Court File and Parties

COURT OF APPEAL FOR ONTARIO DATE: 20210506 DOCKET: C67924

Feldman, Simmons and Harvison Young JJ.A.

BETWEEN

The Corporation of the City of Orillia Applicant (Appellant/Respondent by way of cross-appeal)

and

Metro Ontario Real Estate Limited Respondent (Respondent/Appellant by way of cross-appeal)

AND BETWEEN

Metro Ontario Real Estate Limited Applicant (Respondent/Appellant by way of cross-appeal)

and

The Corporation of the City of Orillia Respondent (Appellant/Respondent by way of cross-appeal)

Counsel: Robert Wood, for the appellant/respondent by way of cross-appeal Krista Chaytor and Caitlin Steven, for the respondent/appellant by way of cross-appeal

Heard: November 3, 2020 by video conference

On appeal from the judgment of Justice Clayton Conlan of the Superior Court of Justice, dated December 20, 2019, with reasons reported at 2019 ONSC 7467, 15 R.P.R. (6th) 78.

Harvison Young J.A.:

A. Overview

[1] This appeal and cross-appeal arise out of a commercial lease of a grocery store in a shopping centre. The appellant landlord, the City of Orillia, appeals the judgment of the application judge who found in favour of the respondent Metro’s position that an amendment of the period of the lease was ambiguous and considered extrinsic evidence that supported Metro’s submission as to the ultimate term of the lease. Metro cross-appeals from the judgment dismissing its claims against Orillia in relation to certain other issues.

B. Background

[2] The issue on the main appeal is the expiry date of the lease. The original lease commenced on March 1, 1979 with an initial term of 25 years. The expiry date was February 28, 2004. Metro also had a right to five successive renewal periods of five years each. Thus, the ultimate expiry date was to be February 2029, or a maximum of 50 years from the date the lease commenced.

[3] In 1999, when Metro was planning the construction of an approximately 10,000 square foot addition, the parties negotiated an amendment to the lease which, among other things, extended the term of the lease by ten years, commencing on March 1, 2004 and expiring on February 28, 2014. The amendment gave Metro the option to extend the term of the lease for three additional periods of five years each for a total of five options or 25 years. Orillia brought an application for a declaration that the maximum term of the lease is 50 years, expiring in 2029. At the application hearing and in the main appeal, Orillia argued that the lease expires, at the latest, in February 2029, while Metro argued that the lease extends until February 2039, at the latest.

[4] The central issue on the cross-appeal is which party has the obligation to replace the roof of the grocery store. Starting in 2016, the roof of the grocery store began leaking, and Metro had to replace many of the ceiling tiles in the store. Months later, Metro determined that the roof needed to be replaced. Orillia took steps to implement a roof overlay solution but later asserted that it had no obligation to repair the roof. Metro brought an application requesting, among other things, an order requiring Orillia to replace the roof. At the application hearing and in the cross-appeal, Metro alleged that under the lease, Orillia had an obligation to replace the roof, while Metro only had an obligation to repair the roof. Orillia disagreed and argued that the roof, whether it requires repair or replacement, is Metro’s responsibility.

[5] For the reasons that follow, I would allow the main appeal and dismiss the cross-appeal, both in favour of Orillia.

(1) The decision below

[6] The applications of Orillia and Metro were heard together. On the lease expiry date issue, the application judge dismissed Orillia’s application and declared, in favour of Metro, that the lease would expire in 2039 at the latest. He found that the lease was ambiguous because there were two reasonable interpretations of the lease term clauses.

[7] The first interpretation, advanced by Orillia, was that the maximum 50-year term of the lease was not altered by the amendment. Section 2 of the amendment, which extended the term of the original lease by ten years from 2004 to 2014, reflected the exercising of two of the five five-year renewal options under s. 3(2) of the original lease. Section 3 of the amendment, which stated that Metro had the option to further extend the term for three additional periods of five years each for a total of five options or 25 years, reflected the fact that three renewal options remained, so that the lease would expire in 2029 at the latest.

