Reserve Properties Limited v. 2174689 Ontario Inc., 2015 ONSC 3469

COURT FILE NO.: CV-14-512602
DATE: 20150529

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Reserve Properties Limited, Applicant

AND:

2174689 Ontario Inc., Respondent

BEFORE: F. L. Myers, J.

COUNSEL: P.E. Du Vernet, for the Applicant

K. Prehogan and H. Book, for the Respondent

HEARD: May 28, 2015

ENDORSEMENT

The Outcome

[1] Reserve Properties Limited (“RPL”) applies for declarations that the respondent 2174689 Ontario Inc. (“217”) had no right to terminate an agreement of purchase and sale dated March 21, 2011 (the “APS”) or, in the alternative, for relief from forfeiture. It wants to put the APS back on foot toward closing.

[2] In my view, the applicant breached the APS by failing to pay its second deposit on a timely basis. That breach however, was not sufficiently material to excuse the respondent from performance of the bargain on the facts and in the circumstances of this case. As a result, its refusal to be bound by the APS is itself a breach of the agreement. While RPL wishes to elect to hold the respondent to its bargain, that is tantamount to a request for specific performance of the APS. The land in issue was only ever held for investment profit. In fact, RPL has already flipped the land to crystallize a potential profit of approximately $370,000. Damages will keep RPL whole. As such, specific performance is not an available remedy. An inquiry into the damages suffered by RPL is therefore required.

[3] Given that damages are an adequate and the appropriate remedy, I would not exercise the discretion in equity to order relief from forfeiture even if it was available.

The Facts

[4] 217 is owned directly or indirectly by Shoppers Drug Mart. RPL has found land for Shoppers to construct or open stores for a number of years. They have engaged in a number of transactions together. Both parties are very sophisticated. They are represented in their real estate dealings by very sophisticated commercial lawyers. Their transactions are reduced to writing as one would expect in such matters.

[5] In 2009 RPL found a site for Shoppers at 2026-2030 Queen Street East in Toronto. Shoppers agreed to buy the site and engaged RPL in an extensive development plan for the site.

[6] RPL then found another site for Shoppers at 2000 Queen Street East, Toronto. Shoppers preferred this site to the first one. Shoppers agreed to enter into a long term lease of a new building to be built at 2000 Queen Street by RPL. Shoppers then had no use for 2026-2030 Queen Street. As part of the deal, it required that RPL buy 2026-2030 from it for $3.175 million. That transfer was to close once Shoppers went into possession of 2000 Queen Street. The APS documents this latter agreement.

[7] The APS provided for RPL to pay the purchase price in three instalments. A first deposit of $25,000 was due within five days of the waiver or satisfaction of the approvals condition in the offer to lease for 2000 Queen Street. Clause 2.2(b) of the APS required RPL to pay $75,000 “contemporaneously upon [Shoppers] taking possession of the premises leased by the 2000 Queen Lease.” The balance was due on closing.

[8] By letter dated March 8, 2012, RPL waived the approvals condition in the lease. Although the APS required the first deposit to be paid upon waiver or satisfaction of that condition, in fact, the offer to lease only allowed for the satisfaction of the conditions (as opposed to waiver). By letter dated September 26, 2012, the lawyers for RPL advised Shoppers’ lawyers that the approvals condition was satisfied. They wrote that “[a]ccordingly, the Approvals Condition no longer applies and the Offer to Lease is now final and binding.” They concluded by noting that they have asked RPL to forward the first deposit and they expect to pay it shortly. In fact, it was paid one day late.

[9] RPL claims that since they waived the approvals condition in March, Shoppers gladly waited six months for the first deposit. This, it says, demonstrates that the parties were lax in their enforcement of payment terms with each other. However, it is apparent from RPL’s own lawyer’s letter, that RPL took the position that the offer to lease only became binding on September 26, 2012 and that RPL understood that it was then obliged to pay the first deposit.

