SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: 5782/12 and 6231/12

DATE: 2013-03-28

RE: The One Stop Fireplace Shop Ltd., Applicant

AND:

Parigon Industries Inc., Respondent

Parigon Industries Inc., Applicant

AND:

The One Stop Fireplace Shop Ltd., Respondent

BEFORE: The Honourable Mr. Justice Robert Nightingale

COUNSEL: Christopher Durdan, Counsel, for The One Stop Fireplace Shop Ltd.

Harry Korosis, Counsel, for Parigon Industries Inc.

HEARD: March 8, 2013

ENDORSEMENT

[1] The Applicant, The One Stop Fireplace Shop Ltd a tenant under a commercial lease with the Respondent landlord Parigon Industries Inc brings this application under Rule 14.05(3) for an interpretation of the lease agreement between the parties.

[2] Essentially, the Applicant asks for a declaration that it has validly exercised its option to purchase the property known as 4332 Drummond Road Niagara Falls and for an Order of specific performance compelling the Respondent to sell the property to it at the appraised value as defined and determined under the lease agreement.

[3] The Respondent opposes the application and commenced its own application for a declaration that the Applicant has been in breach of its obligation under the lease to pay for the property taxes on the property and an Order that the Applicant be required to rectify its breach before any sale of the property is required by the Respondent.

[4] Although the Respondent denies that the Applicant is entitled to an Order of specific performance on the merits, it does not dispute this court’s jurisdiction to grant such an order under Rule 14.05 as ancillary or consequential relief to the determination of rights of the parties based on the interpretation of the lease agreement between them. Tropicana v. Stonevalley Estates Inc. 1997 12184 (ON SC), [1997] O.J. No.6333; 1997 12176 (ON SC), 36 O.R. (3rd) 92.

THE ISSUES

[5] There are three issues that must be resolved on this application as follows:

1. Has the Applicant properly exercised its option to purchase the property from the Respondent contained in the lease agreement by obtaining an appraisal of the property from D.J. Penwarden Appraisals Limited in the amount of $860,000?

2. Does the lease agreement require the Applicant to reimburse the Respondent for realty taxes it paid on the property and if so, what is the amount of the realty taxes the Applicant must pay to the Respondent as a condition of it being entitled to exercise its option to purchase the property?

3. If the Applicant properly exercised its option to purchase the property, should an Order of specific performance be granted requiring the Respondent to convey the property to it?

[6] For the reasons noted below, I find that the Applicant has properly exercised its option to purchase the property by obtaining the D.J. Penwarden Appraisals Ltd. appraisal in the amount of $860,000, that the Respondent is solely responsible for payment of all of the realty taxes on the subject property under the terms of the lease and that the Applicant is entitled to an Order for specific performance of the purchase agreement for the property with a purchase price of $860,000.

BACKGROUND FACTS

[7] The essential facts leading up to the issues in dispute are relatively straightforward.

[8] The Applicant took over the Respondent’s fireplace and barbecue retail business operated out of property the Respondent owned at 4332 Drummond Road Niagara Falls in June 2009. It purchased all of the Respondent’s assets with respect to the business and entered into a five-year lease agreement over the subject property.

OPTION TO PURCHASE

[9] The lease agreement granted the Applicant three separate options to purchase the property. The first option had to be exercised within the first year of operation at a fixed purchase price of $900,000.

[10] The second option had to be exercised within 30 days after the third anniversary date of the commencement date of July 1, 2009 and the third option had to be exercised within 30 days after the fifth anniversary of the commencement date. Both options provided that the purchase price was to be determined by the appraisal report setting out the opinion of fair market value of the property by D.J. Penwarden Appraisals Limited.

[11] The parties agreed that that D.J. Penwarden was a reputable appraiser in the Niagara Falls area. Both parties apparently used the services of the same lawyer for the purpose of preparing the lease agreement.

[12] The terms of the options to purchase are contained in paragraph 7 of the lease agreement as follows:

7.1 In consideration of the payment of basic rent, additional rent and rental taxes hereby reserved and the due performance and observance by the tenant of the terms, covenants and conditions herein contained, the Landlord hereby grants to the Tenant three separate Options to Purchase the Property, such Options to Purchase to be exercised at the times, at the Purchase Price (as may require determination), and upon terms, all hereinafter set forth.

