2015 ONSC 3833
BARRIE COURT FILE NO.: 15-0205
DATE: 20150612
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Mapleview-Veterans Drive Investments Inc., Applicant
AND:
Papa Kerollus VI Inc., c.o.b. as Mr. Sub, c.o.b. as Mr. Submarine-Mapleview and Mr. Submarine Limited, Respondents
BEFORE: THE HON. MR. JUSTICE G.M. MULLIGAN
COUNSEL: I.P. Katchin, Counsel for the Applicant
S.M. Addison, Counsel for the Respondent, Papa Kerollus VI Inc., c.o.b. as Mr. Sub, c.o.b. as Mr. Submarine-Mapleview
No one appearing for the Respondent, Mr. Submarine Limited
HEARD: May 28, 2015
ENDORSEMENT
[1] The applicant, Mapleview-Veterans Drive Investments Inc., brings an application seeking an order that its tenant, Papa Kerollus VI Inc. is in breach of a commercial lease, a declaration that the renewal option is void for uncertainty, and collateral relief. The tenant, Papa Kerollus VI Inc. (Mr. Sub) opposes the relief sought. An order is also sought against Mr. Submarine Limited (Corporate). That respondent, although served, did not appear at the application hearing.
[2] The background facts are not in dispute and can be simply stated. Mr. Sub entered into a lease with the applicant’s successor in title in June of 1999, for premises known as 103 Mapleview Drive West, Barrie. The lease was for a fifteen-year period and had a right of renewal. By way of a Memorandum of Agreement in 2000, the tenant and the landlord’s predecessor in title amended the lease agreement to provide a commencement date of June 1, 2000, and a termination date of May 31, 2015. Several years later, the applicant acquired title to the said property and took an assignment of the lease, thus becoming the landlord. The lease contained a right of renewal for a further five-year period, provided that the tenant gave notice to the landlord at least six months in advance of May 31, 2015. Notice was given in November of 2014 and received by the landlord within the six-month timeframe.
[3] In support of their positions, both the applicant landlord and tenant respondent filed affidavits. Both affiants were cross-examined, and issues regarding undertakings and refusals were addressed subsequently by the parties.
[4] The issue to be determined by the court can be simply stated:
(i) was the renewal option void for uncertainty?
(ii) was the tenant in breach of its obligations under the lease and therefore disentitled to a renewal of the lease?
The Subject Property
[5] It is relevant to note that the subject property contains two commercial structures, as well as a vacant portion of land suitable for commercial development. The first commercial building is the Mr. Sub location said to contain about 1,600 square feet of usable space. The second commercial building is a Royal Bank of Canada branch, said to contain 4,950 square feet of usable space. In addition, both tenants have common use areas within the landlord’s parcel.
[6] The following paragraphs from the lease will provide context for the discussion that follows:
- Term
Provided that the tenant has paid the rent and other sums payable under this lease when due and, provided that the tenant has performed all other covenants under the lease as and when the same are required to be performed, the tenant shall have the option to renew for one further term of five (5) years each, provided that the written notice is given to the landlord at least six (6) months prior to the expiry of the term or any previous renewal thereof, on the same terms and conditions as herein contained, save as to the rental rate which shall be the then current rate. [Emphasis added.]
- Common Area Maintenance
In every year during the term, the tenant shall pay to the landlord upon demand as additional rent, a sum equal to the tenant’s percentage of the total monthly cost of maintaining, replacing and repairing the common area and fixtures, equipment, services or improvements to, upon or under the common area, and maintaining and repairing the foundations, outer walls and roof of the building of which the demise premises form a part (except for the liability of the landlord under Clause 5), plus administrative fee of fifteen percent of the expenses under Clause 8 through Clause 13 inclusive, and above the total base rent payable under the lease to maintain the property.
[7] It should be noted that the administrative fee of fifteen percent made reference to Clause 8 (repairs), Clause 9 (public liability insurance), Clause 10 (share of taxes), Clause 11 (utilities), Clause 12 (insurance costs).
[8] The base rent in the lease increased after the first five years, and again after the first ten years, so that the base rent at the time of the application was $3,666.67. There is no dispute that the tenant has paid the base rent throughout the period of time in accordance with the lease. The issue under dispute is whether or not the tenant has paid the appropriate amount of additional rent plus administrative fees properly attributable to it under the provisions of the lease.
