ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: C-732-10
DATE: 2012-05-02
BETWEEN:
Terrace Manor Limited
Applicant
– and –
Sobeys Capital Incorporated
Respondent
Stephen Longo, for the Applicant
Jennifer McAleer / Sarah Turney, for the Respondent
HEARD: February 7, 2012
THE HONOURABLE MR. JUSTICE P.J. FLYNN
reasons for judgment
[ 1 ] The leased premises in question is a retail grocery store comprising approximately 27,000 square feet. The Lease commenced in November 1993 and expires in July 2013. It grants Sobeys four options to renew for additional terms of five years each.
[ 2 ] The Applicant Landlord seeks a declaration that, pursuant to that lease, the amount of taxes payable by Sobeys, for the taxation years 2005 and all subsequent taxation years, be calculated on a “proportionate share basis”.
[ 3 ] The issue for determination by the court then is, what is the correct method of calculating Sobeys share of the taxes for its store in the plaza.
[ 4 ] Everything I need is contained in the wording of the Lease. To interpret this Lease is to find what the intention of the parties was when they entered into this contract.
[ 5 ] It may be trite to say that one cannot put a 2012 interpretation on a 1993 Lease.
The Lease
[ 6 ] 5. The tenant’s obligation for payment of taxes is set out in section 5.2 of the Lease:
5.2 Taxes Payable by the Tenant
(a) If separate assessments for the Leased Premises and the Common Areas and Facilities or any of them are not made by the municipal or other governmental authorities imposing such Taxes, the Landlord and the Tenant shall use their reasonable and diligent efforts to have such separate assessment made or, failing that, to obtain sufficient official information to determine what such separate assessments would have been if they had been made, and if assessments are made on a basis different from the basis contemplated by this Lease, the Landlord and Tenant shall use their reasonable and diligent efforts to have such basis of assessment converted to the basis contemplated by this Lease.
(b) If there is a separate assessment in respect of Taxes in respect of the Leased Premises and the Common Areas and Facilities determined and used by the municipal or other taxing authority from time to time in accordance with Section 5.2(c) of this Lease (which, if received by the Landlord, the Landlord shall deliver to the Tenant as soon as possible and in any event in sufficient time so as to allow the Tenant to take advantage of any discounts for early payment and to avoid penalties for late payment), the Tenant shall pay (i) directly to the taxing authority as and when the same are due and payable in each and every year all Taxes levied or assessed against the Leased Premises; and (ii) to the Landlord its Proportionate Share of all such Taxes levied or assessed against the Common Areas and Facilities in accordance with the next sentence of this Section 5.2(b). If, however, a separate assessment for Taxes in respect of the Leased Premises is not available, all Taxes attributable to the Leased Premises in accordance with the provisions of Section 5.2(c) shall be paid by the Tenant to the Landlord within twenty (20) days after written request from the Landlord, provided that any such payment shall not be payable earlier than ten (10) days prior to the date upon which a Tax payment or instalment is payable by the Landlord to the appropriate taxing authority and there is provided to the Tenant proof satisfactory to the Tenant that the Landlord has first paid the same to the appropriate taxing authority. If from time to time the Tenant has not received a copy of the receipted Tax bill for any previous instalment payment by the Tenant in respect of Taxes attributable to the Leased Premises by the time that the next payment of Taxes is due, or evidence reasonably satisfactory to the Tenant that the Landlord has paid the amounts which it has agreed to pay and which are due and payable up to such date pursuant to Section 5.1 of this Lease, then, the Tenant shall not be required to make any further payments in respect of Taxes until such time as such outstanding receipted tax bill(s) or other evidence of payment reasonably satisfactory to the Tenant are delivered to the Tenant by the Landlord. In such event the Tenant shall not be responsible for payment of any penalties or late payment or interest charges imposed by any taxing authority as a result of the Tenant’s non-payment of Taxes or any instalment in respect thereof.