[8] The second interpretation, advanced by Metro, was that the parties wanted to extend the length of the lease. Section 2 of the amending agreement added an additional ten years to the maximum potential length of the lease, and s. 3 of the amending agreement reflected that five five-year renewal periods remained after 2014, so that the lease would expire in 2039 at the latest. Section 3(3) of the original lease providing for a 50-year maximum term was altered by s. 6 of the amending agreement, which provided that the original lease is amended where necessary to give effect to the amendments.

[9] The application judge found that the factual matrix did not help resolve the ambiguity in the lease. As a result, the application judge examined the extrinsic evidence. He found that the extrinsic evidence, including the notice of lease registered on title and an estoppel certificate (both of which stated that the lease could be extended to 2039), supported Metro’s position that the amendment extended the maximum length of the lease by ten years.

[10] On the roof issue, in brief reasons, the application judge dismissed Metro’s application and determined that Orillia did not have any duty to replace the roof. He concluded that Metro’s obligation to maintain and repair the “Leased Premises” under s. 14(1)(a) of the lease included the roof. The application judge did not think that there was any legitimate basis to distinguish that clause because it says “repair” rather than “replace”.

(2) Issues on appeal

[11] Orillia makes four arguments on appeal:

• The application judge erred in determining the lease was ambiguous;
• The application judge erred in his consideration of the factual matrix;
• The application judge erred in his treatment of the extrinsic evidence; and
• The application judge erred in his consideration of commercial reasonableness.

[12] Metro makes two arguments on their cross-appeal, although the parties reached an agreement on the second issue during oral argument:

• The application judge erred in finding that Orillia does not have a duty to replace the roof; and
• The application judge erred in finding that Metro does not have a property interest in the Triangle Land.

(3) The parties’ positions

[13] On the main appeal, Orillia argues that the application judge committed an extricable error of law when he found an ambiguity, as he failed to interpret the contract as a whole. He failed to read ss. 2 and 3 of the amending agreement harmoniously with the original lease and the rest of the amending agreement. The application judge’s reading of the amendment reads the words “for three (3) additional periods of five (5) years each” and “if all remaining options are exercised” out of s. 3 of the amending agreement.

[14] Metro argues that this is a question of mixed fact and law and that the standard of review is one of palpable and overriding error. It submits that the application judge did not make such an error. If the parties had intended for s. 2 of the amending agreement to be an early exercise by Metro of two of its options to renew, then the section could have stated that. The application judge considered the lease and amending agreement as a whole, and he specifically considered the effect of s. 3(3) of the original lease and s. 6 of the amending agreement.

[15] On the roof repairs issue, the cross-appellant, Metro, argues that the application judge erred in stating that nothing turned on the fact that Metro’s only obligation under the lease was to repair, rather than replace. It argues that the roof work is a replacement rather than a repair.

[16] The respondent on the cross-appeal, Orillia, argues that Metro bears the sole responsibility of repairing the “Store” (as defined in the lease) and that Orillia has the responsibility of repairing the remainder of the “Shopping Centre”. The roof is part of the “Store” and Metro must repair or replace it when it affects their use and enjoyment of the premises.

C. Discussion

[17] A contract must be interpreted as a whole: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 64. Courts “should not strain to create an ambiguity where none exists”: see Chilton v. Co-operators General Insurance Co. (1997), 143 D.L.R. (4th) 647 (Ont. C.A.), at p. 654; Amberber v. IBM Canada Ltd., 2018 ONCA 571, 424 D.L.R. (4th) 169, at para. 63; and G.H.L. Fridman, The Law of Contract in Canada, 6th ed. (Toronto: Carswell, 2011), at pp. 442-43.

(1) Standard of review

[18] Contractual interpretation is a question of mixed fact and law requiring the application of principles of contractual interpretation to the words of a contract and its factual matrix: Sattva Capital, at para. 50. However, an extricable question of law is subject to a correctness standard of review. Potential extricable questions 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 Capital, at para. 53. Courts should be cautious in identifying extricable questions of law.

(2) The main appeal

[19] In my view, the main appeal should be allowed. The application judge committed an error of law by failing to consider the wording of the provisions in the context of the agreement as a whole. If he had not committed this error, he would have come to the conclusion that there was no ambiguity.

