COURT FILE NO.: CV-11-104806/CV-11-105539

DATE: 20121015

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Beswick Properties Yonge Street Inc., Applicant

AND:
Royal Bank of Canada, Respondent

BEFORE: Justice M. McKelvey

COUNSEL:
Kevin L. MacDonald and Jamie M. Sanderson, for the Applicant

Sharon Wong, for the Respondent

HEARD: April 30 th and May 1, 2012

ENDORSEMENT

Introduction

[ 1 ] Two applications have been brought before the court and were argued together. They both concern the interpretation of two offers to lease, on a property which was to be built in a retail commercial plaza in Aurora. There is no issue regarding the relevant facts. However, the interpretations of the offers to lease have raised a significant issue about the landlord’s right to claim a proportionate share against the tenant for the cost of constructing an underground garage. The parties have brought their applications in accordance with Rule 14.05, which allows a party to bring an application for the determination of rights which depend on the interpretation of a contract.

Background

[ 2 ] On March 3, 2008 the respondent Royal Bank of Canada (“RBC”) entered into two offers to lease on a property which was to be built by Beswick Properties Yonge Street Inc. (“Beswick Properties”).

[ 3 ] One offer related to space which was to be leased on the ground floor. The other related to space being rented on the second floor. Both offers to lease were identical except with respect to some minor provisions that do not bear upon the issues raised in this matter.

[ 4 ] At issue is whether RBC is responsible for paying to Beswick Properties a contribution to cost overruns incurred on the construction of the building. If so, there is an issue as to whether the cost of constructing an underground garage in the building is to be taken into account in determining any amount owed by RBC.

[ 5 ] It is apparent from the evidence before me that in late 2007 or early 2008 Beswick Properties became aware of the fact that RBC was interested in setting up some banking operations in the Town of Aurora. Beswick Properties was aware of a suitable building site and commenced negotiations with RBC for the development of a two storey shopping centre which would be designed to incorporate offices on both levels for RBC. The proposed development also provided for other commercial and retail space which would be leased to other tenants.

[ 6 ] The building was constructed in 2009 and 2010. The contractor and builder for the project was 2000950 Ontario Inc. (“200”). This corporation is jointly owned by David Beswick who is the president and director of Beswick Properties as well as his brother Kevin Beswick.

[ 7 ] The negotiations for the offers to lease were carried out by David Beswick who dealt with CB Richard Ellis Global Corporate Services Ltd. (“CBRE”) which represented RBC in the negotiations.

Terms of the Offer to Lease

[ 8 ] Both offers to lease contained the following paragraph with respect to the construction;

“7. Landlord’s Work”

The Landlord shall construct the premises and all appurtenances thereto in accordance with the outline scope of work (the “Landlord’s Work”) set out in Section A of Schedule “C” annexed hereto and forming part of this Offer to Lease, in accordance with the Final Drawings and the Site Plan (collectively, the “Plans”), and in accordance with the Standards, all as more particularly set out in Schedule “C”. The plans shall form part of this Offer to Lease whether or not attached hereto. For purposes hereof, the terms “Final Drawings”, “Standards”, “Site Plan” shall have the meanings ascribed to them in Schedule “C”.

The total hard costs for constructing the Premises are estimated to be $130.00 per square foot of Rentable Area of the Building, exclusive of Value Added Tax, based upon the Tenant’s design standard, exclusive of soft costs, site development costs and site servicing costs (which shall be at the expense of the Landlord). Soft costs include architectural, electrical, structural, environmental, civil and mechanical consultants’ fees and legal fees and other professional fees, together with all charges under Section 3.5 of Schedule “C”. Site servicing costs include bringing the following services to within the Premises (as identified on the Tenant’s floor plan): sewer, water, hydro, natural gas and local telephone lines. Site development costs include all costs incurred with respect to the work set out under Section 5.0 of Schedule “C”.

Upon substantial completion of the Landlord’s Work, the Landlord shall provide the Tenant with copies of all construction invoices to evidence the total hard costs for constructing the Premises. In the event that the Landlord’s actual hard costs for constructing the Premises are more than $130.00 per square foot of Rentable Area of the Building, exclusive of Value Added Tax, the Tenant shall, provided such excess costs are in accordance with the contract or contracts approved by the Tenant or have otherwise been approved in advance by the Tenant, pay the difference to the Landlord within thirty (30) days after substantial completion of the Landlord’s Work.

