Smith v. 2249778 Ontario Inc. , 2015 ONSC 674
COURT FILE NO.: C-1227-14
DATE: 2015-01-29
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Glenn Smith
Applicant
2249778 Ontario Inc.
Respondent
J. Greg Murdoch, C. Davis, for the Applicant
Ross F. Earnshaw, for the Respondent
HEARD: January 26, 2015
THE HONOURABLE MR. P.B. HAMBLY
Judgment
[1] This is an application by a tenant against a landlord for a declaration that the landlord permit the assignment of a lease.
[2] Glen Smith (the tenant) entered into a Lease Agreement (the lease) with 2249778 Ontario Inc. (the landlord) on May 1, 2011 to lease for 10 years 2 units in a commercial building in Waterloo (the premises) for the operation of a restaurant. The tenant is a part owner of 2280611 Ontario Inc. (228) through which he ran the restaurant.
[3] The lease requires the consent of the landlord before the tenant can assign the premises which consent cannot be unreasonably withheld. If the landlord refuses to consent to the tenant assigning the lease, it can terminate the lease. If it does this, the tenant can withdraw its request to terminate the lease which has the effect of reinstating the lease between the tenant and the landlord. The relevant terms of the lease are sections 12.1 and 12.2 which are attached hereto as Schedule A.
[4] In October, 2014, 228 entered into an agreement to sell its business to Bailiang Gao, in trust (the purchaser). The terms of the sale included a condition that the tenant obtain the landlord’s consent to assign the lease to the purchaser. On October 12, 2014, the tenant made a written request to the landlord for its consent to assign the lease to the purchaser. On November 4, 2014 the landlord requested financial information about the purchaser, which the lease permitted. On December 17, 2014 the landlord, in writing, denied the request of the tenant to assign the lease to the purchaser and terminated the lease. On December 19, 2014 the tenant withdrew its request to assign the lease which had the effect of reinstating the lease between the tenant and the landlord. The market rent for the leased premises is now greater than it was when the parties entered into the lease. If the assignment was permitted, the tenant would remain liable to the landlord for payment of the rent under the lease if the assignee defaulted. The law is clear that it is unreasonable for a landlord to withhold its consent to assign a lease because the market rent has increased from the time that the parties entered into the lease.
[5] Mr. Murdoch for the tenant submits that the clause in the lease that the landlord cannot unreasonably deny the tenant’s request to assign the lease is inconsistent with the clause which permits the landlord to deny the request and terminate the lease. He submits that this is so notwithstanding that the tenant has the right to withdraw its request to assign the lease which has the effect of reinstating the lease between him and the landlord. He further submits that it violates the Commercial Tenancies Act s. 23 which provides that a landlord cannot unreasonably withhold consent from a tenant to assign a lease. He points out that if the landlord consented to the assignment it would be in a stronger position than it is by not consenting since both the tenant and the purchaser would be responsible to pay the rent. He submits that the clause in the lease that permits the landlord to terminate the lease is of no effect and should be struck from the lease.
[6] Mr. Earnshaw for the landlord submits that the court should not interfere with a contract freely negotiated by the parties which is clear on its face.
[7] Although not binding on me, I find the reasoning of Justice C.S. Brooker in Orbus Pharma Inc. v. Kung Man Lee Properties Inc. 2008 ABQB 754, [2008] A.J. No. 1430 where the court was required to decide a similar issue to be persuasive. The lease under consideration in that case stated the following:
[17.01] The Tenant will not assign this Lease … without the prior written consent of the Landlord in each instance, which consent may not … be unreasonably withheld…
[17.03] In the event that the Tenant desires to assign, sublet … the Tenant shall give prior written notice to the Landlord of such desire, … and the Landlord shall, within thirty (30) days thereafter, notify the Tenant in writing either, that: (i) it consents or (ii) does not consent …, or (iii) it elects to cancel this Lease in preference to the giving of such consent. In the event the Landlord elects to cancel this Lease as aforesaid, the Tenant shall notify the Landlord in writing within fifteen (15) days thereafter of the Tenant's intention either to refrain from such assigning, subletting or parting with or sharing possession or to accept the cancellation of this Lease. Should the Tenant fail to deliver such notice within such period of fifteen (15) days, this Lease will thereby be terminated upon the expiration of the said fifteen (15) day period. If the Landlord shall not exercise its option to cancel this lease, then 17.01 and 17.05 continue to apply.
[8] The plaintiff sought to assign the lease. The defendant terminated the lease. The plaintiff submitted that by terminating the lease the defendant breached the lease. It sought damages. Justice Brooker held that the defendant was entitled to terminate the lease. He dismissed the plaintiff’s case.