(c) If a separate assessment for Taxes in respect of the Leased Premises and Common Areas and Facilities is not available, the Tenant shall be responsible for and shall make all payments of Taxes in respect of the Leased Premises on the basis of the Tenant’s share The “Tenant’s Share”) of Taxes levied or assessed against the Shopping Centre. The Tenant’s Share shall be determined by the Landlord reasonably and equitably allocating a portion of the Taxes levied, rated, charged or assessed against the Shopping Centre to the Leased Premises having regard to the generally accepted method of assessment and applicable elements utilized by the lawful assessment authority in arriving at the assessment of similar developments if that method is known, provided however, in no event shall the Tenant be required to pay more than its Proportionate Share of all Taxe s levied, rated, charged or assessed against the Shopping Centre . The Tenant shall in no event be liable to pay any Taxes for land allocated for grocery cart corrals, garbage compactors or containers, loading docks or for basements, roofs and mezzanines, unless the municipality or other taxing authority as part of its normal billing practice bills the Tenant directly for the same.
[ 7 ] What is significant for the purpose of interpreting this Lease now is that there are no longer separate assessments.
[ 8 ] In 1998, the Assessment Act , R.S.O. 1990, was significantly altered. Commencing in that year all properties were to be assessed at their “current value”. That is referred to as current value assessment.
[ 9 ] Prior to 1998, that is, during the first five years of the Lease, in addition to municipal property tax levied against the owner of the property, there was a business tax levied by the municipality against each tenant based on the assessed value of the tenancy as determined by the assessment authority. It was the responsibility of the assessment commissioner to produce a separate Notice of Assessment for each tenant of a multi-tenanted property, such as the plaza, so that municipalities could calculate and levy business taxes against individual tenants.
[ 10 ] After the 1998 tax year the assessment commissioner no longer provided a separate assessment.
[ 11 ] The parties agree that a separate assessment in respect of the leased premises has not been made by municipal or other governmental authorities.
[ 12 ] Accordingly, neither party has asserted that section 5.2(b) is the correct method of allocating taxes pursuant to the Lease.
[ 13 ] The Landlord argues that there is only one method of property tax allocation that may be performed in accordance with the Lease, namely the proportionate share method. It argues that this method was used by the Landlord for taxation years 1998 through 2003.
[ 14 ] On the other hand, Sobeys argues that its share of taxes should be calculated on an assessed value approach.
[ 15 ] Interestingly, both parties urge upon me that I must first look to the Lease, that this is a case about interpreting the provisions of article 5 of the Lease.
[ 16 ] Sobeys argues that the Lease sets out three methods by which taxes are calculated depending on the circumstances, each of them being set out by the separate clauses of Article 5.2, so that:
(a) sets out a method to be used where a separate assessment has not been made but where official information exists to calculate what the assessment would have been had it been made;
(b) is used when a separate assessment has been issued by the taxing authority; and
(c) is used when a separate assessment for taxes is not available.
[ 17 ] Sobeys’ files for the property relating to tax years prior to 2003 were destroyed several years ago and, consequently, Sobeys does not have a record of invoices or tax payments prior to 2003. The invoices produced by the Landlord indicate that the Landlord sent invoices to Sobeys calculating Sobeys’ share of taxes on what the Landlord has called a proportionate share basis between 1998 and 2002. Apparently there was no controversy about this. The Landlord billed Sobeys its share of taxes on a proportionate share basis and Sobeys remitted the payments.
[ 18 ] On February 13, 2003, the corporate realty tax manager for Sobeys wrote to the Landlord advising that he disagreed with the Landlord’s use of the proportionate share methodology to calculate Sobeys’ share of the taxes. It was his view that Sobeys’ share should be calculated on the basis of its assessed value. That letter advised the Landlord that Sobeys would pay the interim 2003 invoice on a proportionate share basis, but that the final invoice for 2003 must be calculated on an assessed value basis.
