Matthew Brady Self Storage Corporation v. Instorage Limited Partnership and Instorage Trustee Corp.

Court File No.: CV-09-13941CM

Date: 2013-08-30

Ontario Superior Court of Justice

Between:

Matthew Brady Self Storage Corporation, Plaintiff

– and –

Instorage Limited Partnership and Instorage Trustee Corp., Defendants

Counsel:

C. Clifford Lax and Shaun Laubman, for the Plaintiff

Robert D. Malen and Robert J. Drake, for the Defendants

Heard: June 18, 19, 20, 21, 22, 25, 26, 27, 28, 29, 2012; July 16, 17, 18, 19, 2012; November 16, 2012; January 8, 2013; and February 1, 2013

Before: Gates J.

OVERVIEW:

[1] The parties, both of whom developed and managed self-storage facilities, had a fairly long history of dealings with one another. Mike and Robert Siskind, two of the principals of Matthew Brady Self-Storage Corporation (“MBSS”) through a related company the Decade Group Inc. (“Decade”) had sold its portfolio of seven self-storage facilities to In-Storage Limited Partnership and Instorage Trustee Corp. (“I-S”) in 2006.

[2] Because I-S was in a growth mode, its CEO James Tadeson (“Tadeson”) expressed an interest in partnering up with the Siskinds to locate and develop a self-storage facility in Windsor.

[3] MBSS was incorporated as a single purpose corporation to acquire a vacant manufacturing building at 1577 Lauzon Road in Windsor which would then be converted into such a facility. The acquisition costs would be shared equally.

[4] The defendants I-S would ultimately acquire the building, and oversee the construction of the required retro-fit to their specifications for its ultimate use.

[5] Before acquiring the building the parties undertook due diligence investigations prior to waiving the conditions set out in the Purchase and Sale Agreement.

[6] Tadeson and I-S were committed to the deal with the Siskinds.

[7] The concept of the original purchase of the Windsor building was that 50 percent of the $2.0 million purchase price would be paid by I-S for which it would receive an ownership of 50 percent of the equity. It had insufficient money for its share at that time, but still wanted to participate in the transaction.

[8] This raised two option issues for the plaintiff; either it could sue its partner I-S or work out a new arrangement with it relating to the purchase.

[9] MBSS chose the second in order that it could continue a future business relationship with I-S. Accordingly the original sale contract was re-drawn to include an option designed to tie up the property for the benefit of the plaintiff. A formal Option Agreement (“the Option”) was executed by the parties on February 18, 2008. On that same day a Property Management Agreement was created between MBSS and 4345142 Canada Inc. (“434”) which was incorporated by I-S to manage the facility.

[10] However, before the renovations were completed, I-S in a hostile take-over was assumed by a U.S. based corporation, Storage Mart (“S-M”), which became the assignee and successor of both I-S and 434 as of March 18, 2009.

[11] It appears that the CEO of S-M did not like the Windsor project and wanted to back out of it. Ultimately it refused to complete the purchase on the scheduled closing date of October 19, 2009.

[12] Since then, MBSS has been paying all of the carrying charges on the property that it never intended to own and ironically, S-M as the successor of I-S, is managing the property for it. To the date of trial MBSS’s damages of $728,080.05 have been agreed to by the parties.

[13] The Windsor site is one of the seven self-storage facilities in Ontario owned by the Siskinds, which were sold to I-S in 2006. MBSS owned and managed the Windsor facility until February 15, 2008 when, pursuant to the Management Agreement, 434 assumed this responsibility until the takeover by S-M on March 18, 2009.

REVIEW OF PERTINENT OPTION CLAUSES:

[14] The Option provided two Put clauses the effect of which put MBSS in the position of being able to force I-S to buy out its interest.

[15] Similarly the Option included two Calls which if exercised by I-S, required MBSS as vendor to sell the property to it.

[16] In essence the Option was a stop-gap measure to overcome the short term financial issues of I-S.

[17] Article 3.1 of the Management Agreement confers on the manager the full responsibility for the management and maintenance of the property as well as securing leases during the term of the Agreement. Central to the plaintiff’s case is the argument that 434 as manager, failed to properly carry out its responsibilities.

[18] The Option Agreement, negotiated and executed by the parties, included the following articles which are pertinent to the issues before the court:

1.1(c) – “Appraiser” means Valco Consultants Inc.

(f) – “Buildings” means the existing building erected on the Lands to be retrofitted and improved by the Vendor for self-storage purposes and municipally identified as 1577 Lauzon Road, Windsor and containing approximately 48,642 square feet of leasable area, and the additional exterior self-storage buildings to be constructed on the Lands by the Vendor and containing between 17,000 and 22,500 square feet of leasable area, all as shown on the Site Plan, and all fixtures (other than tenant trade fixtures), improvements and installations constructed or installed therein including, without limitation, the plumbing, heating, ventilation, air-conditioning, mechanical, security, electrical and sprinkler systems;

(j) – “Closing Date” means, in the case of the exercise of the Purchaser of either the First Option or the Second Option, the first Business Day that is forty-five (45) days after the exercise of the First Option or Second Option, as applicable; in the case of the exercise by the Vendor of either the First Put or Second Put, the “Closing Date” shall mean the first Business Day that is ninety (90) days after the exercise of the First Put or Second Put, as applicable, subject to the right of the Purchaser, only in the case of a Closing resulting from the exercise of the First Put or Second Put, to extend Closing for a period of up to nine (9) months from the originally scheduled Closing Date, which extension is exercisable by the Purchaser giving written notice to the Vendor within thirty (30) days of the exercise of the First Put or Second Put, as applicable, that it requires an extension and indicating therein the length of extension, up to the maximum nine (9) month period;

(m) – “Fair Market Value” means, in respect of the Property, the most probable price which the Property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and prudently and knowledgably and without compulsion, with the primary consideration being the net cash flow being generated from the Property, and assuming the price is not affected by undue “stimuli” in circumstances where: (i) both parties are typically motivated; (ii) both parties are well informed or well advised, and acting in what they consider their best interests; (iii) a reasonable time is allowed for exposure of the Property in the open market; (iv) payment is made in terms of cash in Canadian dollars or in terms of financial arrangements comparable thereto; and (v) the price represents the normal consideration for the Property sold, unaffected by special or creative functioning or sales concessions granted by anyone associated with the sale;

(q) – “First Put” means the right of the Vendor to require the Purchaser to purchase the Property pursuant to Section 2.3, at the First Put Price, which right shall be exerciseable during the First Put Period by the delivery by the Vendor of a written notice to the Purchaser that it requires the Purchaser to purchase the Property pursuant to this put right;

(r) – “First Put Period” means the period commencing on the anniversary of the Substantial Completion and expiring two years thereafter;

(dd) – “Second Put” means the right of the Vendor to require the Purchaser to purchase the Property pursuant to Section 2.3 at the Second Put Price, which right shall be exerciseable during the Second Put Period by the delivery by the Vendor of a written notice to the Purchaser that it requires the Purchaser to purchase the Property pursuant to this put right;

(ee) – “Second Put Period” means the period commencing on the date of the expiry of the First Put Period, and expiring one year thereafter;

(hh) – “Substantial Completion” means the date when a declaration or certificate of substantial performance (in the Form 6 under the Construction Lien Act (Ontario) issued by the Architect in respect of all agreements with respect to the construction of the Buildings and improvement of the Lands in accordance with the Site Plan and the Plans is published in accordance with Section 32 of the Construction Lien Act (Ontario), all as determined in accordance with Section 2(1) of the Construction Lien Act (Ontario);

2.2 Option Purchase Price – In the event the First Option is exercised by the Purchaser, the Purchaser shall pay to the Vendor on the Closing Date, a purchase price equal to the Fair Market Value of the Property. If the Vendor and Purchaser cannot agree on Fair Market Value within fifteen (15) days of the exercise of the First Option, then the Appraiser shall be retained by the parties to determine same and the Appraiser’s determination shall, in the absence of manifest error, be binding on the parties. In calculating the Fair Market Value of the Property for the purposes of the First Option only, 85% of the leaseable area of the Buildings shall be deemed occupied and tenants deemed to be paying rental rates equal to the monthly posted rates at which the Property is marketed to the public at the time of the exercise of the First Option and the Appraiser shall arrive at Fair Market Value based on that assumption. The Fair Market Value arrived at in accordance with the foregoing is referred to as the “First Option Price”. In the event the Second Option is exercised by the Purchaser, the Purchaser shall pay to the Vendor on the Closing Date, a purchase price equal to the Fair Market Value of the Property. If the Vendor and Purchaser cannot agree on the Fair Market Value within fifteen (15) days of the exercise of the Second Option, then the Appraiser shall be retained by the parties to determine same and the Appraiser’s determination shall, in the absence of manifest error, be binding on the parties. The Fair Market Value arrived at in accordance with the foregoing for the Second Option is referred to herein at the “Second Option Price”.

2.3 Put – The Purchaser acknowledges and agrees with the Vendor that, subject to the conditions in Sections 3.1 and 3.3, the Vendor may require the Purchaser to purchase the Property by the exercise of the First Put or the Second Put. In the event that either the First Put or Second Put is properly exercised by the Vendor in accordance with its terms, then there shall be constituted a binding agreement of purchase and sale for the Property on and subject to the provisions of this Agreement.

2.4 Put Purchase Price – In event that either the First Put or Second Put is exercised by the Vendor, the Purchaser shall pay to the Vendor on the Closing Date, a purchase price equal to the Fair Market Value of the Property. If the Vendor and Purchaser cannot agree on Fair Market Value within fifteen (15) days of the exercise of the First Put or Second Put, as applicable, then the Appraiser shall be retained by the parties to determine same and the Appraiser’s determination shall, in the absence of manifest error, be binding on the parties. The Fair Market Value arrived at in accordance with the foregoing on the exercise of the First Put is referred to as the “First Put Price” and the Fair Market Value arrived at in accordance with the foregoing on the exercise of the Second Put is referred to as the “Second Put Price”. Notwithstanding the foregoing, if on the exercise of a First Put or Second Put, the Purchaser elects to extend the Closing Date applicable to the Closing thereof in accordance with the terms of this Agreement, the “First Put Price” or “Second Put Price”, as applicable, shall be the greater of the Fair Market Value of the Property on the originally scheduled Closing Date and the Fair Market Value of the Property on the extended Closing Date and the Appraiser shall, if the parties cannot agree among themselves as to Fair Market Value, be instructed to prepare a second appraisal to determine Fair Market Value on a date as close as possible to the extended Closing Date.

Article 3. Conditions

3.1 – Closing Conditions of the Purchaser – It will be a condition of the Purchaser’s obligation to complete this transaction, unless waived either in whole or in part by the Purchaser in writing (each of which is for the sole benefit of the Purchaser), that on Closing:

a) Representations and Warranties – The covenants, representations and warranties set forth in Section 4.1 shall be true and accurate with the same effect as if made on and as of the Closing and the Vendor shall have delivered to the Purchaser a certificate to this effect;

If the purchaser does not notify the vendor on or before closing that the conditions referred to in 3.1 have not been satisfied, they will be deemed to have been satisfied. If the purchaser notifies the vendor that the conditions have not been satisfied, the agreement is terminated.

Article 4 – Representations and Warranties

4.1 – Closing Covenants, Representations and Warranties of the Vendor

(m) – Building Systems – On the date of Substantial Performance, all equipment and systems (including, without limitation, the heating, ventilating, air-conditioning, plumbing, electrical and mechanical systems and fire detection systems) included in the Property will be in good operating order and when installed, were in new condition, will be suitable and adequate for the purposes for which they have been designed and will have the benefit of any Warranties in connection with the manufacture and installation of such chattels and equipment and systems.

(n) – Buildings – on the date of substantial performance the Buildings will have been constructed in a good and workmanlike manner and in accordance with plans approved and permits issued by the appropriate regulatory agencies and on the date of substantial performance, the Buildings will be fully operational and in good operation order and in a condition consistent with their age. The vendor is not aware of any defect in the design, construction or structure of the buildings.

4.4 – Indemnity – Notwithstanding any investigations or inspections that the purchaser may make, the vendor will for 12 months following the closing date indemnify the purchaser against and save it harmless from any loss or damage sustained by the purchaser by reason of a breach, inaccuracy or incompleteness of these representations.

5.8 – Deficiencies – Subsequent to the date of this Agreement, the Purchaser shall be entitled to attend at the Property and monitor all construction to ensure that same is proceeding in accordance with the Plans and Site Plan. The Vendor covenants and agrees with the Purchaser to complete any unfinished work and remedy all deficiencies so that the Buildings are totally complete within six (6) months of Substantial Completion. In the event of any dispute as to whether work is unfinished or whether there is any deficiency, such dispute shall be referred to the Architect whose decision will, in the absence of manifest error, be binding on the parties.

THE PARTIES’ POSITIONS:

i. THE PLAINTIFF

[19] The plaintiff says there are two issues:

i) The breach by the defendants of the Option by failing to complete the purchase.

ii) The relief to which the plaintiff is entitled, as a result.

[20] On July 21, 2009, MBSS exercised its First Put which triggered an obligation to both parties to negotiate a sale price of the building within 15 days failing which Valco Consulting Inc. (“Valco”), as required by the Option, would solely undertake an appraisal and its conclusion would be binding on the parties, as well as their successors and assigns.

[21] Valco’s opinion (using the Direct Comparison and Cost approach methods), was that it had a value of between $7.3 million and $8.25 million respectively. It settled on the figure of $7.3 million.

[22] Three days before the scheduled closing, S-M’s solicitors took the position that the Agreement was null and void because of an improper appraisal by Valco in that it contained a manifest error, as well as a breach by MBSS of the warranty as to fitness of the building. Therefore the defendants refused to close.

[23] MBSS has remained the owner since and accumulated damages referred to.

ii. THE DEFENDANTS

[24] The defence says that there are two major issues:

i) The Fair Market Value approach, as defined in Article 1.1(m) of the Option should have been used on the appraisal;

ii) Because the roof had been leaking from day one, it had obviously progressed to the point that it was no longer a maintenance issue but rather required replacement which amounts to a breach of the warranty provisions in the Option Agreement.

[25] They say S-M’s computer model, using the Income approach to value since this is an income producing property, assesses the value of the facility at a much lower price.

[26] They say that the words referencing net cash flow in Article 1.1(m) of the Option means the Income approach to value but because Valco did not give primary consideration to that approach it committed a manifest error which renders its appraisal invalid. As a result, the defendants cannot be required to complete the purchase.

