COURT FILE NO.: CV-11-440299

DATE: 20120320

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: MORGUARD CORPORATION, MORGUARD REALTY HOLDINGS INC.,
and MICHAEL A.J. CATFORD, EDWARD C. KRESS, MICHAEL F.B.
NESBITT, K. RAI SAHI, FRASER R. BERRILL, PAUL F. COBB, DAVID
A. KING AND ANTONY K. STEPHENS as trustees of MORGUARD REAL
ESTATE INVESTMENT TRUST

Applicants

AND:

INNVEST PROPERTIES OTTAWA GP LTD., as a general partner for and
on behalf of the partners of InnVest Properties Ottawa Limited Partnership,
INNVEST PROPERTIES OTTAWA LIMITED PARTNERSHIP, INNVEST
PROPERTIES OTTAWA NOMINEE LTD., LGY TRUSTEE INC. as trustee
of LEGACY HOTELS REAL ESTATE INVESTMENT TRUST, 3428851
CANADA LTD., FAIRMONT HOTELS & RESORTS INC., and DELTA
HOTELS LIMITED

Respondents

BEFORE: Mr. Justice Lederer

COUNSEL:
Barbara Gross & Jeremy Millard, for the Applicants

R.S.M. Woods & Marcy McKee, for the respondent, Delta Hotels Limited

James Bunting, for the Respondents, InnVest Properties Ottawa GP Ltd., InnVest Properties Ottawa Limited Partnership, InnVest Properties Ottawa Nominee Ltd., LGY Trustee Inc. as trustee of Legacy Hotels Real Estate Investment Trust and 3428851 Canada Ltd.

Eli Mogil, for the Respondent, Fairmont Hotels and Resorts Inc.

COSTS ENDORSEMENT

[ 1 ] Costs are in the discretion of the court. Any agreement between the parties will be a consideration in the exercise of that discretion, but the parties cannot, by their contract, withdraw the authority of the court (see: Bosse v. Mastercraft Group Inc., 1995 931 (ON CA), [1995] O.J. No. 884 (C.A.,) at para. 65 ).

[ 2 ] In this case, Morguard Corporation, and the other applicants (“Morguard”) applied for an interlocutory injunction. In the face of the imminent expiry of an agreement, by which the respondent, Delta Hotels Limited (“Delta”), was obliged to manage a hotel on property owned by Morguard (“Hotel Management Agreement”), Morguard sought an order of the court compelling Delta to continue to operate the hotel under its brand. In seeking the order, Morguard relied on a lease entered into by Delta and a prior owner of the property. Delta had assigned the lease to another party in 1997. The interlocutory injunction was refused, which is to say, that Delta was the successful party. As such, it seeks its costs on a partial indemnity scale. Morguard and Delta have agreed that, if either is entitled to costs on a partial indemnity scale, the costs should be valued at $75,000, plus HST. Morguard does not accept that Delta should be awarded costs. To the contrary, counsel on its behalf, submitted that the lease requires that any order for costs should be in its favour. Relying on the lease, it requests costs on a full indemnity scale of $243,499.19, inclusive of HST.

[ 3 ] In making this claim, Morguard relies on s. 12.01 of the lease. It states, in part:

The Lessee covenants and agrees with the Lessor:

(a) to promptly perform each and every of the covenants on its part contained in each permitted sublease of the DEMISED PREMISES and to indemnify and hold harmless the Lessor with respect thereto and with respect to any claims, actions, suits, proceedings, damages, costs and expenses that the Lessor may be put to in that regard […]

(c) that notwithstanding any other provisions of this lease, the Lessee shall indemnify and save harmless the Lessor from any and all liabilities, costs, damages, and claims, suits, expenses or actions growing out of:

(i) any breach, violation or non-performance of any covenant, condition or agreement in this lease set forth and contained on the part of the Lessee to be fulfilled, kept, observed and performed; […]

notwithstanding such liabilities, costs, damages, claims suits or actions are a result of or have arisen or are caused by the wrongful acts or omissions of the Lessor or those for whom it is at law responsible.