The Relationship Between Landlord and Tenant
[9] The tenant enjoyed a good relationship with the existing landlord, and that good relationship continued until things turned sour in 2013. The reasons for deterioration in the relationship from the tenant’s point of view were set out in para. 18-20 of the affidavit of Mary Athanasios, manager of the tenant. As she stated:
18-20. In the spring of 2013, the landlord requested that we consider relocating our business from the premises to another property owned by the landlord further down the street. … It was after we rejected the landlord’s request to relocate to its other property that the manner in which he dealt with us changed.
[10] By way of supplementary affidavit of Steven J. Martin, president of Mapleview, the landlord takes a different position. At para. 7, Mr. Martin states:
It is simply not the case that the manner in which the landlord dealt with the tenant changed after the tenant declined to relocate to a new property. This is a complete fabrication by Mrs. Athanasios. The landlord continued to deal with the tenant in the same manner as it always did – prompt and courteous.
[11] Shortly thereafter, the landlord issued a Notice of Default. The notice dealt with a number of matters, dealing with garbage bins, third party signs, parking lot lights issues and maintenance failures. The only rent issue was that the tenant was habitually late. The default did not deal with the monthly common elements or expense issues.
[12] Volumes of correspondence followed this notice. However, I am satisfied that by the time of this application, those defaults had been substantially cured. The tenant had been delivering the rent in a timely fashion in strict compliance with the lease. The advertising signs had been removed. Maintenance issues had been addressed. The only lingering issue was the parking lot lights issue. Each party’s position was set out in their affidavit. I conclude by saying that the tenant was in substantial compliance of these issues and the 2013 defaults are not a factor on this application.
Is the Renewal Option Void for Uncertainty and Unenforceable?
[13] I will deal with this issue first because it will be determinative of the issue of whether or not the tenant’s right of renewal exists. If no right of renewal exists, the lease it at its end and the issue for determination is what, if anything, the tenant owes for rent arrears. Alternatively, if the lease does provide for a right of renewal, then it falls to be determined whether or not the tenant was in default of the lease and therefore unable to avail itself of the renewal option.
[14] Both counsel provided cases on point. The essence of the landlord’s position is that the clause in the lease is merely an agreement to attempt to agree, or an invitation to treat. The landlord points out that there is no arbitration clause in the lease and no fixed mechanism for determining “current rates”.
[15] The tenant’s position is that the wording of the lease is clear, and current rates can be determined by the court provided that landlord and tenant provide expert evidence on “current rates”.
[16] The landlord relies on Delphi Management Corporation v. Dawson Properties, 2014 ONSC 354. Justice Wright noted at para. 10, “The general rule is that the law does not recognize a contract to enter into a contract, nor a contract to negotiate” (citation omitted). On the facts before him, Justice Wright found at para., “Without specific guidelines for the calculation of rent or a provision for arbitration, the new option to renew was just an unenforceable invitation to treat.” On the facts before him, His Honour found that the tenant was in breach of three pre-conditions as to renewal:
(a) due and regular payment of rent;
(b) performance of all covenants;
(c) a written request mailed within timelines set out in the lease.
However, the wording in the lease before the court was different than the covenant here. As Justice Wright noted, section 5.11 of the lease between Delphi and Dawson provided:
If the tenant duly and regularly pays the said rent and performs all and every covenant …the landlord …shall grant to the tenant renewal of the lease of the leased premises for a further term of five years at a monthly rent to be determined by agreement … [Emphasis added.]
[17] Justice Wright went on to note at para. 9, “I accept that renewal is not void for uncertainty merely because the rent was not agreed upon in advance if the rent can be reasonable ascertained by the court or arbiter” (citation omitted).
[18] The tenant relies on Mustard Seed (Calgary) Street Missionary Society v. Century Services Inc., [2009] ABQB 171. The lease in question before the Court contained the following renewal clause:
The tenant provided written notice to the landlord, a minimum of one month prior to the expiry of the initial term of the lease, requesting a five-year extension of the lease. The net rent payable by the tenant during the renewal term shall be agreed by the landlord and tenant at the then prevailing market rates. [Emphasis added.]
[19] On the basis of that clause, the court declined to find the clause void for uncertainty. As the court noted at para. 25:
I am persuaded to this position by the decision of Megarry J. in Brown v. Gould & Others, 1972 [All ER], 1505 (C.H. Div.), an authority that appears to have been regularly applied in this court and elsewhere in Canada.
[20] In Mustard Seed, Justice E.C. Wilson stated, “I am well satisfied that the parties to this lease clearly intended that the renewal provision was to have legal effect.” As Justice Wilson further noted at para. 35:
Megarry J. makes this clear:
If the parties disagree as to the rent payable under such a formula, then in my judgment, since the lease provides no other machinery, the court has jurisdiction to determine it.