[27] In addition they also say the plaintiff has not complied with the vendor’s warranty representation, in that the roof needs to be replaced; it is well past its “best before date”, which should have been apparent because it continued to leak. Roof leaks are of particular significance in a climate controlled self-contained storage facility such as the one in question.

[28] They rely on Article 4.1(n) which states that on the date of Substantial Performance (July 9, 2008) the buildings were to have been constructed in a good and workmanlike manner in accordance with all of the necessary plans and approvals as required by the regulatory authorities and that they would be fully operational, in good working order, and in a condition consistent with their age. Vendor is not aware of any defect in the foundations, walls or roof.

[29] Lastly with respect to the litigation, MBSS has made no attempt to sell the building or to mitigate its damages.

THE EVIDENCE:

1. Michael Siskind:

[30] Michael Siskind (“M. Siskind”) is the President of MBSS, and his father Robert (“R. Siskind”) is Vice President, whereas he is Vice President of the Decade Group, while his father is President.

[31] In 2006 Decade sold the seven self-storage facilities it had developed for approximately $62 million to I-S. After the sale it discussed with I-S the possibility of creating a further working relationship in future developments and for that reason they were looking for new facilities. Windsor was identified as a potential site.

[32] The building ultimately selected, a vacant former manufacturing plant, in a good location in East Windsor, was constructed in the 1960s. The plaintiff MBSS was incorporated to acquire the building and convert it into a self-storage facility. The purchase price was $2.0 million to be shared equally. Financing for I-S would be provided by a related company In-Scotia. The existing building would be retro-fitted to a brand new state and climate controlled for use as a self-storage facility. Because there was already a building in existence the retro-fit project could be brought to market much faster and at less cost.

[33] However before the date scheduled for its purchase, In-Scotia advised that it was financially not able to proceed at that point. With the complication arising out of the fact that In-Scotia had no money at the time, MBSS was faced with the choice of either commencing costly and time consuming legal proceedings or restructure the transaction in some fashion to give effect to the long term interests of both parties.

[34] Therefore Decade funded the purchase price.

[35] On that basis they created a unique Put/Call arrangement whereby the plaintiff MBSS could force I-S to complete the purchase at a certain point in time and conversely, I-S could force MBSS to sell to it.

[36] This was the context for the creation of the Option executed February 15, 2008. The Put and Call vehicle in the Agreement meant that either way the purchase by I-S would be accomplished, which was consistent with the goal of I-S to be the sole owner and the manager of the facility.

[37] It provided that one year after Substantial Completion if MBSS exercised its Put, and the parties could not agree on a price within 15 days, I-S would be obliged to purchase the property at the appraised value as determined by their mutually agreed upon appraiser, Valco. Conversely, I-S could likewise exercise a Call, forcing MBSS to sell to it. The value as determined by Valco was binding on both parties, absent a manifest error.

[38] Once the transaction was completed and Decade became the owner through the newly incorporated entity, MBSS, it immediately started work on the project, around July 2007 and contracted with Cooper Construction (“Cooper”) which had done work on other storage facilities for MBSS and was a trusted contractor. General oversight was provided on site by an engineer and an architect.

[39] On the same day a Property Management Agreement (“Management”) was executed between MBSS and 434, a company organized by James Tadeson, the CEO of I-S.

[40] Under the Option the vendor was required to remedy any construction deficiencies and complete all work within six months of the Substantial Completion date, July 9, 2008. The defendants had the right and opportunity to attend the site and examine the building including the roof and its condition and had the authority to call for a replacement or repairs to it as may be required.

[41] The retro-fit itself was undertaken to the interior of the building but did not involve any exterior change except for the addition of cladding to the walls. Additionally, there were separate self-contained storage units constructed outside which were not climate controlled.

[42] Communication between M. Siskind, the contractor, and the architect was through the Cooper site Superintendant Greg Ford (“Ford”) with whom he walked the site including the roof for a visual inspection and report on the progress of the job, from time to time.

[43] In the due diligence phase during the 90 day approval before the agreement to purchase the building had firmed up, Siskind walked the roof with Richard Rauth of Rauth Roofing (“Rauth”) who had an extensive prior history of working on the roof. During the course of one such walk-about with Rauth, Ford opined that the roof had 10-15 years of life left in it, if maintained properly. Because the building was vacant in 2007 prior to purchase, he was unaware when the last maintenance was undertaken to the roof. Therefore the sum of $40,000 was included by Ford in the budget for the roof repair construction phase of which $38,000 was spent.

[44] I-S as the ultimate owner of the building was very much involved in the construction of the retro-fit including the outlay of the office as well as the layout of the various storage spaces, finishing touches or the design and branding of the building, plus discussion on the size of the lockers and the redesign of the hallways. Its contribution was substantive, not cosmetic, reflecting that it would be the ultimate owner and manager.

[45] By mid-February 2008, I-S had started to staff the facility in preparation for the grand opening toward the end of the month and as well conducted a media release to announce its newest project.

[46] The Cooper Construction Site Minutes of April 28, 2008, confirmed that construction was still ongoing. Item 9.1, noted that Siskind was giving instructions to ensure that any roof leaks were addressed such that there would be no issues afterward with respect to Substantial Completion. No complaints with respect to any roof defects were received at that time.

[47] Similar directions with respect to repair of roof leaks is referred to in the site Minutes of June 8, 2008 which noted that the leaks issue had been addressed and there was no need for further action. It was also recorded that same day that while there had been many days of rain, there were no leaks reported. The site Minutes of June 11 and June 20, 2008 similarly referred to many days of rain but no leaks.

[48] Once the Substantial Completion date of July 9, 2008 passed, neither Siskind nor MBSS was aware of any defects in the design, construction or structure of the building or the roof, by I-S or anyone else within the following six months, as provided by Article 5.8 of the Option. In that six months the defendants never stated that the roof needed to be replaced, it just required leak repair.

[49] After the date of Substantial Completion July 9, 2008, 434 became solely responsible as manager for on-site issues. The plaintiff was no longer on-site.

[50] Subsequent to the issuance of the Certificate of Substantial Completion the manager advised him on July 20, 2008 of leaks in the roof, following a rainstorm. Through the summer of 2008 and into the early fall, as required, he instructed Cooper to arrange for leak repair which was carried out. Rauth confirmed it is industry practice not to warrant roof repairs, only replacement.

[51] The main building held 85 percent of the interior lease space which provided a climate controlled heating and cooling atmosphere which was somewhat unusual in Windsor. This added to the value of the facility because humidity control provides better protection for stored furniture and premium rent could be charged. The remaining 15 percent of the leased units were constructed outside as separately contained units and had neither heating nor cooling.

[52] Siskind stated that the Management Agreement, Section 3.1, confirms that management is to be in the best interest of both parties and, consistent with this, was the requirement of the preparation of an Annual Plan by the manager 434, for submission to MBSS. However, despite numerous requests MBSS did not receive one until 2009. The Plan was required in order to project income for the property as well as expenses for repairs and capital expenses. While the Plans he did receive dealt with marketing and budgeted repair issues, there was no reference to the roof.

[53] In an e-mail of December 30, 2008, Tadeson admitted responsibility for the failure to deliver the Annual Plans on time, as required. When the first one was finally received, it contained no capital expenditure reporting which Siskind considered to be unreliable; this problem was never remedied.

[54] Apart from the unreliable reporting, Siskind stated there were a number of other unresolved management issues which were the responsibility of 434 and its successor S-M from March 2009 onward, such as the extraordinarily high utility bills and malfunctioning air conditioning due to plugged and dirty filters.

[55] On Sunday, June 21, 2009, following a heavy rainstorm in Windsor there were complaints of roof leaks which was, Siskind recalled, the first notice from I-S and its successor S-M, concerning leaks since Substantial Completion in July 2008.

[56] On June 22, 2009 the building manager Ms. Jewell Ross confirmed that Flynn Roofing (“Flynn”) workers had been on-site and had located the spot where water was leaking in. They also noticed that the HVAC units were plugged which caused water to back up. Siskind pointed out to I-S personnel that this was an on-site management responsibility and reflected an absence of regular roof inspections. While the roof drains which had also been plugged had been cleared, this was a plumbing maintenance issue unconnected to the roof.

[57] The new CEO of the defendants, Mike Burnam (“Burnam”) wrote to Siskind the next day and referred to a major re-do of the roof. However MBSS never received any report from the manager with respect to an appraisal or inspection report of the roof until after the commencement of this litigation.

[58] When MBSS exercised the First Put on July 21, 2009 Burnam as the successor of I-S was formally aware of its obligation to purchase the building. Siskind advised Burnam of the workings of the Option and that it provided for a 15 day period for the parties to negotiate a selling price, failing which the mutually agreed upon appraiser, Valco, would undertake the mandatory appraisal for both parties. The result would be binding on both of them. With the exercise of the Put the closing date was set for October 16, 2009.

[59] Burnam’s response was that each party should appoint an appraiser who would then pick a third. This underscored the fact that Burnam did not yet fully understand the implication of the Option with its mutual entitlements and obligations relating to the exercise of the Puts and Calls.

[60] Because no agreement was reached within that time period Valco was instructed and commenced its appraisal but Burnam refused to sign the letter of engagement. As late as August 26, 2009, in an e-mail to Siskind he stated he still did not agree that I-S was obligated to purchase.

[61] Siskind’s understanding of the Put exercise, as defined in the Option, was that because the plaintiff could choose to exercise the Put anytime within two years after the first anniversary of Substantial Completion it would pick a time when, in its view, the appraised value would likely be higher, reflecting a favourable existing cash flow. The reverse would hold if and when I-S exercised a Call.

[62] The witness confirmed that when the appraisal by James Telford (“Telford”) of Valco was completed on or about October 13, 2009, his opinion as to the value of the completed storage facility was $7.3 million. While both parties were obligated to pay Valco’s account, I-S refused to; MBSS paid it entirely.

[63] On October 16, three days before the scheduled closing the defendants’ solicitor advised Siskind that the roof problems were considered to be significant deficiencies attributable to the original construction, and also, because the appraisal by Valco was deficient, their client I-S refused to close.

[64] About two weeks later when he reminded Burnam that there had been no clear plan of action yet received from the manager, Burnam replied that the roof repairs were completed but it needed more extensive work for which he would be obtaining bids. However no bids were ever received from the defendants. Burnam also confirmed that the roof drains had now been cleared.

2. Robert Siskind

[65] Robert Siskind, the father of Michael, described a 30 year career as a developer of commercial projects including self-storage businesses.

[66] His is a new generation of storage facilities of the class A type for which his company seeks out the best piece of land to acquire and build on. In his experience, customers follow. His company constructs and manages the facilities.

[67] MBSS was conceived and incorporated as a joint venture by I-S, with Decade owning 50 percent and In-Scotia, the development arm of I-S, owning the other 50 percent. I-S is a Real Estate Investment Trust (“REIT”) which was organized by its CEO James Tadeson. Procedurally and historically when I-S located a suitable site, Siskind’s company would negotiate its purchase and develop the property. When its rents had been stabilized, that is 75 – 85 percent leased up, the facility would then be transferred into the REIT.

[68] In the short term however things became complicated because Tadeson advised that, at that moment in time, his company had no more money for development. He therefore proposed that R. Siskind’s company purchase the land for which it would have to finance the acquisition price of $2 million. Because Siskind remained interested in a long term development and investment relationship with I-S, he agreed with this proposal.

[69] To accomplish the acquisition, a unique method was chosen, one which he had never undertaken in 30 years of prior experience; a double option or a “Put and Call” scenario. This was accomplished by way of the Option to Purchase or Sell which was executed on February 15, 2008. This changed the original intention of their agreement from a joint venture to a Put/Call Option arrangement with the Put being the right to require a purchase and a Call, the right to require a sale.

[70] The original intention of the parties remained as such that under this new arrangement, the ultimate purchaser whether it be by way of a Put or a Call, would still be I-S and MBSS would at all times be the vendor. I-S would also be the manager of the facility.

[71] The somewhat complex arrangement was that if and when MBSS exercised a Put, I-S would be required to purchase the facility at Fair Market Value to be negotiated by the parties within 15 days failing which, by mutual agreement, they appointed the real estate appraisal company, Valco, to be the sole appraiser of the property for the purpose of establishing the purchase price. Its decision would be binding on both. They agreed to this arrangement with Valco because in their combined experience it was well respected in Southwestern Ontario and had previously prepared a number of appraisals for both parties including an assessment of the property in question in 2007. All of its prior appraisals were judged as satisfactory for financing purposes.

[72] While the Option at Article 2.4, “Put Purchase Price”, provided a mechanism for the determination of value, Article 1.1(m) restricted the scope of the appraiser in the calculation of Fair Market Value by use of the words, “the primary consideration being the net cash flow being generated from the property.”

[73] In his view, the word “primary” meant the first, but not the only, consideration to be employed in the appraisal process.

[74] Siskind’s agreement to this was driven by the fact that he hoped to continue a long term working relationship with I-S. His company had already developed approximately 700,000 square feet in a number of storage sites and was in a position to continue to offer its longstanding development experience to I-S.

[75] Ultimately his company sold its entire storage facility inventory to I-S.

[76] The empty Windsor building, a former manufacturing operation, was to be retro-fitted completely in the interior to produce a new, refurbished facility in good operating condition.

[77] In his experience, typically in a retro-fit operation it is important that the building be structurally sound but it is not warranted as such. In this instance he said the problem developed when the ultimate purchaser, following the takeover by S-M of I-S, expected a warranted roof but as reflected in the purchase price, did not pay for one.

[78] MBSS was involved in the retro-fit up to the date of Substantial Completion on July 9, 2008 after which it would not be in a position to make any warranties or representations as I-S was then fully in control of the facility.

[79] The question of any construction deficiencies was dealt with in Article 5.8 of the Option which stated that the purchaser’s representatives would be entitled to attend the property and monitor the construction, at any time which, he stated, they did. In addition, for six months after Substantial Completion the purchasers could require the plaintiff to complete any unfinished work or correct any deficiencies, up to January 9, 2009. There were no deficiency issues or defects raised by the defendants during that time.

[80] The Option also provided in Article 4.4 an indemnity clause which required MBSS as vendor for a period of 12 months post-closing to indemnify the purchaser I-S for any loss or damage occasioned as a result of any breaches by the Vendor of its covenants under Article 4.1 (the Representations and Warranties claims). Similarly there were no indemnity claims brought and therefore he had no reason to believe that there were any deficiencies relating to the roof.

