ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: 07-CV-330817 PD2

DATE: 20130123

BETWEEN:

Sobeys Capital Incorporated, c.o.b. Price Chopper

Applicant

– and –

Bayview Summit Development Limited

Respondent

Jennifer McAleer, for the Applicant

Stephen Longo, for the Respondent

HEARD: January 9, 2013

Morgan J.

[1] The Applicant is the anchor tenant under a commercial lease for a 21,500 square foot unit in a shopping plaza at 6201 Bathurst Street, Toronto (the “Property”). The Respondent is the owner and landlord of the Property.

[2] This Application raises two substantive questions and one evidentiary question:

(i) the tax allocation question: which of two methods of allocating property taxes to the Applicant does the Lease between the parties call for, the Working Paper method or the Proportionate Share method; and

(ii) the shortfall question: how should any otherwise unallocated amounts of property tax for the Property resulting from a legislative cap on tax increases under certain leases be allocated among the tenants?

(iii) the expert evidence question: which of the two experts has produced the correct analysis of the property tax and shortfall allocations in issue?

[3] The Application as filed also requests that certain specific rulings be made in terms of how the square footage of the Property and its tenants should be calculated in the event that the court finds the Proportionate Share method to be applicable. At the outset of the hearing, however, both counsel advised that they were satisfied to adjourn those questions to a future hearing, if necessary.

[4] Finally, the Application as filed seeks a determination of the amount, if any, that the Applicant has been overcharged for its share of the Property’s taxes between 2001 and 2008. As with the questions about the square footage, counsel both agree that it will suffice to have a declaration of principles in terms of methodology for calculating the taxes and allocating any shortfall. They are confident that with such a statement of principles their experts will be in a position to work out the detailed calculations among themselves.

I. The Tax Allocation Question

[5] The lease between the parties Applicant originated in 1967, but was most recently renewed on September 1, 1998 for a 15 year term, with an option for the Applicant to renew for two additional terms of 5 years each (the “Lease”). The property tax clause of the Lease is contained in section 10, which provides:

(a) The Tenant shall be responsible for the payment of all Taxes assessed or attributed to the Leased Premises and to the Tenant’s share of Common Facilities. If applicable, the Tenant shall be responsible for the payment of all business occupancy taxes assessed or attributable to the Leased Premises.

The parties shall use their best efforts to obtain all necessary information from the municipality or other taxing authority, based on the assessor’s working papers, notes and/or calculations to determine the manner in which such authority would have allocated the assessment for Taxes in respect of the Shopping Centre to the Leased Premises had an assessment in respect of Taxes for the Leased Premises been prepared by such authority. The Landlord agrees to provide the Tenant, on request, a letter of authorization to the appropriate assessing authority allowing the Tenant access to the assessor’s working papers, notes and/or calculations referable to the entire assessment, and the Tenant covenants and agrees to use its best efforts to keep such information confidential. If such information is not available, the Tenant agrees to pay the Tenant’s Proportionate Share of Taxes. If such information becomes available in the future, the Tenant’s Proportionate Share of Taxes shall thenceforth be based upon such allocation, and shall not be adjusted retroactively as the case may be.

The Landlord shall deliver to the Tenant, together with the statement of the Landlord’s computation of Operating Costs provided to the Tenant under Section 8(b) hereof, a copy of all tax bills with proof of payment by the Landlord with respect to the Leased Premises and the Shopping Centre up to and including the date of the last payment made by the Tenant, to the Landlord or to the appropriate taxing authority, on account of such realty taxes. Failure by the Landlord to do so shall not relieve the Tenant of the Tenant’s obligation to make payments.

(b) The Tenant shall pay all Taxes levied, rated, charged or assessed from time to time against the Least Premises, or any part thereof, on the basis of a separate tax bill or assessment issued by an lawful authority, or if there is no separate tax bill, its share of the Taxes levied, rated, charged or assessed against the Shopping Centre, as allocated to the Leased Premises by the Landlord pursuant to Section 10(a) hereof.

[6] The important first sentence of the second paragraph of section 10(a) is not drafted with much finesse. Nevertheless, it is apparent that section 10(a) provides for two alternative methods for calculating the applicable realty taxes. The first of these is “based on the assessor’s working papers, notes and/or calculations”, while the second is based on the Applicant’s (as Tenant under the Lease) proportionate share of taxes for the entire Property.