In all probability, if such a formula were to be given to a valuer employed by the landlords and a valuer employed by the tenant, the figures produced by the two valuers would not be identical; valuation is like that. Yet, in all probability also, if those valuers gave evidence before the court and were duly cross-examined, the court could reach a conclusion. Courts and tribunals have long been hardened to resolving such conflicts.
[21] As it happens, the parties discussed an extension of the lease in 1999. The tenant wished to extend the lease to incorporate the anticipated five-year renewal within a new lease which would match its franchise agreement. The parties discussed values. The tenant submitted its proposal. The landlord made a counter-proposal. However, at the end of the day, no agreement was reached on what the anticipated rent would be for the period 2015 to 2020, which would have been five years into the then future.
[22] In my view, the use of the words “current rates” in the lease is a clear intention that the parties anticipated a renewal, and that the renewal rate would have legal effect. Although there was no provision for arbitration, there was nothing preventing the parties from making proposal and counter-proposals in 2015, similar to the approach they took in 2009. If the issue was not resolved, the parties could have resorted to a decision by arbitration or the courts as to the current rate to be applied to the subject premises.
[23] I conclude that the lease was not void for uncertainty, and that there was a valid renewal clause available to the tenant, provided that the tenant complied with the covenants in the lease.
Is the Tenant in Default Under the Lease and Therefore Disentitled to Exercise its Renewal Option?
[24] It is clear that it is a term of the lease that an option to renew is available provided that the tenant has paid rent and “all other sums payable under this lease when due”.
[25] The position of the landlord and of the tenant can be simply stated. It is the landlord’s position that the tenant is in arrears with respect to sums arrived at after annual reconciliations. Further, the tenant has not paid the increased monthly rent derived from the most recent annual reconciliation of expenses. The position of the tenant can be captured by reference to paragraph 49 of the tenant’s factum, “The landlord cannot rely on its own defaults of the lease, such as the improper allocation of expenses, to deny the tenant its right to exercise the option to renew the lease.”
[26] With respect to lease renewals, courts have long followed the principles set out in Finch v. Underwood (1875), 2 Ch. 310 (C.A.). As Mellish L.J. stated at p.315:
The tenant must take the covenant to renew it as he finds it; if it contains conditions precedent, he must comply with them before he can claim the benefit of it, and if he has not done so, a Court of Equity cannot relieve him.
[27] In Clark Auto Body Ltd. v. Integra Custom Collision Ltd., [2007] BCCA 24, the Court applied the Finch principles and concluded at para. 30:
There is no compulsion on the tenant to exercise the renewal option, but if it does so, the tenant must comply with the conditions precedent. If the tenant fails to comply, it does not suffer a penalty or forfeiture of an existing tenancy. Equity will not intervene.
[28] The tenant has paid rent throughout the tenancy term and has paid increased rent as its portion of the common expenses, taxes and utilities, until it received a notice on May 12, 2014, requesting a revised rent of $7,250.84 monthly, commencing June of 2014. This figure captured the basic rent, the operating expenses, the property taxes, and HST. Prior to this date and for several years, the tenant had been paying $6,233.84. The tenant continued to pay this lower figure and refused to pay the increased amount. The notice sent May 12, 2014 also enclosed a summary of common and tax costs for 2012, and requested a balloon payment of $2,275.67. There was no indication why this reconciliation was not sent in 2013, in accordance with the provisions of the lease. 2013 reconciliations were also provided with this note.
[29] As a result, the tenant retained counsel and correspondence back and forth between counsel followed. Tenant’s counsel requested and eventually received back-up documents to support these monthly statements. When the landlord completed its review, the payment demanded for the December 31, 2012 period rose from $2,275.67 to $8,412.78.
[30] The December 31, 2013 reconciliation delivered at the same time, set out that the amount due was $11,763.49.
[31] By the time of the hearing, the landlord submitted that the arrears had risen to $56,105.21.
[32] The tenant’s solicitor requested further information. Its letter of August 1, 2014 stated:
This is the first time in fourteen years that the tenant has received an annual summary from the landlord. Please advise if the landlord will provide the tenant with annual summaries for 2010 and 2011, pursuant to the lease.
[33] At the application hearing, the tenant’s counsel raised a number of issues or problems with the accounting, both as to the mathematics, the allocations between the tenant and the adjacent tenant, RBC, and changes to the manner of billing for subcontractors.