7.2 The first Option to Purchase may be exercised by the Tenant by providing notice in writing to the Landlord at any time during the first Year of Term (the “First Option”).

7.3 If the Tenant exercises its First Option the Landlord shall sell to the Tenant and the Tenant shall purchase from the Landlord the Property for the Purchase Price of $900,000.

7.4 The second Option to Purchase may be exercised by the Tenant by providing notice in writing to the Landlord on or within the thirty (30) days next following the third anniversary of the Commencement Date (the “Second Option”).

7.5 If the Tenant exercises its Second Option the Landlord shall sell to the Tenant and the Tenant shall purchase from the Landlord the Property for the Purchase Price as determined by Appraisal.

7.6 The Third Option to Purchase may be exercised by the Tenant by providing notice in writing to the Landlord on or within the thirty (30) days next following the fifth (5th) anniversary of the Commencement Date (the “Third Option”).

7.7 If the Tenant exercises its Third Option, the Landlord shall sell to the Tenant and the Tenant shall purchase from the Landlord the Property for the Purchase Price as determined by Appraisal.

7.8 The fees, costs and expenses of any Appraisal shall be borne equally by the Landlord and the Tenant.

7.9 GST shall be payable in addition to the Purchase Price.

7.10 The Purchase Price shall be paid without adjustment by cash, certified cheque or bank draft of the Landlord or to whom it may direct on completion.

7.11 The transaction of purchase and sale arising out of the exercise of any of the foregoing Options to Purchase shall be completed not later than the one hundred and twentieth (120th) day next following the date of exercise of the foregoing option. If such day falls on a Saturday, Sunday or other date upon which the registration of documents cannot be completed the date for completion shall not be later than the first day thereafter when registration of documents is possible.

7.12 The Tenant shall continue to pay all Basic Rent and Additional Rent due to the Landlord and all Rental Taxes under this Lease until the completion of the transaction of purchase and sale.

7.13 The transaction of purchase and sale arising out of the exercise of an option to purchase shall be carried out in accordance with the provisions of the form of agreement then utilized by the Ontario Real Estate Brokers Association.

[13] The terms “Commencement Date”, “Option to Purchase”, “Appraisal” and “Purchase Price” are all specifically defined in the Lease Agreement in the Definitions Section as follows:

1.1 (d) “Commencement Date” – July 1, 2009

(m) “Option to Purchase” or “Options to Purchase”- shall mean the Tenant’s option(s) to purchase from the Landlord the Property subject to the notice, timing and Purchase Price requirements as are more particularly described in Article 7 hereunder.

(n) “Appraisal”- shall mean an appraisal report prepared by D. J. Penwarden Appraisals Ltd. setting out an opinion of the fair market value of the Property. In the event that D. J. Penwarden Appraisals Ltd. shall no longer engage in such business at such time as such appraisal report is required then such appraisal report shall be prepared by a real estate appraiser selected by the Landlord and which appraiser bears the “AACI” designation of the Appraisal Institute of Canada and who practises within the Regional Municipality of Niagara. The Property value determined by such appraisal report shall be determinative of the Purchase Price for the Property as contemplated in Sections 7.5 and 7.7 hereunder.

(o) “Purchase Price”- shall mean the monetary sum for which the Tenant will purchase the Property from the Landlord as more particularly described in Article 7 hereunder.

[14] From 2009 until early 2012, Elio Paonessa, the Respondent’s main shareholder, worked closely with the Applicant as an employee in the Applicant’s business. He and the Applicant’s representatives Terry and Robert Booth enjoyed a good working relationship and friendship to the point of vacationing together with their families. Unfortunately, a falling out between the parties took place when Mr. Paonessa’s employment was terminated in early 2012.

