Court of Appeal for Ontario

Date: 2022-03-11 Docket: C69601

Judges: Simmons, Harvison Young and Zarnett JJ.A.

Between: Jeff Day Hospitality Inc. Applicant (Respondent)

And: Heritage Preservation Holdings, Canada, Inc. Respondent (Appellant)

Counsel: Jonathan Chen and Aoife Quinn, for the appellant Charles Hammond, for the respondent

Heard: February 24, 2022 by video conference

On appeal from the judgment of Justice Robert F. Scott of the Superior Court of Justice, dated June 10, 2021.

Reasons for Decision

[1] The appellant appeals from a judgment that requires it to perform its obligations under an Agreement of Purchase and Sale (“APS”) dated January 20, 2020. In the APS, the appellant agreed to sell a hotel property in Jones Falls, Ontario to the respondent for a purchase price of $1,375,000. The judgment requires the appellant to close the sale in accordance with the terms of the APS; it also authorizes the respondent to hold back $500,000 from the purchase price pending determination of the cost of rectifying certain deficiencies, which the application judge held were the responsibility of the appellant.

[2] The appellant raises three grounds of appeal: (i) that the application judge erred in finding that the parties had actually concluded an agreement on all terms in the APS (the “contract formation issue”); (ii) that the application judge erred in failing to find the respondent was in breach of the APS on the agreed closing date because the first mortgage it had arranged exceeded a limit on such financing found in an implied term of the APS (the “implied term issue”) ; and (iii) that the application judge erred in finding the repair of certain deficiencies to be the appellant’s responsibility under the APS (the “deficiencies issue”).

[3] For the reasons that follow, we allow the appeal as to an aspect of the deficiencies issue. Otherwise, we dismiss the appeal.

(i) The Contract Formation Issue

[4] Between January 8 and 20, 2020, the parties exchanged written offers relating to the purchase of the appellant’s hotel. [1]

[5] The respondent first made an offer to purchase on January 8, 2020, which the appellant rejected. On January 10, 2020, the respondent made a revised offer; it made changes to its first offer and initialled them. On January 16, 2020, the appellant made a counteroffer; it made changes to the respondent’s revised offer and initialled those changes. On January 20, 2020, the respondent made a further revised offer, making certain changes to the terms proposed in the appellant’s January 16 counteroffer and initialling those changes.

[6] On January 20, 2020, the appellant initialled the changes in the respondent’s further revised offer, except for the change to one term relating to the septic system.

[7] The appellant argues that because it did not initial one of the respondent’s changes in the January 20, 2020 further revised offer, it did not accept all of the terms of that offer. It submits that the parties’ course of conduct indicates that changes were accepted by initialling. Accordingly, it submits that the application judge erred in finding that a binding agreement – namely the APS – had been reached on January 20, 2020 by the acceptance of the respondent’s further revised offer.

[8] We disagree, and did not call on the respondent to address this issue in oral argument.

[9] Although on January 20, 2020, the appellant did not initial one of the changes in the respondent’s further revised offer, the appellant did sign a “Confirmation of Acceptance” contained in it which stated: “Notwithstanding anything contained herein to the contrary, I confirm this Agreement with all changes both typed and written was finally accepted by all parties at 2:50 p.m. this 20th day of January, 2020”.

[10] The application judge concluded that the appellant accepted the terms in the APS in their entirety. In our view, that finding was open to him.

[11] Acceptance is constituted by conduct of the recipient that a reasonable person, in the position of the offeror, would consider constituted an acceptance: Owners, Strata Plan LMS 3905 v. Crystal Square Parking Corp., 2020 SCC 29, 450 D.L.R. (4th) 105, at para. 33.

[12] The “Confirmation of Acceptance” unequivocally communicated that all of the terms in the further revised offer presented on January 20, 2020 were accepted, thus forming the APS.

[13] Moreover, both parties and their agents acted on the basis that a binding APS had been reached on January 20, 2020. For example, on June 16, 2020, the parties executed an amendment, which stated: “Per Agreement of Purchase and Sale mutually executed and accepted on January 20, 2020”. The position that no agreement had been reached on January 20, 2020 was not taken by the appellant until after there was a failure to close on February 3, 2021 and litigation had ensued.

[14] We therefore reject this ground of appeal.

(ii) The Implied Term Issue

[15] The APS provided that the respondent would pay a purchase price of $1,375,000. As part of the purchase price, the appellant agreed to take back a second mortgage in the amount of $500,000. The APS provided:

The Seller agrees to take back a 2nd Charge/Mortgage in the amount of Five Hundred Thousand Dollars ($500,000.00), bearing interest at the rate of 5.5% per annum, calculated semi-annually not in advance, repayable interest only, and run for a term of 2 years from the date of completion of this transaction.

