ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
STARRCOLL INC.
Kevin W. Fisher, for the Applicant
Applicant
- and -
2281927 ONTARIO LTD.
John O’Sullivan, for the Respondent
Respondent
AMENDED JUDGMENT[^1]
D.L. Corbett J.:
[1] The applicant (“Starrcoll”) sold three apartment buildings from the respondent (“228”) pursuant to an agreement of purchase and sale dated February 18, 2011 (the “APS”).
[2] A portion of the purchase price was subject to escrow terms as follows (APS, s.3.2(c)):
Payment by the purchaser of the sum of $300,000.00 payable to the Vendor’s solicitors and to be held in an interest bearing escrow account with a Canadian chartered bank (the “Escrow Amount”) to secure the performance of the property for the three year term commencing at closing (the “Performance Period”). At the end of the Performance Period, to the extent the Rent Roll of the buildings (in the same format as set out in Schedule “C” hereto) reveals gross rental of no less than $960,000.00 (the “Gross Rental Threshold”), and upon being presented with a Statutory Declaration to the Purchaser or an authorized agent of the Purchaser, or a representative of the Manager, the Vendor’s solicitors in trust shall pay the Escrow Amount to Vendor and the Vendor’s solicitors shall require no further direction to pay out the Escrow Amount. To the extent that at the end of the Performance Period, the Gross Rental Threshold has not been achieved, on the evidence of the Statutory Declaration of the Purchaser or an authorized agent of the Purchaser, or a representative of the Manager, the Vendor’s solicitors, without the need of a further written direction, shall pay from the Escrow Amount [to] the Purchaser the sum of $5.00 for every dollar that the Rent Roll of the Buildings is less than the Gross Rental Threshold (the “Capitalization Payment”) and pay to the Vendor any balance remaining after making the Capitalization Payment. Interest on the Escrow Amount shall be paid to the Vendor as earned. [emphasis in original]
[3] The purchase closed on May 2, 2011, and the “Performance Period” under clause 3.2(c) ran from May 2, 2011 to May 2, 2014.
[4] The property manager provided a statutory declaration dated April 29, 2014 stating that the Rent Roll for the buildings as of May 1, 2014 was $975,932.64. Since this amount exceeds $960,000, on the strength of the property manager’s statutory declaration, the Gross Rental Threshold had been met by the end of the Performance Period. On this basis Starrcoll sought payment of the Escrow Amount.
[5] 228 disputed that the terms of s.3.2(c) of the APS had been met. It delivered a competing statutory declaration on the basis of its interpretation of s.3.2(c), and took the position that it is entitled to payment of the entire Escrow Amount.
[6] The issue on this application is the correct interpretation of s.3.2(c) of the APS. The underlying facts to which this interpretation is applied are not in dispute. On this basis, this proceeding is properly brought as an application and I am satisfied that I can decide the issue without hearing oral evidence.[^2]
The Competing Interpretations
[7] Starrcoll argues that s.3.2(c) was intended to address projected income potential for the buildings. Thus, for Starrcoll, the focus is on the total of the Rent Roll by the end of the Performance Period.
[8] 228 argues that, on a plain reading, s.3.2(c) was intended to address performance of the buildings during the three year period after the transaction closed. The focus should be on the Rent Roll over the three year escrow period, and not the state of the Rent Roll solely at one particular moment in time.[^3]
Principles of Contractual Interpretation
[9] Where there is no ambiguity in a written contract it should be given its literal meaning. Words should be construed in their plain and ordinary sense unless to do so would result in a commercial absurdity. In construing particular words and provisions, they should be placed within the context of the entire contract, construed as a whole, to the extent that is possible.[^4]
[10] In some circumstances it is appropriate to construe a contract strictly against one of the parties, the so-called contra proferentum principle. That is not this case. This was a negotiated commercial agreement. The parties to the contract were both sophisticated commercial parties, free to contract with each other, or not, as they saw fit. The goal in interpreting s.3.2(c) should be to determine the meaning the parties intended when they made the contract, as divined from the words they chose to reflect their intention.
[11] The court may consider “objective evidence of the factual matrix underlying the negotiation of the contract” to resolve any ambiguity in the contract. However, where a party claims that a literal, plain-meaning reading of the contract leads to a commercial absurdity, the court may look at objective extrinsic evidence to assess the commercial reasonableness of the plain meaning.[^5]
[12] Starrcoll argues that the contract provides that the Escrow Amount is payable if the annualized Rent Roll reaches the Gross Rental Threshold during the Performance Period. The annualized Rent Roll for April 2014 was over $975,000, which exceeds the Gross Rental Threshold. But how can this reading square with the express purpose of the provision: “to secure the performance of the property for the three year term”?
[13] Starrcoll argues that the “performance” that is referenced is the improvement in the gross rent that the property can command. These are residential properties, subject to rent controls and security of tenure that limit annual increases in the rent roll. Starrcoll’s price was based upon its position that the rent roll could be increased through improvements to units that fell vacant. 228 disputed that the rent roll would increase so much. The parties agreed to hold $300,000 in escrow under s.3.2(c) to see if the rent roll could be increased to $960,000 over the course of three years. Thus, Starrcoll argues, the snapshot based on any month during the Performance Period was an appropriate measuring stick chosen by the parties to determine if gross rents achievable by the buildings could reach $960,000.