[ 19 ] Even though the Landlord did not agree with Sobeys’ position as to the calculation of taxes, it did commence billing Sobeys on an assessed value basis. All subsequent billings to Sobeys beyond that date were accompanied by a handwritten notation that those billings were “subject to further adjustments”.
[ 20 ] The next two invoices in August 2003 and February 2004 calculated Sobeys’ share of taxes on the basis of the assessed value with reference to the MPAC valuation records. Then in February 2004, the Landlord’s corporate counsel wrote to Sobeys advising that it required Sobeys to remit its share of taxes on a proportionate share basis.
[ 21 ] While insisting that the corporate method of apportioning taxes in the plaza was based on a proportionate share, the Landlord asserted that “there was no significant difference in the realty taxes that would be apportioned to Sobeys using Current Value figures or Proportionate Share”.
[ 22 ] The dispute began in earnest when Sobeys responded in March 2004 and advised that Sobeys disagreed with the proportionate share methodology but was prepared to accept billing on a proportionate share basis, “for as long as we are able to determine that the amount charged is consistent with the amount that we would pay based upon a calculation utilizing a separate CVA”. (Current Value Assessment)
[ 23 ] Then the Landlord sent invoices for February and May 2004 to Sobeys based on proportionate share calculation. They were considerably higher than the amount that would be owed based on Sobey’s calculated CVA. In fact, the proportionate share calculation that applied to the 2003 tax year increased Sobeys’ share of taxes by almost $45,000. So, on May 10, 2004, Sobeys wrote back to the Landlord and pointed out it had only agreed to pay based on proportionate share if the amount was similar to the assessed value of the Sobeys store. Because the values were not similar Sobeys insisted that the realty tax billing be based on the assessed value in accordance with the terms of the Lease.
[ 24 ] There is some controversy over the fact that the Landlord’s corporate lawyer is said to have written back to Sobeys to advise that in response to a revised interim 2004 billing which reflected an increase of $16,544 in realty taxes payable, the Landlord’s lawyer wanted to clear up “your obvious confusion with respect to this adjustment”. Mr. Walker, for Sobeys, doesn’t have any record of receiving that letter, nor any record or recollection of the corporate lawyer for the Landlord contacting him to follow up on it.
[ 25 ] But then, the subsequent invoices from the Landlord in February, March and August of 2005 were all calculated using the assessed value of the Sobeys store. Sobeys paid each of those invoices and the Landlord accepted Sobeys’ payments and did not request any further additional payments. Of course, it is the Landlord’s position that it accepted partial payment by Sobeys on a without prejudice basis because the Landlord wished to continue receiving some form of payment from Sobeys on account of taxes. The Landlord is adamant that the Landlord ensured that all further tax invoices were accompanied by cover sheets on which there was this hand drawn notation “subject to further adjustments”.
[ 26 ] And, Sobeys received two tax invoices in each of 2006, 2007, 2008 and 2009 which calculated Sobeys’ share of taxes using the assessed value of the Sobeys store and referred to the “municipal property assessment records”. Sobeys paid each of those invoices and the Landlord accepted payment and did not request any further or additional payments.
[ 27 ] In sum then, from the Sobeys’ letter to the Landlord of May 2004 until March 1, 2010, the Landlord accepted Sobeys’ payments based on the assessed value of the Sobeys store and did not renew any attempt to invoice Sobeys based on proportionate share.
[ 28 ] Then, beginning in March 2010, Sobeys received a series of supplementary invoices from the Landlord that purported to charge additional amounts for the 2005 through 2009 tax years, calculated on a proportionate basis.
[ 29 ] Landlord’s counsel advised Sobeys that Sobeys’ share of taxes had mistakenly been calculated on an assessed value basis rather than a proportionate share basis and it is the position of the Landlord that it accepted a partial payment by Sobeys on account of taxes in respect of the 2010 tax year, on a without prejudice basis, because it wanted to received some funds rather none on account of taxes.
[ 30 ] Needless to say, Sobeys has refused to pay any of the additional amounts billed on a proportionate share basis.