[15] The evidence of the Booths was that the options to purchase contained in the lease agreement were critical to their decision to purchase the assets and business of the Respondent, to enter into the lease and take over the retail fireplace shop operation. Their evidence was that it would not have moved forward with these transactions had the options to purchase the property not been provided and that the long-term success and growth of the Applicant’s business was contingent in part on their company’s ownership of the premises out of which it operated.

[16] The evidence of Mr. Booth was that the $900,000 purchase price relating to Option One was not based or obtained on an appraisal of the property but was rather a number selected by the Respondent without input or negotiation from the Applicant to just facilitate the deal. His evidence was that he was not concerned over and did not negotiate the $900,000 price as he knew that the Applicant would not be in a position to purchase the property in the first year of the lease.

[17] The Respondent’s Mr. Paonessa evidence confirmed that there was no appraisal obtained and relied upon resulting in the $900,000 purchase price for the first option. He simply said that he had real estate agents look at it who basically told him that it was “somewhere around million dollars”.

[18] Accordingly, there is really no reliable evidence to suggest that the subject property was actually worth $900,000 at the time the parties simply agreed to use that figure for the first option to purchase price.

[19] No evidence was provided by the parties or by the lawyer who acted for them when they signed the lease agreement as to who decided to use D.J. Penwarden as the appraiser to set the purchase price for the second and third options to purchase, who would or should contact him to obtain his appraisal and what information, if any, the parties would provide to him. The lease agreement is silent on those issues and only states that the fees, costs and expenses of the appraisal would be borne equally by the Applicant and the Respondent.

[20] The Respondent’s position was that the lease agreement contemplated a joint engagement of the appraiser Penwarden and that both parties would have input with the appraiser to determine the fair market value of property for the purchase price of the second and third options. However, the Respondent’s representative Mr. Paonessa admitted in cross- examination that when he signed the lease, he had never heard of D.J .Penwarden and didn’t pay attention or notice that term of the lease until sometime after he received the first appraisal from him in June 2011 described below.

[21] The Applicant’s evidence from Rob Booth was that he understood that the parties had jointly agreed to engage D.J. Penwarden but that his company would initially contact the appraiser as an appraisal was only necessary if it was interested in exercising an option to purchase the property. He understood that his and the Respondent would be involved in the appraisal process by providing any information requested by the appraiser.

[22] In May 2001, approximately one year prior to the time that the Applicant could exercise Option 2, Mr. Booth contacted D.J. Penwarden to appraise the property for the purpose of determining its fair market value and whether it would be feasible for the Applicant to exercise Option 2 under the lease. They discussed in that initial call the lease and the options to purchase in the lease and the purpose of the appraisal. The notes of Mr. Penwarden were passed on to Mr. Kermack, a professional senior appraiser at Penwarden’s to carry out the appraisal.

[23] The sworn evidence Mr. Kermack was that in addition to receiving the notes and the copy of the lease, he understood that his company had been selected by the parties to determine the fair market value of the property which would be determinative of the purchase price should the Booths’ company exercise its option to purchase it. The sworn evidence of Mr. Kermack was that he understood his opinion as to the fair market of the property would be binding on the parties.

[24] Mr. Kermack and Mr. Penwarden attended at the property on May 18, 2011 meeting with Terry Booth and his son Rob Booth after which point Mr. Kermack spent considerable time reviewing the property. Rob Booth provided Mr. Kermack with the telephone number for Mr. Paonessa so that he could obtain any necessary information from the Respondent owner.

[25] The sworn evidence of Mr. Kermack was that he subsequently called Mr. Paonessa to inform him that he was preparing an appraisal for the property and to obtain further information about it that would have been in the owner’s knowledge.

[26] Mr.Kermack’s evidence was that, among other things, they discussed how the $900,000 purchase price for the first option had been arrived at. His letter of January 10, 2013 filed in this application confirms that he spoke to Mr. Paonessa on June 9, 2011 and was told that this price was just to facilitate the deal.

[27] Mr. Kermack confirmed they discussed property taxes of approximately $20,000 a year and that Mr. Paonessa advised that the Applicant tenant paid the utilities and that there was some dispute about the lease. Mr. Kermack said that he asked Mr. Paonessa whether there was any information that he would like to add.