The Landlord or its associated companies shall be responsible for performance of the Landlord’s Work.

The Landlord will use its best efforts to complete the Landlord’s Work by January 1, 2010. Provided that in the event the Landlord’s Work has not commenced by July 1, 2010, the Tenant shall have the option of terminating this Offer to Lease and/or the Lease, as the case may be, forthwith upon written notice to the Landlord, without compensation therefore to the Landlord, notwithstanding that the Landlord may have incurred costs in connection herewith” (underlining added).

[ 9 ] It is also significant to note that the term “premises” is a defined term in the offers to lease. The premises are the spaced occupied by RBC on the ground and second floors of the building together with a drive through facility.

The Parties Positions

[ 10 ] Beswick properties takes the position that RBC is responsible for construction costs which exceed $130.00 per square foot based on RBC’s pro rata share of the rental space and the total cost of the building including the cost of constructing the underground garage. RBC argues that it is not liable for payment of any excess costs on the basis that RBC did not approve the construction contracts or the costs of construction as required under paragraph 7 of the agreement. In the alternative RBC takes the position that if a payment is required by RBC under paragraph 7 the cost of the underground garage should be excluded from the excess costs which are contemplated under paragraph 7.

The Principles of Contractual Interpretation to be Considered

[ 11 ] The general principles to be applied in interpreting a contract are discussed by the Ontario Court of Appeal in Plan Group v. Bell Canada (2009), 2009 ONCA 548 , 96 O.R. (3 rd ) 81. They suggest a commercial contract is to be interpreted;

(a) “as a whole, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective;

(b) by determining the intention of the parties in accordance with the language they have used in the written document and based upon the “cardinal presumption” that they have intended what they have said;

(c) with regard to objective evidence of the factual matrix underlying the negotiation of the contract, but without reference to the subjective intention of the parties; and (to the extent that there is any ambiguity in the contract),

(d) in a fashion that accords with sound commercial principles and good business sense, and that avoid a commercial absurdity.”

[ 12 ] A further principle with respect to contractual interpretation was raised by counsel for Beswick Properties relating to the doctrine of contra proferentem. However, during the course of argument both counsel agreed that this doctrine was not applicable in the present situation because the contract in issue had been modified during the negotiation process by Beswick Properties. In these circumstances both counsel agreed that this doctrine had no application to the proper interpretation of the contract.

Was the Provision of Paragraph 7 Requiring Prior Approval of the Cost by RBC Satisfied in the Circumstances of this Case?

[ 13 ] Beswick Properties was responsible under paragraph 7 of the offer to lease for construction of the shopping centre. Beswick Properties did not enter into a written agreement with 200 for the construction. This seems to be related to the fact that both Beswick Properties and 200 were part of a group of companies which were operated by close family members. It is agreed by both parties, on this application that no construction contracts were ever given to RBC for their approval. It is also agreed that no information was given to RBC about the cost of construction prior to the completion of construction of the building.

[ 14 ] Beswick Properties makes reference in its evidence to the fact that the initial proposal made by RBC required the landlord to obtain three different quotes for the construction. Specifically the initial wording of the draft agreement stated;

“The Landlord shall solicit no less than three (3) bids for the performance of the Landlord’s Work and the awarding of said contract or contracts shall be subject to the prior written approval of the tenant, which approval shall not be unreasonably withheld or delayed.”

[ 15 ] At the request of the landlord this draft provision was deleted and the signed agreement allowed Beswick Properties to construct the building on its own. The signed version of the agreement therefore replaced the aforesaid provision with the following:

“The Landlord or its associated company shall be responsible for the performance of the Landlord’s Work.”

