2249740 Ontario Inc. v. Morguard Elgin Ltd., 2015 ONSC 299

COURT FILE NO.: 12-55692

DATE: 2015/01/14

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

2249740 ONTARIO INC.

Plaintiff/Moving Party

– and –

MORGUARD ELGIN LTD. and MORGUARD CORPORATION

Defendants/Respondents

Ronald F. Caza and Anne M. Tardif, for the Plaintiff/Moving Party

David R. Elliott and James M. Wishart, for the Defendants/Respondents

HEARD: September 16, 2014 at Ottawa

REASONS FOR decision

LABROSSE J.

Overview

1On May 27, 2010, Zadek Ramowski, in trust, and Morguard Elgin Ltd. entered into an Offer to Lease for Grant House, a historic building on Elgin Street in the City of Ottawa. For many years prior, Grant House had been the home of Friday’s Roast Beef House. In September 2010, 2249740 Ontario Inc. (the “Plaintiff”) and Morguard Corporation (“Morguard”) signed a lease which was dated June 9, 2010 (the “Lease”). The Lease incorporated the provisions of the Offer to Lease. Although the Lease term was for ten years with two five‑year options to renew, Morguard’s primary objective for Grant House was to see this property developed in conjunction with an intended high‑rise commercial development on the adjacent parking lot. Before proceeding with the high‑rise development, Morguard needed to find an anchor tenant. In the meantime, Morguard sought to keep Grant House (the “Leased Premises”) occupied by leasing it to the Plaintiff.

2Morguard signed the Lease knowing that the construction of the high‑rise development could not proceed with a tenant operating in the Leased Premises. Morguard was also aware that should the high-rise development proceed, it would have to terminate the Lease or make arrangements to have vacant possession of the Leased Premises during the construction period.

3Although the possession date in the Lease was set for April 2011, Morguard advised the Plaintiff in February 2011 that it was negotiating with a serious anchor tenant and that the Lease could not commence in April 2011. As a result, the parties reached an oral agreement in February 2011 that the commencement date of the Lease would be extended either by one year if the anchor tenant was not secured or three years if the anchor tenant was secured and the high‑rise development proceeded.

4Morguard secured its anchor tenant in or about the fall of 2011 but was unable to negotiate further amendments to the Lease with the Plaintiff that were satisfactory to both parties. In December 2011 Morguard terminated the Lease amendment negotiations with the Plaintiff. Several months later, Morguard’s litigation counsel purported to rely on the Delayed Possession provision (section 3.03) of the Lease to justify the termination.

5For the reasons that follow, I find that Morguard’s reliance on section 3.03 of the Lease to terminate the Lease was unreasonable. Section 3.03 of the Lease allows a landlord who reasonably believes that it cannot deliver possession of Leased Premises to notify a tenant in advance and terminate the Lease. Here, the Plaintiff and Morguard had agreed that the commencement date of the Lease would be delayed by up to three years as the high‑rise development was proceeding. With the certainty of the high‑rise development proceeding, Morguard could not have reasonably determined in December 2011 that it would be unable to deliver possession of the Leased Premises following the construction. Furthermore, Morguard’s use of section 3.03 to terminate the Lease was made in bad faith given my finding that the real reason Morguard terminated the Lease was because it could not agree with the Plaintiff on further amendments to the Lease resulting from the high-rise development proceeding.

6I am therefore satisfied that it is appropriate to grant summary judgment on the question of liability in these circumstances, as there are no genuine issues requiring a trial. I find that Morguard is liable to the Plaintiff for breach of the Lease.

Summary Judgment

7As a preliminary matter, neither party addressed the interplay between Rules 20.04(2)(a) and 20.04(2)(b) in their respective facta. The Notice of Motion requests an order for summary judgment under Rule 20.04 but does not specify if the motion is brought under Rule 20.04(2)(a) or 20.04(2)(b). At the motion, the parties agreed that the record before the Court allowed for a determination of the issue of liability by way of summary judgment without specifying under which rule the motion was proceeding.

8By way of written submissions following a teleconference amongst the parties and the Court, both parties agreed that the motion was proceeding under Rule 20.04(2)(b). Further, the parties set out their positions as to the availability of the fact finding powers under Rules 20.04(2.1) and 20.04(2.2) when proceeding under Rule 20.04(2)(b). I am satisfied that the Ontario Court of Appeal in Lagani v. Lagani Estate, 2013 ONCA 159, 86 E.T.R. (3d) 1 at para 5, has confirmed that when proceeding with a motion for summary judgment under Rule 20.04(2)(b), the fact finding powers under Rules 20.04(2.1) and 20.04(2.2) are available to the judge hearing the motion.