[7] The parties agree that the phrase “working papers” used in section 10(a) refers generally to the valuation records produced by the Municipal Property Assessment Corporation (“MPAC”). Although property tax is assessed for the entire building, the current value is allocated unit by unit by the MPAC in its valuation reports or working papers. Each leased premises is typically assigned a value, and the aggregate of those values forms the assessment value for the property.

[8] Mr. Longo, for the Respondent, makes a number of arguments against using what the Applicant refers to as the Working Paper method under section 10(a) of the Lease. In the first place, he submits that while the section calls for the parties to obtain “all necessary information from the municipality or other taxing authority”, the MPAC is in fact neither a “municipality” nor a “taxing authority”. Rather, Mr. Longo points out, the MPAC is a provincial body that is responsible for assessing value. It does not itself levy any tax.

[9] Secondly, Mr. Longo submits that the “working papers” or MPAC valuation reports are not entirely reliable. He points out that the Court of Appeal has taken note of the fact that in Ontario there are no longer separate assessments for the units in a larger building. Zellers Inc. v Orlando Corporation (2003), 2003 57435 (ON CA), 66 OR (3d) 535, at para 7. Other courts have stated that these working papers are “not dictated by statute or regulation”, 658425 Ontario Inc. v Loeb Inc., 2007 CarswellOnt 1961, at para 16(b) (SCJ), and that there is uncertainty as to their reliability in any individual circumstance. Indigo Books & Music Inc. v Manufacturers Life Insurance Co., 2009 CarswellOnt 1465, at para 46 (SCJ).

[10] In response to the Respondent’s position, Ms. McAleer, for the Applicant, submits that the fact that the MPAC is an assessing authority on whose reports property taxes are premised, rather than a tax-imposing authority, is a distinction without a difference. She asks the court to heed the words of the Court of Appeal that provisions in a contract should not be “placed under the interpretative microscope in isolation and given a meaning without regard to the entire document.” Glimmer Resources Inc. v Exall Resources (1990), 1999 1102 (ON CA), 119 OAC 78, at para 17.

[11] It is important in interpreting a contact that the express and unambiguous terms be enforced, and that courts not create ambiguity where none was created by the drafters. Chilton v Co-operators General Insurance Co., 1997 765 (ON CA), [1997] OJ No 579, at 8 (Ont CA). Assessing property value and levying property tax are, of course, two separate steps; but it is self-evident they are part and parcel of one overall process.

[12] The parties specifically referenced the “working papers” in the Lease, and both sides have produced experts who agree that this phrase refers to the MPAC valuation reports. In my view, by taking the position that the MPAC is not a “taxing authority”, the Respondent is splitting hairs. It is obvious that the parties meant to refer to whatever public authority is responsible for creating the valuation that underlies the imposition of property tax, and the MPAC is that authority.

[13] Mr. Longo emphasizes that the MPAC no longer performs separate assessments for units in a larger building. He argues that therefore the calculation that the Applicant wishes to rely on has no legal stature. I view this position as being technically correct but inapposite as an approach to contract interpretation.

[14] The working papers have no formal stature and could not, therefore, be enforced by the city or province as a separate assessment such as was done under Ontario’s pre-1998 property tax regime. Zellers, supra, at para 16. That said, the Court of Appeal has confirmed that although the MPAC valuation reports may be background documentation, it is perfectly reasonable for parties to choose to rely on them in allocating taxes among the units of a building. In Terrace Manor Ltd. v Sobeys Capital Inc., 2012 ONCA 782, at para 8, the court found that, “‘MPAC's assessment for the plaza was created from assessment data, on a unit by unit basis, as shown on the valuation records’ [and that] the information they contained was sufficient to determine what the taxes to the tenant would have been if a separate assessment had been made.”

[15] As Ms. McAleer points out, it does not matter that the MPAC “working papers” are not guaranteed to be reliable. What matters is that they were specifically chosen by the contracting parties as the documents on which to premise the allocation of taxes. Ms. McAleer likens this to parties who might agree to increase a contract price based on the consumer price index. It would not matter that the consumer price index has no formal status and could sometimes be inaccurate; what would matter is that the parties specifically agreed to refer to it.

[16] Given that the parties here made express reference in the Lease to the MPAC working papers, there is no reason not to use them in the way that the Applicant suggests they should be used. Both sides’ expert witnesses concede that the MPAC valuation reports are available and contain sufficient information to calculate the property tax allocation.