[81] He was aware that there had been some roof leaks but he had no reason to believe they were caused by any structural defects; nor was there any evidence to suggest such. The leaking issues as he understood them arose from wear and tear on the roof. He could not recall anyone suggesting that the roof required replacement and only became aware of this issue for the first time from the defendants, after MBSS exercised its Put to I-S as purchaser on July 21, 2009.

[82] The concept of the defendants as purchaser also being the manager (by way of 434), in his view represents an inherent conflict, given that the manager who is also the potential owner is paid a monthly fee to lease-up the premises in order to generate income and in so doing enhance the value of the facility for ultimate purchase purposes. Yet, as manager, it was in the position that by choosing to not aggressively pursue rent-ups, to downplay or ignore necessary maintenance and repair, it would inevitably diminish the value of the buildings to its advantage as the ultimate purchaser.

[83] Once S-M had acquired the portfolio from I-S, Burnam made it clearly known that it was not interested in owning the Windsor facility. He did not want to be in Windsor.

[84] Siskind was fully aware that when the Put was exercised on July 21, 2009, the 15 days of negotiation of a selling price were unsuccessful. As a result Valco as appraiser was instructed to conduct its binding appraisal of the premises. Burnam not only refused to agree to the Valco appointment, but he also refused to sign the Letter of Engagement or pay its one-half share of the fee when the appraisal was completed.

3. James Tadeson

[85] (“Tadeson”) is the founder and former CEO of the In-Storage Real Estate Investment Trust (“I-S REIT”) which was formed to purchase and develop property in the self-storage industry. It grew through acquisitions to 52 facilities across Canada, including the seven sites purchased from Decade in 2006 for approximately $60.00 million. I-S and Decade had worked together for a number of years. To complete the acquisition, appraisals were obtained for each of its seven properties.

[86] In March 2009 a hostile takeover of I-S by S-M which was operated by the Burnam family from Missouri was completed which resulted in the transfer of all I-S’s properties to S-M, including the Windsor facility.

[87] Burnam was aware of the I-S Option Agreement with MBSS for the Windsor facility because all of the documents pertaining to it were made available to S-M. Furthermore in a telephone conversation with him, Tadeson explained the Option Agreement to Burnam, especially the Put and Call feature of it. Burnam was satisfied with it.

[88] The Windsor facility was originally brought to his attention by the Siskinds who knew the Southwestern Ontario market. He considered this to be a good business opportunity with them as partners. At that time I-S was on an aggressive acquisition program.

[89] The building to be purchased was an older vacant industrial facility which was not unusual because his company had many such retro-finished facilities in its portfolio.

[90] While the shell of the building would remain the same, it would be completely redone on the inside. From his experience, this was an advantage over constructing from scratch because it saves the cost of tearing down and re-building which would add to the time and expense of bringing the facility onto market. He was impressed with the location which was excellent. The original approach was to undertake the project on a joint partnership basis. Because his company was in a tight cash position, he and R. Siskind engaged in discussions that resulted in the re-structuring of the project to the Option Agreement which gave rise to the Put/Call Option as the chosen vehicle. It would achieve the same end and I-S would still acquire the full ownership of the facility which it would manage; this was consistent with their original intention.

[91] Until the exercise of a Put or a Call, MBSS would remain the owner and I-S the manager. The business organization and set-up was structured to comply with I-S standards because it would become the ultimate owner.

[92] He could not recall any outstanding deficiencies in the completed project and although he saw a reference to a roof leak in the documents, he did not think this was anything of significance.

[93] He agreed that the Put arrangement as described by R. Siskind would result in the appointment of Valco to appraise the property. Valco was a well-known appraisal firm in Southwestern Ontario and was known to both parties, which was important because their lenders would ultimately have to be satisfied with both the appraisal and the appraiser. I-S had successfully used it on many other occasions in the past to facilitate financing.

[94] Article 1.1(m) contains the definition of Fair Market Value. This was described as a prudent buyer and seller acting knowledgably and without compulsion negotiating a sale/purchase with the primary consideration being the net cash flow generated by the property. However, in his experience the term “primary” when purchasing a self-storage facility means while cash flow is primary, it is not the only consideration.

[95] For that reason, while the appraiser could use the Income approach, it would not be the only one considered. It would have to be reconciled with the three usual methods of appraisal and weighed, one against the other. He understood this to be a discretionary exercise and ultimately the appraised value reached is the appraiser’s call. From prior experience, his company would sign off on this appraiser’s valuation.

[96] However, if the appraiser considered the Income approach to be unreliable, this would not, he stated emphatically, be considered to be a manifest error.

[97] Article 4 of the Option, the Representations and Warranties of the Vendor, the reference in 4(m) to Building Systems refers to the interior of the retro-fit which would all be new because the building was gutted before the re-fit was undertaken.

[98] Article 4(n) states that the building would be fully operational on the date of Substantial Performance and in good working order, consistent with its age which includes the exterior shell which would remain the same except for the new cladding to be applied to the walls, and the roof.

[99] He was never advised of any unfinished work or deficiencies during or after the six month period following the Substantial Completion of July 9, 2008.

4. Greg Ford

[100] (“Ford”) has been a project manager for approximately 10 years with Cooper Construction, the project contractor which has been in business for more than 100 years. He oversees three or four major projects each year and has managed five or six other storage facility projects involving retro-fit construction, including the facility in Windsor.

[101] In a retro-fit project the shell of the building remains intact but the entire interior is gutted and a brand new installation is constructed inside from the ground up.

[102] He toured the Windsor building before construction commenced, including an inspection of the roof which he described as a Built Up Roof in some sections. Its overall condition seemed reasonable to him.

[103] At that inspection he noticed that Rauth Roofing forces were removing the old vent stacks from the roof in preparation to install the new HVAC system and they were repairing the holes left behind. They were doing a credible job. He was able to see under the roof where they were working; it was dry, not wet.

[104] He estimated the lifespan of the roof, with maintenance, to be approximately ten years. After viewing it and speaking with Rauth workers, he had no concerns about it. Repair and upgrading did not take place until the new HVAC work was completed. The work was carried out by the Rauth company because it knew the roof, having worked on it over many years.

[105] He confirmed that the Certificate of Substantial Performance was similar to an assurance that the building was then ready for its intended use, having been signed off by the City of Windsor Building Department as well as the consultants such as the architect, engineer, and the mechanical trades, to ensure compliance with all relevant City by-laws.

[106] Following the issuance of the Certificate, a one year warranty period provided that any complaints about defects could be made for which the various sub-trades would be responsible. He recalled that while there were a couple of calls made regarding roof leaks, these were repaired but there were no other calls during the warranty period. Cooper’s forces were on site until the expiry of the Substantial Completion period and following a final inspection it too signed off.

[107] In his experience while it is not uncommon to experience roof leaks during construction, none of the ones reported here were of any significant size. Furthermore if and when a leak occurred, Cooper’s onsite Superintendent would arrange to have Rauth attend to repair it.

[108] He also confirmed that the City Building Inspectors had no complaints about the state of the roof following the installation of the new HVAC system and the resulting roof repair, because it too signed off on the Certificate of Substantial Completion.

[109] He explained that a comment made by Rauth that the roof was “beaten up” referred to the area directly under the gas lines that were removed which resulted in some damage to the roof surface which was satisfactorily repaired.

[110] He also confirmed that repair of roof drains which had caused some leaks into the interior was a plumbing, not a roofing issue.

[111] His observations about the roof were reflected in the Minutes of the Cooper on-site meeting of June 11, 2008 in which it was stated that there were “many rainy days and no leaks to report”.

5. Brandon Hexham

[112] Brandon Hexham (“Hexham”) is the Vice-President of Pinnacle Group Inc. (“Pinnacle”), Roofing and Building Envelope Consultants and a qualified Green Roofing Professional. His company mandate is solely that of a consultant to avoid a potential conflict between consulting and pursuing employment as a roofing contractor. It consults Pinnacle for prospective purchasers of buildings as well as for property managers in order to develop strategies for roof maintenance and repairs.

[113] He undertakes three inspections a week in his present capacity as V.P. but carried out approximately 30 per week when he was in charge of investigations for about eight years, amounting to many thousands of industrial and commercial roofs including self-storage facility roofs.

[114] On the basis of his qualifications and experience, I accepted him as an expert in the maintenance and management of roofing systems.

[115] Pinnacle was instructed by plaintiff’s counsel on February 28, 2011 to prepare a roof condition report of the building in question. He conducted an infrared scan and moisture verification on May 31 and June 2 following his visual inspection, and 12 core cuts analysis on May 27. The testing disclosed no areas of roof deficiency or wetness. Both the insulation and the felts underneath were dry.

[116] If the roof had serious leaks or deficiency, he would not expect these results, because typically either the insulation or the felt would be wet.

[117] Because leaks are common in roofs, as part of an overall strategy he recommends an annual maintenance inspection to determine whether there are any visible deficiencies which can be repaired before they become a larger problem. This type of preventative maintenance increases the life of a roof. However clients don’t always follow his advice.

[118] While a roof deteriorates from the point of its installation, one cannot retroactively determine its condition at some time in the past; rather one can only comment on its current condition.

[119] Of the 71,007 square feet of roof he concluded that only approximately 9,500 square feet (or 13.3%) needed replacement with the remainder requiring neither maintenance nor repair.

[120] He emphatically stated that roof leaks do not mean automatic replacement.

[121] Typically the strength of a roof is based on the felt material which forms the base, onto which asphalt is applied, making it waterproof. Stone is then applied on top of the asphalt to protect the roof membrane from the deteriorating effects of the ultraviolet rays of the sun. Thus, the life span of a roof can be extended or maintained if the asphalt and the gravel are properly covered over it.

[122] He observed a section of the roof which displayed bare felts indicating to him that someone had removed the gravel cover in order to carry out a repair job but the gravel should have been replaced. This would be readily visible on a routine inspection or walk-about.

[123] He also observed a large number of blisters on the two largest sections of the roof comprising in all approximately 61,000 square feet. Blisters represent air or moisture trapped in the roof. However they need not be replaced. If they are soft and pliable, they can be left as is until they become dried and cracked in which case simply cutting out the blister and replacing it with a waterproof patch is the standard method of repair.

[124] He strongly disagreed with the suggestion of Joseph Vidican (“Vidican”) of Vidican Engineering that blisters were a “ticking time bomb”. So long as a blister is not punctured, no weather will enter; however even when punctured, moisture will not necessarily percolate into the interior of the roof if it has been sealed underneath.

[125] With respect to roof drainage, in his opinion, contrary to that of Vidican, there were in fact a sufficient number of drains.

[126] He found nothing unusual that the largest section of the roof was flat and without a slope; in his experience most flat roofs do not have one. Furthermore, slopes on flat roofs are not a requirement under the Ontario Building Code, O. Reg. 350/06.

[127] Ponding or puddling was noted only on one small section of the roof which is not unusual on a flat roof; in his experience most water will evaporate within 24 to 72 hours.

[128] Overall with respect to the larger roof areas, he recommended maintenance and repair as opposed to outright replacement at this time, although ultimately replacement would be required. Those areas where the bare felts were observed to be exposed to the sun should be re-covered with gravel to protect them; a relatively minor remedial measure.

6. Richard Rauth

[129] (“Rauth”) has been a roofer for 35 years, more than any other witness. He has been associated with his family business, Rauth Roofing, since it started in 1977.

[130] His experience includes commercial and industrial roof installations and repairs as well as institutions such as school boards and hospitals.

[131] While he could not say when the original roof was first installed, he did recall two additions and that in the late 1980s and in the mid 1990s the north and east roofs were replaced. He had worked on the roof before its conversion to a storage facility and his company had for many years performed maintenance work for the previous owners.

[132] On October 20, 2007 he was contracted by Cooper Construction to remove the old HVAC equipment, install 12 new rooftop curbs or supports for the new system, and cap around the three existing curbs.

[133] During the course of the HVAC removal, he recalled a conversation with one of his foremen that another roofing company, possibly Flynn, had done some work on another area approximating 2.5 x 3.5 feet. Although he considered the repair to be acceptable, he noticed that they did not put any gravel or pea stone on the repaired area in order to cover the felt to protect it from deterioration by the sun.

[134] Based on his experience as a roofer, the lifespan of a roof which has been maintained ranges somewhere between 20 and 30 years but 20 to 25 is more common. In his view the remaining life expectancy of the roofs on this building would approximate ten years on the upper levels and four to five years on the lower ones.

[135] He recalled during the construction walking the roof with Ford of Cooper Construction to inspect it and he noticed some blisters on the north roof, which were fairly solid. In his experience blisters are a common occurrence in roofs and can arise from moisture trapped inside the roof membrane or the escape of gas from the underlying felt cover. If a blister is not too old it will be soft and pliable and will not break when stepped on. It is left alone. However if it is old and dry and cracks underfoot, then his practice is to remove it and replace it with a waterproof patch. Blisters occur because of the type of insulation used, and is no reflection on the quality of the workmanship on installation or repair of a roof.

[136] Consistent with his longstanding experience as a roofer, he could distinguish the ages of the various roofs on the facility by the nature of their insulation; fiberglass insulation would mean it was installed around 1989 whereas elsewhere roofs on the facility without it reflected newer construction techniques and materials.

[137] Based on his prior knowledge and experience with this roof and his recent attendances there for inspection and repairs, he disagreed with the conclusion in the Flynn report that it required replacement. He considered it to be in fairly good condition, consistent with its age.

[138] He strongly disagreed with the Vidican life expectancy estimate of 12 to 16 years. Part of the reason for this opinion is based on the fact that there have been improvements in the flashings and the quality of the materials used.

[139] He, too, stated that there is no warranty in the roofing industry for repairs, just for a replacement.

[140] When he last attended on July 30, 2008 to undertake some maintenance or repairs, he was advised that another roofer completed a repair that was still leaking. He saw evidence of water from the inside. When he went up to the roof he observed a 3 x 3 foot mastic repair that was incomplete because it was not protected against the sun’s UV rays; there was neither a gravel covering nor a silver coating applied to the surface. Without either, he estimated only a short 6 to 9 months lifespan before it became compromised due to UV rays.

[141] His practice with a patch repair like this is not to limit the repair to the immediate area of concern but to patch a much larger area, extended outward until a split was located (where two sections of roofing material abut), to create a more effective seal against rain. He also thought it to be strange that someone would travel two hours in each direction from London for a small 3 x 3 foot repair job, suggesting to him it was Flynn.

7. Michael Burnam

[142] (“Burnam”), the CEO of S-M, has since 1976 been involved in his family business of owning and managing self-storage facilitates primarily in the U.S. but recently in western Canada.

[143] By 1999, his company employed 600 people at 237 facilities, with 100,000 customers paying monthly rent for the storage of their goods.

