Court File and Parties

COURT FILE NO.: CV13-1085

DATE: February 20, 2014

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

BONNIE LEE BOSAK AND JANICE IRENE MAES, carrying on business as BOJA ENTERPRISES

Plaintiffs

– and –

3930441 CANADA INC. AND QUDDUS ASHRAF

Defendants

Neville C. Johnston, for the Plaintiffs

Hank Witteveen, for the Defendants

HEARD: January 27, 2014 (at Brockville)

RULING ON MOTION

PEDLAR, J

[1] This is a motion brought by the Plaintiffs for a number of headings of relief as set out at paragraph 2 of their revised factum. As the motion progressed, it became clear that I would not be in a position to resolve all the areas of dispute between these parties, based on affidavit material. I will leave some of the claims for relief to a trial of the issue between the parties. I also recommended that the parties consider taking this dispute out of the court process and using an Alternative Dispute Resolution process to resolve the differences between them, in order to save time and expense.

[2] Because of the nature of the dispute and the history between the parties, I will focus on the claims for abatement of the rent to be paid by the Plaintiffs to the Defendants and an order restraining the Defendants from terminating the tenancy as well as relief from forfeiture.

[3] Both counsel prepared very helpful factums for this motion, which summarize both the facts agreed upon and disputed between the parties, as well as the law to be applied. For the purpose of convenience and in order to get this Ruling on Motion done within a reasonable timeframe, I will be referring extensively to the summary of facts as well as the law contained in both those factums, without specifically itemizing numbered paragraphs or case names. In any situation where there is not a consensus between the parties about the facts, or the law, that will be pointed out. There is very little dispute about the law to be applied herein, the disputes tend to focus on issues of fact.

[4] At the time of the hearing of the motion, both parties agreed that a Certificate of Pending Litigation would issue against the property in question and that Order was made on consent.

[5] Pursuant to a Lease Agreement, the Defendant, 3930441 Canada Inc., leased to the Plaintiffs the property situated at 4022 County Road Highway #43, Kemptville, legally described as Part of Lot 12, Concession 6, South Gower, being Parts 1 and 2 on Plan 15R-6779, North Grenville (the “Leased Premises”), for the term of 12 months, which includes an option to purchase the leased premises. At all material times, the Defendant, 3930441 Canada Inc., has been the registered owner of the leased premises.

[6] The Defendant, 3930441 Canada Inc., acquired the lands which are the subject of the lease herein on August 6, 2010. The purchase price was $1,640,000 and the purchase was subject to a mortgage in the sum of $1,475,000.

[7] The leased premises include a motel, known as Knights Inn, which includes a restaurant/bar and banquet hall, a house used for rental, four apartment units and 38 motel rooms, together with the chattels and equipment used on the leased premises.

[8] Between May 19 and June 7, 2013, the Plaintiffs and the Defendants exchanged a series of emails concerning a lease with option to purchase the lands. These emails reveal the positions taken by the Defendants and the Plaintiffs, respectively, on the amount of monthly rent and the option price for the lands. It is apparent from these emails that the Plaintiffs anticipated substantial expense in upgrading the lands for their intended purposes. It is also apparent from these emails that the Plaintiffs wished to assume possession of the lands as soon as possible.

[9] The Defendant, Quddus Ashraf, is the principal of 3930441 Canada Inc.

[10] In reliance on the Defendants’ representations of the condition of the leased premises, the Plaintiffs entered into the Lease Agreement and took possession of the said leased premises.

[11] The parties agree that one or more tours of the lands took place, but disagree on what was inspected. The Plaintiffs allege the inspection was limited and that they accepted the assurance of the Defendants that those portions of the premises not inspected were in good condition and in working order. The Defendants deny making any such representation and say that they offered to arrange inspection of those portions of the lands which had not been inspected.

[12] Shortly after taking possession of, and beginning to make improvements to, the leased premises the Plaintiffs claim they discovered that some of the representations as to the condition of the leased premises made by the Defendant, Quddus Ashraf, were not accurate.

[13] The Plaintiffs were aware that the Defendants were not in possession of the rental apartments or house and were not in possession of the restaurant/bar. Notwithstanding this, the Plaintiffs made no inquiry regarding when these premises were last inspected or how the Defendant, Quddus Ashraf, had determined these to be in a good state of repair.

[14] The major mechanical and structural systems of the leased premises that require repair or replacement include, but are not limited to, the roof of the restaurant/bar and banquet hall, the heating and cooling system of the restaurant/bar and banquet hall, the water supply system, the hot water tanks and the electrical system.