[ 31 ] Sobeys takes the position that for six years the Landlord based taxes on the valuation records and that nothing has changed from 2004, neither the legislation, nor the valuation records; and now the Landlord simply seeks to claim more money by an alternative method.
[ 32 ] I didn’t find any of the cases referred to me by either party to be of much help, except that the cases clearly show that there is no longer a regime of separate assessments in Ontario.
[ 33 ] Zellers Inc. v. Orlando Corporation , 2003 57435 (ON CA) , [2003] O.J. No. 3328 makes it clear that separate assessments no longer take place. In that case, the issue was whether amendments to the Assessment Act in 1997 affect the reimbursement of realty taxes payable by the Tenant to the Landlord under the Lease signed in 1975. The landlord requested individual assessments for each tenant in the shopping centre and the director of appraisal services of the Ontario Property Assessment Corporation wrote back indicating that legislative changes to the Assessment Act eliminate the requirement for the assessor to produce separate assessments for each tenant. The court in that case at para. 15 makes this observation:
While I appreciate that this separate Tenant assessment was often used as a convenient basis for allocating realty taxes under Lease agreements, it was not established for that purpose. With its elimination there is no legislative requirement and therefore, we do not apportion an assessment on a tenant by tenant basis.
[ 34 ] In none of the cases that I was given, were the words of the Lease with respect to the payment of realty taxes, identical or similar to the Lease in question here.
[ 35 ] As a basic principle of contractual interpretation what must be determined is the legal intention of the parties at the time the document was signed.
[ 36 ] The law did not change until 1998. It could not have been in the contemplation of these sophisticated parties in 1993. My role is to determine what the reasonable intentions of the parties were at the time of the making of the contract and Article 5.2 says it all. This Lease specifically contemplates a situation when separate assessments are not made. That distinguishes it from the Zellers case. And indeed the wording of 5.2 distinguishes this case from all the rest of the cases to which I have been referred. It is a unique Lease.
[ 37 ] The Landlord in effect is arguing against the position that it took for six years with respect to the collection of taxes as rent.
[ 38 ] There is no evidence before me that either the Landlord or Sobeys initiated any efforts to obtain a special regulation from the Minister creating a “separate assessment” for the Sobeys premises.
[ 39 ] The Landlord argues that the proportionate share method accords with the Lease. The summary of its position is as follows:
(a) as there are not “separate assessments”, section 5.2 of Article V provides that Sobeys and the Landlord are to use their “reasonable and diligent efforts to have such separate assessment made. Neither party has made any effort to have a separate assessment made.
(b) Failing that the section further provides that the parties are to obtain “sufficient official information” to determine what such separate assessments would have been had they been made. The term “official information” is not defined in the Lease. The Landlord argues that the valuation records or “working papers” produced by MPAC are not “official information”.
(c) As well, the valuation records or “working papers” produced by MPAC are not sufficiently reliable or created for the purposes of apportioning the tenant’s share of property taxes. Accordingly this should not be used for the purpose of determining Sobeys’ share of taxes.
(d) As there is no “official information available” that would permit the determination of what a separate assessment “would have been” had it been made, section 5.2(a) is not capable of being performed.
(e) The taxes must therefore be calculated in accordance with section 5.2(c) of the Lease. That section provides that, where a separate assessment for taxes is not available, Sobeys shall make payments of taxes on the basis of its share of taxes levied or assessed against the shopping centre. Sobeys share is to be determined by the Landlord “reasonably and equitably” allocating a portion of the taxes “levied, rated, charged or assessed” against the shopping centre to the leased premises. In so doing, the Landlord is to have regard to the “generally accepted method of assessment” as well as “applicable elements” used by MPAC in arriving at the assessment of “similar developments” if that method is known. The terms “generally accepted method of assessment”, “applicable elements” and “similar developments” are not defined.
