SUPERIOR COURT OF JUSTICE - ONTARIO

MOTIONS HEARD: JUNE 18, 2015

RE: Super A Hotels Investment and Management Group (Canada) Inc.

v.

1205723 Ontario Inc.

BEFORE: MASTER R.A. MUIR

COUNSEL: Gregory M. Sidlofsky for the plaintiff
Arnold H. Zweig for the defendant

REASONS FOR DECISION

[1] There are two motions before the court. The first is brought by the plaintiff and seeks an order pursuant to Rule 45.02 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 (the “Rules”). The plaintiff requests that certain specific funds held by the defendant be paid into court pending the outcome of this proceeding. The second motion is brought by the defendant and seeks an order requiring the plaintiff to post security for costs pursuant to Rule 56.01(1).

BACKGROUND

[2] This is a commercial tenancy dispute. In the summer of 2013, the principal of the plaintiff corporation approached the defendant with a view to leasing certain commercial property owned by the defendant at 3405 Kennedy Road, Toronto (the “Property”). Following a series of negotiations, the parties entered into two lease agreements covering several units located at the Property and identified as Units 1A, 1B and 1C (the “Leased Premises”). At the same time the parties entered into two other agreements. One agreement required the defendant to takes steps to terminate an existing lease over Unit 1A. The other agreement related to the rezoning of the Property in order to permit it to be used for the operation of a hotel business (the “Rezoning Agreement”). This last agreement required the defendant to take certain steps to apply for a rezoning of the Property. All of these agreements are dated November 28, 2013.

[3] The lease agreements required the plaintiff to provide a $200,000.00 security deposit and to make advance rental payments to the defendant. The Rezoning Agreement required the plaintiff to provide the defendant with a payment in the amount of $20,000.00 to cover the plaintiff’s share of anticipated expenses associated with the rezoning application. All of the required advance payments were in fact paid to the defendant by the plaintiff.

[4] The plaintiff takes the position that these advances constitute specific funds that should be paid into court pending the outcome of this action.

[5] After the various agreements were finalized, the plaintiff took possession of the Leased Premises. It retained consultants and engineers and began making leasehold improvements, apparently with a view to constructing a hotel on the Property.

[6] The proposed operation of a hotel business on the Property lies at the heart of this dispute. The lease agreements themselves do not refer to the operation of a hotel. They reference recreational use, exercise facilities and a sports bar. However, the plaintiff’s evidence is that it always intended to use the Leased Premises for a hotel business. The principals and the backers of the plaintiff corporation operate hotel businesses in Asia. They allege that they were not interested in operating a restaurant or bar or any other recreational businesses, except insofar as such ventures were ancillary to the hotel operation. The plaintiff’s evidence is that this was made clear to the defendant during the course of negotiations.

[7] The plaintiff also relies on the Rezoning Agreement, certain architectural drawings and a design contract as evidence of its intention to operate a hotel on the Property. Moreover, the plaintiff alleges that representatives of the defendant made representations to the plaintiff that the Property could be used for the operation of a hotel. The plaintiff’s ultimate position is that it would never have entered into the lease agreements if it had known that the Property could not have been used for the operation of a hotel.

[8] The defendant, on the other hand, points to the lease agreements which only refer to the Leased Premises as being used for the operation of a restaurant, sports bar or other recreational uses. As indicated, the lease agreements do not refer to a hotel business. The defendant argues that the plaintiff may have contemplated the operation of a hotel on the Property but its ability to do so was never part of the agreement between the parties.

[9] The plaintiff alleges that by the summer of 2014, it became apparent that the defendant had not taken any of the necessary steps to obtain a rezoning of the Property as required by the Rezoning Agreement. At that point, the plaintiff began to make inquiries with respect to the rezoning of the Property. It was then that the plaintiff allegedly learned for the first time that the Property could not be rezoned for such a purpose. It then commenced this action on November 26, 2014.