[15] The lease was prepared by solicitors retained by the Defendants and amended as directed by the Plaintiffs before it was executed.

[16] The lease provides that the Plaintiffs are responsible for repair and maintenance with the exception of the Defendants’ obligation to repair which was limited to the replacement of major mechanical systems or major repairs, to the structure or roof.

[17] The Defendant, Quddus Ashraf, warranted that all chattels and equipment will be in good working order on July 10, 2013.

[18] The Defendant, Quddus Ashraf, agreed to evict the tenant occupying the restaurant/bar and delivering that portion of the premises in an “operational state” as soon as reasonably possible with an expected date of August 1, 2013.

[19] In order for the restaurant/bar and banquet hall to be operational, the Defendants must comply with the work orders of the Leeds, Grenville and Lanark County Health Unit in relation to the restaurant/bar and banquet hall and the Fire Code.

[20] Also required for the restaurant/bar and banquet hall to be operational is the repair and replacement of the missing and broken equipment in the bar and kitchen of the restaurant/bar.

[21] With the exception of the restaurant/bar, the Plaintiffs began to occupy the leased premises on July 11, 2013.

[22] The occupant of the restaurant/bar gave up possession to the Plaintiffs on July 16, 2013.

[23] The Plaintiffs allege that the Defendants made a number or representations concerning the leased premises and that “…a tour of the lands was not necessary because everything on the leased premises was in good condition and working order.”

[24] The Defendant, Quddus Ashraf, denies having made the representations alleged or knowledge of any of the deficiencies now alleged. The Defendant, Quddus Ashraf, anticipated that the Plaintiffs would carry out their own due diligence and in fact one or more tours of the leased premises took place and, according to him, further inspections were available but declined.

[25] The Defendants did warrant in paragraph 37 of the lease that all chattels and equipment will be in good working order on July 11, 2013. It also covenanted in paragraph 39 to provide possession of the restaurant/bar in an operational state as soon as reasonably possible. Otherwise, the Defendant, Quddus Ashraf, states that he did not make, or intend to make, any other representations as is contemplated in paragraph 31 of the lease.

[26] It is an express covenant under the Lease Agreement that any replacement of major mechanical systems or major repairs to the structure or the roof shall be the responsibility of the landlord. The Plaintiffs’ claim is that the Defendants were aware of the condition of disrepair, inoperability and damage to the major mechanical and structural systems, including, but not limited to, the roof, of the leased premises prior to entering into the Lease Agreement with the Plaintiffs. The Plaintiffs also claim that in any event, once the Defendants were notified by them of such disrepair, inoperability and damage, the Defendants had the express duty to repair or replace said systems and structures pursuant to the Lease Agreement.

[27] The Plaintiffs claim that the Defendants have refused to make the necessary repairs and replacements required to bring the leased premises into an operational state as warranted and covenanted and breached the landlord’s duty to repair under the Lease Agreement.

[28] The Plaintiffs also claim that failure to effect the necessary repairs and replacements by the Defendants has breached the express warranty of quiet possession in the Lease Agreement.

[29] The Plaintiffs’ evidence is that the significant ongoing expenses for repairs and the major loss of income, because the restaurant/bar is inoperable and the banquet hall may only be operated on a limited basis, has resulted in the Plaintiffs having difficulty meeting their ongoing obligations, including the obligation to pay rent, and they are in jeopardy of insolvency.

[30] The Plaintiffs are seeking an abatement of rent paid, and to be paid, until such time as the Defendants fulfill their obligations under the Lease Agreement to repair or replace the major structural and mechanical systems of the leased premises.

[31] Allegedly, because of the inability to operate the restaurant/bar and banquet hall, the Plaintiffs were unable to meet their obligation to pay the rent due on November 11, 2013. The Plaintiffs made a partial payment thereon in the amount of $11,305.00, representing 50% of the rent, plus HST, and full payment of the property taxes, which was accepted by the Defendants. In that regard, the amount of arrears is relatively small.

[32] As of December 3, 2013, a consent order was entered into for an abatement of rent for $5,000.00 per month, which order remains in effect until this ruling.

[33] The Plaintiffs state that all other payments required to be paid by them under the Lease Agreement are in good standing, including, but not limited to, the fees paid to the Franchisor.

[34] The Plaintiffs also allege a number of problems with the motel rooms, the wells and water, the internet, satellite and telephone including defective key-card entry system, mould, water damage, non-compliance with an Order respecting the well, failure of a water heater, an inadequate water treatment system, and an old internet, satellite and telephone system not working properly.