(f) The words “reasonably and equitably” give the Landlord broad leeway in terms of determining how to allocate Sobeys’ share of taxes. The “generally accepted” method of assessment is the income approach. As for the reference to “applicable elements” used by MPAC in arriving at the assessment of “similar developments”, it is not possible to ascertain what is meant by this phraseology. Is it the physical components of the shopping centre (ie: retail stores, food courts, parking, etc.) or is it the elements of MPAC’s income approach (such as capitalization rate, vacancy allowance, or determination of fair market rent). Further, what is meant by the term “assessment of similar developments”?
(g) As this wording is too vague and unspecific as to be enforceable, and in accordance with the principles of contra proferentem , the clause should be interpreted in favour of the Landlord. This doctrine applies where language is ambiguous and the meaning of the clause cannot be ascertained from a plain reading of it [Of course Sobeys take the position there is no place at all in this case for contra proferentem . Neither is the weaker side. both are sophisticated business people, negotiations took several weeks ] .
(h) And the Landlord relies in section 5.2(c) on what it calls a final caveat that “in no event shall the Tenant be required to pay more than its Proportionate Share of all taxes”. This provision provides further support for the Landlord’s calculation of Sobeys share of taxes on a proportionate share basis.
[ 40 ] Not unexpectedly, Sobeys disagrees with the Landlord’s position that what is available is not “official information” and asks us to give the word “official” its plain and ordinary meaning. Here the information sufficient to calculate the taxes emanates from MPAC under the authority of the Assessment Act . Moreover, the Landlord’s own expert calls that information “official”, namely in the official valuation record. He later backtracks from that and swears he doesn’t really know why he said that. We have no help from the cases in terms of what is “official”, but counsel for Sobeys argues that the valuation records are indeed “official information”. So if that information is “official”, the question then becomes is it sufficient so as to comply with the interpretation that Sobeys is placing on section 5.2.
[ 41 ] It is important to understand that the valuation records contain all of the information necessary to work out how the current value was calculated for each of the units based on the information MPAC had on the property at the time the valuation record was produced.
[ 42 ] Indeed the valuation records for each of the tax years at issue are available and are attached to the Affidavit of Harvey Diamond.
[ 43 ] The assessed values for each unit that appear on the valuation records are used for a number of other official purposes. For example, they are used individually to calculate vacancy rebates pursuant to the Municipal Act . If Sobeys were to vacate the plaza and the Landlord were to apply for a vacancy rebate, then Sobeys current value as shown on the valuation records would be the assessed value used to calculate the amount of the rebate owed to the Landlord.
[ 44 ] Moreover, the current value for individual units is used by municipalities to calculate other property tax rebates. So, if a unit of an income-producing property like the plaza were to be occupied by a charity eligible for a charitable rebate, the municipality would use the current value provided by MPAC to determine the correct value of the unit for the purpose of issuing the rebate.
[ 45 ] Section 5.2(a) of the Lease requires that the parties obtain such official information as necessary to determine what a separate assessment would have been had it been made . The Lease does not require that the parties go to the raw data. Pursuant to the current taxation scheme, indeed even the scheme that was in place at the time the Lease was negotiated, all municipalities are required by law to use MPAC’s assessment data to levy their taxes. The assessing authority’s data is the data relied on by all municipal taxing authorities to impose taxes and is precisely the data being contemplated by section 5.2(a) of the Lease. Because there is no definition of “official” it cannot be said that those valuation records are not official because they are not referred to in the legislation. I agree with the Sobeys that the valuation records are “official” because they emanate from and are authorized by MPAC, which produces them to record the assessment data it collects under the authority of the Assessment Act .
[ 46 ] I also agree with Sobeys that the Tenant’s share is not the same as proportionate share.
[ 47 ] The Landlord argues that Sobeys’ share of the taxes ought to be calculated in accordance with 5.2(c) of the Lease which provides for the calculation of taxes according to “the Tenant’s share”. The Landlord’s argument presupposes that “Tenant’s share” is synonymous with “proportionate share”, but that is not the case.