[14] 228 responds that this leads to a commercial absurdity. The buildings never achieved annual gross rents of $960,000 during the Performance Period. 228 points out that the buildings could have been entirely vacant during most of the Performance Period but yet, under Starrcoll’s interpretation, the escrow funds would be payable if the gross rents on an annualized basis were achieved in a single month. Theoretically that is true, but the scenario is itself absurd, unless brought about intentionally, and even then, it would be very difficult to do given the security of tenure enjoyed by residential tenants.
[15] 228 places emphasis on the phrase “to secure performance of the property for the three year term”. It argues that the proper interpretation of the provision is to assess the extent to which total gross rents averaged $960,000 per year. But that is not what the rest of the provision says. The parties are to look at the Rent Roll, not the total gross rents received over the Performance Period. If 3.2(c) was intended to secure gross rents of at least $960,000, whether annually or on average, over the entire three year period, then there would be no need to look at the Rent Roll at the end of the Performance Period. Actual gross rents for the period would be the data required to determine if rents received had met the $960,000 level.
[16] 228 argues for a close but alternate reading to the “gross rents” approach. It argues that recourse is to be had to the Rent Roll to determine whether gross rents reached an annualized level of $960,000 for any twelve month period during the Performance Period. But this reading must also fail: again, why have recourse to the Rent Roll for one month if the analysis is to be actual gross rents received for 12 months? And nothing in the language of s.3.2(c) supports picking any consecutive 12-month period to determine if the target of $960,000 was met.
[17] 228 notes that annual gross rents in year 1 were $860,956. In year 2 they were $915,686. In year 3 they were $904,362. The one and only month that gross rents met or exceeded $80,000 ($960,000 annualized) was April 2014. 228 argues that the applicant’s interpretation is based, not upon “rental income”, but “projected rental income”. And even then, 228 argues, the projected income is based on an assumption that all tenants as of April 2014 would remain in place, paying their full rent, to April 2015.
[18] With respect, several of 228’s proposed interpretations would lead to an absurd result. Its position that the rents for the entire performance period are the measuring stick cannot possibly be right. If the buildings were fully occupied for the maximum chargeable rents for the first two years of the Performance Period, gross annual rents could not have reached $960,000. This was known at the time the APS was signed. It would hardly make sense for the parties to set up a target that both sides knew could not be met. The same conclusion applies if annualized rents for the entire Performance Period were averaged: on a practical basis it would not have been possible to reach an average of $960,000 for the three years of the Performance Period.
[19] These facts support the commercial reasonableness of Starrcoll’s interpretation. It took the position that annualized rents could be increased over three years so that future potential rents would reach $960,000. That is how rent rolls are used in the residential rental business according to Harold Green, the real estate agent and broker who acted for both sides on this transaction. Rent rolls are a more accurate projection of future income than are historic rents received and so rent rolls are relied upon in the industry to determine value. This evidence is independent and credible, and 228 had no answer to it.
[20] I find that the language of s.3.2(c), in its plain and ordinary meaning, provides that the Escrow Amount will be payable to Starrcoll if the Gross Rental Threshold is achieved in any month during the Performance Period. I find that the provision is not ambiguous, and so that recourse to extrinsic evidence is not necessary to construe this provision. I find that the provision does not lead to a commercial absurdity. When examining the objective extrinsic evidence to assess whether the result is absurd, I find that the purpose of the provision was to test the extent to which chargeable rents could be increased over the Performance Period. I find nothing commercially unreasonable in this result.
[21] The Gross Rental Threshhold was met in April 2014. The Escrow Amount, together with accrued interest, is payable to Starrcoll.
[22] If the parties cannot agree on costs then Starrcoll shall make brief written submissions by June 30, 2015. 228 shall make brief responding submissions by July 31, 2015.
[23] Judgment accordingly.
D.L. Corbett J.
Released: 20150609
COURT FILE NO.: CV-14-507080
DATE: 20150609
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
STARRCOLL INC.
- and –
2281927 ONTARIO LTD.
JUDGMENT
D.L. Corbett J.
Released: 20150609
[^1]: Paragraph 1 has been amended to correctly reflect that Starrcoll was the vendor, not the purchaser, of the apartment buildings.
[^2]: R.14.05(3)(d), (h).
[^3]: Starrcoll argued that 228 has offered several competing and inconsistent interpretations. In my view that is not relevant. 228 has been consistent that it disputes Starrcoll’s interpretation as commercially unreasonable.
[^4]: Fridman, Law of Contract in Canada (5th ed.), pp. 454-462.
[^5]: Sameluk v. Wild Goose Bay Cottagers’ Assn., 2010 ONSC 3895; 3869130 Canada Inc. v. I.C.B. Distribution Inc., 2008 ONCA 396.