[17] It clear in reading section 10(a) that the Working Paper method is the parties’ preferred way of allocating property tax, and that the Proportionate Share method is an alternative to be used only in the event that the valuation reports are not available. The Respondent does not get to choose between the primary and the alternative method of calculation; it must use the Working Paper method as the primary method as long as that is possible – and it clearly is possible to do so here.

[18] To the extent that its annual calculations have been based on the Applicant’s proportionate share of the Property’s overall square footage rather than on the MPAC working papers, the Respondent has miscalculated the Applicant’s allocation of property taxes. As indicated at the outset, I will leave it to the parties and their respective experts to calculate a revised schedule of property tax payments for the years in dispute and going forward. This revised schedule should be based on the Working Paper method rather than the Proportionate Share method of allocation.

II. The Shortfall Question

[19] Property tax has been described as “the most important source of revenues for [municipalities]”. Moreover, scholars have noted that “the basic property tax is not inefficient unlike other forms of taxes on real and immovable property.” Benjamin Alarie and Pierre-Pascal Gendron, “The VAT Treatment of Real and Immovable Property in Canada”, in: Robert F. van Brederode (ed.), Immovable Property under VAT: A Comparative Global Analysis (The Netherlands: Kluwer Law International, 2011), at p. 118. Beginning in 1998, the Ontario government implemented certain changes in the property assessment and tax regime designed to ensure its continued centrality and efficiency.

[20] Increased efficiencies overall, however, can have a burdensome impact on certain individual taxpayers. In an effort to ameliorate some of the impact of the changes, the Municipal Act, 2001, SO 2001, c. 25, s. 332, and the City of Toronto Act, 2006, SO 2006, c. 11, s. 295(6) introduced measures that shielded some commercial tenants from tax increases beyond identified levels. The shielding measures are commonly known as “tax capping”. They were in force for the entire 2001-2008 period in contention between the parties.

[21] Were it not for the tax capping policies, a landlord during this period would use whatever method was permitted under its leases to allocate the tax for its overall property among all of the tenants. In the case of the Property in issue here for example, assuming that the leases were all written in the same way as the Lease with the Applicant (a hypothetical assumption since none of the other leases for the Property are in the record before me), the Respondent would use the MPAC working papers to determine what portion of the overall tax bill for the Property is attributable to each tenant’s unit.

[22] Because of the tax capping, however, the Respondent was faced with a shortfall. Some of the taxes that would otherwise be attributable to certain of the tenants could not be billed to them as the result would be to exceed the legislative cap.

[23] In order to alleviate this problem, the legislation permitted landlords to bill certain eligible tenants more for taxes than would otherwise be attributable to them under their lease. The tenants who can be charged extra to make up for the shortfall are general called “eligible capped tenants”. This category is comprised of those tenants who have pre-December 31, 1997 leases that provide for tax payments that do not reach their legislative cap. Omers Realty Corp. v Sears Canada Inc. (2006), 2006 16477 (ON CA), 80 OR (3d) 561, at para 9 (Ont CA).

[24] There is a second category of tenants, generally referred to as “uncapped shortfall tenants”, to which a landlord can allocate shortfall in collecting taxes. This category is comprised of tenants whose leases commenced between January 1, 1998 and June 11, 1998. It not clear why tenants whose leases were entered during this initial post-reform period were treated this way, but the legislation is clear that the property tax bill for these uncapped shortfall tenants is subject to no statutorily-imposed restriction. Those tenants can theoretically be allocated unlimited amounts of shortfall by their landlord. Omers, supra, at para 10.

[25] Because of tax capping, the Respondent had to figure out ways to allocate the shortfall in tax collection during the years 2001 to 2008 (when the capping policy came to an end). The Applicant is an eligible capped tenant, as it has a pre-December 31, 1997 Lease and its tax allocation, although increased from the previous method of calculation, has not reached the legislative cap.

[26] The parties and their experts are in agreement as to how to allocate the shortfall to all but two of the other tenants of the Property. The two tenants in question occupy smaller units, and are referred to in the record as “Lazarus Food (Restaurant)” and “Shugar (Sheldon Cooper)”. They are both uncapped shortfall tenants, and so their ability to absorb shortfall is not limited by any legislative cap.