[34] Paragraph 3(c) of the lease is clear as to the tenant’s requirements to pay its proportionate share in monthly installments over a twelve-month period. Cost of maintaining, replacing and repairing common areas were to be paid yearly upon demand. A review of the Summary of Common Expenses for 2009, 2010, 2011, 2012, 2013, indicates that the tenant paid monthly payments totalling $14,100 in each of these years for rent and common expenses. The December 31, 2013 figure showed a shortfall of $11,763.49.
[35] The tenant called into question a number of figures used in the landlord’s summaries. After cross-examination and answers to undertakings, the tenant obtained a copy of the lease from the Royal Bank. Common expenses are divided between the two tenants, Mr. Sub and RBC. Examination of the RBC lease indicated that the premises were 4,950 square feet. The Mr. Sub location is 1,600 square feet. The tenant submits that its location constitutes 24% of the subject property, and therefore it should bear only 24% of the expenses.
[36] It appears that the landlord was billing on a different basis. The expense statement provided to RBC showed a split of 35/65%. A similar statement provided to Mr. Sub omitted any reference to the 35/65% allocation. It was the landlord’s position on cross-examination that this percentage was first instituted by the previous landlord/owner and simply carried on by the applicant. The tenant submits that it was unable to scrutinize this allocation over the years because it was never provided with the square footage of the RBC building. It should be noted that if this allocation is wrong, then the 15% management fee applied is also wrong.
[37] The tenant also submits that the landlord changed his method of billing for subcontractors without informing the tenant. For example, snow removal contractors were requested to bill separately for each location, so that each location received 100% of the bill for its own location. The tenant submits that while this may be a fair allocation, they were never given notice of this change which related to increased cost to them.
[38] The tenant points out that all of the insurance costs were attributed to them. There was no cost to RBC. Although there may be a logical explanation for this if RBC arranged and paid for the landlord’s insurance directly, there was no explanation to the tenant for this variation from the expectations set out in the lease and the earlier billing.
[39] The tenant also points out certain mathematical errors which appear to indicate that there were different totals used on the figure submitted to Mr. Sub or RBC, compounding the percentage allocation of costs between the two tenants.
Conclusion
[40] In my view, there is a live issue as to the proper calculation of what the tenant owes for additional amounts. A tenant is entitled to know with some degree of accuracy what arrears exist, so that it can put itself in a position where it is not in default when exercising its right to renewal.
[41] In my view, these issues cannot be resolved on the basis of affidavit material filed at an application hearing. A trial is required to make a determination of what is owing by the tenant to the landlord. Based on the material before me, the following facts may inform a trial judge as to a decision about amounts owing by the tenant:
• the proper percentages to be applied to the annual statements as between the two tenants;
• the timeliness of annual statements to the tenant;
• whether the tenant was given a yearly opportunity to cover anticipated increased expenses by increments of one-twelfth for the following months as contemplated by the lease;
• whether the tenant was requested to make a balloon payment annually, so the payment could be made on a timely basis each year;
• whether there are mathematical or other allocation errors which affected the statement and the consequential 15% administrative fee of the landlord.
[42] The tenant was not give a reasonable opportunity to cure defects, if any, in a timely manner prior to its attempt to renew the lease for a further five-year period which would have commenced May 31, 2015.
[43] In my view, the logical progression of this matter is to have a judicial determination of the arrears, if any, by trial. Thereafter, the tenant should have a sixty-day period to pay the properly calculated arrears, if any, by way of a lump sum payment at which time the renewal notice shall be deemed to have been validly constituted, save and except for the remaining term. It was always contemplated that the renewal would be for a five-year term, so I am satisfied that the renewal term, or the balance thereof, ought to mature on May 31, 2020.
[44] Once the tenant pays the arrears, if any, “current rates” needs to be determined. The term “current rates” is capable of judicial determination provided that the parties call expert evidence on the point.
[45] In the interim, commencing July 1, 2015, I order that the monthly rent and common expenses be fixed at $7,500 per month until settlement or judgment. The excess amount above the current amount shall be considered a credit towards the properly calculated arrears.
[46] Although I do not order it, I strongly suggest that the parties avail themselves of mediation or arbitration with respect to the issues remaining. However, if the parties wish to appear before me for trial management purposes, an appointment can be arranged through the Trial Coordinator at the Courthouse, Barrie, Ontario.
Costs
[47] The parties are encouraged to settle the issue of costs for this application. If costs are not agreed upon, I will receive submissions from the respondent, Papa Kerollus VI Inc., c.o.b. Mr. Sub within twenty days of the release of this endorsement. The applicant, Mapleview-Veterans Drive Investments Inc. will then have fifteen days to respond. The respondent will then have a further ten days for reply.
MULLIGAN J.
Date: June 12, 2015