ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: CV-08-366444
DATE: 20120626

BETWEEN:

1302207 ONTARIO LIMITED Plaintiff Defendant by Counterclaim – and – 1517979 ONTARIO LIMITED, 1727299 ONTARIO INC., FRANK PANICCIA and MAURO MARCHIONI Defendants Plaintiffs by Counterclaim

Eric Fournie & Oleg M. Roslak, for the Plaintiff/Defendant by Counterclaim

Mauro Marchioni, for the Defendants/Plaintiffs by Counterclaim

HEARD: March 12-16, 29 & 30, 2012

LEDERER J.:

Introduction

[ 1 ] This case arises from a commercial tenancy. The landlord acted precipitously to close down renovations being undertaken by the tenant. The landlord made the same mistake when it began to demolish the premises while waiting for a decision of the court that was to determine whether the tenant had breached the lease. The landlord has to pay damages for those failings. On the other hand, the tenant cannot guild its damages by failing to act to minimize its loss, particularly when the path to do so is made clear by orders of the court.

Background

[ 2 ] 1517676 Ontario Limited was operated as a night club. Its principal, if not its only assets, were the lease for the space in which the club was located, the liquor licence and the equipment required to run the business. It sold the assets to 1727299 Ontario Inc., which was owned by Frank Paniccia. For whatever reason, Frank Paniccia agreed to close the transaction before and without the lease having been assigned. The request for the assignment was made sometime during May or June, 2007. On June 13, 2007, the landlord, 1302207 Ontario Limited, delivered a “Statement of Recoveries Adjustment” going back to 2003 and dealing with each of the intervening years. This was a request for the payment of “additional rent” under the lease. 1517676 Ontario Limited disputed the claim. The disagreement dealt largely with what was being sought for the cost of water as delivered by the municipality. The evidence provided to the court demonstrated that it was an ongoing policy of the landlord not to consent to the assignment of a lease while the current tenant was in default of its obligations under the lease. Rather, on August 20, 2007, the landlord delivered a Notice of Default for failure to pay additional rent in the amount of $49,445.31. While it is not clear what was intended, it appears that a request for a date for the hearing of an injunction was to be made, on August 24, 2007, at the applicable triage or scheduling court. As it turned out, that was not necessary. The endorsement, made on that day by Mr. Justice Campbell, indicates that counsel had agreed to withdraw the Notice of Default, based on an understanding that the disputed sums would be held in trust. After the endorsement and in response to the concerns of its tenant, the landlord retained an outside consultant and revised the calculation of additional rent in accordance with the work of this consultant. The revision was dated December 20, 2007 and sent to the tenant (1517676 Ontario Limited). The tenant continued to dispute the charges being claimed. The landlord did not provide its consent to the assignment of the lease.

[ 3 ] Frank Paniccia wished to renovate the nightclub. He thought it could respond to a different, more remunerative segment of the market. The lease required that no “alterations” be made to the premises without the written approval of the landlord. During the month of March 2008, Frank Paniccia approached Laura Trujillo, the property manager for the landlord. She indicated a desire to speak to Joseph Gagliano, the principal of 1517676 Ontario Limited. This precipitated an e-mail which exhibited a measure of frustration on the part of the tenant. On March 9, 2008, counsel wrote to the solicitor acting for the landlord expressing indignation that Laura Trujillo refused to deal with Frank Paniccia, who he referred to as “my client’s manager”. For her part, Laura Trujillo testified that she was concerned that the landlord was not being paid. I understood this to refer to the “additional rent’, a problem that remained unresolved. Laura Trujillo indicated that it was not unusual that, in such circumstances, she would want to talk to the person responsible. She wished to speak to the owner of the company that continued to be the tenant. Laura Trujillo testified that, a few days after March 9, 2008, she met with Frank Paniccia. She said that this is when she learned that he had already purchased the nightclub from Joseph Gagliano.