[28] He then prepared his report after carrying out all of the necessary investigations and research. This 61 page short narrative appraisal report dated June 15, 2011 with an effective date of May 18, 2011 confirmed his opinion as to the fair market value of the property at $850,000.

[29] When the Applicant’s representatives received the Penwarden 2011 appraisal report, they immediately provided it to Mr. Paonessa who was not pleased with the opinion of fair market value but who voiced no other complaints with respect to the details of the appraisal, the information upon which the appraisal was based, its involvement in the appraisal process or any other matter.

[30] Mr. Paonessa did not dispute the report and really did nothing for approximately a year to deal with the original appraisal report suggesting that nothing was going to be done for another year anyway. In particular, he did not contact Mr. Kermack to discuss anything that was contained in the 2011 appraisal report and did not raise with him or D.J. Penwarden any relevant information he thought had been excluded from its appraisal report or incorrect information that was included. The Respondent also did not raise any concern with the fact that it was the Applicant who had originally contacted D.J. Penwarden in 2011 for the purpose of obtaining the appraisal.

[31] The uncontradicted evidence of the Applicant’s representative Mr. Booth is that he decided in 2012 to obtain a new appraisal from D.J. Penwarden closer to the period in which it could exercise Option 2 so that the Respondent could not complain that the opinion as to its fair market value was outdated.

[32] A second appraisal of the property was prepared by Mr. Kermack of D.J. Penwarden on June 27, 2012. It was Mr. Kernack’s opinion that based on certain changes in the market over the prior year, its appraisal as to the fair market value of the property had increased by $10,000 to $860,000. Again, a copy of this 2012 appraisal was provided to the Respondent by the Applicant immediately after it was obtained.

[33] On July 4, 2012 the Applicant’s lawyer sent the proper notice in writing to the Respondent via registered mail confirming its intention to exercise its option to purchase the property in accordance with the requirements of the lease. This notice of intention indicated that the purchase price would be $860,000 in accordance with the second D.J. Penwarden appraisal.

[34] The Respondent through its lawyer indicated by return letter that it would not sell the property to the Applicant at the $860,000 purchase price determined by D.J. Penwarden. It took the position that the Penwarden opinion of the fair market failure of $860,000 was not a fair, reasonable and equitable price or value for the property and demanded that an appraiser chosen by the Respondent provide an opinion of fair market value even though the lease agreement terms of the options to purchase made no such provision.

[35] The Respondent then made allegations without any foundation that there was partiality on the part of D.J. Penwarden in favour of the Applicant and that the appraisal was biased in favour of the Applicant because of an alleged personal connection between the Applicant and D.J. Penwarden suggesting that that relationship was “fishy”. Mr. Paonessa also alleged that Mr. Kermack had told him that the appraisal had been prepared by and from the point of view of the Applicant tenant not the landlord which was immediately and emphatically denied by Mr. Kermack in a letter he wrote and attached to his affidavit in this proceeding.

[36] Mr. Kermack’s evidence is clear and concise and essentially unchallenged that his opinion of the fair market value of the property in his appraisal was not prepared from anyone’s particular point of view, that he was guided by his professional obligations to prepare an unbiased report, that the fact that he was initially retained by the Applicant tenant as opposed to the Respondent landlord had no impact whatsoever on his opinion as to the fair market value and that his opinion would not have been different had he been retained by the Respondent landlord or by the landlord and tenant jointly.

[37] Notwithstanding that clear evidence, the Respondent continued to suggest some impropriety and bias of D.J. Penwarden to the effect that the Applicant for at least partial payment of the appraisals, provided Mr. Kermack with a fireplace normally sold at the Applicant’s business which was flatly denied by both the Booths and Mr. Kermack. Mr. Paonessa was provided with copies of the Applicant’s cancelled cheques for payment of Mr. Kermack’s full invoice costs but he still insisted that Mr. Kermack was lying about how he was paid for his appraisals and he simply didn’t believe it.

[38] The Respondent then obtained his own separate appraisal from Anchor Valuation Services dated July 19, 2012 which also is a short narrative report in which they agreed with the appraisal report of D.J. Penwarden that the direct comparison and income approach appraisal methods were relevant to consider the value of the property.