[ 16 ] Beswick Properties argues that by deleting the requirement for the landlord to obtain three bids which would then be subject to the prior written approval of the tenant, RBC was thereby agreeing that the landlord would perform the work and that any approval required for the cost overrun provision had been satisfied. I do not believe that this is a reasonable conclusion based on the wording of paragraph 7. Even if the provision requiring the landlord to obtain three bids for the construction was replaced, the agreement which was signed still requires the tenant to approve the construction contract or otherwise approve in advance the excess costs of construction. This accords with sound business sense because otherwise RBC would have no control over the cost that it might be exposed to under the contract. Common sense would suggest that they would want to have some reasonable notice as to what the costs were going to be prior to assuming responsibility for those costs. This is especially the case when by virtue of the amendment requested by the landlord the requirement for three competitive bids was being eliminated and the responsibility for construction was being turned over solely to the discretion of the landlord and an associated company.

[ 17 ] In addition, the interpretation proposed by Beswick Properties would require this court to ignore the condition requiring approval by RBC and render this term ineffective. This would be contrary to one of the key principles of contractual interpretation.

[ 18 ] The plain wording of this provision would suggest that approval by RBC was a condition precedent which had to be fulfilled before there was any obligation on RBC to make a payment. The decision of the Ontario Court of Appeal in 1383421 Ontario Inc. v. Ole Miss Place Inc. (2003), 2003 57436 (ON CA) , 231 D.L.R. (4 th ) 193 deals with an agreement which provided for renewal of a lease. The provisions of the lease included a term which allowed for an option to renew, “provided that” the tenant is not in default under the lease. The court held that the tenant in that case had the burden of proof to show that it was not in default and had performed the terms upon which his right depended.

[ 19 ] Similarly, in this case Beswick Properties has the onus to show that the excess costs were approved in advance by RBC. It is acknowledged that this was never done.

[ 20 ] A further argument advanced by Beswick Properties is that RBC had “waived” any reliance on advance approval of the expenses. In support of this position they referred to some settlement discussions which took place after the building was completed. There is some conflict in the affidavit evidence before me as to the discussions which took place after completion of the building.

[ 21 ] The affidavit evidence indicates that on October 29, 2010 Mr. Beswick delivered a summary of costs. This was followed by a meeting to try to resolve matters. This meeting took place on December 10, 2010. It was attended by several individuals on behalf of CBRE as well as Mr. Beswick. At the settlement meeting there was discussion of a resolution. It appears CBRE may have proposed a figure of $600,000.00 and Mr. Beswick wanted $750,000.00. Counsel for Beswick properties relies on the fact that no one at the meeting specifically took issue with his client’s right to claim excess costs and that RBC waived any reliance on this condition.

[ 22 ] The evidence of the CBRE representatives who attended varies in a number of significant respects from that of Mr. Beswick. For example counsel for RBC pointed me to the evidence of Mr. Stephen Rodrigues who testified at an examination on October 28, 2011 (at page 4, question 319) that his position was that Beswick Properties was not entitled to anything but they were trying to negotiate a solution acceptable to both parties.

[ 23 ] Even taking the evidence of Beswick Properties at its highest, however, it would not appear to be sufficient to constitute a waiver of RBC’s rights to rely on the provisions in the agreement. In the Supreme Court of Canada decision in Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., 1994 100 (SCC) , [1994] 2 S.C.R. 490, the court comments on the requirements for waiver. The court states,

“Waiver will be found only where the evidence demonstrates that the party waiving had:

(1) a full knowledge of rights;

(2) an unequivocal and conscious intention to abandon them.

The creation of such a stringent test is justified since no consideration moves from the party in whose favour a waiver operates. An overly broad interpretation of waiver would undermine the requirement of contractual consideration.”

[ 24 ] In my view the fact that RBC entered into settlement discussions with Beswick Properties about a resolution of the dispute is not sufficient to constitute an unequivocal and conscious intention to abandon their defence based on the contract. To conclude otherwise would mean that parties entering into settlement discussions would always have to be concerned about making any offers which, if not accepted, would compromise their ability to rely on any applicable defences. In my view, the fact that the parties entered into settlement discussions does not constitute an unequivocal intention by RBC to abandon rights under the lease agreements.

[ 25 ] A further argument raised by Beswick Properties is that conduct subsequent to the signing of the offers to lease should be taken into account in interpreting the parties’ intentions at the time of contractions. In this regard it is argued that after the signing of the offers to lease, the parties conducted themselves as though the landlord would be entitled to claim for its expenses over and above $130 per square foot and the only issue was the amount of the landlord’s entitlement.