[27] The Respondent, as landlord, has the authority to allocate shortfall among the tenants available for such allocation (i.e. among the eligible capped tenants and the uncapped shortfall tenants). This authority, however, does not amount to an unfettered power for landlords. The Court of Appeal has stated that “there would need to be clear language in the statute to empower a landlord to allocate shortfall to tenants in an arbitrary manner…[and that] No such language exists in the statutory provisions at issue here.” Omers, supra, at para 36. Accordingly, the Respondent must provide a principled basis for its allocation of shortfall.

[28] There is little doubt that the Respondent’s allocations during the years in issue have been arbitrary. Its own expert concedes as much, and has worked to try to correct the errors of past years and to put a more proper allocation in place. Indeed, as Ms. McAleer has pointed out, the Respondent itself has provided no evidence and no explanation whatsoever as to its rationale for the allocations that it implemented from 2001 to 2008. It has provided a sheet explaining what those allocations were, but the only principle that can be gleaned from that evidence is that the Respondent simply taxed all of its eligible capped tenants – including the Applicant – at their respective legislative maximums.

[29] As for the two smaller tenants referenced above, it would appear that the Respondent was unaware during the material period that they were uncapped shortfall tenants. Accordingly, none of the shortfall was allocated to them at all.

[30] Mr. Longo explains in his factum that under the Applicant’s suggested allocation, the two small tenants “would face taxes of two and three times their maximum lease taxes, while Sobeys would have the benefit of paying well below its leased maximum taxes.” At the hearing, Ms. McAleer responded to this assertion by showing that the result of the Respondent’s method of allocation of shortfall is that the Applicant’s tax bill has since 2001 more than doubled what would otherwise be payable under its Lease.

[31] Each of the parties’ experts has done a calculation showing how he thinks the shortfall should be allocated for the years in issue. Robert Cushing, the expert witness for the Applicant, treats the two uncapped shortfall tenants the same as he treats the Applicant as a capped shortfall tenant whose cap is not reached, and allocates a proportion of the annual shortfall to each of them based on their share of the taxes for the entire Property. Gordon Alexander, the expert witness for the Respondent, does not allocate any of the annual shortfall to the two uncapped shortfall tenants.

[32] The parties have both indicated that I need not do the numerical calculations myself or come up with my own allocation of shortfall for the relevant years. Rather, what I must determine is which of the two experts’ approach to the shortfall allocation issue is the right one.

III. The Expert Evidence Question

[33] Both experts have the kind of qualifications that one would expect to see in the field of property assessment. Robert Cushing is a professional appraiser registered with the Appraisal Institute of Canada and a former employee and assessment professional at MPAC. Gordon Alexander is also a professionally qualified appraiser and a paralegal registered with the Law Society of Upper Canada who is engaged in property tax matters. Both experts have the credentials and professional experience to qualify them as experts on the tax allocation issues raised in this proceeding.

[34] The question posed by Ms. McAleer is with respect to the Respondent’s expert’s independence, not his credentials. She points out that Mr. Alexander, in his practice as a paralegal, provides ongoing advocacy services to the Respondent in representing it before the Assessment Review Board, among other forums. She further submits that this advocacy relationship is incompatible with the objective analysis and independent opinion expected of an expert witness, and that Mr. Alexander’s evidence should therefore be given little weight.

[35] In response, Mr. Longo points out that the fact that an expert has an ongoing relationship with the party is not itself reason to impugn his evidence. Indeed, a repeat retainer may be a rather commonplace occurrence where the party is a business entity that has frequent need of similar expert analysis and opinion. Mr. Longo submits that courts have accepted that repetition is not itself a signal that objectivity has been undermined. InterAmerican Transport Systems Inc. v Canadian Pacific Express & Transort Ltd., [1995] OJ No 3644, at para 61 (Gen Div).

[36] The problem, as I see it, is not with Mr. Alexander’s prior or ongoing relationship with the Respondent per se, but with his approach to the particular issue at hand. Regardless of whether this is a first or a hundredth retainer, an expert’s opinion must be neutral and objective in order for it to be helpful to a court. Alfano v Piersanti, [2009} 12799, at para 7 (SCJ). If he creates the impression that he has “simply taken on the cause of the client who pays the bills, a court will be most reluctant to place great weight on the opinions of that expert.” Fenwick v Parklane Nurseries Ltd., [1996] OJ No 3656, at para 35 (SCJ).