9The parties agreed that this was a proper circumstance for the Court to consider the issue of liability by way of a motion for summary judgment. If the Plaintiff is successful, it will significantly reduce the time required at trial as the only remaining question will be an assessment of damages. If the Defendants are successful, it will finally dispose of the matter.

10On a motion for summary judgment the Court must first determine if there is a genuine issue requiring a trial based only on the evidence before the Court. If there appears to be a genuine issue requiring a trial, the Court should then determine if the need for a trial can be avoided by using the fact finding powers under Rules 20.04(2.1) and 20.04(2.2).

11The leading case on the use of summary judgment is Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87 at para. 49, where the Supreme Court of Canada stated:

… There will be no genuine issue requiring a trial when the judge is able to reach a fair and just determination on the merits on a motion for summary judgment. This will be the case when the process (1) allows the judge to make the necessary findings of fact, (2) allows the judge to apply the law to the facts, and (3) is a proportionate, more expeditious and less expensive means to achieve a just result.

12While a motion under Rule 20.04(2)(b) permits the parties to move jointly for summary judgment, the Court retains the discretion to refuse summary judgment where the test for summary judgment is not met, notwithstanding the agreement of the parties (See Combined Air Mechanical Services Inc. v. Flesch, 2011 ONCA 764, 108 O.R. (3d) 1 at para 41).

13My reasons in this decision turn on the evidence of the February 2011 oral agreement between the parties. Both parties agree that there was a collateral oral agreement to delay the commencement date of the Lease by one year if the anchor tenant was not secured or three years if the anchor tenant was secured and the high‑rise development proceeded (See Ramowski Transcript, p. 78, Q. 405 and Affidavit of F. Rowe, paras. 59 to 61).

14The Court is alive to the issue of the effect of the collateral oral agreement on the Lease. The Statute of Frauds, R.S.O. 1990, c. S.19, requires all the essential terms of a lease to be in writing. The equitable doctrine of part performance is an exception to the Statute of Frauds. The doctrine provides that writing requirements under the Statute of Frauds must give way in the face of part performance because the acts of part performance fulfill the very purpose of the written document—that is to diminish the opportunity for fraudulent dealings (See Erie Sands & Gravel Ltd. v. Seres Farms Ltd., 2009 ONCA 709, 97 O.R. (3d) 241 at para. 49 [Erie Sands & Gravel]).

15For a party to bring itself within the doctrine of part performance, the Court may consider the acts of both the plaintiff and the defendant. (Erie Sands & Gravel at para. 78). Here, both parties acknowledge that the Lease was still valid after April 2011 as they both worked towards a Lease Amendment Agreement. At no time did either party allege that the lease was in default after the original commencement date of April 1, 2011.

16The acts of part performance are sufficient to take the collateral oral agreement outside the operation of the Statute of Frauds. In applying a contextual approach, where both parties agree to the existence of the collateral oral agreement, as in this case, recognition of the agreement accords with the principle that the Statute of Frauds not be used as an engine of fraud. I find that the collateral oral agreement is sufficiently definite and ascertainable to the extent that the commencement date of the Lease was to be delayed either by one or three years depending on Morguard’s ability to secure an anchor tenant. Therefore, the oral agreement was effective in amending the Lease.

17As there is no dispute on the existence of the oral agreement, the Court may rule on its impact on the Lease. The parties agreed to an alternating scenario for the commencement date depending on what transpired with the anchor tenant. The landlord’s purported termination of the Lease must be evaluated under the terms of the Lease, subject to the oral agreement to delay the commencement date. There are no relevant facts in dispute and as such I am able to draw the necessary conclusions to dispose of the issue of liability. Therefore, there is no need for me to utilize my fact finding powers under Rules 20.04(2.1) or 20.04(2.2) in order to finally dispose of this matter.

18I conclude that this is an appropriate case to proceed by summary judgment. I will now consider the issues as presented by the parties.

Issues

19As for the subject matter of the dispute, there are two main issues to be determined.