[10] RPL says it spent $25 million developing 2000 Queen Street for Shoppers. It built a mixed use, multi-story building. Shoppers is the only commercial tenant and occupies two floors. The project took 5 years. RPL was managing 2026-2030 Queen Street from 2009 for Shoppers as well. This entire project was a major development effort with great value to both sides that took a long time to work through.

[11] Then two things happened. In mid-2013 Loblaws bought Shoppers. In early 2014, RPL flipped 2026-2030 Queen Street to an affiliate of Sobeys – a competitor of Loblaws. Nothing in the agreement between RPL and Shoppers limited RPL’s entitlement to sell 2026-2030 Queen Street to whomever it wished. But, Loblaws was not amused. Although there had been a small Sobeys store nearby when the project commenced, the idea of Sobeys buying a developable site near its new Shoppers was not to Loblaws’ liking.

[12] Shoppers told RPL that its parent was unhappy. Discussions ensued with RPL offering to decline to agree to any extensions of time sought by Sobeys under its agreement of purchase and sale and Shoppers indicating that it would consider holding RPL harmless for its loss of profit of $370,000 on its flip of the property. Sobeys ultimately waived its conditions and did not ask for any extensions of time. Its agreement went firm. However, the agreement between RPL and Sobeys contains a term entitling RPL to get out of the agreement and return Sobeys deposit if RPL cannot convey title to Sobeys due to its purchase from Shoppers not closing. So, Shoppers submits that if RPL is entitled to damages, its damages are capped at its loss of profit on the sale to Sobeys of $370,000 subject to reduction for mitigation.

[13] By letter dated June 13, 2014, Shoppers’ project manager gave notice to RPL that Shoppers elected to take possession of 2000 Queen Street on June 16, 2014. Shoppers did indeed take possession of the store and changed the locks that day. RPL billed it for rent one month later. There was no lack of clarity or ambiguity as to what had happened. Shoppers made a clear statement that it was taking possession under the lease and it did so.

[14] As set out above, clause 2.2(b) of the APS required RPL to pay the second deposit of $75,000 “contemporaneously upon [Shoppers] taking possession.” RPL did not pay the deposit as required. Shoppers stayed quiet. It waited. After four days, on June 20, 2014, Shoppers purported to terminate the APS due to RPL’s failure to pay the second deposit as required. RPL tendered the $75,000 deposit that day. It is being held by counsel on consent pending the outcome of this case.

[15] RPL says that Shoppers’ letter dated June 13, 2014 was unclear. It did not refer to the timing of substantial completion of the landlord’s work. It listed certain deficiencies but it did not explain whether it was demanding that the deficiencies be fixed by RPL or if it was doing so itself. None of this, in my reading of the letter, takes away from the clarity of the statement that Shoppers was taking possession. That is the only precondition to the second deposit becoming due.

[16] RPL also complains that the June 13, 2014 letter is not from the subsidiary of Shoppers that is the actual tenant of 2000 Queen Street under the offer to lease. That is true. But no one was misled or surprised. It is clear that an authorized agent was speaking for Shoppers and its subsidiaries. RPL reacted right away by trying to pay the second deposit. It knew who it was dealing with and what was happening. In its letter of June 20, 2014 responding to the termination of the APS, it argued that four days was “contemporaneously” and it denied that timing was important to Shoppers in light of the relationship between the parties. It argued that had Shoppers warned it that the deadline mattered, it would have paid. The identity of the author of the termination letter is not a relevant issue in this case. Firkin Pubs Metro Inc. v. Flatiron Equities Ltd., 2011 ONSC 5262 at paras. 41 to 44. Premium Properties Ltd. v. Subway Franchise Restaurants of Canada Ltd., 2014 ONSC 3150 at paras. 46 and 50.