[ 48 ] Section 5.2(c) of the Lease clearly states that in no event shall Sobeys be required to pay more than its proportionate share of taxes. Proportionate share is the ceiling for the amount of taxes payable by Sobeys. Section 5.2 also says that “the Tenant’s share” shall be calculated having regard to the “generally accepted method of assessment and the elements utilized by the lawful assessing authority in arriving at the assessment of similar developments”. It must be that the generally accepted method of assessing properties, like the plaza and the elements used for that assessment, are found within the valuation records.
[ 49 ] While no separate assessment has been issued in respect of the leased premises, the evidence is clear that sufficient information to determine what a separate assessment would have been if it had been made is available from the MPAC valuation records. The valuation records do not constitute a separate assessment but do provide sufficient information to determine what a separate assessment would have been, had one been made.
[ 50 ] Short shrift can be given to the Landlord’s argument that the applicable clause of the lease be interpreted in its favour on the basis of the doctrine of contra proferentem. That principle must only be used when other rules of contract interpretation have failed. Here, the Lease was drafted by sophisticated commercial parties, using legal counsel and possessing equal bargaining power. It was negotiated over the course of approximately two years. During the course of those negotiations, several drafts of the Lease were exchanged. The Landlord’s broker and lawyer participated during different stages of the negotiations. Nor is the language of the lease ambiguous. The doctrine does not apply.
[ 51 ] I agree with counsel for Sobeys that the evidence before me is clear that the MPAC documents are reliable and all that the parties needed to determine is what the separate assessment would have been. The taxes should be calculated under section 5.2(a) of the Lease. It directs the parties to use the reasonable and diligent efforts to obtain sufficient official information to determine what a separate assessment would have been had it been made.
[ 52 ] The valuation record contains all of the information necessary to work out how the current value was calculated for each of the units based on the information MPAC had on the property at the time the valuation record was produced.
[ 53 ] MPAC’s assessment of the plaza was created from assessment data, on a unit by unit basis, as shown on the valuation records. It is significant that these commercial parties, when cobbling together this Lease, determined that they would resort to this exact information if there were no separate assessment. So it doesn’t matter what the intent of the legislature was under the Assessment Act or what position MPAC takes with respect to separate assessments. What matters is what these parties agreed on.
[ 54 ] In my view, the Lease is clear and unambiguous. It requires that the parties use their reasonable and diligent efforts to determine what the allocation of taxes to Sobeys would have been had a separate assessment with respect to the Sobeys store been made. The information necessary to perform such a calculation is available to the parties and, in fact, was used by the Landlord to allocate taxes to Sobeys for the tax years 2004 to 2009. For six years between 2004 and 2009, the Landlord used the MPAC valuation records to determine the assessed value for the Sobeys store and apportioned taxes to Sobeys accordingly. It is untenable for the Landlord now to take the position that the MPAC valuation record cannot be used to determine Sobeys’ share of the taxes.
[ 55 ] Accordingly, the application must be dismissed, without any need for me to deal with the estoppel or limitation arguments raised.
Costs
[ 56 ] It is evident to me that the Respondent Tenant was completely successful in this application and in the usual course would be entitled to costs. I will fix those costs after receiving the parties’ costs submissions in accordance with these directions:
(a) on or before May 31, 2012, the Respondent shall serve and deliver to me at my Kitchener chambers its Form 57B Costs Outline not augmented by more than two pages, together with its Bill of Costs and any relevant Offers(s) to Settle; and
(b) on or before June 15, 2012, the Applicant shall serve and deliver to me at my chambers in Kitchener its Form 57B Costs Outline, together with any Offer(s) to Settle.
P.J. Flynn J.
Released: May 2, 2012
COURT FILE NO.: C-732-10
DATE: 2012-05-02
ONTARIO SUPERIOR COURT OF JUSTICE Terrace Manor Limited – and – Sobeys Capital Incorporated REASONS FOR JUDGMENT P.J. Flynn J.
Released: May 2, 2012
/lr