CITATION: 1251614 Ontario Ltd v. Gurudutt Inc, 2015 ONSC 2141
COURT FILE NO.: C-760-14
DATE: 2015-04-14
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
1251614 Ontario Limited
Christopher Clemmer, for the Applicant
Applicant
- and -
Gurudutt Inc. o/a Quiznos Sub
Trenton D. Johnson, for the Respondent
Respondent
HEARD: March 18, 2015
REASONS FOR JUDGMENT
INTRODUCTION:
[1] The Applicant brings this application seeking an order to have the Respondent execute the Applicant’s Standard Form Lease, with the demolition clause, as a precondition of the respondent exercising its right to renew its lease.
FACTS:
[2] The facts appear not to be in dispute.
[3] The Applicant (landlord) is the owner and landlord of premises known as 210-220 King St. N. in the City of Waterloo.
[4] The Respondent (tenant) is a tenant at one of the premises at 210-220 King St. N.
[5] The landlord and original tenant (the franchisor) entered into a lease dated October 8, 2002, for a ten year period with rights of renewal.
[6] On May 5, 2005, the original tenant assigned the lease to the current tenant (franchisee), with the consent of the landlord.
[7] The tenant, pursuant to that lease, has the right to renew the lease for two further 5 year terms with the rental rate to be negotiated and settled by arbitration, if necessary.
[8] The lease also states as follows in schedule “E”:
“Any such renewal to be on the same terms and conditions as are contained in this Lease except:
(iii) the form of renewal Lease shall be, at the landlord’s option, a lease extension agreement or a new lease in the landlord’s then current standard form.”
[9] The original lease was for 10 years and was fully completed on March 31, 2013.
[10] On June 12, 2012 the tenant delivered notice to the landlord indicating it intended to renew the Lease effective April 1, 2013.
[11] On October 10, 2012, the landlord provided the tenant with the proposed new lease, which contained a demolition clause. Such a clause had not been present in the original Lease.
[12] The tenant has refused to sign the Lease which contains the demolition clause.
[13] The demotion clause has been revised and I find as a fact that it is the only difference between the original Lease and the proposed Lease, subject to new rental rates to be negotiated or arbitrated.
[14] There are 10 tenants occupying the landlord’s premises including the Respondent tenant. Eight of those tenants have signed the landlord’s current Standard Form Lease which all contain a demolition clause. This current Standard Form Lease, with the demolition clause, was first used in March, 2011. Five other tenants of the landlord had signed this current Standard Form Lease prior to it being presented to the Respondent tenant.
[15] As of this application there is only one tenant, in addition to the Respondent tenant, who is yet to sign this new Lease. That tenant’s renewal is set for May 2015 and it will be presented with this same Lease, which will include the demolition clause.
[16] I find as a fact that the original Lease was reviewed and negotiated between sophisticated business parties who had full legal advice, prior to execution of the document.
POSITION OF THE PARTIES:
[17] The landlord argues that the proposed Lease submitted to the tenant is its “current standard form lease” and pursuant to the original Lease must be signed by the tenant if it wishes to renew the Lease for the further five year term.
[18] The tenant argues that the current Standard Form Lease must “be on the same terms and conditions as are contained in this Lease” and that by adding a demolition clause with only 6 months notice the new Lease is no longer the same as the original as the renewal periods could be drastically shortened at the landlord’s option of giving notice of demolition. The clause states the landlord must be acting bone fide in invoking the clause. As well, the tenant argues, such a clause significantly reduces the value of the tenants business if it attempts to sell.
[19] Likewise, according to the landlord, the absence of the demolition clause significantly reduces the value of the landlord’s property if it attempts to sell.
ANALYSIS:
[20] Counsel have been unable to find any case on point. Likewise, neither have I.
[21] The Ontario Court of Appeal in Ventas, Inc. v Sunrise Senior Living Real Estate Investment Trust Trust (2007), 2007 ONCA 205, 85 O.R. (3d) 254 (C.A.) at paragraph 24 summarized the principles applicable to the interpretation of commercial contracts:
(a) as a whole, in a manner that gives meaning to all of its terms and
avoids an interpretation that would render one or more of its terms
ineffective;
(b) by determining the intention of the parties in accordance with the
language they have used in the written document and based upon the
“cardinal presumption” that they have intended what they have said;
(c) with regard to objective evidence of the factual matrix underlying
the negotiation of the contract, but without reference to the
subjective intention of the parties; and (to the extent there is any
ambiguity in the contract),
(d) in a fashion that accords with sound commercial principles and good
business sense, and that avoids a commercial absurdity.