[39] During submissions, Respondent’s Counsel agreed that his client’s appraiser was not in any way critical of the appraisal report to D.J. Penwarden even though its appraiser’s opinion of the fair market value of the property as of July 19, 2012 was $986,500. On reviewing both reports, the reason for the difference appears to be Anchor Valuations’ use of a higher per square foot value of the building ($110 versus $100) and a higher value for the vacant land ($326,000 versus $200,000).

[40] Counsel for the Respondent suggests that the terms of the option to purchase and the setting of the purchase price should be interpreted on the basis that both the Applicant tenant and the Respondent landlord were to have input in the information provided to the appraiser D.J. Penwarden. He suggests that because of Penwarden’s failure to consider his client’s input in the calculation of this fair market value, this court should, as a matter of fairness, essentially ignore that report and require the parties to obtain a new and independent second appraisal report for the purpose of determining the fair market value of the property for the option to purchase.

[41] The particular complaints that the Respondent has regarding the information not allegedly considered by Penwarden are as follows:

A) Mr. Kermack did not consider that the Respondent had made $400,000 in improvements to the building including an addition after it purchased the property in 2001. The suggestion was that because Mr. Kermack said in a letter that he had initially been told by the Applicant the front addition was built in 1999, he had false information as it was actually built in 2002.

However, on reviewing the appraisal reports of D.J .Penwarden of 2011 and 2012, Mr. Kermack makes it very clear that he had the true facts and evidence that the Respondent had made extensive renovations and additions to the property after it purchased it in 2001 and that he had obviously seen the extent of the work done when he inspected the property. There is no merit to that position.

B) The Respondent argues that Mr. Kermack did not consider that the property was in fact more valuable because the Applicant tenant was obligated to pay the real estate taxes of approximately $17,000 per year, not the landlord.

However, Mr. Kermack’s report makes it clear that in determining fair market value of the property from an income approach perspective, he assumed that the Applicant tenant was responsible for the real estate taxes which would have resulted in a higher value in favour of the landlord. There is no merit to this position.

C) The suggestion was also made that Mr. Kermack did not consider the fact that the Respondent landlord had completed extensive roof repairs which should have increased the value of the property. However, on review of Mr. Kermack’s report he makes it clear that he was assuming the subject building was in average to good condition and that even though there was a roof leak, it was the obligation of the tenant to repair it and hence it did not affect the fair market value. There is no merit to this position.

D) Lastly, the submission was made that Mr. Kermack did not consider that the original value of the property was the $900,000 amount set in the first option to purchase. The sworn evidence of Mr. Kermack is that he was told by the Respondent that this $900,000 buyout price was arrived at just to “facilitate” the deal. It was also suggested that the Respondent having offered to purchase the property for $900,000 earlier was relevant information that he did not have. However, the terms of that verbal offer included a vendor takeback mortgage at only 3% interest per year for a 10 year term amortized over 20 years. Mr. Kermack’s position was that had the offer been in writing, he would have considered it but that there was likely a trade-off of low interest rates for a higher purchase price which would therefore make the proposed purchase price irrelevant. His evidence was that this alleged verbal offer caused him no concern with respect to the correctness of his appraisal given the beneficial interest rate. Again, there is no merit to this position.

[42] What is rather significant is that none of these four concerns or information were provided to the Respondent’s own appraiser when he calculated his assessment of fair market value of the property. As indicated above, there is no criticism of the report of Mr. Kermack by the Respondent’s own appraiser nor is there any evidence from any expert witness to suggest it is in error or subject to criticism.

[43] Moreover, by letter of July 20, 2012 addressed to the Respondent’s lawyer, the Respondent was advised by the Applicant’s lawyer that the Applicant had no objection to Mr. Kermack discussing or reviewing his appraisal reports with the Respondent if the Respondent wished to do so. He was simply advised because of the Respondent’s earlier incorrect statements about his comments regarding the reports that any such discussions would have to be held in the presence of both parties’ lawyers. The Respondent declined a meeting and accordingly did not provide Mr. Kermack with any evidence to suggest that his opinion of value was incorrect.