[20] The original lease commenced in 1979 with an initial term of 25 years. Metro also had the option to renew for five successive periods of five years each. The maximum term was to be 50 years with an ultimate expiry date in 2029. The relevant provisions of the original lease are as follows:

INITIAL TERM 3. (1) TO HAVE AND TO HOLD the Leased Premises for and during a period of 25 years and nil months commencing on the first day of March, 1979….

RENEWALS 3. (2) The Tenant shall have the options to renew this lease for 5 successive renewal periods of 5 years each….

MAXIMUM TERM 3. (3) If the exercise of an option to renew shall result in the Term exceeding a period of 50 years, then notwithstanding the provisions of section 3(2), the Term shall expire on that date which is 50 years after the date which is the earlier of the Occupation Date or the commencement date of the Term.

[21] The parties entered into a lease amending agreement in 1999. The amendment extended the term of the lease by ten years and gave Metro the option to extend the term of the lease for three additional periods of five years each for a total of five options or 25 years. The relevant provisions of the amending agreement are as follows:

2. TERM The term of the Lease is extended from the date that it would otherwise expire for a further term of ten (10) years commencing March 1, 2004 and expiring on February 28, 2014.

3. RENEWAL The Tenant has the option to further extend the term of the Lease for three (3) additional periods of five (5) years each, for a total of five (5) options or twenty-five (25) years, if all remaining options are exercised. The Tenant may exercise its options in the same manner as provided in the Lease.

4. EXISTING LEASE The Lease is amended wherever necessary to give effect to the foregoing and the Landlord and Tenant confirm that the Lease as so amended remains in full force and effect. [Emphasis added.]

[22] When the 1999 amendment is read within the context of the original lease, there is no ambiguity. Three reasons support this conclusion.

[23] First, a reading of the 1999 lease amendment alongside the original lease, considered from the perspective of the parties in 1999, leads to this conclusion. It is the only coherent way to make sense of the three additional periods specified in s. 3 of the amendment, and Metro was unable to explain what else the three additional periods could refer to, apart from the interpretation advanced by Orillia. While the drafting was not perfect, this reading is the only harmonious way to read the amendment with the original lease. At the time of the amendment, five years remained in the first 25-year term. None of the lease extension options under the original lease had been exercised, as the first opportunity would only have arisen in 2004. In extending the original term by ten years to 2014, the parties provided that there would have been a “further” three options to renew. The provision of “for a total of five” in s. 3 of the amending agreement can only mean that the extension from 2004-2014 comprised an early exercise of two of Metro’s options to extend.

[24] Second, the application judge’s interpretation would have rendered the overall term of the lease to be 60 years rather than 50, which was specifically precluded by s. 3(3) of the original lease. The application judge’s view that the basket clause in s. 6 of the amending agreement applies does not survive scrutiny. Section 6 provided that the original lease would be amended where necessary to give effect to the amendments. But the parties did not amend the 50-year limit provision, despite the fact that it was in the same section of the original lease addressing the initial term and renewal options. It was not buried elsewhere in the lease. Had the parties intended to vary the maximum term set out in s. 3(3), it would have been easy for them to do so. They did not.

[25] Third, this interpretation is supported by the factual matrix at the time of the 1999 amendment. Metro was expanding its store significantly, by 10,676 square feet. The parties agree that as part of Metro’s financing, the landlord contributed about $672,000 to the project ($63 per square foot). In return, Metro agreed to pay about $4.50 more per square foot in rent in the extension area, compared to the rent it was paying for the original area of the store. There is no dispute that it was therefore in the landlord’s interest to secure an early extension of the lease by ten years to 2014. While Metro undoubtedly expended large amounts on the renovations, one can infer that this was a business decision and it already had the right to remain for a further 30 years at the same rent if it chose to exercise the options.

[26] In short, the application judge fell into error in failing to consider the actual wording within the context of the lease as a whole, which led him to find that the provision was ambiguous. This was an extricable legal error: see Thunder Bay (City) v. Canadian National Railway Company, 2018 ONCA 517, 424 D.L.R. (4th) 588, at para. 46, leave to appeal refused, [2018] S.C.C.A. No. 358. The expiry date of the lease is 2029 and not 2039 as Metro argued. Orillia’s appeal must be allowed.