[144] When his family business was purchased by a competitor in 1999, he and his brother started up their own self-storage private company, which by 2006 had grown to 58 facilities in major markets.

[145] There is no doubt that Burnam is a very experienced and sophisticated businessman whose success is a reflection of this.

[146] Because of the startup time and the expense involved in building new facilities from scratch, their experience directed them to the purchase of competitors’ properties instead. Ultimately this led S-M to acquire I-S.

[147] Prior to the completion of this purchase on March 18, 2009, S-M performed its due diligence which involved looking at the balance sheets and doing in-depth audits of all of the I-S facilities and analyzing how to integrate their 50-odd facilities into his company’s operation.

[148] S-M had created its own computer financial model in 1995 which was used in each case to assess and analyze any property before acquiring it. Using this model his company had purchased approximately $1.5 billion worth of facility inventory. The Windsor site was appraised at $5.5 million under this model; $500,000 for the land and $5 million for the building.

[149] Burnam admitted that prior to the acquisition of I-S, he had not spent much, if any, time considering the implications of the Option Agreement, especially Article 2, concerning the Puts and Calls and the mandatory appraisal process.

[150] In an e-mail to Tadeson of January 28, 2009 he confirmed that he and Tadeson had discussed the Windsor site about a week earlier and he was waiting to receive the Agreement which demonstrated that I-S was expected to purchase the property. In that conversation Tadeson indicated that while it had been appraised at $9 million earlier, I-S was prepared to sell it for $7.5 million to which Burnam’s response was “great” and he requested a copy of the Agreement. He admitted he knew he was obliged to complete the transaction.

[151] Consistent with his lack of understanding of the Option’s implications, in an e-mail dated July 24, 2009 to Siskind, Burnam stated that his best price would be $4.5 million, after the roof is repaired.

[152] Burnam admitted that he did not inspect the Windsor facility because he was not aware of the Put obligation at the time of the acquisition of I-S in March 2009. When he was reminded that Tadeson had explained the Put arrangement to him, Burnam could not recall it but he did not deny that the conversation took place.

[153] The Management Agreement was assumed from I-S as was the potential conflict which had existed for I-S in that it was the property manager for the owner, all the while being obliged to purchase the property.

[154] In March 2009 after it was discovered that the air conditioners were dirty, packed, and clogged, Burnam agreed that this would cause a decrease in the overall efficiency of the system and as a consequence, raise the price of its operation; in turn this would mean less income to the owner. He readily admitted that the efficient operation of both the heating and the cooling systems were the sole responsibility of the building manager, 434.

[155] On July 8, 2009 Burnam advised Siskind that the roof had been repaired but because more and bigger work was required for which bids were being pursued, he stated these would be sent to MBSS but this was never done. Furthermore when Vidican was retained to undertake his assessment of the roof, the defendants kept his report for about a year after receiving it, before giving a copy to MBSS.

[156] Article 3.8 of the Management Agreement requires that an Annual Plan must be prepared by the manager for the operation and maintenance of the facility which is to be submitted to the owner. However Burnam admitted that the defendants ignored their management obligations when they failed to do this; they failed to provide a projected income statement on an accrual basis and an operating and a capital budget and they failed to account for all expenses relating to repairs as well as capital expenses.

[157] As of 2012 he admitted that nothing even close to the recommended expenditures on roof maintenance, as recommended by its roofing consultant Flynn, had been spent by 434 as manager.

[158] Turning to the building structural issue, Burnam admitted that there is no report, engineering or otherwise, relating to the structure of the building. His reference to the north wall being part of the structural issue is, he admitted, not accurate since it only involved water seepage owing to the higher grade of an adjoining field. While the problem had been identified by the building staff, 434 as manager never corrected it.

[159] While the Option provided that, for a period of six months after the Substantial Completion I-S could provide the plaintiff with a list of deficiencies, he agreed that none were ever brought to the attention of the plaintiff within that period of time.

[160] When S-M acquired all of the storage facilities of I-S, including Windsor, Burnam stated that he did not want to operate in Windsor. As noted he did not bother to visit the site.

[161] Once he realized the implications of the Put provisions of the Option, he did not want to honour the I-S obligations under it. He consulted legal counsel in Ontario as well as his personal lawyer in Missouri and was told by each that he had no choice but to go through with it.

8. Jewel Ross

[162] As the facility manager, her duties include leasing up the premises and collecting rents. Initially she reported regularly to M. Siskind for information and guidance and sent him nightly reports.

[163] When the roof leaked, because the interior storage units had no individual roof or cover over them, since it was a climate-controlled interior, water would drip into individual units and then leak out under the doors and into the hallways.

[164] At the rear wall on the north side of the building water would enter the facility after a rainstorm because the floor level of the building was below the grade of the field adjacent to it so that water would percolate from the higher ground, into the building. Management of the building had not constructed a bevelled lip along this side of the building, to raise its exterior to a level higher than the surrounding field, so the problem continued. However, she agreed, this had nothing to do with the roof. This problem remained uncorrected by 434 management in a timely fashion.

[165] Following a very heavy rainstorm during the night of June 19-20, 2009, flooding occurred in three of the sections of rented units. She arranged for restoration companies to attend to clean up the water.

[166] However, even during the course of clean-up she was still able to continue to rent out units to new customers while not losing any old ones.

[167] While Flynn was dispatched from London to repair the leaks with a satisfactory result, the area at the north wall still leaked as it had not yet been attended to by 434 management.

[168] Following a rainstorm over the weekend of August 31, 2009, no leaks were observed and at this point occupancy of the building was close to 50 percent.

[169] On September 28, 2009 she reported to her regional manager in an e-mail that while a very heavy rain had occurred, all of the problem areas were dry.

[170] In her experience the leaking roof, the inoperable roof drains and the seepage of water into the building from outside the north wall were all management responsibilities and they all remained uncorrected. Similarly Flynn reported to her that the HVAC filters were clogged. While she could not confirm they were replaced, three months later it was again reported to her they were clogged.

[171] At present, she testified that there is 77 percent occupancy with 60 new rentals in the previous month alone.

9. James Telford

[172] I accepted the witness Telford as an expert in the area of valuation as he demonstrated considerable experience with respect to self-storage facilities having appraised somewhere between 14 and 18 of them in Southwestern Ontario, including the seven facilities that Decade sold to I-S. The remaining were unrelated storage facility appraisals that he has conducted for others. Since his 2009 report, up to trial he has undertaken another three or four.

[173] During the course of the trial, plaintiff’s counsel moved to exclude the appraisal by Ray Bower retained by the defendants, on the basis that there had not been, despite the assertions of defendants’ counsel to the contrary, any manifest error committed by this appraiser in conducting his valuation.

[174] After submissions from both counsel I ruled that there had not been a manifest error committed and the Telford appraisal would stand, rendering the Bower appraisal moot.

[175] Nevertheless, for the sake of completeness, I have reviewed the Telford report again and remain of the view that his approach and opinion of value are appropriate and do not constitute a manifest error. To assert this would mean that Telford’s approach was clearly wrong. On the basis of his evidence and the facts before me I reject this assertion. His method of analysis was both reasonable and appropriate.

[176] In 2007 he was initially retained to complete a valuation of the empty building on behalf of MBSS, prior to its retro-fit as a storage facility. At that time he ascribed a value of $9.0 million to it.

[177] In 2009 he prepared a second valuation report on the Windsor facility for MBSS and I-S, following its takeover by S-M and estimated its value to be $7,300,000.

[178] Through a number of conversations with R. Siskind he became aware that MBSS and I-S had jointly agreed to Valco’s appointment as the sole and final arbiter of value, if they could not agree on value after a Put/Call was exercised. He received e-mails on August 27, 2009 from R. Siskind and Burnam, who each provided him with some of their recent appraisals.

[179] In his experience it is not unusual for clients to contact him in advance of an appraisal and on many such occasions he has received useful information from them relating to specifics about the property. However he was not in any way guided or influenced by the comments of either Siskind or Burnam.

[180] In the valuation having the effective date of September 1, 2009 he used two approaches, the Direct Comparison and the Income approach which, together with the Cost approach are the three traditional methods of valuation. Which one is used depends upon the type of facility being appraised and if it is found that one of the approaches is not relevant then it is excluded from the final analysis. In his experience one normally utilizes two of the three and sometimes all three if the circumstances warrant it.

[181] Generally speaking for investment properties, Income would be the primary consideration. The Direct Comparison approach involves comparable sales that are available in the marketplace, and lastly, the Cost approach depends on whether or not the age of the facility dictates the use of that method or not. For an older, historic building this would not be considered to be particularly relevant in the overall valuation.

[182] The property in question is an income producing property and in his initial 2007 valuation the Income approach was used together with the Direct Comparison approach. The Cost approach was not used because there was no construction yet underway in the building. Furthermore, there were too many unknown factors to use this approach which can be substantial in the conversion of a building from one use to another. These unknown factors were sufficient for him to conclude that the Cost approach would not be appropriate, because he did not have confidence in the projections of the developers.

[183] Ultimately, his responsibility is to utilize those approaches to determine a Fair Market Value which he will confidently endorse and sign off.

[184] In the 2007 valuation, using the Direct Comparison approach and analyzing sales of other self-storage units in other locations, he estimated a value of between $8.7 and $9.3 million.

[185] Because in 2007 the building was empty and with no income, in order to utilize the Income approach he had to rely on the data assembled by the developers as to costing as well as their projections on revenue and expenses, to provide a guideline or a starting point. Independent of that, as the appraiser he would undertake a market survey of the local area to see what rental rates are applicable. He would then make assumptions on the rate at which the building in question would become leased up and the rental rates that would be achieved.

[186] The lease-up is projected over the number of months that it might take to stabilize income and expenses; a term used to describe a stable or mature net cash flow which is then capitalized into a capital sum.

[187] After his 2007 analysis he concluded that the Direct Comparison and Income approaches produced results that were very close; somewhere between $70,000 and $100,000. Therefore, he placed a value of $9 million on the facility, using a combination of these two approaches.

[188] Neither the plaintiff nor the defendants had any objections to his approach at that time.

[189] While the 2007 appraisal was for feasibility purposes, in 2009 it was undertaken to establish a sale price from the one party to the other.

[190] His conclusion in the report of September 30, 2009 was that the value was $7.3 million, a figure that was less than what he had originally projected in 2007 the value to be, at stabilization.

[191] To support his analysis, a Cost approach produced a value of $8,285,000 while the Direct Comparison approach produced a value between $7,150,000 and $7,500,000.

[192] He did not use the Income approach in that report and is aware that the defendants maintain this constituted a manifest error. He disagrees with them.

[193] When undertaking his analysis, the primary consideration had to be given to the net cash flow that would direct his analysis toward an Income approach. He chose not to use it because, as of September 1, 2009, the facility was in a lease-up stage and had only achieved a 44 percent occupancy rate. At that point in time, the expenses that were fixed in place would produce a very limited net operating income which he calculated to approximate $67,000 a year. When capitalized this would produce a very low market value for the property.

[194] Furthermore this approach took into account the discounts being offered by the operators in order to attract business and increase rent-ups which would deflate revenue. This in turn would decrease the net operating income of the facility, a factor which, as the appraiser, he has no control over.

[195] When all factors were considered, he declined to use the Income approach because it was not reliable, based on the extremely low occupancy level, which in turn produced a significantly low net operating income for capitalization purposes. Additionally there was some question in his mind as to the reliability of the expenses; normally in a lease-up they approximate 14 percent but at this facility they were 23.4 percent which was reflective of the discounts being given to tenants.

[196] Lastly, in an appraisal involving a lease-up, the Income approach is considered to be less reliable such that he concluded it not to be appropriate here, leaving the Cost and Direct Comparison models to utilize. He had not used the Cost approach in 2007 because it was too hypothetical at that time, given that the building had not yet been retro-fitted and in his experience the ultimate cost can often be more expensive than anticipated.

[197] Conversely, in 2009 the building was finished and he saw the finished product. It was obvious that the developers had spent a considerable amount of money and had gutted the inside of the building and re-built it completely so that everything inside was brand new including partitions, storage units, retail area, washrooms, and offices. The building was also fully sprinklered and it had new plumbing, electrical, and HVAC systems.

[198] Because everything was brand new the depreciation factor for the interior would be zero.

[199] In his opinion the owner produced a class A facility reflective of the fact that it was climate controlled for all of the interior storage which comprises 85 percent of the total facility with the remaining 15 percent being outside storage without heating or cooling.

[200] Also influencing his assessment of the facility was the fact that it had exposure to a main road with dual access from the front and the rear.

[201] With respect to the issue of the extraordinary limiting condition that primary consideration should be given to the net cash flow generated from the property, in Telford’s opinion this is not an extraordinary limiting condition at all.

[202] It is typical in any analysis of an investment property to consider the net cash flow as a primary consideration and is usually the first place that an investment property analysis commences.

[203] However while he conducted an analysis using this approach, he rejected it as being inappropriate, and used the Direct Comparison and Cost approaches.

[204] Of the two approaches he used, he considered the facility as being 100 percent stabilized for the Income approach which provided two scenarios. The first presumed an 8 percent vacancy and a 33 percent expense ratio. The second a ten percent vacancy and a 35 percent expense ratio. Each of the two net operating incomes produced were capitalized into a value range with an estimated low of $6.5 million to a high of $7.719 million, based on a stabilized basis.

[205] He utilized the two approaches which he thought to be most relevant here. Firstly, the Cost approach involved consulting recognized building cost manuals and the actual building costs as provided by the developer to obtain replacement cost data. He found that the various costing sources of information that he consulted were in line with those set out in the industry manuals.

[206] In the final analysis, the hard costs information was taken from developer’s projections and checked against industry published information, while the soft costs were taken from the developer’s construction analysis. His analysis on this issue was assisted by the experience and information from previous assessments Valco had undertaken of other properties of the developers as well as discussions with other developers regularly. Ultimately the projected replacement cost was estimated to be at $7.3 million.

[207] Using the Direct Comparison approach he selected ten comparables of similar facilities across Ontario, four of which were the closest in that they were all in the lease-up phase and were climate controlled.

[208] From the data reviewed, the range of sale prices was $83.38 to $99.01 per square foot. The other piece of data which he considered relevant was the sale price per storage rental unit, especially considering that the comparable sites were similarly climate controlled facilities.

[209] Furthermore the sale price per storage unit could be used as a method of checking the accuracy of his own projected Fair Market Value.