[44] Based on all the evidence before me, there is nothing to suggest that the appraisal report Mr. Kermack was improperly obtained by the Applicant and without any input from the Respondent. The evidence of Mr. Kermack is that he did all that was reasonable in the circumstances to obtain the information he needed in order to come up with a fair market value of the property. His uncontradicted evidence is that his opinion is not in favour of one party or the other but rather simply a calculation of the fair market value of the property which is what he was asked to do and which the lease agreement provided in order to determine the purchase price of the property.

[45] There is no question that the Respondent was not pleased with his appraisal report and its calculation of the fair market value of the property as the Respondent obviously thought his property was worth more.

[46] It is noteworthy that the Respondent’s appraisal came up with a higher value based on assuming a higher per square foot basis for the building and a higher vacant land value which had nothing to do with any of the four concerns raised in argument by Respondent’s Counsel.

THE LAW

[47] 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 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. Ventas, Inc. V. Sunrise Senior Living Real Estate Investment Trust (2007) 2007 ONCA 205, 85 O. R. (3rd) 254.

[48] In addition, each word in an agreement is not to be placed under the interpretive microscope in isolation and given a meaning without regard to the entire document and the nature of the relationship created by the agreement. Courts should not strained to dissect a written agreement into isolated components and then interpret them in a way that- while apparently logical at one level -does not make sense given the overall wording of the document and the relationship of the parties. The Plan Group v. Bell Canada 2009 ONCA 548.

[49] In my view, the intention of the parties at the time the lease was signed, pure and simply, was to let D.J. Penwarden do its professional job of providing its expert opinion on the fair market value the property if and when the Applicant decided to exercise its Option 2 to purchase the property. They obviously trusted him to do that work when they chose him to do so in June 2009. Both parties had the opportunity to provide whatever input they deemed appropriate to assist Mr. Kermack if they wanted to. Mr. Kermack’s evidence is that he had all the relevant information he needed when he provided his opinion of the fair market value of the property without bias or favour towards either party.

[50] This agreement made good commercial and business sense as it provided certainty to both parties as to how the purchase price for the Applicant’s option to purchase was going to be determined for the balance of the lease term. It also avoided any potential dispute in that determination if more than one appraiser or any other appraisal method was involved in the process which is what the parties obviously intended. Reading the lease agreement and in particular the option to purchase clauses as a whole, there is no ambiguity whatsoever in those terms. The four concerns of the Respondent that it says were not considered by D.J. Penwarden were in fact properly addressed by it and its opinion of the fair market value did not change.

[51] The appraisal of D.J. Penwarden setting the fair market value the property at $860,000 just a few days prior to the commencement date of the Applicant’s right to exercise Option 2 to purchase the property satisfies that condition of the lease agreement. There is no evidence before me to suggest that there was any material change or increase in the value of the property in that few days prior to July 1, 2012 and I find that the Applicant properly exercised its option to purchase the property in accordance with the terms of the lease.

OBLIGATION FOR PAYMENT OF REALTY TAXES

[52] The following are the relevant provisions of the lease agreement with respect to payment of realty taxes:

1.1(p) “Realty Taxes”-means all real property taxes, rates, duties and assessments (including local improvement rates), impost charges or levies, whether general or special, that are levied, charged or assessed from time to time by any lawful authority, whether federal, provincial, municipal, school or otherwise, and any taxes payable by the Landlord which are imposed in lieu of, or in addition to, any such real property taxes, whether of the foregoing character or not and whether or not in existence at the Commencement Date, and any such real property taxes levied or assessed against the Landlord on account of its ownership of the Property or its interest therein, but specifically excluding any taxes assessed upon the income of the Landlord;

1.1(q) “Operating Costs”-means the total of all costs and expenses attributable to the maintenance, repair (and if applicable, replacement) administration management and operation of the Property and which are due as Additional Rent as more particularly described hereunder;

1.1(r) “Rental Taxes”-shall include but are not limited to, GST(including any taxes imposed in the future on Basic Rent) value added tax, harmonized sales tax, business transfer tax, retail sales tax, federal sales tax, excise taxes or duties, or any tax similar to any of the foregoing.