(3) The cross-appeal

(a) The roof repairs

[27] Starting in 2016, Metro experienced leaks in the roof at the grocery store, and its roof consultant determined that the roof needed to be replaced. The consultant suggested either a roof overlay that would salvage the existing insulation, or a full roof replacement strategy. Orillia approved, budgeted for, and entered into a contract for the roof overlay solution, but Orillia later took the position that these steps were taken in a mistaken belief that it had an obligation to repair the roof and that it now understands it has no such obligation. It was in this context that Metro sought an order requiring Orillia to replace the roof.

[28] The application judge correctly concluded that Orillia did not have any duty to replace the roof and that Metro had the obligation to maintain and repair the roof. Section 14(1)(a) of the lease states that the tenant, Metro, must “maintain and repair the Leased Premises”. The landlord’s obligation to make repairs and replacements in s. 15 is subject to the tenant’s obligations under s. 14.

[29] The relevant sections of the lease are as follows:

ARTICLE XIV – REPAIR, ALTERATIONS AND MAINTENANCE OF STORE

TENANT’S OBLIGATION 14. (1) The Tenant covenants that from and after the earlier of the Occupation Date or the date on which the Tenant accepts possession of the Store and opens the Store for business to the public (a) The Tenant shall maintain and repair the Leased Premises….

EXCEPTIONS 14. (2) The obligations of the Tenant under section 14(1) shall be subject to the following exceptions: (a) reasonable wear and tear which does not affect the use and enjoyment of the Leased Premises by the Tenant….

ARTICLE XV – REPAIR, ALTERATIONS AND MAINTENANCE OF SHOPPING CENTRE

LANDLORD’S OBLIGATIONS 15. (1) Subject to Article XIV, the Landlord shall (a) keep or cause all buildings and improvements in the Shopping Centre and the Common Facilities to be kept in good repair and in a clean, orderly and safe condition (both inside and outside), and (b) in a good and workmanlike manner promptly do all such work and make or cause to be made all necessary repairs, make all necessary rebuildings and replacements (structural or otherwise), ordinary as well as extraordinary, and foreseen as well as unforeseen, including all such repairs, rebuildings and replacements which as a prudent owner thereof it should do or make to properly maintain and operate all buildings and improvements in the Shopping Centre and the Common Facilities.

[30] Given the structure of the repair obligations under this lease, the proper analytical approach is to determine 1) whether the roof work is included in the tenant’s obligation to repair, 2) determine whether the roof work falls under an exception listed in s. 14(2), and 3) if the roof work is not the tenant’s obligation, determine if the work falls under the landlord’s repair obligation in s. 15 of the lease.

(i) Tenant’s obligation to repair

[31] The construction of a covenant of repair in a lease is a contextual, fact-specific exercise: see G.M. Pace Enterprises Inc. v. Tsai, 2003 BCSC 1336, 37 B.L.R. (3d) 60, at para. 66; Lurcott v. Wakely, [1911] 1 K.B. 905 (C.A. (Eng.)), at pp. 915-16. Like all contracts, the contract as a whole forms part of this context. Several principles on interpreting lease repair covenants emerge from a review of English and Canadian case law. First, the primary inquiry is to ask whether the repair gives the landlord back something entirely different than was demised. Second, the obligation to repair must be interpreted having regard to the specific wording of the repair covenant, the terms of the lease as a whole, and the premises rented, including its condition at the start of the lease. Third, a repair will generally involve some kind of replacement or renewal. One question is whether the replacement or renewal is of subsidiary parts of the whole or of the entire thing.

[32] A tenant that covenants to repair the premises is not obligated to fix defects in the premises that go beyond a repair. The analytical question is whether the work that “the tenant is being asked to do can properly be described as repair, or whether on the contrary it would involve giving back to the landlord a wholly different thing from that which he demised”: Ravenseft Properties Ltd. v. Davstone (Holdings) Ltd., [1980] Q.B. 12 (Q.B.D. (Eng.)), at p. 21; Nicholas Dowding et al., eds., Woodfall: Landlord and Tenant, loose-leaf (London: Sweet & Maxwell, 2020) (loose-leaf updated 2021, release 122), vol. 1 at 13.032.