[210] In his view, the value of $83 per square foot was the most comparable to the Windsor facility. He discounted this by 5 percent to a range of $78 to $82. When multiplied by the 91,783 square feet of the building, this produced a range of value of $7,160,000 on the low end with a high of $7,525,000.

[211] Using the per storage unit Cost approach as a check on his conclusions, he found the range of values to be from $11,000 to a high of $15,400. This was discounted to a range of $10,000 to $10,500 because some of the properties in question were superior to those sites used in the comparable approach. This produced a valuation range from $7,040,000 to $7,392,000.

[212] Because the two appraisals compared favourably, he concluded that they were both within an acceptable range. The per unit analysis had provided the back up support for his Direct Comparison valuation.

[213] His final conclusion was a value of $7,300,000.

[214] The greatest weight was given to the Direct Comparison approach because he considered it to be the most reliable, having the most accurate information to consider. Once an analysis is completed, he stated that one picks a midpoint in the range of values which have been forecast.

[215] Of interest, he and his firm previously appraised seven of the ten comparable sites considered which gave him a complete access and understanding of each one of them, including accurate documentation concerning rental rates, capitalization rates and expenses, leaving out any need for guesswork.

[216] As I have previously concluded, Telford’s methodology and analysis as well as his conclusion are devoid of any suggestion of manifest error.

10. Joseph Vidican

[217] (“Vidican”) holds the degree of P. Eng. having obtained a BSC in Industrial Engineering from the University of Windsor. Subsequently over a period of several years he took additional Civil Engineering courses to acquire knowledge about buildings. He has acquired a certain degree of experience in buildings and construction including roofs and the concept of building envelopes. Over the past 20 years he has been retained to inspect approximately 700 roofs, substantially related to private dwellings.

[218] I therefore accepted him as an expert in roofing and evaluation of building conditions and systems as it relates to HVAC.

[219] He generated two reports October 12, 2010 and December 13, 2011, for I-S to undertake an evaluation of the building.

[220] Based on his investigations he prepared a Roof Plan but did not undertake any testing by way of roof cuts; rather he just referred to the Flynn findings with their test cuts which he assumed were accurate. However later in 2011 for his second report he carried out some of this destructive testing.

[221] In his view the roofs in question were past their due date and concluded that they were about 20 to 25 years old. He estimated the typical service life of a BUR (Built Up Roof) to be 12 to 17 years although some may last a little longer.

[222] He estimated the cost of replacing the roof to be between $600,000 and $800,000.

[223] While he inspected the roof in 2009, and in 2011, he conceded that he was unable to comment on its condition in 2008, when the Option Agreement was executed.

[224] While he and Flynn concluded the roofing system should be replaced, Pinnacle recommended that extensive repairs would extend the roof life by five or six years, before it required replacement.

[225] He did not challenge Hexham’s methodology of investigation including the infrared scans. When told that the Pinnacle’s heat scan of the roof could not locate any wet insulation, Vidican stated that a proper infrared scan would have done so. However not only did he not explain the difference, he did not bother to conduct a scan himself.

[226] On the subject of wet insulation or trapped moisture which can accelerate the deterioration of a roof, he agreed that only an infrared thermograph and a test cut could assist in the determination of the extent of compromised insulation. When it was pointed out to him that Pinnacle not only undertook an infrared thermography evaluation but it also performed 12 test cuts and found no moisture, his only response was that 12 test cuts really would not amount to very much testing; a rather obvious attempt in my view to gloss over the fact that he did not do so himself.

[227] While he was critical of the methods employed by Pinnacle, namely, infrared thermography and test cuts, as a reasonable approach to analyze the problem, his second report was really only a critique of the reports of others without adding anything of substance or value.

[228] In two of the photographs which he had taken in October 2009 and approximately two years later in November 2011, the first one displayed an area of exposed felt which he had recommended be covered. However two years later the second picture confirmed that the same felts were still exposed leading to the conclusion that the manager had ignored his 2009 recommendation to cover the bald spots and to protect the roof. Similarly there were other areas of the roof which identified where in the two years in question, management had done nothing to protect it.

[229] With respect to the issue of the slope of the building he ultimately agreed with the other roofing witnesses that a flat roof without a slope was typical of industrial buildings like this one and this would not constitute a deficiency.

[230] He agreed that at the time of trial, which was approximately two and a half years from his last inspection, there had been no significant roof leaks.

[231] He also acknowledged that he was the only one of the four roofing witnesses who testified about the roof issue to recommend that the entire roof be replaced.

[232] When I challenged him as to the critical nature of his report on the present HVAC system without having undertaken any background investigation including direct inquiries to the system designer and installer and the City building inspector, he again very evasive in his response as to why he did not.

[233] In cross-examination, he admitted that a designer has a discretion when designing a heating and cooling distribution system. Furthermore there was evidence before the court from other witnesses that this is the same system employed in other self-storage climate-controlled facilities.

11. Robert McMillan

[234] Robert McMillan has been employed by Flynn Canada for the past four years as a Superintendant and for six years previous to that he was a roofing foreman with experience on more than 1,000 roofs.

[235] In September 2009 his company was instructed by 434 to attend at the site after the commencement of this litigation and measure the roof from which they drew a plan of the overall system and identified the areas which needed the most attention.

[236] He noted from his visual observation there were blisters in various places and, consistent with the evidence from Rauth and Hexham stated that if a blister is old and stiff, it will break when stepped on, requiring removal and a waterproof patch repair. Otherwise, they all agree, if it is pliable, it need not be replaced.

[237] He also noted the various areas of exposed felts which could lead to deterioration of the felts by UV rays from the sun.

[238] He estimated that the roof was approximately 20 years old and its condition, generally speaking, was consistent with its age; the condition of the roofs ranged from excellent to poor; some requiring only light maintenance, others none at all while some others were in need of replacement.

[239] The Flynn Report recommended that the sum of $40,000 be budgeted for 2009-2011 for roof maintenance.

12. Phil Dewsbury

[240] Phil Dewsbury (“Dewsbury”), the Regional Vice President of S-M, for all of Canada except Quebec, confirmed that S-M owns 54 storage facilities in all.

[241] He admitted that the Property Management Agreement of February 15, 2008, obligated the manager as the eyes and ears of the owner to undertake all management and maintenance of the operation. He agreed that it was also to provide an Annual Plan for the owner MBSS with a budget as well as crafting a plan for periodic inspections and maintenance of the property. However, he was not aware if any of this had ever been carried out.

[242] He recalled a major rainstorm on or about June 20, 2009 which caused flooding in some of the customers’ units. He assisted in taking the necessary steps to arrange to have the place dried out and the customers’ goods moved elsewhere in the complex. On June 22 Dewsbury confirmed in an e-mail to Burnam that the roof was dry. On that same day M. Siskind confirmed that $35,000 had been spent on roof repairs on six occasions by MBSS. Furthermore he told Dewsbury that when Rauth and Cooper inspected the roof neither of them ever mentioned roof drains and drainage as being an issue. Had they, Siskind stated, more drains would have been installed. Furthermore, if the clogged HVAC vents were a cause of roof leaks, the lack of maintenance to them had been communicated in the previous winter to the Manager. Dewsbury also noted that the river rock on the roof had been moved around to create channels for the water to the drains. This may account for the observation by various roofing witnesses that the pea stone gravel had been scraped away leaving the base roof exposed to the sun.

[243] On June 21, 2009 when Burnam asked what it would take to make the roof function properly, Dewsbury suggested a new roof inspection by a professional. In response Burnam instructed him to “wait for now”, which he did until the September report.

[244] On July 8, 2009 Burnam told him the roof had been repaired and, in a subsequent rain, it did not leak. Later that same day Dewsbury wrote to Burnam suggesting for the first time a full roof inspection at a cost of approximately $2,500 should be undertaken but he was instructed by Burnam to wait.

[245] In reference to the allegation that the roof drains were inadequate, it appears that the existing drains were from the original factory and were alleged to be inadequate however this was a plumbing issue, not one related to the roof condition. On September 28, 2009, Ms. Jewel Ross, in an e-mail, stated that there was “tons of rain” that morning but all of the problem areas in the facility were dry. There was only one new, small leak discovered.

[246] Subsequently he retained Flynn in late August 2009 to undertake a roof condition report as well as a five year estimate for costs. In its report of September 28, 2009 Flynn recommended the expenditure of approximately $500,000 to replace the entire roof in the first year which would result in smaller maintenance or replacement expenses in subsequent years.

[247] He admitted that the Flynn report was given to Burnam but not to M. Siskind, until almost a year later.

DISCUSSION:

The Agreement

[248] The Fair Market Value is defined in Article 1.1(m) as the most probable price which the property should bring in a competitive and open market where a buyer and seller are each acting prudently and knowledgeably and without compulsion with the primary consideration being the net cash flow being generated from the property. In my view, while primary means of chief importance or first in order of importance, it is not an exclusive concept.

[249] The structure of the agreement relating to the Puts and Calls provides each party with a strategic choice as to whether or not to exercise its rights and, secondly, at what point in time. The thrust of the defendants’ position on this point is implicitly to suggest an unfairness in the arrangement which favours the plaintiff. Observing that this complex agreement was negotiated between two sophisticated parties with experienced lawyers, the logic of the defendants’ argument on this point would seem to suggest that the court should intervene to change the arrangement as opposed to interpreting it. In the circumstances of this case there is no justification to do so.

[250] Rather, it equally protects the interest of both contracting parties. As Tadeson expressed it, it was always their mutual intention that I-S would become the owner and until then it would manage the facility as it did with all of its other properties. For its part MBSS is protected because until a Put or Call is exercised, it remains the owner of the land and the building.

[251] There is no ambiguity or uncertainty in the manner in which the terms were negotiated which might require a ruling from the court as to the parties’ intention. The onus is on the defendants seeking to invalidate a contractual provision to show that such provision amounts to a penalty clause or can be characterized as unconscionable (see: The Mortgage Makers Inc. v. McKeen, 2008 NBQB 327, 339 N.B.R. (2d) 215), rev’d on other grounds 2009 NBCA 61, 349 N.B.R. (2d) 115).

[252] The additional point to be considered here is the fact that while the defendants make this argument, it must be borne in mind that in its capacity as Manager, 434 had control over cash flow in that it controlled the lease-ups and the lease rates which created the cash flow. The lower the cash flow then the lower the potential purchase or sale price on the exercise of a Put or Call, whereas the higher the cash flow then the higher the price. To that extent it had a leverage which MBSS did not.

[253] For that reason, the objection by the defendants to the purchase price being based upon the value determined by the mutually agreed upon Appraiser, whose decision is final and binding, is disingenuous.

[254] Furthermore it was somewhat late in the day, after Burnam directed his attention to the agreement, that he came to the realization of two obvious facts, which had always been there; firstly, the terms of the Option which defined the Put and Call options and secondly, the fact that MBSS and I-S had jointly agreed to the appointment of the Valco appraisal company as the sole and binding appraiser for the purpose of settling the purchase price, in the event the parties could not agree on one within the time provided.

[255] Indicative of Burnam’s lack of understanding of the implications of the Option Agreement, is a series of e-mails to and from Siskind after the Put had been exercised on July 21, 2009 which pointed out that the defendants were now obligated to purchase the Windsor facility. However he would not accept this and stuck to the belief that he would be entitled to appoint his own appraiser and the two appraisers would pick a third, which contradicts Article 2 of the Option. He admitted that he did not understand it.

[256] One has to wonder therefore whether the focus on the roof by the defendant was really a smokescreen attempt to either circumvent entirely its obligation to purchase or alternatively, to try to negotiate a lower price in keeping with its own in-house computer modeling analysis which set a price approximately $2 million less than the Valco evaluation. On more than one occasion, Burnam not only stated he did not want the Windsor facility because it did not fit in with his company’s profile, but he sought legal advice in Ontario and from his personal counsel in Missouri to walk away from the Windsor deal. Both lawyers advised him that he could not do so and told him he was stuck with the deal.

[257] This admission lends support for the inference that the appraisal and roof issues were nothing more than abstractions in an attempt to deflect his ultimate obligation to proceed with the transaction while he attempted to find a way out.

[258] Consistent with his hardball approach, when it was suggested by Robert Siskind that the appraisal was binding, in the absence of a manifest error, he replied that he would negotiate in court.

[259] It appears that he did not trust either Siskind or Tadeson with respect to the appraisal issue and that there might be a behind the scenes connection between Siskind or Tadeson, or both and the Valco company because it had appraised a number of properties for I-S over the years. This was flatly denied by both. This notion was clearly dispelled by Siskind in a letter of August 19, 2009.

[260] The Option is historically and contextually linked to the fact that when it came down to the wire to purchase the building initially for $2 million, I-S did not have the money. Both parties nevertheless wanted to proceed so they went back to the drawing board and crafted the Option Agreement which carried forward their underlying desire to complete the purchase. As Tadeson succinctly put it, I-S would become the owner and the manager, by itself. As with all of its other facilities, it would not have a partner.

[261] From the evidence of all the roofing witnesses, the overall condition of any roof and its lifespan will be enhanced and lengthened by regular inspections and dedicated repair. While $40,000 was originally budgeted in the construction costing for the retro-fit of the interior of the building, this could have been continued on a go-forward basis by 434 but it was not.

[262] It must be remembered that on February 15, 2008, when the Maintenance Agreement was executed between MBSS as owner and 434 as Manager, the latter assumed full responsibility for the regular inspections and maintenance of the facility including the roof, as outlined in Article 3. Additionally it was required to prepare and submit to the owner an Annual Plan for the operation and maintenance of the property as well as periodic inspection reports. This obligation was assumed by S-M when it acquired I-S and 434 which, through this Agreement, gave it control over the facility. As the evidence demonstrates, compliance with the management obligations was spotty to the point of being non-existent.

[263] The plaintiff MBSS was at all times entitled to assume that, pursuant to the Management Agreement, 434 and any successor would carry out its obligations under that Agreement. The blaming and finger pointing engaged in by Burnam and others in my view amounts to a deflection of its obligations under that Agreement. One could arguably conclude that the lack of a proactive and concerted maintenance programme as required by the Agreement amounts to a dereliction of its duty as manager. Burnam candidly admitted that they were a lousy manager and invited M. Siskind on several occasions to fire him.

The Roof

[264] Turning to the roof issue, while the witness Vidican opined that the age of the roof exceeded 25 years, Rauth and Hexham disagreed. In support of his position Hexham referred to the type of pea gravel which was used on the roof to cover over the membrane and he noted that the nature of the stone used in the industry has changed over the years. To his experienced eye, the stone on this roof was the newer type which would indicate the roof was newer. Furthermore he noted that the membrane control joints between sections of the 800 roof were newer than membrane control joints between other sections of the roof, all of which supports the fact that the roof is newer than as claimed by Vidican.