PLAINTIFF’S MOTION - INTERIM PRESERVATION OF PROPERTY

[10] Rule 45.02 reads as follows:

Where the right of a party to a specific fund is in question, the court may order the fund to be paid into court or otherwise secured on such terms as are just.

[11] The test to be applied on this motion is set out in the decision of the Court of Appeal in Sadie Moranis Realty Corp. v. 1667038 Ontario Inc., 2012 ONCA 475. At paragraph 18 of that decision, the court describes the test as follows:

I conclude therefore that the appropriate test for relief under rule 45.02 should require the plaintiff to establish that:

(a) the plaintiff claims a right to a specific fund;

(b) there is a serious issue to be tried regarding the plaintiff's claim to that fund;

(c) the balance of convenience favours granting the relief sought by the plaintiff.

[12] A specific fund has been defined as a reasonably identifiable fund earmarked to the litigation in issue. See Rotin v. Lechcier-Kimel, [1985] O.J. No. 466 (HCJ) at page 2.

[13] It is important to note that the test will not be met where the plaintiff’s claim is simply for damages. A claim for damages is not a claim for a legal right to a specific fund.

[14] I am satisfied on the evidence before the court on this motion that the plaintiff has met this test, but only with respect to the $200,000.00 security deposit. That deposit was required by a term of the lease agreement in respect of Unit 1A of the Leased Premises which reads, in part, as follows:

In consideration of the favorable terms of the Lease, the Tenant shall provide a security deposit of $200,000.00 to be held by the Landlord until the Tenant has completed its fixturing of the premises for the Tenant’s intended use of the Premises . . . Upon completion of the fixturing as per the plans and drawings, and upon successful opening of the Tenant’s business, the Landlord shall return the $200,000.00 security deposit to the Tenant.

[15] This $200,000.00 security deposit is currently being held by Mr. Zweig in his trust account. The statement of claim makes a specific claim for the return of this security deposit along with rescission of the lease agreements. The portion of the lease agreement set out above makes it clear that the defendant is to hold the deposit as security pending completion of the plaintiff’s leasehold improvements. The plaintiff is asserting its right to the return of the deposit in accordance with the terms of the lease agreement. In my view, this is a reasonably identifiable fund earmarked to the litigation.

[16] The defendant takes the position that the plaintiff’s work in connection with the leasehold improvements was carried out without the necessary municipal permits and has damaged the Property. The defendant states that it must spend many thousands of dollars to repair and remedy the Leased Premises. It wants to use the security deposit to do this. The plaintiff responds by arguing that the defendant was fully aware of the work being undertaken by the plaintiff. The defendant’s representatives were on site from time to time and did not take issue with the work being performed by the plaintiff.

[17] In my view, there is a serious issue to be tried with respect to whether, and the extent to which, the defendant has a right to apply the security deposit to remedy the alleged damage to the Leased Premises in these circumstances.

[18] The plaintiff also alleges it was misled by the defendant when it entered into the lease agreements. It argues that it would not have made this deal if not for the misrepresentations of the defendant. It is therefore entitled to rescission of the agreements. I am unable to determine on the evidence on these motions whether the plaintiff was misled or whether it is the author of its own misfortune. However, at a minimum, it is clear that the question of the operation of a hotel on the Property was on the table during the negotiations leading up to the agreements. It also appears clear on the evidence on these motions that the defendant did not make an application for a zoning amendment to permit the operation of a hotel business as it was required to do pursuant to the Rezoning Agreement. The question of whether the defendant or the plaintiff is responsible for that failure, and what remedies flow from that failure, is one the trial judge must decide. I am satisfied that there is at least a serious issue to be tried in that regard.