[ 4 ] The proposition appears to be that Delta, as the lessee, is compelled to indemnify Morguard, as the Lessor, of any costs associated with any breach of the lease by the Lessee. The problem with this position is that Delta has long since ceased to be the Lessee to which the lease currently applies. The history of the lease was summarized in the decision made with respect to the application for an interlocutory injunction:

During the month of October 1992, the hotel was leased by Pensionfund Realty Limited, its owner at the time, to Delta. In 1997, as a result of a series of transactions, the lease was assigned to Legacy Hotels Real Estate Investment Trust (“Legacy”). In September 2007, a limited partnership, which included InnVest, acquired Legacy. The partners ‘divided up’ the assets of Legacy. Among the assets InnVest acquired was the lease. In December 2007, the applicant Morguard Corporation or one of its associated entities, purchased the hotel. Morguard Investments Limited, Morguard Corporation and Morguard Real Estate Investment Trust (‘Morguard’) are the assignees of the original landlord. Accordingly, at the time the motion was argued, Morguard was the landlord and InnVest was the tenant.

( Morguard Corporation v. InnVest Properties Ottawa GP Ltd. 2012 ONSC 80 at para. 3 )

[ 5 ] It is true that the lease provided that Delta continued to be bound by the obligations of the tenant under the lease. As the decision on the motion repeats, s. 11.04 of the lease said:

No assignment, transfer, subletting or use or occupation of the DEMISED PREMISES by any other person or corporation or entity shall release or relieve the Lessee of its obligations under this lease, including, without limitation, the obligation to pay RENT.

[ 6 ] The current tenant is InnVest Properties Ottawa GP Ltd. or one of its associated entities, (“InnVest”). InnVest took part in the motion. It supported Morguard. It wanted Delta to continue to operate the hotel as a Delta hotel. Morguard does not request costs from InnVest. The position taken by Morguard proposes that the obligations of Delta, under the lease, remain primary and are not subsidiary to those of InnVest. As the decision on the motion notes: “this seems peculiar given the specific reference in section 11.04 of the lease to rent. It would be surprising if it was suggested that Delta was liable for rent in the absence of a default by InnVest”. It was not suggested by anyone that Delta could bear the principal responsibility to pay the rent or undertook any responsibility for obligations owed by InnVest as the tenant. The position of Morguard proposes that it could obtain an order for costs against any of the previous tenants. In a footnote which is included with the submissions in support of the application for costs made on behalf of Morguard, its counsel suggested that: “The indemnity obligation of section 12.01 applies against all current and former tenants when a tenant covenant is breached, regardless of which one committed the breach”. Based on this, Morguard would be free to pick whatever tenant, current or prior, it wishes to pay the costs. The question is whether this is what the lease says and if it is, whether the court, taking this into account, will exercise its discretion to award costs in favour of Morguard against Delta.

[ 7 ] For s. 12.01 of the lease to apply, there must have been a breach of the lease on the part of “the Lessee”. Morguard says that Delta breached the lease, with which it is still obligated to comply (see: s. 11.04 quoted above). In this regard, counsel for Morguard referred to the cross-examination of the deponent of an affidavit sworn in support of Delta. It is said that he acknowledged that the lease would be breached by the removal of the name Delta from the hotel. What role did this play in the motion? In the submissions made with respect to costs, counsel for Morguard submitted that its position at the hearing was that, while it requested an order requiring Delta to continue to operate the hotel as a Delta hotel, with all the benefits associated with the brand, it would have accepted an order simply requiring that the Delta name be retained. I agree with counsel for Delta. He submitted that this was not an alternative that was sought during the course of the argument of the motion: “[W]hat Morguard actually asked the Court to award it was not a narrow injunction requiring the Hotel to have the word ‘Delta’ in its name, but rather a broad injunction requiring the Hotel to be operated under the Delta brand”. This being so, the presence or impact of the breach now asserted on behalf of Morguard was not dealt with in the decision on the motion.

