COURT FILE NO.: CV-13-473944

DATE: 20140214

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: 2454 Bloor Street West Ltd. and 2150 Bloor Street West Ltd., Plaintiffs

– AND –

2107733 Ontario Inc. carrying on business as Moksha Yoga Studio and Don Christensen, Defendants

BEFORE: E.M. Morgan J.

COUNSEL:
Robert B. Cohen, for the Plaintiffs

Bruce G. McEachern, for the Defendants

HEARD: February 5, 2014

ENDORSEMENT

[1] This is a motion for relief from forfeiture by a defaulting commercial tenant and a cross-motion by a landlord to vary the terms of an order under which it was to pay the tenant an inducement payment for leasing the subject premises.

[2] I released my endorsement in a previous motion in this matter on October 18, 2013 and the accompanying costs endorsement on November 7, 2013.

[3] In my endorsement of October 18th I enforced a Surrender of Lease for premises located at 2454 Bloor Street West, Toronto (the “Lease” and the “Premises”). The Premises had been leased by the Defendant, 2107733 Ontario Inc. carrying on business as Moksha Yoga Studio (the “Tenant”), from the Plaintiff, 2454, Bloor Street West Ltd. (the “Landlord”).

[4] At the same time I enforced a lease for premises located at 2150 Bloor Street West, Toronto (the “Replacement Lease” and the “Replacement Premises”). The Replacement Premises was leased by the Tenant from the Plaintiff, 2150 Bloor Street West Ltd. (the “Replacement Landlord”), which is a sister company to the Landlord. Rent for the Replacement Premises was to be payable under the Replacement Lease commencing upon the keys being delivered to the Tenant, which was to be considered to be the possession date for the Tenant in the Replacement Premises. Further, upon vacating the Premises and taking possession of the Replacement Premises, the Landlord was to pay the Tenant $112,500 owing to it as the next instalment of inducement payments agreed upon in the Surrender of Lease.

[5] All of this was to take place forthwith upon the issuance of my endorsement. However, the best laid schemes of judges and litigants often go awry.

[6] The Tenant moved out of the Premises in some haste, leaving a trail of destruction in its wake. Shower heads were removed from the walls of the shower room, built-in heating fixtures were removed from the ceiling of the exercise room, light fixtures and wall switches appear to have been removed from some walls, as was a washroom ventilation fan. This has left gaps and holes in the walls and ceiling, necessitating substantial renovation and repair. In addition, at least one window was broken, electrical wires were left hanging, exposed, and damaged, plumbing pipes were damaged and others removed leaving water leaking on the floors, the hot water tank and fittings were removed, and some of the hardwood floors and baseboards were damaged.

[7] Damage to any leased premises would cause a landlord consternation. Here, the problem is compounded by the fact that the Tenant was vacating what was by its own admission a particularly attractive premises. In his affidavit of July 29, 2013, sworn in support of the motion leading to my endorsement of October 18th, the Defendant, Don Christensen, the principal of the Tenant, deposed:

Irreplaceable Premises. The existing Premises are very impressive due to their high ceilings, maple hardwood flooring, windows on all four walls, and charming detail in the woodwork. Every week, and often more frequently, visitors and students tell me and other staff members that it is the most beautiful yoga studio they have ever seen; I am not aware of any other prospective premises that would or could be this impressive…

[8] I am not left to imagine what the Premises looked like upon the Tenant vacating it. A video of Mr. Christensen walking through the Premises after the removal of all of these items was shown at the hearing of this motion. Suffice it to say that the Premises is no longer impressive or charming.

[9] In addition to the damage caused in the Premises, numerous fixtures belonging to the Landlord were removed. These include overhead lights, ceiling fans, the hot water tank, internal doors (some of which were French doors with thermal-injected double glazed window inserts, and others of which were ornate and solid oak), internal glass (including stained glass) panels, shower heads and fixtures, granite and other counter tops, sinks, vanities, radiant heating panels, and even toilets.

[10] Mr. McEachern, for the Tenant, concedes that much of the damage should not have occurred. He argues, however, that many of the fixtures that were removed from the Premises were trade fixtures, that were permissible for the Tenant to remove under article 10(a) of the Lease. He also submits that since the Landlord did not complain about the removal of furniture and equipment from the Premises, he is estopped from complaining about the removal of fixtures as well. In addition, Mr. Christensen deposes that he removed the trade fixtures in order to install them in the Replacement Premises, which after all was owned by the same owners as the Premises. The removed items are apparently being stored by the Tenant in a warehouse pending the outcome of this motion.

[11] Mr. Cohen, for the Landlord, says that he does not understand the Tenant’s estoppel argument, and frankly neither do I. The Landlord is certainly free not to complain about the Tenant’s removal of furniture but to complain strenuously about the Tenant ripping pipes out of the walls.