[19] I do not view the other advance payments in the same light. Unlike the security deposit, there is nothing in the language of the agreements that requires the defendant to hold or segregate those payments pending some future event. The language of the agreements appears to allow the defendant to use those funds as it sees fit. In my view, the plaintiff’s advance payments of rent and its contribution to the rezoning expenses are not reasonably identifiable funds earmarked to this litigation. The plaintiff’s claims in this respect are more in the nature of a claim for damages rather than a claim for the return of a specific fund. Finally, it appears from the evidence that the defendant is no longer in possession of the advance rental payments in any event. In my view, the court cannot order the preservation of a fund under Rule 45.02 when the fund no longer exists.

[20] With respect to the preservation of the security deposit, it is my view that the balance of convenience favours the plaintiff in the circumstances of this action. I come to this conclusion for several reasons. First, the defendant was first served with notice of this motion in late December 2014. At that point, the defendant was aware of the relief requested by the plaintiff on this motion and its desire to seek an order preserving the funds it had paid to the defendant. Despite this notice, the defendant proceeded to pay the $200,000.00 security deposit to a third party contractor. The deposit was only retrieved and placed in Mr. Zweig’s trust account after the parties first appeared before me in February 2015 at which time I made an interim preservation order.

[21] Second, the defendant has stated quite clearly in its evidence that it fully intends to use the security deposit to pay its anticipated expenses in relation to repairs and other construction work on the Property. If the security deposit is not preserved by court order it will be paid to third party contractors. The defendant argued that it needs the security deposit in order to carry out the necessary repairs. However, I note that the defendant declined to provide the plaintiff with copies of its bank statements when requested on cross-examination. As a result, the court has no evidence as to the defendant’s alleged inability to pay for the repairs without resort to the security deposit.

[22] Third, the evidence with respect to the defendant’s equity in the Property is not satisfactory. No appraisal evidence has been provided. The defendant alleges that there is $2,000,000.00 in equity in the Property. However, this evidence is nothing more than a bald statement of the value of the Property made by the defendant’s representative. No expert evidence has been filed. No supporting documents have been produced. I also note the defendant’s evidence that it is currently prepared to sell the Property if someone offers a good price. The Property has also been the subject of a recent listing agreement.

[23] In my view, the balance of convenience favours the granting of the relief requested by the plaintiff in relation to the security deposit.

[24] I am therefore ordering that the sum of $200,000.00, plus accumulated interest, currently being held in trust by Mr. Zweig, be paid into court, or otherwise secured as may be agreed to by the parties.

DEFENDANT’S MOTION - SECURITY FOR COSTS

[25] Rule 56.01(1)(d) provides as follows:

56.01 (1) The court, on motion by the defendant or respondent in a proceeding, may make such order for security for costs as is just where it appears that, . . .

(d) the plaintiff or applicant is a corporation or a nominal plaintiff or applicant, and there is good reason to believe that the plaintiff or applicant has insufficient assets in Ontario to pay the costs of the defendant or respondent . . .

[26] The principles applicable to a motion for security for costs can be found in the decision of the Divisional Court in Zeitoun v. Economical Insurance Group, 2008 20996 (ON SCDC), [2008] O.J. No. 1771 (Div. Ct.); affirmed 2009 ONCA 415. In general terms, a moving defendant has the initial onus of demonstrating that the plaintiff falls into one of the categories set out in Rule 56.01(1). This onus is not a heavy one. The defendant need only show that the plaintiff is a corporation and that there is good reason to believe that the plaintiff has insufficient assets in Ontario to pay the costs of the defendant. The onus then shifts to the plaintiff to tender evidence that it has assets available to respond to any costs order, to demonstrate impecuniosity or to ask the court to make such order as is just in the circumstances of the action, including an assessment based on the merits of the plaintiff’s claim.

[27] I have applied these factors and principles in determining the issues on the defendant’s motion. Overall, I am guided by the central principle that an order for security for costs is discretionary. The role of the court on a motion such as this is to make the order that is just in all of the circumstances.