[ 8 ] In considering how this affects any award of costs, some context should be set. The section of the lease that dealt with the “Operating Name” of the hotel was clause 7.06. It outlined a process to be followed if the name was to be changed. The decision on the motion notes:

…The request was to be made to the landlord, in writing, with information that would allow for analysis as to the impact of the change. On November 17, 2010 the President of InnVest wrote a letter to the Vice President of Morguard asking for consent to change the name of the hotel. None of the information referred to in s. 7.06 was included. InnVest did undertake some analysis as to the effect of the change of name would have on the hotel, but it was never provided to Morguard (see: Transcript of Cross-Examination of George Kosziwka at Questions 398-405). It was not provided because InnVest understood that Morguard had already indicated that it would not consent. As Innvest saw it, Morguard had made up its mind before the question was asked. InnVest knew the answer because Morguard had already told them (see: Transcript of Cross-Examination of George Kosziwka at Questions 417-424)…

Section 7.06 of the lease outlined what was to happen if Morguard did not agree to a request that the name of the hotel be changed. In such circumstances, the Lessee had the option of requiring the appointment of an expert to determine whether the change of the operating name would result in a material adverse impact on revenue, taxes, the cost of insurance or the market value of the hotel and the adjoining office tower… According to counsel for InnVest this was not done, not only because it was known that Morguard would refuse, but because the parties understood that the analysis, if carried out, would have revealed that the change of name would have a ‘material adverse impact’, as referred to in s. 7.06 of the lease.

Thus, as InnVest sees it, there was no purpose in making a proper application. If Morguard acted as this suggests, it may be that it was complicit in a failure to make a proper application… For their part those involved on behalf of Morguard rely on the fact that no proper application to change the name of the hotel was made. They did not have the information required by s. 7.06 of the lease and were unable to assess the impact on the hotel of the change of its name.

( Morguard Corporation v. InnVest Properties Ottawa GP Ltd., supra, at paras. 27, 30 and 31 )

[ 9 ] In this situation, the present Lessee, InnVest, failed to make a proper application for the necessary consent to the change of name. It may be that Morguard was complicit in this failure. If not, it could have looked to InnVest for that company’s failure to provide the requisite material. The quote above suggests that one reason that InnVest did not require the “appointment of an expert” was because, to the parties, it was a given that the change of name would result in a “material adverse impact” to the hotel. The evidence on the motion suggested that the loss to the hotel would be $45,000 a year and that it would take 12 to 18 months for the hotel to be “competitive at its full level for an unbranded hotel” (see: Morguard Corporation v. InnVest Properties Ottawa GP Ltd., supra, at para. 43 ).

[ 10 ] Delta may have breached the lease. On the motion, the issue was not whether the lease was breached, but whether the response to the amalgam of three questions to be answered on an application for an interlocutory injunction would lead to such an order being made (see: Morguard Corporation v. InnVest Properties Ottawa GP Ltd., supra, at para. 11 ). With respect to costs, taking into account the words of the lease and the actions of the parties, the question is whether the Lessee breached the lease, and if it did, whether Morguard can rely on that breach and if it can, whether the court will, with the presence of those factors, exercise its discretion to award those costs in favour of Morguard against Delta.

[ 11 ] Finally, to my mind, it is important to consider how all of this developed. At the outset, the situation was governed by the lease and the Hotel Management Agreement. The Hotel Management Agreement defined Delta’s relationship to the hotel after it ceased to be the tenant. It continued to operate the hotel as a Delta hotel. Initially, the Hotel Management Agreement was to end on the earlier of the expiry of the lease or December 10, 2011. At the time the Hotel Management Agreement was signed, the lease was to expire at the end of 2006. At that point, the lease and the Hotel Management Agreement would have expired at the same time. The hotel would have been operated as a Delta hotel until the end of the lease. In 2006, Legacy Hotels Real Estate Investment Trust, to which the lease had been assigned, exercised its right to renew the lease for a further ten years. It will expire in 2016. In 2006, the Hotel Management Agreement was amended and re-stated. Rather than amend the term to coincide with the lease, it remained the same. This created the circumstance where the hotel (without a further change to the Hotel Management Agreement) would cease to be a Delta hotel on December 31, 2010, six years before the lease expired. This was the circumstance when InnVest became the tenant and when Morguard became the owner of the property. On the motion, they attempted to avoid the problem this created by relying on the lease. Even if Delta continues to be bound by the lease, is it in breach of the lease such that Morguard can rely on that breach? Taking into account the background, the question remains whether the court should exercise and award those costs in favour of Morguard against Delta.