Issue # 1 – Did Morguard properly terminate the Lease under section 3.03? The following questions arise from this issue:

1. Was the Notice of Termination defective?

2. Had the Plaintiff taken possession of the leased premises thereby rendering section 3.03 inapplicable?

3. Did Morguard breach an implied duty of good faith or reasonable exercise of discretion?

Issue # 2 – In the event the Lease was not terminable under section 3.03, was the Lease abandoned or surrendered by operation of law, or otherwise unenforceable?

Issue # 1 - Did Morguard properly terminate the Lease under section 3.03?

Position of the Plaintiff

20The Plaintiff advances the position that the purported termination letter dated December 15, 2011 (the “Notice of Termination”) wrongfully terminated the Lease in that the notice itself did not comply with section 15.11 of the Lease. Pursuant to section 15.11 of the Lease, all notices must be served upon the Tenant at the Leased Premises. The Notice of Termination was in the form of correspondence addressed to the Plaintiff’s solicitor, Christopher Spiteri. While the Plaintiff admits that it received actual notice of the Notice of Termination, it maintains that the notice is invalid pursuant to the Lease.

21With respect to possession, the Plaintiff recognizes that while there was an early access provision in Schedule E of the Lease, the Plaintiff’s occupation went far beyond early access. The Plaintiff submits that its occupation constituted possession pursuant to the Lease. The Plaintiff argues that the February 2011 agreement was an agreement to postpone the commencement date of the Lease but not the possession date. In support of its position, the Plaintiff provided evidence that it had access to the Leased Premises, had spent funds on design drawings and many hours of site preparation in the Leased Premises. The Plaintiff had also secured insurance for the Leased Premises and had assumed the garbage removal contract. According to the Plaintiff, all this points to much more than a mere right to access the Leased Premises for the purpose of site preparation work. The Plaintiff was effectively in possession of the Leased Premises and as such, section 3.03 was no longer available to Morguard as a ground for termination of the Lease.

22Finally, with respect to good faith and reasonability, the Plaintiff argues that there is an implied duty that discretion in a contract must be exercised reasonably and fairly, honestly and in good faith and with regard to how a party’s interests are affected. The Plaintiff relies on the fact that the Plaintiff and Morguard were involved in extensive negotiations about amendments to the Lease when it terminated those negotiations. Further, Morguard did not initially purport to rely on section 3.03 of the Lease as the ground of termination. To the contrary, the Notice of Termination only referred to the inability to arrive at mutually acceptable terms for a Lease Amendment Agreement. The first time that Morguard relied on section 3.03 as the ground of termination is in the correspondence from its litigation counsel on May 25, 2012, approximately six months after the date of purported termination. The Plaintiff advances that there was an agreement in place that the commencement date would be extended as a result of the high‑rise development proceeding and that Morguard’s termination of the Lease was done unreasonably and in bad faith.

Position of the Defendants

23Morguard takes the position that it is not limited to the grounds raised in the Notice of Termination in order to invoke section 3.03 of the Lease and that the Notice of Termination was validly given.

24On the issue of notice, Morguard relies on the fact that actual notice trumps the prescribed notice. Mr. Spiteri was closely related to the Plaintiff. There is no doubt that the Notice of Termination was received as the Plaintiff responded to it and its validity was not questioned. Morguard relies on the decision in 3574423 Canada Inc. v. Baton Rouge Restaurants Inc., 2011 ONSC 6697 in support of the position that notice can be effective where actual notice is demonstrated. The failure to follow the prescribed forms of notice, pursuant to section 15.11, only serves to deprive the sending party from relying on the deemed notice provisions in the Lease. Otherwise, the notice is valid.

25On the issue of possession, Morguard relies upon Schedule E of the Lease in advancing the argument that the Plaintiff only had a right to access the Leased Premises. In considering the type of work performed by the Plaintiff and the steps taken, these fall within the scope of the right to access. The Plaintiff was never actually in possession of the Leased Premises as contemplated by the Lease. Clearly, the Tenant did not have quiet enjoyment of the Leased Premises and was only accessing the Leased Premises under the terms of Schedule E.

26Finally, with respect to the issue of bad faith and reasonable exercise of the termination rights at section 3.03, Morguard submits that it acted fairly with the Plaintiff in advising the Plaintiff of its progress in finding an anchor tenant and that it tried to negotiate the amendments in good faith but that in the end, the unreasonable demands of the Plaintiff for amendments to the Lease justified the termination under section 3.03.