12 Realty Taxes

The Landlord shall pay to the appropriate taxing authority all Realty Taxes levied, rated, charged or assessed throughout the Term in relation to the Property, or any part thereof.

13.1 Operating Costs

The Tenant shall pay to the Landlord all Operating Costs. Without limiting the generality the foregoing, Operating Costs shall include:

a) Charges for utilities and similar services;

b) Costs in connection with the maintenance, repair (and, if applicable, replacement on any part of the Property) and operation of the Property (subject to the terms of Article 21 hereof) and of complying with all applicable laws, directions, rules and regulations;

13.2 Operating Costs shall exclude:

d) Taxes upon the income of the Landlord

14 Tenant’s Taxes

14.1 The Tenant shall pay to the lawful taxing authorities, or to the Landlord, as the Landlord may direct, all taxes, rates, duties, assessments, license fees and other charges that are levied, charged or assessed against or in respect of all businesses, improvements, equipment and facilities of the Tenant, its transferees and other occupants on or in the property or any part or parts thereof, or against or in respect of the Landlord on account of its ownership thereof or interest therein to the extent that the Landlord is assessed for any such taxes, duties, assessments and any other charges in lieu of the same being levied, rated charged or assessed against the Tenant.

[53] The Respondent’s position is that although Article 12 places the initial obligation of the Landlord to pay the realty taxes, the tenant is obligated to repay or reimburse the landlord for those realty taxes either under Article 14.1 or as operating costs under Article 13.

[54] I disagree with that position for the following reasons.

[55] Firstly, there was no evidence provided on this application as to what discussions or negotiations the parties had when they initially signed the lease agreement in June 2009. The lawyer who drafted the lease agreement did not give evidence nor is there any evidence tendered as to what was discussed regarding who was responsible for payment of the realty taxes when the lease was first signed. In particular, there was no evidence of any discussions that what was intended was a “net net” or “net net net” lease which would be understood to mean that the Tenant would be obligated to be responsible for payment of the realty taxes.

[56] What is also very important is that at no time prior to the commencement of this application was the Applicant ever provided with any information from the Respondent regarding the quantum of the annual property taxes it always paid which are significant in the amount of approximately $17,000 annually compared to the annual rent of approximately $64,000.

[57] Mr. Paonessa admitted that he had never provided the Applicant with a copy of the tax bill for the property and also admitted that Respondent had never demanded in writing that the Applicant reimburse the Respondent for the realty taxes paid.

[58] The evidence of the Applicant was that the property tax issue was first raised by the Respondent when the 2001 appraisal of Mr. Kermack was being prepared.

[59] Mr. Paonessa acknowledged that the Respondent took no steps to enforce its alleged rights for reimbursement of the realty taxes saying that he didn’t want to jeopardize the good relations the parties held at the time. However, he also admitted that even when he received the notice of intention of the Applicant to exercise its option to purchase the property in June 2012, there was no mention of these alleged arrears of property taxes by him then which were not raised until this court application was commenced.

[60] I place no reliance on the fact that Mr. Kermack assumed that the tenant was responsible for payment of the property taxes as that is not relevant to the issue as to who was legally responsible for the realty taxes under the lease agreement. I note that the Respondent’s appraiser assumed that the landlord was responsible for payment of the property taxes under the lease and I similarly place no reliance on that evidence either.

[61] The parties conduct regarding the property taxes is readily explained by the wording of the lease agreement that in my view requires the Respondent landlord to pay for the realty taxes on the property without any right to reimbursement from the Applicant tenant.

[62] Article 12 of the agreement places the clear obligation on the part of the Respondent landlord to pay for all realty taxes in relation to the property.

[63] Article 14 dealing with the tenant’s obligation to pay tenant’s taxes makes it clear that the Applicant tenant must pay all taxes that are levied, charged, or assessed against or in respect of all businesses, improvements, equipment and facilities of the tenant. It goes on to say “or against or in respect of the landlord on account of its ownership thereof or interest therein” which the Respondent suggests means the realty taxes. However those words are clearly qualified by the next words which state “to the extent that the landlord is assessed for any such taxes, duties, assessments or other charges in lieu of the same being levied, rated, charged, or assessed against the tenant”.