[ 4 ] While counsel for the defendant was concerned that Laura Trujillo would not deal with Frank Paniccia, counsel for the landlord perceives that there was some sort of conspiracy to mislead his client when the assignment had taken place, as he sees it, in breach of the lease. I am unsure as to why it is said that the lease had been transferred. The fact remains that the landlord had not consented and the sale had taken place without it being required. Be that as it may, neither of these mutual contretemps matter to the issues that I am asked to decide.

[ 5 ] In the days immediately after March 9, 2008, there was an e-mail exchange between Laura Trujillo and Frank Paniccia, the upshot of which was that it was understood that renovations were to take place, that the approval of the landlord was required, but that some work could begin in advance of the approval being given.

[ 6 ] I digress to note that, in his e-mail of March 9, 2008, counsel for the defendants referred to money that had been placed in his trust account. I presume this includes the money to be held in trust in respect of the claim for additional rent. I mention this only to observe that counsel was also named as a defendant in this action. As I understand it, this is only on account of whatever funds are being held in his trust account to the credit of this action. No objection was raised or concern expressed as to his acting for the other defendants.

[ 7 ] Frank Paniccia commenced work on the renovations. On April 10, 2008, Laura Trujillo visited the site. She was not happy with what she found. She expected that the work that was being undertaken, to that point, would be cosmetic. It had been described in an exchange of e-mail between them on March 11, 2008. Laura Trujillo asked “… what will be demolished or removed?” and Frank Paniccia responded: “As far as demolition goes things like the vip booths, glass on top of bars that are chipped and broken, bar facings, mirrors that are cracked and have to be replaced. Basically general items that have to be replaced due to wear and tear and do not effect structural or mechanical until drawing proposals are reviewed by you...” As far as Laura Trujillo was concerned, what she found was far more extensive than she had been led to expect. It was in furtherance of the complete renovation of the space. It was not cosmetic. She thought the work was structural. As Frank Paniccia saw it, she “freaked out”. She asked: “What the hell do you think you are doing?” Laura Trujillo acknowledged she was surprised, but denied she was agitated or lost her professionalism. Again, this difference does not matter.

[ 8 ] Laura Trujillo took pictures of what she saw and told Frank Paniccia to tell his workers to stop, which he did. He and they left. Frank Paniccia was never again in possession of the premises.

[ 9 ] On the following day, April 11, 2008, Laura Trujillo prepared, signed and delivered a fresh Notice of Default. There were said to be three areas in which the tenant, identified as 1517676 Ontario Limited (the company owned by Joseph Gagliano), was said to be in default, as follows:

• default of rental payments in the amount of $60,730.04;

• default by permitting a transfer (assignment) of the lease without the written approval of the landlord; and,

• making repairs, alterations or improvements of a structural nature without the written approval of the landlord.

[ 10 ] In response, an application was brought by the tenant (1517676 Ontario Limited) seeking a declaration that it was not in breach of the lease. It seems that, in early July, an Order was made by Madam Justice Pepall directing a summary trial. The trial was heard by Mr. Justice Gans on August 5, 6, 7 and 8, 2008.

[ 11 ] In the period between the delivery of the Notice of Default and the trial, the monthly rent (“Minimum Rent”) continued to be paid or otherwise accounted for. For the months of April, May and June, rent was paid to the landlord; thereafter, it was paid into the trust account of counsel for the defendants and held there pending resolution of the dispute between the parties.

[ 12 ] At the outset of the trial, as a result of questions asked and a request made by Mr. Justice Gans, the parties considered the three issues directed to trial by Madam Justice Pepall. They arrived at an agreement that limited the issues to be dealt with. The arrangement they made was included within the documents exhibited in this proceeding. It says, in part:

Additional Rent Stipulation

a) $42,947.65 held in the trust account of Mauro Marchioni was paid into trust on account of the claim for additional rent made by the Landlord;

b) the Tenant no longer disputes that $42,947.65 is owing to the Landlord for additional rent;

c) those funds are held in trust for the benefit of the Landlord;

d) whatever is decided at trial the tenant owes this money to the landlord, subject to the possible set off against [the] security deposit.