[33] In Morcom v. Campbell-Johnson, [1955] 3 W.L.R. 497 (C.A. (Eng.)), at p. 501, leave to appeal to H.L. (Eng.) refused, Denning L.J. observed that the distinction between a repair and an improvement is whether it is a replacement of something already there or if it is the provision of something new:

It seems to me that the test, so far as one can give any test in these matters, is this: if the work which is done is the provision of something new for the benefit of the occupier, that is, properly speaking, an improvement; but if it is only the replacement of something already there, which has become dilapidated or worn out, then, albeit that it is a replacement by its modern equivalent, it comes within the category of repairs and not improvements.

[34] The test to determine whether the work goes beyond a “repair” has been stated in many different ways. One approach is to “look at the particular building, to look at the state which it is in at the date of the lease, to look at the precise terms of the lease, and then come to a conclusion as to whether, on a fair interpretation of those terms in relation to that state, the requisite work can fairly be termed repair. However large the covenant it must not be looked at in vacuo” (emphasis in original): Brew Brothers Ltd. v. Snax (Ross) Ltd., [1970] 1 Q.B. 612 (C.A. (Eng.)), at p. 640, leave to appeal to H.L. (Eng.) refused (October 13, 1969); Dowding, at 13.032.

[35] In Lurcott, at p. 924, Buckley L.J. described repair as “restoration by renewal or replacement of subsidiary parts of a whole. Renewal, as distinguished from repair, is reconstruction of the entirety, meaning by the entirety not necessarily the whole but substantially the whole subject-matter under discussion.” Buckley L.J. continued, at p. 924, “the question of repair is in every case one of degree, and the test is whether the act to be done is one which in substance is the renewal or replacement of defective parts, or the renewal or replacement of substantially the whole.”

[36] The English law on the definition of repair has, with some exceptions not relevant here, been adopted by Canadian courts: see e.g. Norbury Sudbury Ltd. v. Noront Steel (1981) Ltd. (1984), 11 D.L.R. (4th) 686 (Ont. H.C.), at p. 698; Hall v. Campbellford Cloth Co. Ltd., [1944] 2 D.L.R. 247 (Ont. H.C.).

[37] There are only a few Canadian cases that deal specifically with the obligation to repair a roof under a lease. In Hall, the roof of a curling rink collapsed after an unusual amount of snow accumulated on top of it. The roof and premises were available to be repaired, and the premises were not wholly destroyed. After a thorough review of Canadian, English, and American case law, the court determined, in conclusory reasons, that the repair fell under the tenant’s obligation to “repair, reasonable wear and tear and damage by fire, lightning and tempest only excepted”.

[38] In G.M. Pace, the court concluded that the tenant was not obligated to replace the roof of a service station that was at the end of its useful life. The service station was described as an older building that had suffered the ravages of neglect, and the roof was the original roof, when the lease began. As a result, the court determined that replacing the roof would provide to the landlord a building in a condition better than the tenant had received it. The tenant was only obliged to maintain, through repairs, the building as it existed when the lease began. In addition, the roof did not require immediate replacement and could continue to be “bandaided” for quite some time.

[39] Finally, in 708-1111 West Hastings Ltd. v. Coopers & Lybrand Vancouver Ltd., rev’d on other grounds, 1991 1374 (B.C.C.A.), the issue was whether the roof membrane repair was a “structural repair”. In deciding the issue, the court commented in obiter that “[s]ome of the English cases appear very harsh on the tenant. But it must be kept in mind the tenancies are frequently of long duration. That a tenant for 40 years would be held responsible for replacing a 20 year bonded roof during the term is not remarkable.” Some have cautioned that the length of the lease, although relevant, cannot be weighed too heavily: see Post Office v. Aquarius Properties Ltd., [1987] 1 All E.R. 1055 (C.A.), at pp. 1064-65.

[40] In summary, when interpreting a covenant of repair in a lease, a court should consider:

(i) whether the repair gives the landlord back something entirely different than was demised (see Ravenseft; Morcom);

(ii) the circumstances surrounding the obligation to repair including the specific wording of the covenant, the terms of the lease, the premises rented, and the condition of the premises at the start of the lease (see Brew Brothers; G.M. Pace; 708-1111 West Hastings; and Post Office); and

(iii) whether the replacement or renewal is of subsidiary parts of the whole or of the entire thing (see Lurcott).