[28] The plaintiff has conceded that it has no assets other than this cause of action and its claim for the return of the security deposit and the other payments it made to the defendant. Importantly, however, the plaintiff does not rely on impecuniosity as that term has been defined in the authorities. The plaintiff has not provided any evidence with respect to the financial wherewithal of its principals and investors. In fact, it is reasonable to infer from the evidence that the plaintiff’s principals and backers may very well have sufficient assets to post the relatively modest security for costs requested given their operation of hotel businesses in Asia.

[29] The plaintiff’s argument in opposition to the defendant’s motion simply amounted to a submission that it would be unjust to order it to post security for costs when the defendant’s actions have allegedly caused its impoverishment. I am unable to accept this argument. When impecuniosity has not been shown, a plaintiff must show a good chance of success in order to avoid an order for security for costs. This is because there is no compelling argument in such circumstances that the poverty of the plaintiff will cause an injustice by impeding its pursuit of its claim. See Zeitoun at paragraph 50.

[30] As I have indicated above, I am satisfied that there exists a serious issue to be tried with respect to the plaintiff’s claims. However, I am not prepared to elevate that finding to a finding of a good chance of success for the purposes of this motion. The plaintiff has obstacles to overcome when it comes to proving its claim. The complete absence of any reference to the operation of a hotel business in the lease agreements and the agreement to lease is one of those obstacles. The conflicting evidence of what was and was not said during the negotiations of the lease agreements is another obstacle. These are issues to be decided at trial on a full evidentiary record. I am unable to conclude that the plaintiff has a good chance of success on the basis of the evidence on this interlocutory motion.

[31] The plaintiff also argued that the security deposit and other payments made to the defendant are available as potential security for the defendant’s costs of this action. I do not agree. The defendant will be entitled to an award of costs only if successful in defending the plaintiff’s claim. If the defendant is successful, it will be entitled to retain those funds currently on deposit. The funds will not be a source of additional security for any costs award made in favour of the defendant.

[32] For these reasons, I have determined that it is just in the circumstances of this action to require the plaintiff to post security for the costs of the defendant.

[33] However, I do agree with the plaintiff that the $50,000.00 in security for costs outlined in the defendant’s draft bill of costs must be reduced in the circumstances of this action. The defendant has included a request for security for the costs of this motion and the plaintiff’s preservation of property motion. The costs of these motions will be determined by me in accordance with Rule 57.03. The Rules provide remedies for the non-payment of interlocutory costs orders. Security is not required.

[34] It is also my view, that some of the necessary preparation and discovery time will be reduced as a result of the work involved with these motions, including the cross-examinations.

[35] Finally, the defendant is advancing a significant counterclaim. A party is not required to post security for costs in order to defend itself. See Wilkings v. Velocity Group Inc., [2008] O.J. No. 1101 (Div. Ct.) at paragraph 29. In my view, the issues raised by the counterclaim are very closely connected to the claim being advanced by the plaintiff. The time and expense devoted to defending the claim will be equally applicable to advancing the counterclaim.

[36] I have reviewed the defendant’s draft bill of costs with these factors in mind. In my view, it is reasonable in the circumstances of this action to fix the quantum of security for costs to be posted by the plaintiff at $15,000.00, through to the end of oral discovery.

ORDER

[37] I therefore order as follows:

(a) the defendant shall pay into court, or otherwise secure in a manner agreed to by the parties, the sum of $200,000.00, plus accumulated interest, currently being held in trust by Mr. Zweig;

(b) the plaintiff shall pay into court security for the costs of the defendant, through to the end of oral discovery, in the amount of $15,000.00;

(c) the security for costs shall be payable in cash or by way of an irrevocable stand-by letter of credit from a Canadian chartered bank, in a form approved by the defendant or the court;

(d) the amounts referred to in (a) and (b) above, shall be paid into court within 90 days;

(e) the balance of the relief sought by the plaintiff is dismissed; and,

(f) if the parties are unable to agree on the issue of the costs of these motions, they may make brief submissions in writing by August 10, 2015.

July 7, 2015

Master R.A. Muir