently, pursuant to s. 134(1)(a) of the CJA, [4] I would grant Smiles First a declaration that it is entitled to possession of the Premises until the end of the term of, and on the terms and conditions set out in, the Sublease, including the amount of rent payable.

IV. DISPOSITION

[33] For the reasons set out above, I would allow the appeal, set aside the application judge's order, and grant a declaration that Smiles First is entitled to possession of the Premises until the end of the term of the Sublease, on the terms and conditions set out therein, including the amount of rent payable.

[34] Although, in the result, Smiles First has obtained relief on this appeal, it did not succeed on its main argument based on an assignment of the Head Lease and its alternative request for relief in respect of the Sublease was sufficiently imprecise as to necessitate calling for further submissions. In those circumstances, I would only award Smiles First costs of the appeal, including the stay motion, in the amount of $5,000, inclusive of disbursements and applicable taxes. I would order that no costs be awarded in respect of the proceeding below.

Released: June 8, 2018

"David Brown J.A."

"I agree. Gloria Epstein J.A."

"I agree. K van Rensburg J.A."

Footnotes

[1] Section 21 provides:

Where a lessor is proceeding by action or otherwise to enforce a right of re-entry or forfeiture under any covenant, proviso or stipulation in a lease, the court, on motion by any person claiming as under-lessee any estate or interest in the property comprised in the lease or any part thereof, in the lessor's action, if any, or in any action or application in the Superior Court of Justice brought by such person for that purpose, may make an order vesting for the whole term of the lease or any less term the property comprised in the lease, or any part thereof, in any person entitled as under-lessee to any estate or interest in such property upon such conditions as to execution of any deed or other document, payment of rents, costs, expenses, damages, compensation, giving security or otherwise as the court in the circumstances of each case thinks fit; but in no case is any such under-lessee entitled to require a lease to be granted to him, her or it for any longer term than the under-lessee had under the original sub-lease.

[2] Section 98 provides: "A court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just."

[3] Section 17 states: "Where the reversion expectant on a lease of land merges or is surrendered, the estate which for the time being confers as against the tenant under the lease the next vested right to the land shall, to the extent of and for preserving such incidents to and obligations on the reversion as but for the surrender or merger thereof would have subsisted, be deemed the reversion expectant on the lease."

[4] Section 134(1) states, in part: "Unless otherwise provided, a court to which an appeal is taken may, (a) make any order or decision that ought to or could have been made by the court or tribunal appealed from".