[ 26 ] Both parties agreed on the law relating to subsequent conduct in the interpretation of a contract. This is set out in the Ontario Court of Appeal decision in Arthur Anderson v. Toronto Dominion Bank (1994), CarswellOnt 223 (Ont. C.A.) . In that case the court affirms that evidence of subsequent conduct is only admissible if there is ambiguity in a written contract. The court summarized this principle as follows:

First, the words of the contract must be analysed “in its factual matrix”, and a conclusion arrived at that there are two possible interpretations of the contract. Then, and only then, may the trial judge look at other facts including facts leading up to the making of the agreement, circumstances existing at the time the agreement was made, and evidence of subsequent conduct of the parties to the agreement.

[ 27 ] In my view, there is no ambiguity relating to the requirement of approval of cost overruns in the offers to lease. The requirement for prior approval is unequivocal and clear. As a result there is no basis to consider the issue of subsequent conduct in the interpretation of these terms.

[ 28 ] For the above reasons I conclude the Beswick Properties is not entitled to claim for the excess costs under paragraph 7 of the Offer to Lease as they did not obtain approval in advance from RBC of the excess costs.

Did the Excess Costs under Paragraph 7 Include the Cost of the Underground Garage?

[ 29 ] Although I have concluded that RBC is not obligated to pay any of the excess costs the issue of what costs RBC would be liable to pay was argued before me. The issue here is whether the excess costs include the costs of the underground garage.

[ 30 ] The position taken by RBC is that the excess costs do not include the costs of the underground garage. They rely on the wording of paragraph 7 which states;

“The total hard costs for constructing the Premises are estimated to be $130.00 per square foot of Rentable Area of the Building, exclusive of Value Added Tax, based upon the Tenant’s design standard, exclusive of soft costs, site development costs and site servicing costs (which shall be at the expense of the Landlord).”

[ 31 ] Counsel for RBC argues that in calculating any excess payment the cost of the underground garage is to be excluded because it is not associated with the construction of the premises which are defined under the agreement to be the space occupied by the tenant. This position does not appear to be consistent, however, with other provisions in the agreement which contemplate costs outside of the tenant’s premises. For example Schedule “C” talks about the costs which are excluded as site development costs under Schedule “C”. Article 4 of Schedule “C” sets out the site development costs which include costs for site clearing and demolition, sodding and site landscaping, provision of full turn ingress and egress from city or town streets, concrete sidewalks, curbs and ramps and all excavation, backfill, compaction, grading and all other work necessary for placing the premises on the site. It is apparent that many of the site development costs clearly fall outside the construction of the tenants premises. The clear inference from the wording noted above would appear to be that the costs associated with the construction of the tenants premises will take into account the costs of the building generally, subject to the specific exclusions set out in the agreement.

[ 32 ] The cost of constructing the underground garage would clearly fall under the “hard costs” of constructing the building. As the cost of constructing the garage is not excluded it would appear from the language of the agreement that the parties intended that these costs would be included as part of the hard costs for constructing the premises for the purposes of a possible payment of excess costs under the agreement.

[ 33 ] This view is reinforced by the position taken by RBC on the motion where they acknowledge that the “per square foot cost for constructing the rentable area of the building may be a reasonable proxy for the per square foot cost for constructing the premises.” It is apparent, therefore, that even RBC contemplates that the per square foot cost of construction will not be based solely on the cost of construction for their premises but will take into account a broader consideration of the building costs.

[ 34 ] I therefore conclude that the cost overrun provisions as set out in the offer to lease should take into account the costs of the building generally including the construction of the underground garage.

Conclusion

[ 35 ] Based on the foregoing analysis I have concluded that RBC is not liable to Beswick Properties for the cost overruns on the construction of the building as Beswick Properties did not comply with their obligation to obtain approval of the construction costs in advance.

[ 36 ] If counsel is not able to agree on costs an appointment may be taken out through the Trial Coordinator’s Office to schedule a date to address the issue of costs. If no arrangements are made by either counsel within 45 days of the release of this decision then there will be no order as to costs.

Justice M. McKelvey

Date: October 15, 2012