[35] The Defendants admit that problems came to light following possession of the restaurant/bar. As the Defendants were not in possession of this portion of the leased premises, they claim they were not aware of these problems at the time the lease was entered.

[36] The Defendants admit there were minor problems associated with the remaining leased premises, but deny the conditions described concerning the motel rooms. The Defendants also admit that the remaining items complained of are older but state that they are in the same working condition as prior to the lease.

[37] In subsequent months, the Defendants did, at the request of the Plaintiffs, conduct certain repairs to the leased premises, including some work on the roof over the restaurant/bar.

[38] In the succeeding months, the Plaintiffs raised numerous complaints concerning the hot water tanks, the heating and cooling systems, water supply and HWT, missing and broken equipment, Fire Code concerns, electrical system and key-card entry system. These have involved considerable dispute between the parties all as detailed in affidavits filed subsequent to the commencement of this motion. It is apparent from these affidavits that the Defendants made some efforts to address the concerns and that these efforts were not satisfactory to the Plaintiffs. The Defendants claim that the Plaintiffs incurred no expense in relation to any of these concerns other than expenses related to the HWT, which the Plaintiffs unilaterally deducted from the rent.

[39] The Plaintiffs have continued to generate revenue from the motel rooms and the apartments notwithstanding the alleged defects. According to the statement it produced, the Plaintiffs generated revenues of $148,853 to December 31, 2013.

[40] The Plaintiffs allege they have incurred expense due to the default of the Defendants. In their financial statement, it describes these expenses as amounting to $22,966.77. They have also produced records showing expenditures of $26,673. The Defendants state that they were not asked to carry out this work and it is therefore unclear whether these are items the Defendants were responsible for or whether they are part of the improvements the Plaintiffs planned on their own.

[41] The Plaintiffs allege they have been unable to generate revenue from the restaurant/bar as it is not operational. The Defendant, Quddus Ashraf, denies representing any level of income to the Plaintiffs, that could be expected to be earned from the restaurant/bar.

[42] The lease provides that the Plaintiffs shall pay rent of $21,030 per month inclusive of realty tax and HST.

[43] The Plaintiffs defaulted in payment of rent August 11, 2013 when they proposed to arbitrarily reduce rent to cover the cost of repairs. That rent was subsequently paid and the Defendants accepted payment.

[44] The Plaintiffs made a partial payment of rent on November 11, 2013, in the amount of $11,305.00. Pursuant to a written consent between the parties, it was agreed to adjourn the motion and cross-motion scheduled to be heard on Tuesday, December 3^rd, 2013, to January 27, 2014 on certain terms.

[45] One such term of that consent adjournment was that the monthly rent due and payable under the Lease Agreement shall be abated by $5,000.00 on a without prejudice basis commencing with the rent due on December 11, 2013 and continuing until such time as the motion can be heard. My endorsement adjourning for a ruling on this motion continued the terms of this consent.

[46] The consent also stated that the Plaintiffs shall not be required to pay the pro-rated payment of last month’s rent in the amount of $1,250.00 that is due and payable under the Lease Agreement on December 11, 2013 and January 11, 2014 on a without prejudice basis.

[47] It was also agreed that subject to the terms of this consent, the Order of The Honourable Mr. Justice M. Quigley dated November 5, 2013 shall remain in full force and effect.

[48] The final term agreed to in the consent adjournment from December 3^rd, 2013 to January 27^th, 2014 was that so long as the abated rent is paid, the Defendant, 3930441 Canada Inc., shall be restrained from using the non-payment of the full rent from December until such time as the motion is heard as evidence to terminate the lease for default.

[49] That Order of November 5, 2013 of Justice Quigley required the Defendants to forthwith instruct a roofing contractor to replace the roof of the restaurant/bar/kitchen/banquet hall. All work is to be done in a good and workmanlike manner in accordance with the Ontario Building Code. Another term related to the Defendants paying money into trust with their solicitors, only to be paid on the account of the said roofing contractor referred to above.

[50] Paragraph 5 of that Order reads as follows:

This Court orders that the Defendants, at their sole cost and expense, forthwith instruct the relevant gas utility company to connect the gas supply to the restaurant/bar/kitchen/banquet hall, and in the event that repairs or replacement of any equipment, including, but not limited to, the pipes, heating system and gas appliances, are required to safely connect the said gas supply, to arrange for such repairs and replacements forthwith, all without prejudice to any right to either party to recover these amounts in a hearing before the court in this action. All repairs and replacements are to be done in a good and workmanlike manner and in accordance with the Ontario Building Code and relevant safety standards.