Analysis

Notice of Termination

27On the validity of the Notice of Termination, I agree with the Defendants’ submissions that the proof of actual notice is sufficient in these circumstances. The Plaintiff received the Notice of Termination and disputed Morguard’s right to terminate. It did not dispute the validity of the notice. I agree with the Defendants that the failure to deliver notice, as provided for under the Lease, only prevents the Defendants from relying on the deemed notice provisions (Ibid at para. 227). The Notice of Termination is not defective by reason of section 15.11 of the Lease.

Possession

28On the issue of possession, I find that the Tenant accessed the Leased Premises pursuant to the early access provision found at section 2 of Schedule E of the Lease. I agree with the Defendants that the Plaintiff’s access to the Leased Premises did not amount to “possession” as contemplated within the definition of “Possession Date” found at Schedule B for the following reasons:

a) If the “Possession Date” was triggered by the Tenant receiving the keys to the Leased Premises in mid‑September 2010, the 120‑day Construction Period would have expired before the February 2011 oral agreement to extend the commencement date;

b) The actions of the Tenant, while they had access to the premises in the fall of 2010 and early 2011, were not inconsistent with the rights granted to the Plaintiff under section 2 of Schedule E;

c) The September 2011 correspondence from Mr. Spiteri to Morguard includes negotiations about the changes to the Possession Date in the draft Lease Amending Agreement; and

d) The only logical conclusion which can be drawn from the February 2011 oral agreement is that both the “Possession Date” and the “Commencement Date” as defined under the Lease were being delayed by the oral agreement.

29I therefore conclude that since the Plaintiff had not taken possession of the Leased Premises, section 3.03 remained available to Morguard pursuant to the terms of the Lease as amended by the oral agreement.

Reasonable Exercise of Section 3.03

30Morguard had a contractual duty of good faith to act in a way that did not defeat the objective of the Lease (See Nareerux Import Co. v. Canadian Imperial Bank of Commerce, 2009 ONCA 764, 97 O.R. (3d) 481 at para. 69). I find that it failed to do so. The wording of the Notice of Termination terminated the Lease amendment negotiations but not the Lease. The Notice of Termination makes no reference to Morguard being unable to deliver possession of the Leased Premises at any time. As is plainly obvious from the wording of the Notice of Termination, Morguard did not terminate the Lease pursuant to section 3.03 or in good faith exercise its rights under section 3.03 of the Lease.

31Further, the Notice of Termination failed to recognize that the parties had an oral agreement to delay the commencement date of the Lease by one year if the anchor tenant was not secured or three years if the anchor tenant was secured and the high‑rise development proceeded. By December 19, 2011, the anchor tenant had been secured. Consequently, the commencement date had been extended by up to three years. Section 3.03 was not available to Morguard at the date of the Notice of Termination.

32To reasonably exercise the right to terminate under section 3.03, Morguard had to be of the opinion that it could not deliver possession within six months of the commencement date. On December 19, 2011, the Defendants were in no position to reasonably determine that it would not be able to deliver possession. The Defendants’ attempt to rely on section 3.03 as its right to terminate the Lease on December 19, 2011, was both contrary to the terms of the oral agreement concluded in February 2011 and an unreasonable exercise of its limited termination rights under the Lease.

33It is evident to the Court that Morguard became frustrated with the Plaintiff’s demands and as a result terminated the negotiations for the Lease Amendment Agreement. However, I am of the view that while the Lease Amendment Agreement provided some additional detail as a result of the construction of the high‑rise development, the oral agreement of February 2011 had been in place for some ten months prior and was binding on both parties.

34Section 3.03 was only used as a litigation defence and was not a legitimate exercise of the landlord’s rights under this section of the Lease. It is also important to note that the termination of the Lease was inevitable, according to Morguard, upon proceeding with the high‑rise development (See Transcript of F. Rowe, Q. 1091‑1093). This admission by Morguard confirms that in entering into the Lease, Morguard made a business decision that the Lease would have to be terminated upon the high‑rise development proceeding. This admission further puts into question the good faith of Morguard’s negotiations of the Lease Amendment Agreement and the reasonableness of its reliance on section 3.03 as a valid exercise of discretion of its rights under the Lease.

35In terminating the Lease in this fashion, the Defendants acted in bad faith and are liable to the Plaintiff for having wrongfully terminated the Lease.