[22] I conclude that the terms of the Lease are clear and the tenant knew that the renewal would be the Standard Form Lease in existence at the time of renewal. The words “except” after the words “same terms and conditions” must mean that there could be an exception to “the same terms and conditions” or the word is meaningless.
[23] In my view clause (iii) is clear – the option is strictly that of the landlord to simply extend the original Lease or prepare a new Lease in its then current Standard Form. The word “except”, in my view, allows for changes to the Lease to accommodate a demolition clause, as here, if it is the landlord’s then current Standard Form.
[24] I conclude on the facts that as this new Lease had been signed by 5 out of 10 tenants over 1.5 years prior to being presented to the tenant that this was the landlord’s current Standard Form Lease at the time it was presented to the tenant and the tenant was obligated to sign it if it wished to renew the Lease.
[25] In support of this conclusion I have reviewed the case of Timothy’s Coffees of the World Inc. v. Switt 1996 CarswellOnt 2803 where a franchise agreement indicated that if the franchisee wished to renew the agreement it had to execute the form of franchise agreement then in use by the Company. The court found that the franchisee had to execute the form of franchise agreement in use by the franchisor at the time of the renewal, notwithstanding that it had different terms than the original franchise agreement. The court went on to say at paras. 30, 34, 35, and 37 the following:
There is therefore a positive obligation on the franchisee to effect the renewal through proper notice to the franchisor and by executing the form of franchise agreement then in use by the Company [Italics in original]. What can this surely mean other than there must be a new agreement signed at the time of each renewal? Why would such a new Agreement have to be signed if the terms of the old one were to apply? This, in my view, makes no business sense. The form of the agreement is to be the one "then" in use, meaning the one used by the Company at the time of the renewal. The new Agreement makes this provision clearer than the 1983 Agreement did. The words "then in use" can only apply to the new Agreement in use at the time of the renewal
Further, the requirement to execute the "then current form" of agreement may leave the franchisee without any ideas as to what terms will apply on renewal. While the franchisor will not normally wish to commit to terms that far in advance, the franchisee may attempt at least to negotiate commitments from the franchisor that the renewal agreement will contain "substantially" similar terms to the initial agreement with respect to territorial protection and royalty and advertising fees, and that there will not be a renewal fee or further initial franchise fee payable on renewal.
It is conceded that the business terms in Timothy's new Agreement were, in certain aspects, substantially different than those in the 1983 Agreement. Had the Switts carefully read their Agreement, they would have noticed that this might happen on the renewal.
I have concluded that Section 3.2 of the February 14, 1983 Franchise Agreement gives the franchisor the right to require the franchisee to execute the franchisor's new form of Franchise Agreement as a condition of renewal, which new Franchise Agreement contains terms different from those contained in the 1983 Franchise Agreement, and I order them to do so accordingly.
[26] In the 5th edition of The Commercial Lease: A Practical Guide (2013), Harvey M. Haber annotates a standard Commercial Lease, which includes a renewal provision requiring the execution of a "then current standard form" lease. The relevant portion of the standard Option to Renew reads as follows:
“… the Landlord shall grant to the Tenant the right to renew the Term of this Lease upon the expiration of the initial Term of this Lease for a period of ( ) years (the "Renewal Term") on the same terms and conditions as set out in the Lease except that:
(iii) Landlord may, at its option, at Tenant's expense, require that Tenant (A) enter into an agreement prepared by Landlord, at Tenant's expense, to give effect to the Renewal Term, or (B) execute a new net lease for the Renewal Term on Landlord's standard net lease form for the Centre currently in use at such time".
[27] The standard Option to Renew included in The Commercial Lease: A Practical Guide is almost identical to the clause at issue in this Application.
