Court File and Parties

COURT OF APPEAL FOR ONTARIO DATE: 2023-06-09 DOCKET: COA-22-CV-0022

Lauwers, Huscroft and Zarnett JJ.A.

BETWEEN

Horn Ventures International Inc. Applicant (Appellant)

and

Xylem Canada LP, by its General Partner Xylem Canada GP ULC (Successor in Interest to Xylem Canada Company, Formerly ITT Canada Ltd.) and Xylem Ontario Inc. Respondents (Respondents)

Counsel: Kyle C. Armagon, for the appellant Scott Kugler, Jennifer Danahy, and Heyla Vettyvel, for the respondents

Heard: May 29, 2023

On appeal from the order of Justice Robert Centa of the Superior Court of Justice, dated July 14, 2022, with reasons reported at 2022 ONSC 4158.

Reasons for Decision

[1] Horn Ventures International Inc. (“Horn Ventures”) appeals the dismissal of its application to compel the respondents (“Xylem”) to sell it property in Whitby, Ontario. The application judge rejected Horn Ventures’ position that it had caused a binding agreement for sale to come into effect by triggering the “Obligation to Purchase” provision of an Offer to Lease between the parties.

[2] The key issue before the application judge was the interpretation of the Offer to Lease and the Obligation to Purchase provision it contained. More specifically, it was whether the Obligation to Purchase provision could be triggered before remediation of the property’s environmental issues was completed. For the reasons that follow, we are not satisfied that Horn Ventures has identified any reversible error in the application judge’s interpretation. The appeal must therefore be dismissed.

A. Background

[3] The property is about 17.6 acres of land with a 66,000 square foot industrial building. Xylem listed the property for sale in about 1996; Horn Ventures was interested. The property was contaminated and needed remediation.

[4] The parties entered into the Offer to Lease on July 24, 1996. Horn Ventures agreed to lease the property for a term of 15 years and Xylem agreed to remediate the property to address all environmental conditions as required by the government, including those identified in the Phase I and Phase II Environmental Site Assessment (“ESA”) reports prepared by a specified environmental consulting firm. Xylem was given broad rights of access to the property to perform the remediation, and rights to require co-operation from Horn Ventures. Xylem promised to make all commercially reasonable efforts to complete the remediation within the first ten years of the lease; if it was unsuccessful the parties agreed to extend the period of remediation for another five years. There was no promise, however, that the remediation would be completed by any specific date. Horn Ventures acknowledged that the remediation may continue for an indefinite period.

[5] The Offer to Lease contained the following provision, under the heading “Obligation to Purchase” (Xylem and Horn Ventures are referred to in it as Landlord and Tenant, respectively):

The Landlord and the Tenant agree that the Tenant shall have the obligation to purchase the Premises upon the following terms:

(a) The Landlord shall advise the Tenant that the Landlord has completed the Remediation and shall provide an unqualified and unconditional certificate from an environmental consultant, both of which certificate and consultant must be satisfactory to the Tenant in its sole and unfettered discretion, addressed to both the Landlord and the Tenant and upon which both the Landlord and the Tenant may in law rely upon, confirming that any and all environmental problems at the Premises (save and except those caused by the Tenant) have been successfully remediated in accordance with the then current guidelines of the [Ministry of the Environment and Energy] or any other governmental agency having jurisdiction over the matter and in accordance with any applicable laws, rules or regulations and in accordance with the then best recognized practice. The said certificate shall further confirm, without qualification or condition, that the then current environmental condition of the Premises does not then exceed or violate in any way the then current guidelines of the [Ministry of the Environment and Energy] or any other governmental agency having jurisdiction over the matter or any applicable laws, rules or regulations (save and except for any environmental problems caused by the Tenant). The foregoing requirement for delivery of the said certificate is inserted for the sole benefit of the Tenant and may be waived by the Tenant at any time by written notice delivered by the Tenant to the Landlord.

(b) Within twenty (20) business days of either receipt by the Tenant of the certificate referred to in paragraph 11(a) or receipt by the Landlord of the waiver referred to in paragraph 11(a), the Tenant shall deliver an executed copy of the agreement of purchase and sale in the form of the agreement and [ sic, of] purchase and sale (the "Agreement of Purchase and Sale") attached hereto as Schedule "D", together with the required deposit cheque. Upon delivery of the Agreement of Purchase and Sale to the Landlord, the Agreement of Purchase and Sale shall be firm and binding and shall be completed in accordance with the terms thereof.