[12] In any case, Mr. Cohen points out that art. 2 of the Surrender of Lease states that that document supersedes the provisions of the Lease, and that art. 3 of the Surrender of Lease provides that the Tenant “will leave the premises vacant and in a clean broom-sept condition and it will remove all of its equipment, garbage and debris and other goods from within the Premises and any areas outside of the Premises.” The Tenant is entitled to remove equipment, which is no doubt why the Landlord made no complaint about that, but is not permitted to remove trade fixtures. Moreover, and it goes without say, whatever is removed must be done without breaking the walls, damaging the ceilings and floors, etc.

[13] The Landlord’s representative, Claude Bitton, attended at the Premises to observe that the Tenant was vacating it on October 20, 2013. He states in his affidavit that he had in his possession the keys to the Replacement Premises and a cheque in the amount of $112,500, the amount that I ordered the Landlord to pay the Tenant. I note that the cheque was not payable to the Tenant but rather was made payable to the Landlord’s solicitors, in trust. The reason for this is not clear, although it is possible that this was done to facilitate the deduction of costs awarded in my November 6, 2013 costs endorsement. I indicated in my costs endorsement that this set-off would be permissible.

[14] Mr. Bitton further deposed that upon seeing the damage done to the Premises he was shocked, and turned the funds over to the Landlord’s solicitors for them to hold as security for the cost of the repairs that would have to be done. He also left the keys to the Replacement Premises with the solicitors. The solicitors for the Landlord continue to hold those funds, which now total $85,602.59 after deduction of the costs awarded to them in my November 6th costs endorsement.

[15] Despite the problems with respect to vacating the Premises, the Landlord and the Tenant appear to have begun working toward the Tenant’s occupancy of the Replacement Premises. On October 21, 2013, the Tenant retrieved the keys to the Replacement Premises from the Landlord’s lawyers. Then, on October 22 and 23, the Replacement Landlord, through counsel, corresponded with the Plaintiff over a number of matters entailed in obtaining insurance and doing whatever re-modelling and other work that needed to be done by the Tenant in moving into the Replacement Premises.

[16] Despite retrieving the keys and communicating with the Replacement Landlord in a preliminary way, the Tenant never moved into or commenced paying rent for the Replacement Premises. The Replacement Landlord sent a default notice to the Tenant on November 4, 2013. On November 27, 2013, the Tenant was advised, through counsel, that the Replacement Lease had been terminated (with a reservation of rights as against the Tenant).

[17] Christensen deposes in his affidavit that he was unable to make the rent payments because the Landlord did not pay the Tenant the funds that I had ordered be paid. For its part, the Replacement Landlord doubts the veracity of that statement, and points to the fact that the Tenant had been in communication with a real estate agent who was actively seeking another premises for the Tenant’s business. The Replacement Landlord contends that there is a good chance that the Tenant intended to “take the money and run”, by renting another premises after receiving the funds from the Landlord. The Respondent Landlord further alleges that it is likely that the Tenant intended to install the fixtures removed from the Premises in not in the Replacement Premises but in some other leased premises belonging to an altogether different landlord.

[18] As indicated at the outset, the Tenant seeks relief from forfeiture and a reinstatement of its tenancy in the Replacement Premises. A tenant may apply to the court for relief against forfeiture pursuant to s. 20(1) of the Commercial Tenancies Act, RSO 1990, c. L.7:

20. (1) Where a lessor is proceeding by action or otherwise to enforce a right of re-entry or forfeiture, whether for non-payment of rent or for other cause, the lessee may, in the lessor's action, if any, or if there is no such action pending, then in an action or application in the Superior Court of Justice brought by the lessee, apply to the court for relief, and the court may grant such relief as, having regard to the proceeding and conduct of the parties under section 19 and to all the other circumstances, the court thinks fit, and on such terms as to payment of rent, costs, expenses, damages, compensation, penalty, or otherwise, including the granting of an injunction to restrain any like breach in the future as the court considers just.

[19] The modern doctrine of relief from forfeiture was articulated by the Court of Appeal in 1497777 Ontario Inc. v Leon's Furniture Ltd. (2003), 2003 50106 (ON CA), 67 OR (3d) 206. There, the court quoted approvingly from the seminal judgment of Lord Wilberforce in Shiloh Spinners Ltd. v Harding, [1973] AC 691, who opined at 724 that such equitable intervention “involves consideration of the conduct of the applicant for relief, in particular whether his default was wilful, of the gravity of the breaches, and of the disparity between the value of the property of which forfeiture is claimed as compared with the damage caused by the breach.”

[20] Mr. Cohen also cites Kochar v Ruffage Food Corp., 1992 CarswellOnt 570, at para 9, for the proposition that a tenant looking for relief from forfeiture must come to court with clean hands. He submits that the Tenant’s willful damage to the Premises, and its equally willful failure to take possession or pay rent in the Replacement Premises, undermine its claim to clean hands. He also notes that the Replacement Landlord’s motivation in proceeding against the Tenant is not a relevant consideration even if, as the Tenant suspects, it simply wants to rid itself of a Tenant to whom it will owe further inducement payments under the Surrender of Lease. As the court observed in Leon’s Furniture, at para 74, “[i]f the law and facts support the landlord’s claim to termination of the lease, the basis of its motivation is irrelevant.”