Rent Paid Since Notice of Default

The parties agree that Rent paid into the trust account of Mauro Marchioni will be paid to the Tenant in the event the Lease is terminated, and to the Landlord in the event the Lease is upheld.

[ 13 ] By this agreement, the issue concerning additional rent was resolved for an amount less than had been claimed and a determination made as to the basis upon which the money paid, as rent, into the trust account of counsel to the defendants would be distributed. Prior to the commencement of the first trial, the landlord abandoned any claim for what were alleged to have been structural alterations made without its approval. The trial dealt only with the question of whether the tenant (1517676 Ontario Limited) had breached the lease by transferring or purporting to transfer its interest in the lease. This included not only the apparent transfer to Frank Paniccia, but also the earlier change that occurred when Joseph Gagliano took control of the tenant in 2003. The court refused to set aside either transaction. In respect of the “2007 Transfer”, the judge found in favour of the tenant. Contrary to the terms of the lease, the landlord had unreasonably withheld its consent to the assignment, beginning in July 2007. He determined that the tenant was not in default of the lease.

[ 14 ] Mr. Justice Gans ended the substantive part of his reasons, as follows:

I will leave it to counsel to re-attend before me to discuss what should properly flow from that determination, particularly since the Additional Rent, if not the ongoing rent, has been paid into one counsel’s trust account pending this decision.

( 1517676 Ontario Limited v. 1302207 Ontario Limited , 2008 47730 (ON SC) , at para. 21 )

[ 15 ] Counsel advised that they did approach Mr. Justice Gans in respect of this matter but, in the end, an action was commenced and these issues were left to be resolved in this proceeding. As a result, the history does not end with the decision of Mr. Justice Gans.

[ 16 ] The reasons of Mr. Justice Gans were released on September 24, 2008.

[ 17 ] During the weeks subsequent to the release of the reasons of Mr. Justice Gans through to and after the appeal period, the tenant (now 1727299 Ontario Inc., the company owned by Frank Paniccia) refused to pay rent. At first, the objection to paying was a desire to set-off the rent against any damages that it had suffered as a result of the actions of the landlord in refusing to consent to the assignment and closing down the renovations to the nightclub. The landlord responded by observing that Article 3.8 of the lease required that rent be paid without any set-off. The tenant then demanded a lease in its name. Counsel for the landlord pointed out that a “Consent to Transfer” (assignment) was an amending document and no new lease would, in the normal course, be prepared. The landlord was willing to provide its consent so long as doing so did not prejudice its right to appeal the decision of Mr. Justice Gans. This was unacceptable to the tenant. It wanted to proceed with the renovations. The consent would not provide the necessary security if it was accompanied by an appeal of the order which had validated the rights of the tenant. The tenant indicated that, if the decision of Mr. Justice Gans was accepted and the Consent to Transfer provided, the rent would be paid. The landlord answered that it would forego an appeal and consent to the transfer if the tenant agreed not to pursue its claim for damages. The tenant refused. As its counsel saw it, the tenant would be giving up a significant claim that had already been established through the decision of Mr. Justice Gans.

[ 18 ] The applicable appeal period expired on October 24, 2008 without an appeal being commenced. On October 28, 2008, the executed Consent to Assignment was delivered by the landlord. Nonetheless, the tenant still refused to pay rent. The money remained in the trust account of its counsel. Instead, its counsel advised that it would be providing the requisite drawings and requesting the consent of the landlord to proceed with its proposed changes to the premises. Counsel also referred to damages his client had suffered and indicated that it would seek an injunction protecting it from having to pay rent until after that issue had been determined.