[17] As to the argument that “contemporaneously” can mean “in four days,” I was presented with no law to suggest that the meaning of a word can be changed to fit a party’s position. There is no ambiguity to the meaning of “contemporaneously”. Its ordinary and grammatical meaning is “occurring at the same time.” Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para. 47. Shorter Oxford English Dictionary, 6^th ed. Shoppers gave notice on June 13 that it was taking possession on June 16, 2014. RPL had plenty of time to cut their cheque.

[18] Nor can RPL argue that Shoppers was obliged to give it notice of the requirement that it pay its deposit. Simply put, the contract does not say so. RPL has submitted no evidence explaining why it did not make its payment as required. It argues that it was sandbagged by Shoppers who continued to conduct business as usual during the time when it was just hoping that RPL would not pay. RPL did not disappoint. But there is nothing in the record to establish that Shoppers did anything in the period to mislead or lull RPL into its complacency. Shoppers’ witness was equivocal at best. RPL did not point to any particularized evidence of anything said or done by Shoppers during the four days of significance. The only written communication was from RPL’s lawyers to Shoppers concerning negotiations over the Sobeys purchase of 2026-2030 Queen Street. Shoppers’ witness clearly denied having planned the strategy to terminate the APS. They reacted once RPL gave them the opening.

[19] RPL says that in light of the relationship that has developed, each of the parties is comfortable with the other. They are tolerant of some laxness. They expect and are entitled to good faith efforts to be open and honest with each other. All of this is motherhood until RPL goes further and says that in light of the relationship, it expects Shoppers to give it notice of its impending commitments before Shoppers purports to give notice of default.

[20] Shoppers of course denies that it has agreed to any such term. It is always open to parties to negotiate for notice if they want or expect it. If their counter-party is so accommodating, it should readily agree. However, absent an estoppel, I do not see how I can imply such a term into a negotiated agreement among sophisticated parties that contains an entire agreement clause (clause 9.3). There are several clauses in the operative agreements among the parties, including the APS, that require various notices to be given. Implying a notice requirement for other things that were not negotiated is not necessary to give business efficacy to the agreement. Nor would a disinterested third party think it obvious that a notice clause was required before Shoppers could note RPL in default for breach of the APS where the agreed upon terms of the agreement do not require that notice be given.

[21] The case law is also clear that there is no duty to remind a party of its obligations – especially not sophisticated parties. 1376273 Ontario Inc. v. Knob Hill Farms Ltd., 2003 CanLII 28382 (ON SC), [2003] O.J. No. 2364 (S.C.J.) at para. 108. In Bhasin v. Hrynew, 2014 SCC 17, Cromwell J. made a specific reference to the limits on the duty of good faith recognized in that case. At para 86, he wrote:

But a clear distinction can be drawn between a failure to disclose a material fact, even a firm intention to end the contractual arrangement, and active dishonesty.

[22] The duty of good faith does not require reliance (see para 88 Bhasin) but it does require active dishonesty. Bhasin is a very measured case which makes little incremental change to the common law. Warburg-Stuart Management Corporation v. DBG Holdings Inc. et al., 2015 ONSC 1594 at para. 38. There is no basis to find that Shoppers was required to make demand for the deposit under clause 2.2(b).

[23] Shoppers also notes, rightly, that the APS contained a clause that made time of the essence. In 1473587 Ontario Inc. v. Jackson, 2005 CanLII 4578 (ON SC), [2005] O.J. No. 710 (S.C.J.) at para. 19, Rutherford J. asked rhetorically:

How more clearly could contracting parties make conditions as to the timing of performance essential than by simply saying, time in all respects shall be of the essence of this agreement?