[37] In cross-examination, Mr. Alexander confirmed that he has in the past played an advocacy role for the Respondent, but it was difficult to pin down what role he envisioned himself playing in the present matter. The following exchange reveals the problem:

Q [Ms. McAleer]: And, obviously, in that context, you are advocating for your client? You are trying to get the most advantageous result from the Assessment Review Board?

A [Mr. Alexander]: Well, we act on their behalf to achieve what is going to be in their best interests within the prescribed laws and legislation.

Q [Ms. McAleer]: Is that equally what you see your role to be in this litigation as well is to try and act in their best interest to see, you know, what is the best that can be achieved by them in this litigation?

Mr Longo: I object to the question.

Ms. McAleer: On what basis?

Mr. Longo: It is meandering. It is beside the point. It doesn’t address anything that is actually at issue. I also think you are going down a path that is not relevant to this litigation…

[38] With all due respect, the question posed to Mr. Alexander is a pointed one, not a meandering one. It is certainly not beside the point; it is the very point that an expert must establish. The question addresses the issue that a court needs to confirm, and it leads to a path that is highly relevant to this litigation.

[39] Ms. McAleer’s question about Mr. Alexander’s role here is so directly on point that the only inference I can draw from Mr. Longo’s objection is an adverse one. Counsel did not want the Respondent’s proffered expert to discuss the role he envisioned himself as playing in this proceeding, as the role that he envisioned for himself is the wrong one for an expert witness.

[40] This confusion of roles is evident from the very way that Mr. Alexander approached the shortfall calculation. He testified that it would be difficult for the Respondent, as landlord, to now allocate any of the shortfall to the two uncapped shortfall tenants, as that would significantly change the way their taxes have been allocated to date. As Mr. Alexander explained it in cross-examination:

A [Mr. Alexander]: I mean, even though the landlord has that discretion, the philosophic view that we have tried to maintain through this is that the status quo that began in ’98, if you will, is a reasonable target to try and maintain so that there is not 100 percent, 200 percent shifts in taxes.

[41] Mr. Alexander’s expert evidence is not so much an assessment of what is the correct or incorrect way to allocate the property tax shortfall, but rather what is the best way for the Respondent to salvage a difficult dilemma with its tenants. His testimony is clear that the Respondent did not realize all along that the two small tenants were in the uncapped shortfall category. Having been mistaken for tenants whose taxes were capped, the Respondent never allocated to them any of the shortfall. For that reason, any allocation to them now would be a burdensome increase and would cause a business problem for them as tenants and for the Respondent as landlord.

[42] Mr. Alexander has mistaken the initial ameliorative thrust of the tax capping policy for an ongoing desire by the landlord to soften the tax burden on tenants that it might otherwise lose. The two tenants he discusses, however, were always uncapped and so were never within the scope of the legislative protection against property tax increases.

[43] Moreover, the question is whether they should have absorbed any increase back in 2001, not going forward from today. Mr. Alexander’s approach – his “philosophic view”, as he put it – is more of a management plan for the party that retained him than an expert assessment of the tax years in issue between the parties.

[44] By contrast, Mr. Cushing’s approach is what one expects of an expert witness addressing the issues at hand. He presents an objective view of what a proper allocation of property taxes among the tenants of the Property should have been all along, and he takes into account that two of the tenants were uncapped shortfall tenants. There may or may not be other ways of appropriately allocating the shortfall for the Property during the relevant years, but of the two experts it is only Mr. Cushing that asked himself the right question.

[45] Although it works out that Mr. Cushing’s approach leads to the conclusion that the Applicant has been overcharged and has a right to a refund or credit, that is the effect but was not the goal of his analysis. Mr. Cushing did not approach his task with the business concerns of his client uppermost in his mind. Accordingly, the allocation of property tax shortfall from 2001 to 2008 should be done in accordance with Mr. Cushing’s calculations, not Mr. Alexander’s.

[46] The parties may make written submissions as to costs, to be sent to my attention within two weeks of the release of this judgment.

Morgan J.

Released: January 23, 2013

COURT FILE NO.: 07-CV-330817 PD2

DATE: 20130123

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Sobeys Capital Incorporated, c.o.b. Price Chopper

Applicant

– and –

Bayview Summit Development Limited

Respondent

REASONS FOR JUDGMENT

E.M. Morgan J.

Released: January 23, 2013