[51] Paragraph 6 of that Order reads as follows:

This Court orders that the Defendant 3930441 Canada Inc. be and is hereby restrained from terminating the tenancy under the Lease Agreement or evicting the Plaintiffs from the leased premises in the event of default under the Lease Agreement, including, without limitation the failure to pay rent, without first returning the matter to the court in this action.

[52] The Plaintiffs delivered a payment of $12,548.00 related to the rent due on December 11, 2013, to the Defendants’ solicitors and a copy of an invoice in the amount of $1,582.00 that they had paid to a third party, Brooks and Cryderman Limited, for repairs to the rented premises.

[53] On January 11, 2014, the Plaintiffs delivered a cheque in the amount of $6,764.00 to the Defendants, along with invoices totalling $6,518.60, again from Brooks and Cryderman for repairs to the rented premises.

[54] The Defendants have expended $17,890.18 in efforts to address Plaintiffs’ various concerns about the condition of the rented premises.

[55] The parties agree that the three-part test for an interlocutory injunction is as follows:

(a) Is there a serious issue to be tried?

(b) Will the moving party suffer irreparable harm not compensable by monetary damages if the injunction is not granted? and

(c) Does the balance of convenience favour the granting of the injunction?

[56] Both parties accept that there is a serious issue to be tried.

[57] With regards to the second part of the test related to irreparable harm, the parties do not agree. The Plaintiffs point out that in assessing irreparable harm that the term “irreparable” refers to the nature of the harm suffered rather than its magnitude. It is harm that cannot be quantified in monetary terms or which cannot be cured.

[58] The Plaintiffs claim to have suffered, and continue to suffer, irreparable harm because they cannot continue to pay for the significant ongoing expense of repairs/replacements and meet their obligation under the Lease Agreement to pay rent given the major loss of income because the restaurant/bar is inoperable and the banquet hall has limited use. The Plaintiffs were unable to pay the full rent due on November 11, 2013 and are thereby at risk of losing their investment in the property, including the option to purchase, and becoming insolvent.

[59] The Supreme Court of Canada has held that the question for determining the “balance of convenience” is: which party will suffer the greatest harm from the granting or refusing of the injunction (i.e. where does the balance of convenience lie)?

[60] The Plaintiffs’ position is that the Defendants have nothing to lose, as the Plaintiffs are paying personally to improve the leased premises, thereby enhancing the value of the Defendants’ property. Conversely, the Plaintiffs have everything to lose in relation to the leased premises. If they cannot meet the ongoing obligation to pay rent, they will be in default under the Lease Agreement, which could lead to termination of the lease, thereby vitiating the Plaintiffs’ investment in the leased premises, loss of the option to purchase the leased premises, and insolvency.

[61] The Plaintiffs have provided an undertaking to pay damages pursuant to Rule 40.03 of the Rules of Civil Procedure.

[62] The Defendants take the position that it is not possible on an interim motion for the court to determine the abatement of rent to be paid. They question how the abatement of rent will avoid the irreparable harm and how the repairs the Defendants would be obligated to carry out on an interlocutory basis would be determined and how compliance with any such order would be determined. They suggested a trial is required to deal with those issues as an award of damages.

[63] The Defendants also claim that a trial will be needed to determine whether the actions of the Defendants to repair or replace portions of the rented premises have or have not been adequate and award any applicable damages, or not, depending on the outcome of that inquiry.

[64] The Defendants also point out that the rents are not apportioned as between the different parts of the rented premises and consequently, it is not possible at this stage, on an interim motion, to determine what amount should be attributed to the Plaintiffs’ allegations that they are losing money by not being able to operate the restaurant/bar and banquet facility.

[65] On this issue of “irreparable” harm, I find in favour of the Plaintiffs. I find that the Plaintiffs have suffered irreparable harm, and continue to do so, because of the significant ongoing expense of repairs and replacements and because of the loss of income due to the inoperable condition of the restaurant/bar and the limited use available for the banquet hall. The Defendants warranted in paragraph 37 of the Lease Agreement that all chattels and equipment would be in good working order on July 11, 2013. The Defendants also covenanted in paragraph 39 to provide possession of the restaurant/bar in an operational state as soon as reasonably possible. I accept the evidence of the Plaintiffs, which is not denied by the Defendants, that a number of problems existed with the restaurant/bar, including a leaky roof and a prohibition order from the Health Department and missing and broken equipment. The evidence is also that, in spite of the Order of Justice Quigley of Tuesday, November 5^th, 2013, and specifically paragraphs 3, 4 and 5, the restaurant/bar and banquet hall are not in an operable condition as contemplated by the Lease Agreement.