[24] Shoppers relies as well on Union Eagle Ltd. v. Golden Achievement Ltd., [1997] A.C. 514 a decision of the Privy Council on appeal from the Court of Appeal of Hong Kong. In that case, the court held that a closing that was just 11 minutes late for the deadline could not be saved when time was of the essence. The court stressed the need for certainty in real estate transactions so that vendors can know that they are free to re-sell. At post “C” on page 519, Lord Hoffman states that:

The existence of an undefined discretion to refuse to enforce the contract on the ground that this would be “unconscionable” is sufficient to create uncertainty. Even if it is most unlikely that a discretion to grant relief will be exercised, its mere existence enables litigation to be employed as a negotiating tactic.

[25] While certainty is a very important attribute of commercial law, in Canada perhaps Lloyds Bank Ltd. v. Bundy, [1974] 3 All E.R. 757 (C.A.) enjoys wider application than it does in the UK. We do recognize a limited discretion to refuse to enforce unconscionable contracts. Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4. Moreover, litigation can always be threatened as a bargaining chip. Furthermore, we have statutory relief form forfeiture. There is no absolute certainty that a termination will be unimpeachable in Canada. The Privy Council goes too far, in my respectful view, at post “G” of page 520, in suggesting that there can be no specific performance for any breach related to the timing of performance. Several exceptions are pointed out by Lord Hoffman on the very next page.

[26] There is no term of the APS specifically allowing termination without notice for non-payment of the deposit. In fact, the termination clause in the APS is very narrowly drawn. This is an important distinction from most of the “time is of the essence” cases on which Shoppers relies. Usually the right of the innocent party to terminate the contract is not even considered in the cases because the agreements clearly provide for termination on specified breaches. In this case however, there is no express term of the contract enabling Shoppers to terminate the APS for late payment of the second deposit. Shoppers’ right to terminate, if it has one, flows from common law principles rather than from the contract itself.

[27] Thus, while I accept that RPL committed a breach of contract by failing to pay the second deposit contemporaneously with Shoppers taking possession, that is only the first step in the analysis. The next question is whether the breach allowed Shoppers to terminate the agreement.

[28] In Shelanu Inc. v. Print Three Franchising Corp., 2003 CanLII 52151 (ON CA), Weiler J.A., writing for the unanimous panel of the Court of Appeal, described the test for assessing whether a breach of contract is a sufficient negation of the relationship to allow the innocent party to terminate the contract as follows:

[118] Professor Waddams addresses the variety of expressions that have been used to define the sort of breach that will excuse a party from further performance under a contract in his text: Waddams, supra, at para. 583. Waddams says that behind all of these expressions lies a single notion, that of substantial failure of performance. Irrespective of the expression used, he proposes five factors derived from the jurisprudence to measure whether future performance under a contract should be excused at para. 587. In 968703 Ontario Ltd. v. Vernon (2002), 2002 CanLII 35158 (ON CA), 58 O.R. (3d) 215, 22 B.L.R. (3d) 161 (C.A.), this court, after referring to the decisions in Robson, supra, and Bayer, supra, adopted and applied the factors suggested by Waddams to measure whether future performance should be excused. They are: (a) the ratio of the party's obligation not performed to the obligation as a whole; (b) the seriousness of the breach to the innocent party; (c) the likelihood of repetition of such breach; (d) the seriousness of the consequences of the breach; and (e) the relationship of the part of the obligation performed to the whole obligation.

[29] This test has been variously referred to as “fundamental breach,” “material breach,” a breach that “deprives the innocent party of substantially the whole benefit of the contract” or one which “evinces an intention to no longer be bound.” The label does not matter. The point is that not every breach entitles the innocent party to terminate the contract. A termination for an immaterial breach is an over-reaction that is not fair and is implicitly beyond the deemed contemplation of the parties at the time that the contract was formed.

[30] In this case, applying the five Waddams factors:

(a) The ratio of the deposit to the obligation as a whole is $75,000 to $3 million or $25 million depending on whether one views the APS as a standalone obligation or part and parcel of the redevelopment of 2000 Queen Street. It makes no difference. The reality is that the quantum was insignificant one way or the other. RPL could easily afford to pay it. Its failure to do so was not any kind of an indication that it was backing out of the deal. It had been working for five years and it was still finishing off its obligations.