[16] The APS was silent on the amount of the first mortgage that could originally be placed on the property by the respondent ahead of the second mortgage to the appellant. It did contain terms about what would happen if that first mortgage were later replaced during the term of the second mortgage:

This Charge/Mortgage [i.e. the second mortgage to be taken back by the appellant] shall contain a clause permitting the removal or replacement of the existing first Charge/Mortgage at any time, provided that any increase in the principal amount of the new first Charge/Mortgage over the amount of principal owning under the first Charge/Mortgage at the time of renewal or replacement shall be applied in reduction of the principal amount of this Charge/Mortgage; and the Chargee/Mortgagee hereunder shall execute and deliver to the Chargor/Mortgagor such postponement agreement, Charge/Mortgage Statement, or other documents as the new first Chargee/Mortgagee may reasonably require, forthwith upon request.

[17] When the respondent tendered on February 3, 2021, it indicated that it proposed to place a first mortgage on the property of $1,000,000. The appellant argues that this constituted a breach of an implied term of the APS, the implied term being that the combined amount of the first and second mortgages could not exceed the purchase price as that would leave the second mortgage in part unsecured. In other words, there was an implied term that the first mortgage could not exceed $875,000.

[18] The application judge refused to find such an implied term. As the Supreme Court affirmed in M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., [1999] 1 S.C.R. 619, at para. 27, courts may imply terms in a contract:

(1) based on custom or usage; (2) as the legal incidents of a particular class or kind of contract; or (3) based on the presumed intention of the parties where the implied term must be necessary “to give business efficacy to a contract or as otherwise meeting the ‘officious bystander’ test as a term which the parties would say, if questioned, that they had obviously assumed”.

The application judge considered the evidence led by each party as to whether there was a regular custom in mortgage and sale transactions to support such an implication. He concluded that this was not a case where the term could be implied based on custom or usage, nor to give business efficacy to the APS, nor based on the officious bystander test. Moreover, he noted that the APS contained an entire agreement clause limiting the agreement to the terms expressed in it.

[19] We see no basis to interfere with the application judge’s conclusion. It was open to him to find on the evidence that no custom or usage supporting the implication of such a term had been established, and that no other basis for implying such a term existed.

[20] The narrow circumstances under which terms may be implied based on business efficacy or the officious bystander test are concerned with the presumed intentions of the actual parties. They are not an invitation for a court to revise an agreement to make it accord with what reasonable parties might have done: M.J.B. Enterprises, at para. 29. Although it may have been wise for the appellant to have sought such a term before agreeing to the APS, it did not do so, despite having been professionally advised. The APS does not lack business efficacy without such a term, nor is it obvious that the respondent, if asked by the officious bystander, would have answered that such a term was included. The parties’ express terms indicate a contrary answer. The parties included specific provisions about the second mortgage and its relationship to the first without including the limit the appellant says should now be implied.

[21] Nor do we see any error in the application judge having referred to the entire agreement clause as a factor in deciding whether the implied term contended for here accords with the presumed intentions of the parties, who stated that their entire agreement was to be found in the express terms of the APS: Perkins v. Sheikhtavi, 2019 ONCA 925, 16 R.P.R. (6th) 42, at para. 22.

[22] We therefore reject this ground of appeal.

(iii) The Deficiencies Issue

[23] The application judge dealt with three main categories of deficiencies and held that each was the responsibility of the appellant under the APS.

[24] The first category was a foundation wall below the kitchen that was in a state of disrepair. The application judge found this to be covered by para. 5(f) of the APS, which provided:

To the best of the knowledge, information and belief of the Seller, all structural components of the Buildings and shoreline elements (Seawall, docks, etc) including any renovations/ additions/ improvements, are sound and in good and substantial repair, and meet all appropriate technical and safety codes;

[25] The appellant does not contest that the wall was in a state of disrepair, and that this was known to the appellant. It argues that para. 5(f) only applies to matters within its “knowledge, information and belief”, and that this requires the appellant to have known, believed or been informed not only of the disrepair, but also that the wall was structural. The appellant submits that its principal gave evidence that it was not so aware, and that the application judge thus erred in finding that para. 5(f) applied.

[26] We disagree.

[27] The application judge described the wall as a “foundation wall”. He concluded, after reviewing photographs that the “collapsed wall is… structural”. Implicit in the application judge’s approach is that whether the wall was structural is an objective issue – the knowledge/belief/information limit in para. 5(f) pertains to the wall’s state of repair. That interpretation is free of any extricable error, is reasonable, and is entitled to deference. The application judge was entitled to find that the wall was structural, based on its location and the photographic evidence. Given the appellant’s knowledge that the wall was in a state of disrepair, the application judge was therefore entitled to find that para. 5(f) of the APS made it the appellant’s responsibility.