[21] On the other hand, Mr. McEachern points out that a breach by the Tenant does not undermine his claim to relief from forfeiture since, by definition, all applications for relief from forfeiture will be premised on the tenant having defaulted. As the court put it in Greenwin Construction Company Ltd. v Stone & Webster Canada Ltd. (2001), 2001 27993 (ON SC), 55 OR (3d) 345, at para 27 (SCJ), “relief from forfeiture can be granted in a situation where the offending situation can be unravelled and the status quo can be restored, by money or otherwise, which is the thrust of the second condition.”

[22] There is no doubt that the Tenant is the author of its own misfortune here. It was ordered out of the Premises and into the Replacement Premises, but it followed through by damaging the Premises and abandoning the Replacement Premises. I have no reason to doubt Mr. Christensen when he says that the Tenant needed the payment that the Landlord withheld from it in order to pay the rent, but the Tenant’s own conduct prompted the Landlord to respond as it did. Accordingly, I would only exercise my discretion to grant relief from forfeiture on certain conditions designed to protect the Landlord’s and Replacement Landlord’s rights. Such conditional relief is specifically authorized in section 20(1) of the Commercial Tenancies Act.

[23] That said, the Landlord did not have a right to withhold payment to the Tenant based on the estimate of how much it will cost to effect repairs to the Premises. That would amount to a pre-judgment seizure of funds to secure a damages claim. To the extent that the Landlord has justified the funds being held in trust by its solicitors on the grounds that it needs security for the as yet unknown cost of repairing the Premises, the Landlord has put the cart well before the horse.

[24] Nevertheless, the Landlord does have a right to have all amounts owing under the Lease paid to it by the Tenant upon vacating. In this respect, the Landlord’s motion to vary the terms of my October 18, 2013 order dovetails with the need for conditions to be imposed on any relief from forfeiture granted to the Tenant. Rules 59.06(1) and (2) allow the court to amend an order on any matter which was not adjudicated or which arose after the date of the order whose amendment or variance is sought.

[25] The Landlord has presented evidence here that there are arrears in water and electricity charges payable by the Tenant for its use of the Premises, in the amount of $52,288.37. Mr. McEachern does not deny that the Tenant was responsible for these utility bills under the Lease and must pay any arrears, but he states that the Tenant has a right to see the backup billing or other documentation that supports this claim for arrears. I agree with Mr. McEachern on that point. The Tenant must pay the arrears and the Landlord must provide him with the supporting documentation. The payments by the Tenant may be deducted from the $85,602.59 that the Landlord’s solicitors hold in trust.

[26] Moreover, the Replacement Landlord has a right to expect the Tenant to make the payments that are due under the Replacement Lease. The Landlord also has a right to expect that the inducement payments agreed to in the Surrender of Lease be used by the Tenant in its remodeling of and investment in the Replacement Premises. After all, those payments were agreed upon as an inducement not just to get out of the Premises but to get into the Replacement Premises.

[27] As Goldstein J. observed in 7984987 Canada Inc. v Lixo Investments Ltd., 2012 ONSC 5439, at para 14, where “the landlord can be made whole by compensation in money, relief from forfeiture will ordinarily be granted.” This is such a case. The Tenant is therefore relieved from forfeiture and its tenancy in the Replacement Premises is reinstated. It may now take possession of the Replacement Premises. The date of this endorsement shall be considered to be its occupation date of the Replacement Premises under the Replacement Lease.

[28] The first month’s rent, and any other amounts immediately due and payable by the Tenant under the Replacement Lease, may be deducted and paid to the Replacement Landlord from the $85,602.59 held in trust by its solicitors. The balance, if any, of the $85,602.59 held in trust by the Landlord’s and Replacement Landlord’s solicitors are to be used toward the re-modelling and improvements in the Replacement Premises required by the Tenant. The Tenant may present invoices from contractors or suppliers in respect of work done in or supplies delivered to the Replacement Premises for the re-modelling thereof, and the Tenant is to be reimbursed for its payment of those invoices by the Replacement Landlord from the balance of the $85,602.59 held in trust until that balance is depleted.

[29] In sum, the Tenant is granted relief from forfeiture. My order of October 18, 2013 is varied to the extent that the payment I ordered of $85,602.59 (after deducting the costs ordered on November 6, 2013) by the Landlord to the Tenant may be held in trust by the Landlord’s solicitors. From this amount held in trust, $52,288.37 may be paid to the Landlord in respect of the Tenant’s arrears in utility bills once the backup documentation for those arrears is provided to the Tenant. Also from the $85,602.59 held in trust, the first month’s rent for the Replacement Premises and any other amount payable by the Tenant to the Replacement Landlord under the Replacement Lease may be deducted and paid to the Replacement Landlord. Finally, if there is any balance left of the $85,602.59 held in trust, that balance may be paid to the Tenant to reimburse it for the cost of any work or supplies relating to the remodeling of the Replacement Premises required by the Tenant, upon presentation of invoices from the applicable contractors or suppliers.

[30] Given the mixed results of this motion and cross-motion, there will be no costs ordered for or against any party.

Morgan J.

Date: February 14, 2014