(b) Apart from the fact that the breach gave Shoppers a technical way out, the breach was of no consequence to Shoppers. Having said that, it should be noted that deposits can be vital components of all manner of commercial agreements. In the insolvency world, seeing a significant deposit is often the key component of the acceptability of a sale of collateral. In residential real estate sales and in a wide variety of other transactions as well, deposits can reflect a true earnest to bind the bargain. In the unusual facts of this case however, apart for the fact that it was agreed upon, there was no commercial significance to the second deposit; nor can Shoppers point to any prejudice by RPL’s tardiness.

(c) This was the last deposit. There was no likelihood of repetition. Moreover, while it was not obliged to do so, had the deposit mattered to Shoppers for anything other than providing a tactical basis to terminate the agreement, it could have asked for it and it would have been paid.

(d) There was no serious consequence of the breach apart from the formal issue that a clause protected by a “time is of the essence” clause was violated.

(e) The relationship of the second deposit to the obligation as a whole is minimal in this case. RPL had performed the bulk of its bargain over five years at great cost and effort. It had agreed to take the first property back from Shoppers and was going to recoup a profit of a few hundred thousand dollars for its trouble in taking on the sale obligation. That property was not redeveloped and had just sat for past five years. But for the fact that RPL did not think about or was not concerned by the notion of upsetting Loblaws, the property was surplus to the intention of the long term business deal and was irrelevant to the parties.

[31] In the unusual circumstances of this case therefore, RPL’s breach was not a material breach. It did not give Shoppers the right to terminate the APS. Shoppers June 20, 2014 letter was therefore itself a breach of the APS.

[32] RPL asks for a declaration of right that the agreement is still on foot. It asks the court to enforce the contract. The common law provides damages as a remedy for breach of contract. Specific performance is an equitable remedy that has been quite limited over the past few decades. It is clear that specific performance will not be ordered of an agreement to buy land and flip it for profit. John E. Dodge Holdings Limited v. 805062 Ontario Limited, 2003 CanLII 52131 (ON CA), 2003 CarswellOnt 342 (CA) at paras 38 to 40. Mutual Apartments Inc. v. Lam Estate, [2009] O.J. No. 2695 (S.C.J.) at pars 68 and 69.

[33] The court is not in the position to determine the damages to which RPL may be entitled at this hearing. Issues such as mitigation have yet to be canvassed on the facts. The parties should consider the process by which damages will be assessed. A summary hearing is preferable given the amount in issue in my view. If the parties cannot agree by June 12, 2015, they may contact my office in accordance with Rule 1.09 to schedule a case conference under Rule 50.13. The parties are on notice as required by Rule 50.13(6)(c) that at the case conference I will give directions as to the form of process for proof of damages.

[34] Finally, Mr. Du Vernet did not press the issue of the termination of the applicant’s management contract. He said that its fate followed the main issues. However, I cannot tell if Shoppers had a right to terminate that contract which may have very distinct attributes as compared to the APS. While the tail should not wag the dog, i.e. the most minor issue should assume prominence, I am prepared to hear the parties on what to do with this issue. If they cannot agree, I will make directions at a case conference on this as well.

[35] The parties agreed that partial indemnity costs should be awarded to the successful party. While Shoppers may have attained its goal of keeping the property away from its competitor, it has been found guilty of breach of contract and required to pay damages. It says that it has been willing to do so throughout. That pudding was not proven however by an offer to settle or otherwise. I have reviewed the parties’ costs outlines. The rates and hours billed by the applicant’s counsel are reasonable. The quantum is well within the range that Shoppers ought to have expected to pay in a hard fought commercial piece of litigation such as this. 217 shall pay costs to RPL in the amount of $39,181.45 all-in.

________________________________ F.L. Myers J.

Date: May 29, 2015