[ 12 ] In relying on s. 12.01, Morguard is saying that it does not matter what it did or why it did it. It submits that it should get its costs in any event. Not only that, it gets to identify which of a succession of tenants it wishes to obtain its costs from. I do not accept that this is what the Lease says. Rather, the prior tenants hold the obligations of tenants as a recourse where a successor has failed to honour its obligations. InnVest has not been asked to pay costs. It supported the motion. The owner and its tenant have acted together. Either the tenant failed to properly apply for a change of name or, in the alternative, the owner would not consider the application. They failed to respond to the coming expiry of the Hotel Management Agreement. They have attempted to use the lease to continue to have the hotel managed as a Delta hotel. Having failed, Morguard wants Delta to pay its costs. If Delta breached the lease, its liability, if there is any, is for damages. In the circumstances, I find that s. 12.01 of the lease does not assist Morguard. It is not the lessee as that section uses the term. If Delta breached the lease, by removing the name, Morguard and InnVest cannot rely on the breach because, together, they did not comply with the obligations and employ the process outlined in the lease that dealt with a change to the name of the hotel. If I am wrong and s. 12.01 does apply, I would, nonetheless, refuse to exercise the discretion of the court to award costs to Morguard. It is simply not appropriate, where the present tenant has failed to follow the provisions of the lease dealing with a change of name, to bring a motion that purported to rely on the lease, to have the motion fail and, then, seek costs approaching a quarter of a million dollars, not from the present tenant, but from a party that has not been the Lessee since 1997. Delta’s current responsibilities were defined by the Hotel Management Agreement. It has expired. While the effort of counsel to extend the provision of the lease dealing with the “Operating Name” into a requirement to operate the hotel as a Delta hotel with all the benefits that entails was valiant, it did not raise “a serious question…”. This is not, as counsel for Morguard would have it, similar to the case of Longwood Station Ltd. v. Coast Capital Savings Credit Union, [2007] B.C.J. No. 2300. In that case, a tenant breached its lease by moving to larger premises. It had undertaken to continue to pay the rent. The landlord sought an interlocutory mandatory injunction requiring the tenant to continue in business at its location. The injunction was refused. The plaintiff had shown a strong prima facie case, but its allegation of irreparable harm was tenuous. In dealing with costs, the judge observed that the tenant had invited the application and that the landlord should have its costs. This is not a case where Delta invited an application for an injunction. It is a circumstance where the landlord has attempted to extend the lease in a fashion that was not tenable. There was no strong prima facie case demonstrated on the motion.

[ 13 ] Counsel for Morguard also relied on Lackner Centre Developments Inc. v. Toronto-Dominion Bank, [1993] O.J. No. 1465, 17 C.P.C. (3d) 60. In that case, the bank leased space in three plazas owned by the plaintiff: one in Halifax; one in Kitchener; and a third in Newmarket. The leases required the bank to “conduct continuously, actively and diligently the business”. The bank indicated its intention to close all three branches. It acknowledged that it remained liable to pay rent and indicated its willingness to do so. The plaintiff moved for an injunction to compel the bank to continue to operate in each of the three locations, relying on the breaches of the leases and the harm that would be caused to each of the three plazas with the withdrawal of the bank. The judge found that the bank was in breach, but did not grant the injunction in respect of any of the plazas. The plaintiff had failed to demonstrate “irreparable harm” or that “grave damage will accrue...in the future” (see: Lackner Centre Developments Inc. v. Toronto-Dominion Bank, supra, at paras. 17 and 34). In dealing with costs, the judge found that the bank had deliberately, with calculation, decided to breach the leases. She said it was a calculation that necessitated the bringing of the motion and, on that basis, determined that costs should not follow the event. She dismissed the claim for costs. Like the judge in Lackner, supra, I observe that the parties in the case before me are all “highly sophisticated business entities well-versed in the nature and ramification of leases”. It is not clear that Delta calculated to breach the lease recognizing it would invite an application for an injunction. The Hotel Management Agreement was about to expire. Delta advised the parties that it did not intend to renew. Morguard made known its position that, if Delta withdrew from the hotel, it would be in breach of the lease. After some negotiations, the Hotel Management Agreement was extended for one year. Any calculation lies as much with Morguard as with Delta. Morguard and InnVest could have moved to implement plans that the latter had in motion to operate the hotel independent of any established brand and sued for damages. They chose to respond by trying to obtain an interlocutory injunction that would compel Delta to stay on. This was the calculation that brought this matter to court.

[ 14 ] Finally, I should note that InnVest did not seek costs. None were sought against it.

[ 15 ] Costs are awarded to Delta in the amount agreed to: $75,000, plus HST.

LEDERER J.

Date: 20120320