Issue # 2 – In the event the Lease was not terminable under section 3.03, was the Lease abandoned or surrendered by operation of law, or otherwise unenforceable?

36Although I have concluded that section 3.03 of the Lease was not available to Morguard on December 19, 2011 and that their purported reliance on this provision was unreasonable, I must briefly address the issue of abandonment, surrender or uncertainty of the Lease by the Plaintiff.

Position of the Parties

37Morguard advances that the oral agreement of February 2011 failed to provide certainty to the exact commencement date and is therefore void for uncertainty. Alternatively, Morguard states that when the Plaintiff left the Leased Premises in November 2011, it either abandoned the Leased Premises or surrendered the Lease.

38The Plaintiff states that the Lease was continuing and that the parting of possession during construction was part of the agreement between the parties. The Plaintiff states that to put an end to the Lease, there needed to be an express or implied agreement to do so. The Plaintiff states that the test for abandonment of a commercial agreement is not met as the Plaintiff took no actions that would lead Morguard to believe that the tenancy was at an end.

Analysis

39On the issue of abandonment, I am of the opinion that there was no evidence of abandonment and that the Plaintiff’s removal of its possessions from the Leased Premises during the construction were consistent with the terms of possession under the Lease as amended by the oral agreement of February 2011. The Plaintiff accepted that it could not occupy the Leased Premises during construction and after doing some work pursuant to the early access provision, handed over the Leased Premises to allow the construction project to proceed. I see no basis for a finding of abandonment by the Plaintiff.

40As for the notion of implied surrender, it is clear that to establish implied surrender, Morguard must show that the tenant agreed to abandon the Leased Premises, that Morguard resumed possession without protest and in a manner inconsistent with the Plaintiff’s possession under the Lease (See Computer Science Canada Inc. v. 1142543 Ontario Inc. (2000), 37 R.P.R. (3d) 123 at para. 46). The evidence does not support a finding of implied surrender. The Plaintiff did not abandon the Leased Premises. The parties clearly agreed that during construction, the Plaintiff could not occupy the Leased Premises. This was an agreed upon consequence of the construction of the high‑rise development that is consistent with the Lease as amended by the oral agreement.

41Further, I disagree that the February 2011 oral agreement would have rendered the Lease void for uncertainty. To the contrary, the parties knew exactly what they had agreed upon. The October 25, 2011 meeting notes demonstrate that Morguard was relying on the terms of the Lease in resisting the proposed changes by the Plaintiff. Once building permits were issued and the construction schedule determined, the dates could be finalized. I am of the opinion that the February 2011 oral agreement was sufficiently defined and that it was not uncertain. As a result of the high‑rise development proceeding, the exact possession date and construction period had to be determined; however, this did not invalidate the Lease. This is the manner in which the parties agreed to proceed and each understood the framework of the agreement to delay the commencement date. The details would fall into place once the building permits were issued by the City of Ottawa and the construction schedule could be determined.

42I find that the Lease remained valid despite the failed Lease amendment negotiations and could have continued as amended by the oral agreement.

Conclusion

43I therefore conclude that the Defendants’ Notice of Termination only terminated the Lease amending negotiations as it properly states. As section 3.03 of the Lease was not available to the Landlord for the purpose of terminating the Lease as of December 19, 2011, the Defendants termination of the Lease is not authorized by the Lease and is a breach of the terms of the Lease. The Landlord is therefore liable for the damages that resulted from the wrongful termination of the Lease.

Costs

44As the Plaintiff has been substantially successful on this motion, it is entitled to its costs. If the parties are unable to agree on the issue of costs, they may write to me. The Applicant shall provide written costs submissions within 14 days of the date of release of this Endorsement. Thereafter, the Respondent shall provide written costs submissions within 14 days. Thereafter, the Applicant shall have a right of reply within 7 days. Each costs submission shall be no longer than two pages in length, excluding the Costs Outline. The parties shall comply with Rule 4.01 of the Rules of Civil Procedure.

Mr. Justice Marc R. Labrosse

Released: January 14, 2015

CITATION: 2249740 Ontario Inc. v. Morguard Elgin Ltd., 2015 ONSC 299

COURT FILE NO.: 12-55692

DATE: 2015/01/14

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

2249740 ONTARIO INC.

Plaintiff/Moving Party

– and –

MORGUARD ELGIN LTD. and MORGUARD CORPORATION,

Defendants/Respondents