[64] In other words, the appropriate interpretation of that article is that if the landlord is in fact charged for the tenant’s taxes with respect to the tenant’s own improvements, equipment and facilities, the tenant must reimburse the landlord to the extent that the landlord paid for those tenant’s taxes.

[65] The Respondent also suggests that the obligation of the Applicant tenant to pay the Respondent landlord’s realty taxes is contained in the Operating Costs Article 13. The position is that the realty taxes are included in 13.1(b) as they are “costs in connection with the operation of the property”.

[66] I disagree with that position. The “operation of the property” also refers to the definition of Operating Costs which refers to those costs and expenses attributable to the maintenance, repair, administration, management and operation of the property.

[67] Nothing is mentioned in this definition with respect to realty taxes which are separately and clearly defined in the lease agreement as being on account of the landlord’s “ownership” of the property which is clearly different and separate from the operation, maintenance, or repairs of the property.

[68] Had the intention of the agreement been that the tenant reimburse the landlord for the realty taxes paid by it, a clause specifically to that effect could easily have been added to the end of Article 12 or included in paragraphs 13 or 14. The absence of such a clause specifically referring to realty taxes being the ultimate responsibility of the tenant in my view makes it clear that it was the Respondent landlord only which was to be responsible for those realty taxes without reimbursement by the Applicant tenant.

[69] As indicated above, the actions of the parties and in particular the Respondent landlord in doing nothing to provide the tenant with details of the amount of the annual taxes or take any steps for almost three years steps to enforce the Applicant’s alleged obligation to reimburse it for the realty taxes paid confirm that the parties knew that the Respondent was solely responsible for the realty taxes.

[70] The Articles in the lease agreement make clear distinctions between the taxes that relate to the landlord’s ownership of the property and those taxes or levies against the tenant for its operations or administration of its activities on the property. The former are the Respondent’s responsibility and the latter are the Applicant’s responsibility. This also makes good business sense for these two parties which both wanted the Applicant to succeed financially in taking over from the Respondent and starting up its own business which would be beneficial to both parties in the future especially if the Applicant was successful and exercised its option to purchase the property from the Respondent.

CONCLUSION

[71] Accordingly, the Applicant is entitled to a Declaration that it has validly exercised its option to purchase the property known municipally as 4332 Drummond Road Niagara Falls in accordance with Article 7.5 of the lease agreement entered into between the parties.

[72] Given that the Applicant’s business for some years now has been located on the subject property which has some considerable goodwill value to the Applicant with its customers, the property is indeed unique to the Applicant. An award of damages only to the Applicant because of the failure of the Respondent to complete the sale transaction to the Applicant would likely be very costly to the Applicant in terms of relocation fees and loss of profit and a loss of the goodwill at that location it has built up as well as the goodwill it was effectively acquiring from the Respondent because of its previous operations at that location. An order of specific performance of the option to purchase agreement of that property is the only reasonable remedy for the parties in this case.

[73] The Applicant is accordingly entitled to a decree of specific performance compelling the Respondent to cause the property known municipally as 4332 Drummond Road Niagara Falls to be sold to the Applicant at the appraised value of $860,000 all within a commercially reasonable amount of time from the date of this order in accordance with the provisions of the lease agreement. If the parties require further directions in the event they cannot agree on the terms of the sale, either party can apply to the Court for same.

[74] The Respondent Parigon Industries Inc application in Court file 6231/12 is hereby dismissed.

[75] The usual order regarding costs would be that the Applicant should be paid its costs on a partial indemnity basis by the Respondent with respect to this application and the Respondent’s cross application. This usual order would be subject to any written offers to settle that the parties may have exchanged. If the parties cannot agree on those costs, I am prepared to receive brief written submissions on costs of no more than three pages plus a bill of costs from each of the parties within five days the date of this decision.

The Honourable Mr. Justice Nightingale

Date: March 28, 2013