[6] The agreement of purchase and sale attached to the Offer to Lease specified a purchase price of $1.6 million. It included a term that Xylem represented and warranted that the property has been remediated to correct the hazards set out in the Phase I and II ESA reports referred to in the Offer to Lease, and that Xylem would, on closing, deliver a “Certificate of Completion of Remediation”.

[7] Renewals extended the lease arrangement to 2016 and then to July 31, 2021. The obligations of Xylem to make commercially reasonable efforts to complete the remediation continued through these extended periods.

[8] In 2020 and 2021, the parties engaged in an initial round of litigation over Xylem’s position that the Obligation to Purchase provision had come to an end at the expiry of the original term of the lease and therefore did not continue in effect through the renewals. Xylem’s position was rejected: Horn Ventures International Inc. v. Xylem Canada Company, 2020 ONSC 4865, aff’d 2021 ONCA 341.

[9] The first round of the parties’ litigation thus confirmed that the Obligation to Purchase provision remained in effect up to the end of the last renewal period. As that period was due to expire at the end of July 2021, Horn Ventures took steps which, in its view, triggered an entitlement to proceed under the Obligation to Purchase provision and purchase the property at the price of $1.6 million. It wrote to Xylem on June 2, 2021, giving formal notice that it was waiving the requirement in the Obligation to Purchase provision that Xylem provide an unqualified and unconditional certificate from an environmental consultant, and advised it would be sending a signed agreement to purchase the property, in the form required by the Obligation to Purchase provision. It sent the signed agreement the same day, deleting from it the representation and warranty of Xylem that the remediation was complete and the obligation of Xylem to deliver a certificate of completion of the remediation.

[10] Xylem refused to sign the agreement of purchase and sale and took the position that Horn Ventures could not compel a sale under the Obligation to Purchase provision. Xylem’s position was that the provision was subject to conditions precedent which had not been fulfilled. First, the remediation had to be complete and Xylem had to so advise Horn Ventures. Second, Xylem had to deliver an unqualified certificate of an environmental consultant attesting to the completion. According to Xylem, Horn Ventures could waive the second condition but not the first.

B. The Application Judge’s Decision

[11] It was tacitly accepted before the application judge that the remediation had not been completed. Horn Ventures did not contend that Xylem had failed to use its best efforts to complete the remediation. The issue for the application judge was, given those facts, whether Horn Ventures could require Xylem to sell the property by waiving the conditions about remediation in the Obligation to Purchase provision. As he noted, if Horn Ventures was correct, it had always had “an essentially unfettered right to purchase the Premises at any time of its choosing”.

[12] The application judge articulated the relevant principles of contractual interpretation. He then examined the factual matrix, the circumstances known to the parties when the Offer to Lease was made, and concluded that both parties knew that the extensive contamination of the property, and the need for it to be remediated, posed risks to both parties. He examined the balance of the Offer to Lease for the context it provided for interpreting the Obligation to Purchase, noting that the Offer gave Xylem wide access and other rights to facilitate its completion of the remediation and did not require the remediation to be completed by any definite date.

[13] He then examined the text of the Obligation to Purchase provision, concluding:

I find that the obligation to purchase the property in s. 11 arises if and only if Xylem first advises Horn that the remediation is complete. The contract only allows Horn to waive the delivery of the unqualified and unconditional certificate from an environmental consultant. Delivery of that waiver does not have the effect of waiving the advice that Xylem has completed the remediation and the contract does not otherwise permit Horn to waive the completion of the remediation.

Given the careful attention the parties paid to the rights of Xylem to access the Premises during the currency of the Lease, I do not accept that the agreement demonstrates an intention to permit Horn to trigger the obligation to purchase as early as, for example, 1998, leaving Xylem with no contractual rights to complete the remediation. That interpretation makes little commercial sense given the other provisions of the [Offer to Lease], including the inclusion of the representation and warranty in the Agreement of Purchase and Sale that the remediation is complete.

I find that the provisions of s. 11 of the [Offer to Lease] are not triggered unless and until Xylem advises Horn that the remediation is complete. Horn can then waive the delivery of the consultant’s certificate, but it cannot do so before Xylem advises that the remediation is complete. Therefore, Horn’s waiver of the consultant’s certificate did not, and could not, have the effect of waiving Xylem’s assessment of whether the remediation was complete.