[265] For his part, Rauth, drawing on his long experience as a roofer stated that by examining the type of insulation used, he concluded the roof was younger than what Vidican had stated.

[266] This type of experiential evidence in my view justifies preferring their evidence to that of Vidican.

[267] Furthermore the evidence of the roofers was quite clear that the causes of the leaks were maintenance or plumbing issues, which had nothing to do with replacement of the roof.

[268] While Vidican’s first report, which was delivered prior to the discoveries, did refer to the seven items in 4.1(m) of the Option, this was not the reason stated by counsel for not closing; they relied upon s. 4.1(n). Because of this, the related allegations in the Vidican report are irrelevant.

[269] That said, the point is moot because as I have indicated, I have discounted and disregarded his evidence and report, in preference to that of Rauth, Hexham, M. Siskind, Tadeson and Ford.

[270] The second Vidican Report of December 2011 goes beyond the parameters of being just a reply to the plaintiff’s Pinnacle Report of July 26, 2011 in that he engaged in a commentary of the state of ongoing roof repairs. I would therefore reject it. However because I have accepted the plaintiff’s roofing evidence over that of Vidican, in any event, this point also becomes moot.

[271] This also speaks to the point that S-M, as part of its due diligence prior to acquiring I-S on March 18, 2009, could have had arranged for a roofing expert to assess its condition. For their part I-S and MBSS arranged for an inspection and assessment by Cooper Construction and Rauth early in the construction phase of the retro-fit. As a result Cooper’s Superintendent Ford budgeted $40,000 for roof repairs of which approximately $37,000 was spent by MBSS.

[272] In my view it is disingenuous for Burnam and I-S to object to refuse to close the purchase transaction in October 16, 2009 because of an alleged faulty or failed roof when, since March 2009, its own company, 434 has had the responsibility as building manager to undertake the ongoing maintenance and repair of the roof and to report on a regular basis to MBSS as owner.

[273] The numerous photographs taken by Vidican were a useful demonstration of several areas of the roof where repair work had been undertaken for which the pea stone or gravel over coating had been pushed aside to permit the repairs. This left the roofing felt exposed to the UV rays of the sun because it had not been brushed back to re-cover the repaired area.

[274] It is hard to imagine, given the visual observation displayed in the photographs, that the manager 434 could not be aware of such an obvious shortcoming in the quality of the roof repair and maintenance – if it undertook the periodic inspection mandated by Article 3.4 of the Maintenance Agreement.

[275] MBSS as owner is entitled to rely upon its expertise and obligations to ensure this type of critical shortfall is avoided by having the roof inspected on a regular basis by someone knowledgeable and experienced in roofing issues.

[276] Since February 2008 and March 2009, I-S and S-M as its successor have successively had, through 434, the sole responsibility of roof maintenance which the evidence makes clear they failed to carry out in an adequate manner and I-S now seeks to take advantage of its own default by refusing to close.

[277] The issues raised by Vidican about a yearly or twice yearly inspection of the roof especially after a severe storm to check for deteriorating caulking or joints with which the other roofers agree, speaks to this very issue which 434 has neglected to do.

[278] While Vidican criticized the HVAC design because of the placement of the hot and cold air ducts in the ceiling he ignored the fact that the system received the approval from the City building inspectors as well as the project architect and engineer before the facility became operational. While his preparatory work on the report involved discussions with a number of unidentified people he kept no notes; he spoke to no one at Bryant Heating and Cooling who were the design engineers for the HVAC system of which he was critical; he admitted he was not in a position to comment on design criteria, an essential background fact finding for a report; and he admitted that the designer of a system has some discretion to work with. Lastly, he talked to no one at MBSS.

[279] I found that his testimony was often very long and rambling, straying from the questions posed to him, especially in cross-examination, and he had to be reminded repeatedly to answer questions directly, many of which required only a simple yes or no. He was, in a word, verbose.

[280] While he had previously undertaken approximately 600 inspections, about 85 percent of these were residential. Furthermore this was his first of a self-storage facility.

[281] While he recalled speaking with someone at Cooper he could not recall the specifics. He also spoke with Richard Rauth of Rauth Roofing but refused to provide any specifics or details of that conversation.

[282] From his evidence, therefore, it appears that he reviewed some available but unknown information, without providing any details, and did a walkabout and visual inspection on the roof in October and November 2009. He made no test cuts alleging he could not get permission for 434 as manager. It would appear that the thrust of his opinion based as it is on very little analysis of his own, relied upon the Flynn test results which he only assumed were accurate.

[283] In 2012 when he undertook his second survey he did perform some test cuts without infrared thermography but could not find any wetness in the insulation.

[284] One of his conclusions was that the service life of a roof can be affected by its design, its installation and its maintenance, and that maintenance will lengthen the service life of a roof whereas conversely, a lack of maintenance will shorten it. On this point his evidence comported with that of the other roofing witnesses. He agreed that a building manager has the greater control over the service life of a roof.

[285] In his view maintenance of a roof of this type will cost somewhere between $18,000 and $36,000 annually, however he noted that in 2009, 434 the manager, spent only $6,000. When asked his opinion on this, apart from saying that maintenance is the prudent thing to do, he would not commit to a specific answer. My frank inclination is that he was very much mindful of the party which had retained him for the purpose of this trial and I question the authenticity and objectivity of his evidence. When pressed he admitted that he was surprised that the manager had spent little or nothing on roof maintenance.

[286] This exchange reinforced my impression that he was an advocate for the defence who retained him. When questioned about the service life of the roof in his examination-in-chief he estimated that a built up roof could have a lifespan of between 12 and 17 years but in his draft opinion he estimated this to be 15 to 20 years, with an average between 12 and 17 years. However he admitted in cross-examination that a properly installed and well-maintained roof could attract a lifespan of 15 to 20 years.

[287] He was unable to explain the differences in his estimates and he would not directly answer any questions as to why.

[288] Perhaps equally telling was the fact that when he was reminded that Mr. Rauth, an experienced roofer had testified from years of firsthand knowledge as to this roof that it was probably installed in 1994, about 15 years before the Vidican inspection and report, he conceded that he would defer to Rauth’s firsthand knowledge.

[289] He did agree with the other roof witnesses that the absence of pea stone or gravel to cover the membrane would accelerate its deterioration. As a minimum recommendation, the bald spots noted in his walkabout and his pictures should have been covered until fuller repairs or replacements could be undertaken.

[290] When discussing the subject of blisters which had been previously identified, Vidican described them as “ticking time bombs” and stated that industry literature describes blisters this way but he could not cite any of his sources; rather, he stated, he just knows this from general knowledge. He therefore disagreed with the other roofing witnesses who all previously stated that blisters do not necessarily mean that a roof needs replacement. If they are soft and pliable, they should be left as is and pose no damage to the roof. His only response was that they had their opinions and he had his.

[291] These latter exchanges during the course of his testimony simply serve to affirm my earlier impression that he was really just an advocate for the defendants.

[292] In my view the witnesses Rauth, Hexham and Ford laid the groundwork for an assessment of the roof. As I have previously noted, I accept their collective evidence and opinions in preference to that of Vidican which, with one or two exceptions he actually agreed with the others, I reject the rest of his evidence and my decision on the point is sharpened by my impression and conclusion that he was, essentially, an advocate for the defence.

[293] Further while the defence argues contrary to Article 4.1(n) of the Option, that as of the date of Substantial Completion (July 9, 2008), the building was not in good operating order and in a condition consistent with its age, it offered no proof to the contrary. There was no evidence before the court that would suggest MBSS as Vendor was aware of any defects in the design, construction or structure of the building including the roof.

[294] The evidence of both Rauth and Hexham was consistent in that they concluded in effect that the roof was in fairly good condition for its age. While a small percentage of the overall roof, (13% in Hexham’s opinion), might have required replacement, the rest of it did not and, with a regular maintenance programme would not for another 5 to 10 years.

[295] I would also add that when Tadeson in the very early stages of the construction toured the roof, he too had no objection to its apparent condition. At that point I-S and MBSS were proceeding (before the takeover by S-M) with the construction of the retro-fit. As has been previously discussed, I-S through 434 was bound by the Management Agreement to maintain the roof into the future. I-S at that time had more than just a passing interest as to its condition because it would be the eventual owner of the building and he was satisfied with it.

[296] It is to be remembered that at the point of the acquisition by I-S, on March 18, 2009 the existing Option and Management agreements dated February 15, 2008 were in place and all the rights and obligations thereunder were binding upon the successors and assigns of each of the parties.

[297] It cannot be overlooked that as the successor under the Management Agreement, I-S had the continuing and overriding obligation and responsibility to attend to the roof and its needs. To the extent that neglecting the roof could diminish the value of the building, this in turn could be to the advantage of the defendants in responding to a Put being exercised by the plaintiff or a Call being exercised by them, in the ensuing 15 day negotiating timeframe with the plaintiff. However this became moot once Valco delivered its appraisal without there being a manifest error.

[298] In an e-mail of July 8, 2009 his employee Dewsbury suggested to Burnam that they needed a full roof inspection. Burnam confirmed that it was not done. This is to be taken in the context of his self-professed experience in the self-storage business when he stated that after 36 years he knows that in a retro-fit conversion you require a good envelope to ensure safety of the building insofar as water is concerned in order to protect the customers’ goods and they always budget for it. He also said it is an important part of the process. However there was no evidence that 434 complied with its management obligations to supply Annual Plans and maintenance reports to MBSS.

[299] It appears that Burnam was saying one thing but doing another.

[300] He was unable to answer why 434 commissioned the Flynn Report and paid for it, and not the owner MBSS, as part of its responsibility to the manager, nor was he able to explain why 434 delayed delivering a copy of that report to the owner for almost a year. As manager it did not have an independent right or justification to order a report and not disclose it to its principal, the owner. During that time Burnam was regularly writing to the owner about leaks in the roof.

[301] The obvious deficiencies in the quality of the management is problematic especially when one considers the prior extensive experience S-M had in the self-storage business which included a business plan for each and every facility in its inventory, with a computer model constructed to catalogue and track on an ongoing basis, the expenses including maintenance of the individual facilities to assess the value of each.

[302] It is axiomatic that any deficiency in the management operations when S-M took over from I-S, could and should have been remedied immediately. They were not.

[303] From the evidence of Burnam, a number of facts emerge which in my view negate the defendants’ position in this action:

• The complaints raised by the defendant were well beyond the six months following Substantial Completion on July 9, 2008;

• M. Burnam made known his views that he did not want the Windsor facility in his portfolio;

• I-S refused to close the purchase;

• Burnam did not wake up until late in the day to discover the implications of the Option Agreement with its proviso for a limited 15 day period of price negotiation after the First Put was exercised failing which the sole appraiser and arbiter Valco, would determine it;

• He consulted with his personal lawyer in Missouri who advised him that S-M was locked into the Option Agreement which S-M inherited in the purchase, and S-M could not break it unilaterally;

• He was similarly advised by his lawyers in Ontario;

• His admission to being a poor manager;

• His request on one or more occasions that Siskind take over management of the Windsor operation;

• He told Siskind that he would negotiate in court;

• Despite his life long experience with self-storage facilities reflected in his expression of the importance of the building envelope to ensure that the stored goods of the customers remained clean and dry, yet S-M through 434 undertook no preliminary due diligence inspection of the roof, prior to its takeover of I-S, to determine its condition.

• Fairly soon after the HVAC was installed, it was noted by the roof consultant Hexham that the filter mechanisms were plugged, a plumbing issue which also speaks to the lack of proactive maintenance by 434 as manager;

• When a roof report was eventually commissioned by 434 (without the owner’s prior approval) it withheld for about a year giving a copy to MBSS although he sent an e-mail to Siskind on July 8, 2009 advising that the roof was being inspected and bids were being acquired for major repairs, they were never sent to MBSS.

[304] These are but a few of the facts from the evidence which adversely affect the position of the defendants S-M/I-S which, in my view clearly demonstrate that it did not want to complete the purchase at all or at least not without a substantial discount or price which MBSS was not prepared to consider. Why should it? The jointly appointed Valco appraiser had delivered his opinion on value and there was no manifest error committed by him.

[305] Putting the position of Burnam and S-M another way, when it acquired I-S it became the assignee of very well thought out Option and Management Agreements carefully crafted by experienced businessmen. His organization stepped into the shoes of I-S in the process.

[306] As such S-M was entitled to no less than what the Siskinds and Tadeson had negotiated. But, S-M was entitled to no more.

[307] Burnam’s attempts to rebut or ignore the Option obligations and 434’s responsibility as Manager, are in my view an attempt to get more than what the Siskinds and Tadeson bargained for and agreed upon.

[308] As I have indicated elsewhere, the machinations relating to the roof are a thinly disguised attempt to gain more than his organization is entitled to.

[309] My view is supported by the fact while he and his organization ground out numbers in its computer model, no one thought it important enough to put some boots on the ground and come to Windsor to inspect the physical plant including the roof. It’s all about due diligence and surprisingly, there was none.

[310] With respect to the HVAC system, there was no concrete evidence from the defendants to suggest that the system was lacking in design or function. It was passed by the City’s building inspectors as well as the project architect and engineer. There had been some issue about excessive heating bills but they arose from the fact that in many instances the customers would raise the thermostats in colder weather while they were in the interior of the building. This was resolved by moving them to the interior of the office so they could not be altered except by authorized personnel. Heating costs dropped dramatically.

THE LAW:

[311] Greenforco Holding Corp. v. Young-Merton Developments Ltd., [1999] O.J. No. 3232 (S.C.J.) involved the defendant seeking an order of specific performance. Ferrier J. observed that until the recent Supreme Court of Canada decision in Semelhago v. Paramadevan, 1996 CanLII 209 (SCC), [1996] 2 S.C.R. 415, specific performance was routinely available as a remedy to either party involved in actions concerning the sale of land.

[312] In comments that Ferrier J. noted were obiter, Sopinka J. stated that specific performance does not follow as a matter of course and that the question of the uniqueness of the land in question is an issue that must be resolved.

[313] Picking up on this Ferrier J. stated that the requirement of uniqueness is a qualified one and the property must only be unique to the extent that a substitute is not readily available.

[314] He recognized that the land may have a peculiar and special value to the party either seeking to acquire or to retain it. He notes that this concept continued to be recognized in decisions subsequent to Semelhago.