[28] The second category of deficiency related to the dining room fire separation, the kitchen exhaust, and the fire suppression system in the kitchen.

[29] The application judge held that the appellant was responsible for each of these items under para. 5(h) of the APS, which provides:

The Seller has not received written notice of any work orders, deficiency notices or other similar notices from any municipality, public authority, or board of fire insurance underwriters, or from any tenant, or anyone else advising of any breach of any by-law, code regulation or standard or suggestion that any repair is necessary to the Properties or any part thereof (except as disclosed in writing to the Buyer within the Sellers Deliveries package and anything else prior to the end of the Buyer’s Inspection Period). The Seller agrees to remedy such items which currently exist or which may arise on or before the Close Date at the Seller’s sole expense; The buyer acknowledges there is a work order on the ventilation and fire suppression [2] system on the kitchen commercial stove issued by the Rideau Lakes Township.

[30] More specifically, the application judge found that para. 5(h) applied because it stated that the appellant was aware of a work order that required each of these deficiencies to be corrected.

[31] In our view, although the application judge’s interpretation of the APS must be reviewed on a deferential standard, he made palpable and overriding errors in forming his interpretation of para. 5(h) as it pertains to this category of deficiency, justifying appellate intervention.

[32] First, the application judge appears to have read para. 5(h) as though it referred to a specific work order that addressed the dining room fire separation concern. However, the work order specifically referenced in the last sentence of para. 5(h) refers to the ventilation and fire suppression system, not to the dining room separation issue. The application judge did not identify any other basis upon which remedying this deficiency would be the appellant’s responsibility under the APS. Second, the application judge appears to have read the paragraph as saying that the appellant was aware of the work order referred to in its last sentence, but not to say that the respondent was aware of the order, which is what the last sentence expressly acknowledges.

[33] The interpretive question raised by the paragraph is who bears responsibility for this disclosed and acknowledged work order. The application judge did not address that question.

[34] Paragraph 5(h) begins by stating the appellant has not received notice of work orders, except those disclosed to the respondent. It then refers to the appellant’s obligation to remedy “such items”. And it contains the respondent’s express acknowledgment that it has been advised of the work order mentioned in the last sentence. To read the paragraph as the respondent suggests, that the appellant’s obligation to remedy “such items” refers to items required under any work order – whether undisclosed or disclosed and acknowledged in the paragraph itself – does not accord with the interpretive principle that all the words of the agreement must be given meaning. This reading would give no effect to the respondent’s acknowledgement of its awareness of the specific work order. In our view, the appellant’s obligation to remedy under para. 5(h) does not extend to the work order that the respondent acknowledged had been disclosed to it. The application judge erred in so concluding.

[35] The final category of deficiency relates to work to be done on the septic system under a Director’s Order made by the Ministry of the Environment, Conservation and Parks on September 23, 2019. That Order virtually froze all sewage works at the hotel’s site and would have forced its closure until the system was brought into compliance with s. 53 of the Ontario Water Resources Act, R.S.O. 1990, c. O.40. The Director’s Order also required that the appellant register a Certificate of Requirement on title to alert any potential purchaser to the non-compliance issues. Despite receiving the Director’s Order in September 2019, the appellant did not register the Certificate of Requirement until February 25, 2020, after the parties had executed the APS, and never provided a copy of it to the respondent.

[36] The application judge found that, on these facts, para. 5(h) applied to make this deficiency the appellant’s responsibility. We see no error in that conclusion.

Conclusion

[37] We allow the appeal in part, and vary the decision of the application judge to delete the requirement that the appellant is responsible for remedying deficiencies in the dining room fire separation and in the kitchen exhaust and fire suppression system under the work order acknowledged by the respondent in para. 5(h) of the APS, as noted above. The appeal is otherwise dismissed. Due to the limited nature of the variation of the application judge’s decision, we would not change the holdback requirement he imposed since only the actual repairs for which the appellant is responsible will be charged against it.

[38] The respondent requested costs of the appeal if completely successful in the sum of $11,593. The respondent enjoyed the greater measure of, but not complete, success on the appeal. Costs of the appeal shall be to the respondent in the sum of $7,500, inclusive of disbursements and applicable taxes.

“Janet Simmons J.A.”

“Harvison Young J.A.”

“B. Zarnett J.A.”

[1] The buyer in the offers was “Jeff Day & Core Lee or Assignee”. On October 15, 2020, the APS was assigned to the respondent, and notice of the assignment was subsequently given to the appellant. For ease of reference, we refer to the respondent throughout, as each offer and the executed APS provided that upon assignment, “the Assignee shall be deemed to be the party hereinbefore originally named as the Buyer”.

[2] This paragraph comprises typed text and handwritten additions. The paragraph has been reproduced above to reflect the way both parties interpret the handwriting.