[28] Further, Harber cautions tenants of the consequences of failing to negotiate modifications to the "then current standard form" requirement of the option to renew. Referencing the portion of the Option to Renew excerpted above at paragraph 54, Harber writes as follows:
“On the assumption that the Landlord and Tenant have come to terms with the four conditions, the clause continues by providing that the Landlord will grant the Tenant a renewal option on the same terms and conditions as set out in the Lease except for the following:
Subsection (iii) of the renewal option indicates that the Landlord, at its option, and at the Tenant's expense, can require that the Tenant either enter into a renewal agreement prepared by the Landlord at the Tenant's expense, or execute a new net Lease for the Renewal Term on the Landlord's then "standard new lease form for the Centre". The Tenant should adamantly insist that this subsection be modified so that the only obligation of the Tenant is to enter into a renewal Lease on the terms set out in the renewal option. Under no circumstances should the Tenant agree to sign a new net Lease form, which could be substantially different from (and much more costly than) that originally negotiated with the Landlord in the first instance".
[29] The original tenant did not negotiate the renewal clause out of the Lease, notwithstanding the thorough review of the Franchisor, which was the original tenant. When the Lease was assumed by the current tenant, no objection was made about the renewal clause, despite the fact that the Lease was reviewed by both the tenant's lawyer and by the Franchisor, and its lawyer.
[30] The court notes the renewal provision of the Franchise Agreement between the Respondent tenant and the Franchisor allows the Franchisee to renew its franchise rights for an additional fifteen (15) year term, so long as the Franchisee "executes the Franchisor's then-current form of Franchise Agreement…"
[31] It is clear that such wording would therefore not have been a surprise to the tenant and indeed wording it was content with when it originally executed its franchise agreement and when it executed this Lease.
[32] Counsel for the Respondent has referred me to Strategeas v. Lloyd Parish Holdings Ltd. [1991] O.J. No. 565. That case in my view is distinguishable from the one at bar. It involved a lease “in the usual form” which the tenant was to sign pursuant to a purchase and sale agreement. The usual form lease of the landlord had a clause allowing the landlord to terminate the lease on three months notice. The tenant and his lawyer did not notice the termination clause, while the landlord and his lawyer assumed that the tenant had reviewed the clause and it was acceptable. The court concluded the clause was inconsistent with the common intention of both parties and deleted the clause.
[33] There is no evidence before me that either party missed the clause in the original lease or that they did not understand it and what its repercussions might be on renewal. Certainly, I do not conclude that there was any inconsistency with the common intention of both parties at the time the original Lease was executed, as in Strategeas. I also note that Strategeas was considered in Timothy’s but not followed.
CONCLUSION:
[34] The exception in the renewal clause of the original Lease must be interpreted to mean that the landlord could simply have the Lease renewed “on the same terms and conditions” if there were to be no changes, or at its option, insist that a new Standard Form Lease in place at the time of renewal be executed if there were to be changes. If, as here, the landlord elected that option then in my view the new Standard Form Lease could have material changes in it from the original or the words “except” and “at the landlords option” would have no meaning.
[35] There is no evidence before me that the original Lease was not thoroughly reviewed by both parties who were sophisticated business entities and knew exactly what they were signing. The tenant had the option to negotiate out the renewal clause or not sign the Lease. It elected, I presume for good commercial reasons at the time, to do neither. As such I conclude it must now sign the current Standard Form Lease, as of April 1st, 2013, as presented by the applicant if the respondent wishes to renew the Lease, and I so order.
[36] If the parties are unable to agree on costs they may provide written submissions to me of no more than 3 double spaced pages, in addition to any relevant offers or draft bills of costs. The applicant shall make submissions within 15 days of the release of this decision and the respondent 10 days thereafter. Failure to hear from either party by May 15, 2015 and the court will consider the cost issue resolved.
ARRELL, J.
Released: April 14, 2015
CITATION: 1251614 Ontario Ltd v. Gurudutt Inc, 2015 ONSC 2141
COURT FILE NO.: C-760-14
DATE: 2015-04-14
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
1251614 Ontario Ltd
Applicant
- and –
Gurudutt Inc.
Respondent
REASONS FOR JUDGMENT
Justice HA(vt)
Released: April 14, 2015