[66] With regards to the third test for an interlocutory injunction related to the balance of convenience favouring the granting of an injunction, or not, the Supreme Court of Canada has held that the question for determining the “balance of convenience” is: which party will suffer the greatest harm from the granting or refusing of the injunction (i.e. where does the balance of convenience lie)?

[67] I find that the balance of convenience does favour the granting of the injunction to require the Defendants to conduct sufficient repairs to allow the Plaintiffs to conduct business in the restaurant/bar/banquet hall. That, of course, would not include things like applying for the liquor licence that is required to operate the premises but simply to put the premises together with all equipment in good working order as they are covenanted to do by the Lease Agreement. It seems to me that the existing interim order of November 5^th, 2013, covers those terms and should be complied with. I find that it is a clear expectation of the Lease Agreement that the Plaintiffs would be able to operate the restaurant/bar/banquet hall from these premises and specifically that the Defendants would provide all chattels and equipment in good working order and provide the restaurant/bar in an operational state. The portions of the leased premises consisting of the kitchen/restaurant/bar/banquet hall are virtually useless to the Plaintiffs in their current condition.

[68] For the reasons set out above, I grant an interlocutory injunction as requested at paragraph 77(b)(i) of the revised factum of the Plaintiffs. Such injunction may be worded as requested there or as ordered in paragraphs 3 and 5 of the Order of Justice Quigley, of Tuesday, November 5^th, 2013, whichever the Plaintiffs prefer. I will sign an injunction worded either way.

[69] With regards to the question of an abatement of rent, it is discretionary and may be justified where the tenant is paying rent for something he is not receiving. For the reasons stated above, I find that an abatement of rent is warranted in this action and I find that a reasonable abatement would be as requested at paragraph 77(b)(ii) of the Plaintiff’s revised factum in the amount of 50% of the rent pursuant to the Lease Agreement until such time as the repairs are completed and the leased premises are restored to the standard provided for in paragraph 6 of the Lease Agreement. The Plaintiffs would, however, remain also liable for HST on that amount and full payment of the property taxes.

[70] Based on the above findings, I find it appropriate to grant the relief requested at paragraph 77(b)(iii) of the Plaintiffs’ revised factum so long as the reduced rents are being paid and the said repairs are ongoing, the Defendants are restrained from taking any proceeding to terminate the tenancy under the Lease Agreement or evict the Plaintiffs from the leased premises.

[71] Under the Commercial Tenancies Act, the court has discretionary jurisdiction to grant relief from forfeiture of a lease. The courts lean against forfeiture except in the plainest cases.

[72] The following are criteria applied by the courts in determining whether or not to exercise their equitable discretion to grant relief from forfeiture under a lease:

(a) The conduct of the parties seeking relief, and, in particular, whether the tenant’s breach was wilful;

(b) The gravity of the breach; and

(c) The disparity between the value of the property in question and the damage caused by the breach.

[73] I find that in this case, the Plaintiffs have invested a substantial sum of money in the property and the leased premises have accordingly been improved in a manner which is advantageous to both parties. I also find that if the lease is forfeited, the business carried on by the Plaintiffs would come to an end with a large financial loss to the Plaintiffs and no apparent gain to the Defendants.

[74] I find that the Defendants’ efforts to remedy the deficiencies in the leased premises have not been sufficient to live up to the terms of the Lease Agreement. I find that it is equitable to grant the relief from forfeiture of the Lease Agreement as requested at paragraph 77(b)(v) of the supplementary factum of the Plaintiffs.

[75] If either party wished to seek costs as a result of this ruling, and the parties are unable to agree on those costs, then they may do so in writing within 30 days with such submission limited to three typed pages plus a draft Bill of Costs. The other party is granted 10 days to reply in writing.

[76] I thank counsel for their assistance in dealing with this interesting matter.

The Honourable Mr. Justice K.E. Pedlar

Released: February 20, 2014

COURT FILE NO.: CV13-1085

DATE: February 20, 2014

ONTARIO

SUPERIOR COURT OF JUSTICE

B E T W E E N:

BONNIE LEE BOSAK AND JANICE IRENE MAES, carrying on business as BOJA ENTERPRISES

Plaintiffs

– and –

3930441 CANADA INC. AND QUDDUS ASHRAF

Defendants

RULING ON MOTION

Pedlar, J.

Released: February 20, 2014