[41] The parties, quite properly, did not submit that s. 25 of the lease, which addresses end of term obligations, applied to this case. The lease was renewed in 2019 and the final end of the lease will be 2029 as determined above.

Application to the facts

[42] This case involves the commercial lease of an anchor tenant. The lease length is a maximum of 50 years, which is longer than the typical service life of built-up roofs of 20-25 years, according to Metro’s roof consultant’s report. The building was new when the lease started. When it became clear that the roof needed significant repairs, the parties were presented with two options: (i) a roof overlay, which would preserve part of the roof and defer a roof replacement for another 15-20 years, and (ii) a full roof replacement. Orillia elected for the less expensive roof overlay option.

[43] The starting point for the determination of the parties’ rights and obligations under a commercial lease must be the lease itself, read as a whole. The covenant to repair as set out in s. 14(1) imposes a general obligation upon the tenant, while s. 14(2) creates several narrow exceptions. Metro did not argue that the roof repairs fall within one of the exceptions in s. 14(2) but argued that it was a “replacement” and not a “repair” and thus did not fall within the scope of s. 14(1).

[44] Given the case law referred to above, I reject Metro’s submissions that the roof repair was a “replacement” rather than a repair. Here, the roof overlay solution will not itself even bring the property back to its original condition as it will last less time than a new roof would. This case is distinguishable from the concern in G.M. Pace, where a roof replacement by the tenant would have returned the premises to the landlord in a better condition than it was in when the lease began. It cannot be said that the roof overlay will give Orillia something entirely different – or better – than what was originally demised or that it replaces substantially the entire premises. At the beginning of the lease in 1979, the roof was brand new. Further, given the evidence that the roof overlay would last 15-20 years, and the fact that the lease was renewed in 2019, and has one more renewal in 2024 before the end of the lease in 2029, it seems likely that Metro will receive the bulk of the benefit of the roof overlay.

[45] It should also be noted that the covenant to repair issues in this appeal arise in the course of the lease, and thus are not governed by s. 25(2) of the lease, which provides that the tenant must surrender the leased premises upon termination of the term “in good and substantial repair and condition in accordance with its covenants to maintain and repair the Leased Premises.” This covenant may raise distinct considerations that are not necessary to canvas on this appeal.

(ii) Reasonable wear and tear exception

[46] A reasonable wear and tear exception excludes damage due to the “reasonable use of the house by the tenant and the ordinary operation of natural forces” from a tenant’s obligation to repair: see Haskell v. Marlow, [1928] 2 K.B. 45 (K.B.D. (Eng.)), at p. 59; Stellarbridge Management Inc. v. Magna International (Canada) Inc., at para. 41, leave to appeal refused, [2004] S.C.C.A. No. 371. The burden is on the party claiming reasonable wear and tear to show that they are entitled to rely on the exception: see Stellarbridge, at paras. 60-64.

[47] In this case, s. 14(2)(a) excludes from the tenant’s repair obligation only “reasonable wear and tear which does not affect the use and enjoyment of the Leased Premises by the Tenant”. This exclusion could not apply as the record indicates that the roof was, at points, leaking, which would affect the tenant’s use and enjoyment of the property.

(iii) Landlord’s obligation of repair

[48] Given my conclusion that the roof repair is Metro’s obligation, it is clear from the terms of s. 15 of the lease that Orillia is not obligated to repair the roof.

[49] A review of the lease indicates that there are no additional provisions that are relevant to the interpretation of ss. 14 and 15 in this case. The application judge did not err in concluding that Orillia did not have any duty to replace the roof.

(b) The “Triangle Land”

[50] In the course of argument before this court, the parties were able to agree that it was not necessary to determine any issues of rights with respect to the Triangle Land on this appeal at this time.

D. Disposition

[51] I would allow the appeal and dismiss the cross-appeal. All inclusive costs of the appeal of $25,000 and all inclusive costs of the application below of $35,000 are payable by the respondent and appellant by way of cross-appeal, Metro, to the appellant and respondent by way of cross-appeal, Orillia, for a total of $60,000.

Released: May 6, 2021 “K.F.” “A. Harvison Young J.A.” “I agree K. Feldman J.A.” “I agree Janet Simmons J.A.”