[ 19 ] During the course of the trial before me, there was a suggestion that the tenant was also concerned that it might resolve the outstanding difficulties, pay the rent and complete the renovations only to have the landlord object a renewal of the lease. The initial term of the lease was to expire in April of 2009. There is, in the record, an executed copy of a notice by which the tenant sought to exercise its “first renewal option”. It is dated October 21, 2008, but in an e-mail, dated October 28, 2008, counsel for the tenant advised that it would be delivered to the landlord on that day. On each of November 28, 2008, December 1, 2008, December 4, 2008 and December 10, 2008, Frank Paniccia wrote to Laura Trujillo asking for the status of his renewal. Given what had happened in the intervening days, it is unclear what the tenant expected by way of response to these inquiries.

[ 20 ] On November 3, 2008, the landlord had issued a third Notice of Default. It was based on the failure of the tenant to pay rent. On November 10, 2008, the landlord, in company with bailiffs, issued a notice terminating the tenancy. On November 11, 2008, counsel for the tenant wrote to counsel for the landlord saying that termination of the lease was “untenable” and indicating that a motion would be brought seeking relief from forfeiture. On November 21, 2008, the matter came before Mr. Justice Campbell in scheduling court. The endorsement required that the arrears of rent (the money being held in the trust account of counsel) be paid into court and that access to the premises be given to the tenant. A motion with respect to “access to the arrears” was to proceed on a timetable to be agreed to when the material was prepared.

[ 21 ] In response to the proposed motion, the landlord made a settlement offer, in writing, specifically stated to be made pursuant to Rule 49 of the Rules of Civil Procedure. It states:

The landlord will accept the following terms in settlement of the motion you have proposed:

a) The landlord will consent to relief from forfeiture and the tenant 1727299 Ontario Inc. , may occupy the premises pursuant to the lease dated April 1, 2002, and the Consent to Assignment of Lease dated as of July 5, 2007 (“Lease”), for the term of the Lease, with any extension option it chooses to exercise under the Lease;

b) the full amount of rent owing under the Lease shall be paid immediately to the landlord, subject only to the set-off of [ sic ] in respect of the security deposit;

c) for greater certainty, the full amount of the rent owing under the Lease includes the agreed-upon water charges and all arrears of rent payments due under the Lease;

d) the tenant shall comply with the terms of the Lease, including the obligation to pay rent on the first day of each month;

e) the settlement contemplated by this Offer shall be without prejudice to any proceeding the tenant wishes to bring against the landlord for damages;

f) this Offer to Settle shall remain outstanding until 1 min. after the beginning of the proposed motion or until withdrawn in writing.

[Emphasis added]

[ 22 ] This was followed by an exchange of e-mails in which counsel for the tenant seeks and is given the assurance that the offer contains the right to renew the lease (see the italicized phrase above). Counsel for the landlord wrote: “I do not know how to state it any clearer: if the rent is paid to the landlord the Lease and all its terms are restored, including the right to renew.”

[ 23 ] For whatever reason, the settlement was not accepted. The motion proceeded. It was heard by Mr. Justice O'Neill on April 2, 2009. His Honour ordered that, upon payment of the rent due, relief from forfeiture from the notice of termination would be granted and, thereafter, the lease would remain in full force and effect. His Honour went on to order that the issue of damages would be the subject of a trial. He did this by consolidating the action which had been commenced following the trial before Mr. Justice Gans with the paragraphs of the application through which damages had been sought.

[ 24 ] The tenant sought leave to appeal to the Divisional Court. By order of Mr. Justice Lederman, made on May 20, 2009, the motion was dismissed.

[ 25 ] The trial heard by me is the trial for damages ordered by Mr. Justice O'Neill.

(Decision continues with Issues, Reasons, and Conclusion exactly as provided.)

LEDERER J.

Released: 20120626

JUDGMENT

COURT FILE NO.: CV-08-366444
DATE: 20120626

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

1302207 ONTARIO LIMITED Plaintiff Defendant by Counterclaim – and – 1517979 ONTARIO LIMITED, 1727299 ONTARIO INC., FRANK PANICCIA and MAURO MARCHIONI Defendants Plaintiffs by Counterclaim

JUDGMENT

LEDERER J.

Released: 20120626