C. Analysis

[14] To determine the meaning of the Obligation to Purchase provision, the application judge was required to engage in “an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix”. Deference is owed to such a determination, absent an extricable error of law: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 50-52.

[15] Extricable errors of law made in the course of a judge’s interpretation will displace deference: Sattva, at para. 53. Horn Ventures argues that the application judge made three such errors.

[16] First, Horn Ventures submits that the application judge erred in identifying in the Obligation to Purchase provision’s opening language two conditions to its operation. The provision states: “[Xylem] shall advise [Horn Ventures] that [Xylem] has completed the Remediation and shall provide an unqualified and unconditional certificate from an environmental consultant … confirming that any and all environmental problems … have been successfully remediated”. Horn Ventures argues that this language describes one condition – remediation – and the environmental certificate is simply the way Xylem is to advise that the remediation is complete. Therefore, the contractual right to waive the certificate was in reality a right to waive the one and only condition precedent to the operation of the Obligation to Purchase provision – fulfilment of the obligation to remediate.

[17] We disagree that this argument reveals an extricable legal error. The application judge carefully examined the text of the provision in light of the language of the Offer to Lease as a whole and the factual matrix. No failure to adhere to a principle of interpretation has been identified.

[18] Applying the deferential standard of review, there is no basis to interfere with the application judge’s interpretation. It is one the text can reasonably bear. The clause imposes a requirement that Xylem “shall advise … that [it] has completed the Remediation” and a requirement that Xylem “shall provide an unqualified and unconditional certificate from an environmental consultant”. Viewing those as two matters, not one, is consistent with the waiver clause in the Obligation to Purchase provision which expressly refers only to the “foregoing requirement for the delivery of said certificate ” (emphasis added). The clause does not refer to the requirement that Xylem advise that the remediation is complete, nor does it refer generally to a “foregoing requirement”. In addition, this interpretation is consistent with the attached agreement of purchase and sale, which contemplated a representation and warranty of Xylem that the remediation is complete and the delivery of a certificate of completion. And, it is consistent with the application judge’s findings, derived from the surrounding circumstances and the Offer to Lease as a whole, that the property being remediated (and thus ceasing to be the source of continuing environmental liabilities to third parties) was a benefit to Xylem as well as Horn Ventures, such that neither would have intended that a transfer of ownership and a loss of Xylem’s contractual rights of access would take place before the remediation was complete.

[19] Second, Horn Ventures submits that the application judge erred in finding that completion of the remediation was a mutual benefit, not one to Horn Ventures alone. It argues that remediation only benefitted Horn Ventures, such that the entire requirement to remediate could be waived by Horn Ventures. We disagree that any legal error was involved in the application judge’s finding, which is essentially one of mixed fact and law. The finding was available to the application judge on the record, and there is no basis to disturb it.

[20] Horn Ventures argues that even though Xylem would be selling unremediated property, it could deal with its post-sale environmental liability exposure by exercising rights of access to the property under s. 95 of the Environmental Protection Act, R.S.O. 1990, c. E.19. This argument is beside the point. That right would have existed without the Offer to Lease. Xylem had contracted for specific rights of access and cooperation during the term of the lease in order to address remediation before ownership of the property would be transferred, in view of its future exposure to liability, and its desire to control the remediation effort and the communications with the regulator until remediation was complete and its liability ended. The application judge was entitled to consider that a scenario under which Xylem could be forced to sell and still “be left with the liability for the unremediated land but would no longer hold either the ownership interest or the access and remediation rights under the [Offer to Lease]” was contrary to the parties’ intentions objectively derived.

[21] Finally, Horn Ventures argues that the application judge erred in giving weight to the subjective intentions of Xylem. In our view, the application judge did not make the error of factoring subjective intentions into his contractual interpretation analysis.

D. Disposition

[22] For these reasons, the appeal is dismissed.

[23] In accordance with the agreement of the parties, Xylem is entitled to costs of the appeal in the sum of $37,500 inclusive of disbursements and applicable taxes.

“P. Lauwers J.A.”

“Grant Huscroft J.A.”

“B. Zarnett J.A.”