[315] As he stated, it is trite law that the decision to award specific performance is in the discretion of the court and that often the equities between the parties are determined by circumstances beyond either party’s control which was not the case before him where he found that Greenforco’s sole officer behaved in a manner which Ferrier described as not only contemptuous of his company’s contractual obligation but also he flagrantly disregarded the advice of his advisors.

[316] By analogy to the case before me, Burnam quite directly stated that he did not want to be in Windsor and was not interested in the Windsor facility. Furthermore when he sought legal advice both in Ontario and in his home state of Missouri to attempt to break away from the agreement, he was advised on both counts that he could not. Therefore he settled upon the notion of negotiating in court.

[317] The concept of a particular piece of property being considered as unique was considered by McMahon J. in Canamed (Stamford) Ltd. v. Masterwood Doors Ltd. (2006), 41 R.P.R. (4th) 90 (Ont. S.C.J.) where he concluded that it is fact driven, together with the availability of a substitute property.

[318] The building in question before him was specifically designed to be used as a professional medical building with the result that the plaintiff could not be adequately compensated by damages. He therefore concluded that it had established a fair, real and substantial justification for its claim for specific performance. By analogy to the case at hand, the subject storage facility as found by the Valco appraiser Telford, was the only climate-controlled Class “A” building in Windsor and as such that there were no other comparable buildings in the area.

[319] While the wishes of a purchaser of a piece of property are relevant, this is only one factor to be considered in determining whether it is unique. He rejected the proposition that if property is purchased as an investment, damages will always be the appropriate remedy.

[320] In the case at hand, the parties to the Option completely renovated and retro-fitted an empty factory into a virtually brand new building inside and, consistent with their other holdings of self-storage facilities, each of them engaged in the development of the facility for long term investment.

[321] In Comet Investments Ltd. v. Northwind Logging Ltd. (1998), 22 R.P.R. (3d) 294 (B.C.S.C.), a vendor had subdivided a parcel of land into four acres pursuant to an agreement with the purchaser who then refused to complete the purchase transaction; as a result the vendor brought an action for specific performance, which the court allowed. It concluded that the purchaser’s real reason for repudiation was that it no longer needed the property and that it was sufficiently unique such that specific performance was considered appropriate.

[322] The court concluded that the equities definitely favoured the plaintiff who had invested a considerable amount of money in servicing the property in the expectation that it would be purchased by the defendant who, it concluded, contrived to avoid its contractual obligations due to changes in its business requirements.

[323] In my view there is a very strong analogy to the case at hand where the evidence clearly discloses that MBSS and I-S through their rather complex Option Agreement acquired the land and building in question and then spent several million dollars completely rebuilding the interior of it as a brand-new self-contained climate-controlled self-storage facility.

[324] The evidence clearly establishes that it was always the intent of the parties that once the building had been acquired then retro-fitted, and the CEO Tadeson of I-S testified quite clearly that it was always the intention of the parties that I-S would acquire the building and in addition, would manage it through the vehicle of 434, a company it incorporated for that purpose.

[325] Against this well settled intention by the parties to the Option, when I-S was acquired by S-M through the vehicle of a hostile takeover, the latter then became the successor to the rights and obligations agreed to by I-S in the Option and the Management agreements.

[326] However, the evidence clearly discloses that Burnam as CEO of S-M admitted that he did not want to be in the City of Windsor and as noted previously consulted counsel in Ontario and Missouri seeking advice as to how he might abrogate the obligations of S-M as the successor to I-S.

[327] His actions in seeking advice to break the contract and subsequently stating that he would negotiate in court with a candid admission that under his direction 434 had behaved horribly as a manager of the facility speaks to the unequitable conduct and the issue of patent unfairness and lacking in credibility.

[328] In deciding whether to award specific performance to the vendor, the court should look not only at the nature of the property involved but also the related question of the inadequacy of damages as a remedy. Because it is an equitable remedy, the court must also take into account the behaviour of the parties (see: Landmark of Thornhill Ltd. v. Jacobson (1995), 1995 CanLII 1004 (ON CA), 25 O.R. (3d) 628 (C.A.)).

[329] It is clear from the evidence that the Siskinds through their company, Decade, had acquired and developed approximately seven self-storage sites and were on the way to developing the Windsor facility together with I-S, when the decision was made to sell all of their inventory, including the potential Windsor site. Subsequently, I-S which by now had an inventory of approximately 50 such storage sites, was taken over by S-M. The point to be made in all of this is the fact that having developed their portfolio the Siskinds decided to sell to Tadeson and I-S. Things were moving in the right direction to consummate their mutual plans, when the hostile takeover by S-M occurred and from that point forward, the dynamics of the relationship and the objectives, changed drastically, through no fault of either of the original parties to the Option.

[330] Viewed in this context, the only reasonable conclusion, as between the parties here, is that the equities definitely favour the plaintiff.

[331] To deny specific performance in this instance would mean that the plaintiff’s original business decision in selling the Windsor facility under the terms of the Option would be frustrated by the actions of Burnam and his forces.

[332] The presumption of uniqueness has not yet been replaced by a presumption of replace-ability (see: 904060 Ontario Ltd. v. 529566 Ontario Ltd., [1999] O.J. No. 355).

[333] I agree with the analysis by Paul Perrell (as he then was) when he stated in his article, Semelhago and The New Paradigm for “Specific Performance”, that the key factors in determining uniqueness are firstly, that the remedy of damages is comparatively inadequate to do justice and secondly the plaintiff should show some fair, real and substantial justification for the claim.

[334] As Lax J. observed in John E. Dodge Holdings Ltd. v. 805062 Ontario Ltd. (2001), 2001 CanLII 28012 (ON SC), 56 O.R. (3d) 341 (S.C.J.), one must identify the factors which make a property unique to a particular plaintiff and whether the plaintiff had shown that the land, rather than its monetary equivalent, better serves justice between the parties; this in turn will depend on whether money is an adequate substitute for the plaintiff’s loss.

[335] In my view, the adequacy of money damages will turn on the question of whether the subject matter of the contract is generic or unique.

[336] As the facts here disclose the facility in question, was created by the Option partners out of nothing, into a modern, virtually brand new, climate-controlled storage facility, unequalled anywhere in Windsor or Essex County.

[337] The uniqueness of the property has already been established, in my view, by the appraiser Telford’s comments following his appraisal of the finished product. The parties created what he described as a Class “A” facility, the only one of its kind in the Windsor area.

[338] Furthermore, I-S had an inventory of approximately 50 other self-storage sites, to which it intended to add the Windsor facility, to its ever expanding collection of such sites.

[339] One might ask the question therefore then why, then, should the mutual intention of the two Option partners be frustrated or abrogated by S-M as the contractual successor to I-S, because it did not want to do business in Windsor?

[340] Apart from the business and physical characteristics of the project which make this purpose-built facility unique, is the fact that the value of the asset has been appraised and agreed upon by the original Option partners at $7.3 million as a consequence of the exercise of MBSS of a Put to require I-S to complete the purchase.

[341] The damages in this case, apart from the carrying costs incurred by the plaintiff, represent the fulfillment of the obligation of purchase which was readily agreed upon by I-S in the Option agreement of February 15, 2008. In my view this represents another indicia of the uniqueness of not only the property but of the contextual agreement to which it is connected.

[342] Consistent with the intention of I-S to bring the project forward to its completion is the fact that during the construction phase it had complete access to the project site and because of its intended acquisition and management of the facility, it played a meaningful role in many of the key decisions made during the course of the interior retro-fit of the building because it was the intended ultimate owner and manager. It was, as the phrase has been used in Canamed, a purpose-built building.

[343] To deny the remedy of specific performance to the plaintiff at this time, after it sold off its entire inventory to I-S would mean that the Windsor site would stand alone. Furthermore, there is nothing in the Option agreement which would suggest that I-S (or its successor S-M) could “cherry pick” a specific location for exclusion out of the takeover by S-M of I-S.

[344] The court does not have to consider that the plaintiff has to demonstrate that the premises are unique in a strict dictionary sense in that they are entirely different from any other piece of property. Rather it is sufficient if the plaintiff can demonstrate that the premises is of a quality that makes them especially suitable for the proposed use which cannot be reasonably duplicated elsewhere (see: 1252668 Ontario Inc. v. Windham Street Investments Inc. (1999), 27 R.P.R. (3d) 58 (S.C.J.)).

[345] This principle was adopted by Weiler J.A. when Dodge Holdings was argued in the Court of Appeal. She agreed with the earlier comment of Lamek J. in Windham Street that in order to establish if a property is unique, the party seeking specific performance must show that it has a quality that cannot be readily duplicated elsewhere and a quality that makes it particularly suitable for the purpose for which it was intended.

[346] Furthermore damages are not a suitable remedy where the defendant purchaser has flagrantly and deliberately inflicted risk and loss to the vendor in refusing to complete the purchase: see 1589380 Ontario Ltd. v. Heasty (2009), 2009 CanLII 25608 (ON SC), 61 B.L.R. (4th) 64 (S.C.J.) (Ferguson J.)

[347] Again, in my view these indicia of uniqueness dovetail with the reality of the Option Agreement with which we are currently dealing.

[348] While the principle of mitigation states that a plaintiff cannot recover damages for loss that could have been reasonably avoided he is not contractually obliged to mitigate. However if he fails unreasonably to do so, the damages for breach of contract may be reduced (see: Asamera Oil Corp. v. C. Oil and General Corp. (1979), 1978 CanLII 16 (SCC), 1 S.C.R. 633 and Janiak v. Ippolito, 1985 CanLII 62 (SCC), [1985] 1 S.C.R. 146).

[349] But a defendant who has breached a contract bears the onus of proving that the plaintiff unreasonably failed to mitigate its loss. Furthermore failure to mitigate may not be unreasonable for a number of reasons, one of which may be a “fair, real and substantial justification” for claiming specific performance. These principles were discussed in Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51, [2012] 2 S.C.R. 675.

[350] On the facts before me I conclude that there is no evidence of there being a lost opportunity available to the plaintiff for mitigation and secondly, the defendants have failed to discharge their onus of proving that the plaintiff has unreasonably failed to do so.

[351] The plaintiff therefore reiterates its claims as follows:

1. Specific performance of the sale of the facility at the appraised value of $7.3 million.

2. Damages as agreed in the sum of $728,080.05.

3. Interest and costs.

[352] It must also be borne in mind that the defendants have previously conceded that if the appraisal by Valco complied with the Option, then it would close. The appraisal did in fact comply with the Option and I previously ruled that there was no manifest error in it. In the circumstances therefore one has to ask the question as to why the defendants have not therefore picked up on their obligation to complete the purchase except, as Burnam has previously stated, the strategy was to litigate in the courts.

[353] In its submissions defence counsel conceded that Burnam had said he would write a cheque if the appraisal complied with the Option and there was no manifest error. However counsel concedes my in trial ruling that there was no manifest error and that this effectively neutralizes the statement by Burnam.

[354] Defence counsel says that the estimate by the appraiser Telford that the property would probably sell within six to nine months suggests that it is not unique. Furthermore he argues that the plaintiff did not attempt to mitigate by selling it in the open market because it would not fetch the $7.3 million appraised value that Telford ascribed to it. Therefore, he argues, the defendants are simply trying to take advantage of the plaintiff.

[355] The fallacy, in my view, of the logic of the defendants from the resale perspective is that, if the property did not fetch the appraised value (for which the defendants say that the plaintiff owes a mitigation duty) then this forces the plaintiff to commence another action and sue the defendants for the difference. Why should it have to engage in another round of litigation? In Southcott the Toronto School Board as vendor failed to satisfy a contractual obligation in their contract and it refused to extend the closing date. As a result Southcott sought specific performance of the contract and argued that it was not required to mitigate its losses.

[356] While the Court of Appeal upheld the trial judge’s finding that the Board had breached the contract, it concluded that he had erred in his approach to mitigation and found that Southcott had unreasonably failed to take available steps to mitigate its loss. It reduced the damage award to a nominal sum.

[357] In the appeal to the Supreme Court of Canada, Karakatsanis J. cited British Columbia v. Canadian Forest Products Ltd., 2004 SCC 38, [2004] 2 S.C.R. 74 for the proposition that as a general rule a plaintiff will not be able to recover for those losses which could have been avoided by taking reasonable steps. Where it is alleged that a plaintiff has failed to mitigate, the burden of proof rests with the defendant who must prove firstly that the plaintiff had failed to take reasonable efforts to mitigate and that secondly mitigation was possible.

[358] In its discussion on the requirements of litigation the Supreme Court cited Asamera for the proposition that a plaintiff cannot recover damages for loss that could have been reasonably avoided. However a plaintiff is not contractually obliged to mitigate and it held that in this sense the term “duty to mitigate” is misleading where a plaintiff unreasonably fails to mitigate its damages for breach of contract may be reduced (see: Janiak).

[359] If the defendant breaches a contract it bears the onus of proving that the plaintiff unreasonably failed to mitigate its loss (see: Red Deer College v. Michaels, 1975 CanLII 15 (SCC), [1976] 2 S.C.R. 324). This entails establishing on a balance of probabilities two steps of proof: that the opportunities to mitigate were available to the plaintiff and that the plaintiff unreasonably failed to pursue them.

[360] However failure to mitigate may not be unreasonable in a variety of circumstances one of which would be that there is a “fair, real and substantial justification” for claiming specific performance (see: Asamera).

[361] While the defendant argues that the $728,080.05 already agreed to as damages incurred by the plaintiff in carrying the costs of the facility would have been substantially diminished or completely eliminated, had the plaintiff mitigated as it should.

[362] The fallacy in my view of that argument is that there is no obligation to mitigate here that on the facts of this case, which represents one of those cases where there is a fair, real and substantial justification for claiming specific performance.

[363] It is not to be forgotten that MBSS and I-S as the original contracting parties to the Option had very clearly expressed their mutual intention to developing the property and thereafter conveying it by way of either a Put or a Call, from MBSS to I-S. The only reason the transaction was structured in this way was the fact that at the point of acquisition of the property, I-S through its development arm In-Scotia, did not have the money. Accordingly with considerable work and effort from both sides, these two sophisticated parties put together the Option Agreement which was designed to achieve the same thing, namely the acquisition of the facility by I-S, but on a deferred basis.

[364] It was, and always remained, their mutual intention that I-S alone would become the owner and the manager of the premises as was stated emphatically by its CEO Tadeson.

[365] With that all important context in place, I have no doubt that if I-S had reneged on its agreement, specific performance would be a justifiable resolution for MBSS.

[366] Bearing in mind that I-S was subsequently swallowed up by M-S on a hostile takeover, in doing so it not only assumed as successor to I-S, its obligations under the Option but its entitlements. As a result, I conclude that while it was entitled to no less than what I-S had bargained for, it was entitled to no more. It was bound by the equities which, like glue, held the entire Option agreement together.

[367] The actions and efforts by Burnam in seeking to avoid the terms of the contract have been commented upon previously and are nothing short of disingenuous and in my view, provide a fair, real and substantial justification for MBSS to claim specific performance here.

[368] The defendants also argued that by virtue of Article 4.1(m) on the date of substantial performance the buildings were to be fully operational and in good working order and in a condition consistent with their age and that the vendor was not aware of any defect in the design, construction or structure of the buildings including the roof.

[369] There was no evidence before me that would suggest that there were any defects in the design, construction or structure of the building.

[370] With respect to the roof there is ample evidence from Rauth, Hexham and Ford, that it was in a condition consistent with its age and all three whose evidence I accepted in preference to that of Vidican, agreed that it was not as old as Vidican had opined it to be.

[371] In any event by Article 5.8 of the Option concerning deficiencies, I-S had up to January 9, 2009 being six months after Substantial Completion, to raise the issue of any deficiencies, but there were none.

[372] While the defendants argue that there is nothing unique about this facility, in my view there are two levels of uniqueness here. First and foremost is the very Option Agreement itself which was created because of the short-term financing issue of In-Scotia on behalf of I-S, resulting in a finished product which was not a standard Agreement of Purchase and Sale.

[373] Secondly, a review of the entire document can only lead to the conclusion that the two parties went to great lengths to ensure that their joint venture development of the Windsor self-storage site came to fruition with its ultimate acquisition by I-S as the sole owner and operator of the facility.

[374] This was the gist of the conclusion of Brockenshire J. in Dick v. Dennis (1991), 20 R.P.R. (2d) 264, who concluded that fairness would dictate that the vendors in the case before him who had substantially upgraded a condominium unit to make it more attractive for a purchase. They had no use for the unit when their prospective purchaser attempted to back out of the deal. Brockenshire J. granted them specific performance because in his view the obligations of ownership and the risk of an eventual resale, fairly speaking, should be transferred to the buyer who had agreed in writing to purchase it.

[375] From the evidence, it would appear that everything was on track to achieve this goal until S-M arrived on the scene by way of its takeover of I-S. From that point forward, there was a seismic shift in the attitude of S-M as the successor to I-S. As Burnam himself stated, he did not want to be in Windsor nor did he want the Windsor site and sought legal advice on how to avoid the legal obligations of the Option. When he was advised by his two sets of lawyers that he could not, he set about to frustrate the agreement, including, negotiating in court. As I have previously concluded, the conduct of I-S, at the behest of Burnam, was disingenuous.

[376] Furthermore on the asset side of things, I also reject the defence argument that the facility was not unique and again refer to the context of the original agreement by which this facility would be folded into a significant inventory of approximately 50 other self-storage sites owned and operated by I-S and which formed part of its investment trust. In addition, it was, as the appraiser Telford testified, the only Class ‘A’ storage facility in Windsor.

[377] Equity dictates that the interests of the parties be balanced. Fairness would obligate the defendants to complete the purchase called for and thereafter, if Burnam’s intention of not wanting to carrying on business in the city of Windsor is valid, then his company could sell the facility in the open market and assume any risk which it otherwise is attempting to impose upon MBSS.

[378] In his textbook, Excerpt of Injunctions and Specific Performance, Professor Robert J. Sharp (as he then was) stated that the vendor’s right to specific performance is well supported by the authorities although it is not at all clear in principle that the vendor’s interest invariably merits the protection of this relief.

[379] However he states that the alternative claim for damages often leads to the inadequate result if the amount of the award is limited to the difference between the contract price and the market price whereas in an award of specific performance, the vendor gets the entire purchase price immediately which had been originally agreed upon.

[380] While he suggests there should be a rule which required a vendor to demonstrate the inadequacy of damages before being allowed the relief of specific performance, his remarks seem directed to the usual situation of the sale of a home, normally an uncomplicated and fairly direct transaction, in contrast to the business arrangement which we are considering in this case.

[381] In answer to the question as to whether the vendor or the purchaser here should assume the obligation of a resale and possible consequential damages, in my view that obligation should rest with the defendants.

[382] Putting this another way, one might ask the question, what did the vendor do wrong? In my view, nothing. The difficulty here results from the refusal by I-S to complete the contract obligations which it succeeded to from its predecessor.

[383] I-S, through its CEO Burnam must be held accountable for his calculated decision to refuse to honour its obligations and the only way to accomplish this is to require it to complete the terms of the agreement which it willingly assumed.

[384] At the end of the day it would still be left with a revenue generating asset, one of many self-storage facilities in its inventory and it could carry on business as usual whereas if the plaintiff is denied specific performance it will be in effect stuck with this single asset where it is no longer in the self-storage business.

Findings:

[385] The background to MBSS and the purchase of the property and the Option and Management agreements of February 15, 2008 reflects an intention of both parties that the ultimate result would be that I-S would be the owner and the manager of the property.

[386] Both parties undertook due diligence on the building before the purchase and I-S through Tadeson inspected the roof and did not find it wanting.

[387] I-S made a decision to accept the roof with recommended repairs by Cooper Construction the contractor, of $40,000. Approximately $38,000 of that was actually spent on the instruction of M. Siskind.

[388] I-S would have more than a passing or casual interest in the roofs when considering the fact that it was going to be the ultimate owner and manager of the facility.

[389] Both the two Siskinds and Tadeson, fairly speaking, were very sophisticated and experienced business and development people with much experience in the self-storage business.

[390] The renovation proceeded but before it was finished I-S was taken over by S-M. Therefore I find that as the successor or assignee, S-M succeeded to the rights and obligations of I-S under the Option and the Management agreement, effective March 18, 2009.

[391] I find that Mike Burnam, the CEO of S-M did not want, for whatever the reason, to do business in the City of Windsor nor did he wish to have a facility here.

[392] I find he wanted to back out of the deal which had been earlier consummated by I-S and the Siskinds but was told by two sets of lawyers, in Ontario and in Missouri, that he could not.

[393] MBSS has absorbed the carrying charges of the building to the date of trial and has incurred the agreed sum of $728,080.05.

[394] I find that the Option in the agreement incorporates mutual obligations and entitlements in the form of the Puts and Calls on each party to purchase or sell. Furthermore once a Put or Call was exercised, the parties were obliged to negotiate a purchase price, within 15 days, failing which the Valco appraisal company would unilaterally undertake a binding evaluation of the purchase price to be paid.

[395] Following the exercise by MBSS of its Put on July 21, 2009 and the failure of the price negotiations between the parties, (were undertaken by S-M as the assignee or successor of I-S) the appraiser James Telford valued the facility at $7.3 million.

[396] Conversely the in-house computer model which S-M had apparently created some years earlier, valued the facility at approximately $5.5 million.

[397] While the closing was set for October 19, 2009, on October 16 the defendants’ solicitors advised plaintiff’s counsel that it refused to close which led to the commencement of these proceedings.

[398] I accept the evidence of the two Siskinds, Michael and Robert, and James Tadeson as to the history and context which lead up to the execution of the Option and the Management agreement on February 15, 2008.

[399] I find that as noted earlier, Tadeson, on behalf of I-S, the ultimate owner of the building, had his own interest in assessing the integrity of the roof and he inspected it with Michael Siskind and Richard Rauth of Rauth Roofing and found it to be satisfactory and in a condition consistent with its age.

[400] I find that M. Siskind was conscious of and familiar with the issue of roof leaks which were repaired as they occurred throughout 2008 and 2009, at least up to the point where S-M, as the successor to I-S, took over as building manager through 434.

[401] Its involvement as the building manager through 434 was in a word, nothing short of a disaster. It is obvious in the inspection by the various roofing consultants and roofers, from both sides, that there were obvious shortcomings in the roof as mentioned, and as observed by among others, Rauth, Hexham, and Vidican. There were spots on the roof where the pea stone or gravel had been pushed or swept away, during various repairs, thereby exposing the felt underneath, thereby compromising the felt to ultraviolet (UV) rays from the sun. As manager 434 was unaware of this or did nothing to correct it.

[402] The air-conditioning ducts were plugged on more than one occasion which adversely affected the operation of the HVAC system. Similarly the roof drains were ineffective. In both instances this reflected the poor state of maintenance and repair of the roof membrane by I-S after March 2009.

[403] I accept that it failed to heed the advice of the roofing consultants including its own, that a regular maintenance and inspection program would protect and prolong the roof’s life expectancy.

[404] After the Substantial Completion date of July 9, 2008 passed, there were no complaints made to the plaintiff about the design, construction, or structure of the building, including the roof replacement, within the six month period of time, pursuant to Article 5.8 of the Option. After that date, 434 became solely responsible as the manager, for all on-site issues. The plaintiff was no longer on-site.

[405] Turning back to the Option and the exercise by MBSS of the First Put on July 21, 2009, Burnam who did not want to be in Windsor in any event, had no clear understanding of the implication of the Put as it related to setting a value for the Put Purchase.

[406] Robert Siskind’s description of the exercise of a Put is consistent with that of Michael and Tadeson. I accept their evidence that when the plan to purchase the empty building was first conceived, the intention was always that I-S would become the owner and manager of the facility after completion. I-S made it clearly known through Tadeson that in the operation of its storage business, it acted alone and without partners.

[407] I accept his evidence that after a Substantial Completion date of July 2009, MBSS was no longer in a position to consider any warranties and representations since I-S was then in full possession and control of the facility.

[408] I accept his evidence that the issue of a roof replacement only came up for the first time from the defendants, after MBSS exercised its Put on July 21, 2009.

[409] I also accept Tadeson’s evidence that S-M had copies of all the documents relating to the Option and in a telephone discussion he explained to Burnam how it worked, especially the Put and Call features, at which time Burnam expressed his satisfaction with that.

[410] I accept the evidence of the construction superintendent Ford, Richard Rauth and Brandon Hexham as to their experience in commercial and industrial roofs. I also accept their collective opinion that the roof still had as much as ten years life left in it. Leaks were not only common during construction but when they occurred, they were repaired. Further, the construction site minutes of Cooper Construction in January 2008 recorded that there were many days of rain without leaks.

[411] I accept the evidence of Richard Rauth who, of all the witnesses had the longest history as a roofer and whose family business Rauth Roofing have more experience with the roof than anyone else. I also find that his observations of apparent lack of maintenance from his last working attendance on the roof in 2008 speaks to the ineffective management by 434 after February of that year. I also accept the evidence of the roofers, except Vidican, that soft and pliable roof blisters do not reflect on poor roofing maintenance or installation and are harmless, and can be left alone. They are certainly not “ticking time bombs” as have been characterized by Vidican.

[412] I accept that in July 2009 Burnam advised Siskind that there had been repairs to the roof but he felt that more and bigger work was required, for which he would be pursuing bids that would be sent to MBSS. However it never did so. Furthermore while Vidican undertook his assessment of the roof for the defendants, they kept his report from the plaintiffs for about a year after receiving it.

[413] With regard to roof maintenance he candidly admitted that as of 2012 nothing even close to the recommended expenditures for roof maintenance had been carried out by 434 as manager.

[414] I find that there is no evidence before the court, engineering or otherwise, relating to any of the allegations about the structure of the building and I accept Burnam’s confirmation that there was no report dealing with this as an issue.

[415] I accept the evidence of the facility manager, Ms. Jewel Ross, that dealing with the north wall, the reason for seepage of rainwater into the building arises from the fact that the adjoining vacant land area immediately outside the building, was higher than the building’s foundation with the result that during and after a rainstorm water would percolate toward the base of the north wall and seep through. While she recommended on several occasions a beveled lip be constructed along the north side of the building, to raise its exterior to a level higher than the surrounding field, nothing was ever done about it by 434.

[416] In August and late September 2009 she reported that following heavy local rainstorms no leaks were reported or observed.

[417] I accept her view from the perspective of a manager of the facility that the inoperable roof drains and the periodic leaking in the roof as well as the water seepage issue relating to a north wall were all management responsibilities and they all remain uncorrected.

[418] With respect to the evidence of James Telford as I have noted previously, at the close of the plaintiff’s case, in response to a motion brought by counsel to object to the introduction of an appraisal report by Ray Bower, a certified appraiser employed by the defendants, I ruled that an appraisal had in fact been carried out in a reasonable, forthright manner by Mr. Telford of Valco and further, I concluded that there was no manifest error committed by him.

[419] I previously summarized in some detail during the course of my recitation of the evidence, Telford’s analysis and conclusion. I adopt here as part of my findings, my earlier description and conclusion of his evidence.

[420] While I accepted qualifications of the witness Joseph Vidican who had been retained by the defendants to undertake an assessment of the roof I choose not to rely on it, and in fact reject it. On many occasions he was at odds with the other roofing consultants and experts who had testified and again, I adopt as part of my findings, the comments I have previously made about his evidence.

[421] I note with interest that the evidence of the witness McMillan of Flynn Canada, who testified for the defence from the perspective of several years’ experience that on the issue of the benign nature of pliable as opposed to hard and brittle blisters, that his evidence is consistent with the other roofing witnesses except Vidican, to the extent that they are not harmful to a roof and do not in effect constitute a “ticking time bomb” as characterized by Vidican.

[422] Furthermore I accept his evidence as well as the others that the significance of pea stone or gravel or silver painting, on top of the roof felt material is to protect it from deterioration as a result of the ultraviolet rays from the sun.

[423] I accept his evidence, again which is consistent with that of the others, that the condition of the roof was consistent with its age and that the recommended sum of $40,000 be budgeted for roof maintenance which from the evidence elsewhere, it would appear was not done by 434.

[424] When a thorough inspection was undertaken by Flynn Roofing in late August 2009 its September 28 report was provided to Burnam but held back from the plaintiff for almost a year.

DECISION:

1. There will be judgment for the plaintiff for specific performance of the sale to the defendants of the Windsor Self-Storage facility for the sale price of $7.3 million.

2. The defendants were not justified in breaching the Option Agreement relating to the purchase.

3. The appraisal conducted by James Telford of Valco was conducted properly and without a manifest error.

4. The defendants shall pay to the plaintiff its damaged agreed to in the sum of $728,080.05.

5. The plaintiff shall have its costs. While counsel previously agreed on the partial indemnity scale to the sum of $251,718.15, this is subject to the implication of an Offer to Settle under Rule 49 having been served which may require supplementary submissions. I will await hearing from counsel before I set the final amount.

Original signed “Justice Gates”

Richard C. Gates

Justice

Released: August 30, 2013