[9] He set out the positions of the parties as follows:
Plaintiff
[14] The Plaintiff submits that Clause 17.01 qualifies Clause 17.03, and that the Defendant was only entitled to terminate the lease if it had a reasonable basis to withhold consent. Since no reasonable basis to withhold consent existed, the termination of the lease constituted an unreasonable withholding of consent in breach of Clause 17.01. The Plaintiff argues that this is the most reasonable, objective interpretation consistent with the principles of contractual interpretation. The Plaintiff argues that were the lease not interpreted in this manner, Clause 17.01 would be rendered meaningless, and there would be a conflict between Clause 17.01 and 17.03.
[15] Pursuant to the Plaintiff's interpretation of the lease, the choices available to the Landlord were as follows:
a) In the event a reasonable basis to withhold consent existed:
i) Withhold consent
ii) Consent to the Assignment
iii) Terminate the Lease
b) In the event that no reasonable basis to withhold consent existed:
i) Consent to the Assignment
[16] Since the Defendant concedes that there was no reasonable basis upon which to withhold consent in this instance and that the Defendant's actions were undertaken solely pursuant to the terms of Clause 17.03, according to the Plaintiff's interpretation of the lease, the only option available to the Defendant in this instance was to consent to the assignment.
This is the position of the tenant in this case.
Defendant
[21] In contrast, the Defendant submits that it had the contractual right under the terms of the Lease to cancel the Lease in preference of giving consent to the requested assignment, and that the Defendant properly exercised that right. The Defendant submits, as it exercised its option to terminate the lease, the requirement that the withholding of consent be reasonable was not relevant.
[22] Pursuant to the Defendant's interpretation of the lease, the Defendant had the following options available to it:
a) In the event that there was a reasonable basis to withhold consent:
i) Withhold Consent.
ii) Consent to the Assignment
iii) Terminate the Lease
b) In the even that there was no reasonable basis to withhold consent:
iv) Consent to the Assignment.
v) Terminate the Lease
[23] The Defendant submits that this interpretation gives meaning to all of the terms of the contract, while striving to harmonize apparently conflicting terms. It submits that Clause 17.01 ensures that the Plaintiff cannot withhold consent unless there is a reasonable basis upon which to do so. However, it submits that Clause 17.03 allows the Defendant to terminate the lease in preference to giving such consent.
This is the position of the landlord in this case.
[10] Justice Brooker stated the following:
[48] The purpose of Clause 17.01 is apparent on its face: it prohibits the Plaintiff from assigning the Lease without the Defendants prior written consent and requires that the Defendant cannot withhold consent unreasonably. The purpose of Clause 17.03 is to outline the options of the Defendant upon receipt of a request to transfer the lease. For greater clarity I reproduce these options below:
... the Landlord shall, within thirty (30) days thereafter, notify the Tenant in writing either, that:
i) it consents or
ii) does not consent as aforesaid to the assignment, subletting or parting with or sharing possession as the case may be, or
iii) it elects to cancel this Lease in preference to the giving of such consent. [my emphasis]
[49] I find that the phrase "in preference to the giving of such consent" is determinative. There are two options, i) and ii), that involve the Landlord's consent. As such, they invoke the requirement in Clause 17.01 that, should the Landlord withhold consent, such withholding must be reasonable. However, the third option, iii), gives the Landlord the right to cancel the lease in preference to the giving of such consent.
[11] The phrase “in preference to the giving of such consent” is not in the lease before the court. However, I find that it is implicit in the options to the landlord. Also, Alberta does not have legislation similar to s. 23 of the Courts of the Commercial Tenancies Act in Ontario. It not necessary in this case since the prohibition of the landlord unreasonably withholding consent is in the lease.
[12] Justice Brooker stated further:
[53] This conclusion (that the defendant could terminate the lease) is consistent with the principles of contractual interpretation. It gives effect to both Clauses 17.01 and 17.03. A general right not to have consent unreasonably withheld is extended by Clause 17.01. The right is limited by 17.03, where the Landlord is given an additional right; to terminate the lease. This interpretation is consistent with the approach advocated in BG Checko at para. 9, where the Court states: "where there is apparent conflict between a general term and a specific term, the terms may be reconciled by taking the parties to have intended the scope of the general term to not extend to the subject matter of the specific term." The general right of the Plaintiff to not have consent unreasonably withheld does not extend to the specific right granted to the Defendant to terminate the lease.
[54] This does not, as argued by the Plaintiff, render Clause 17.01 "utterly meaningless." If the Defendant did not wish to terminate the Lease, consent could not have been withheld and the Plaintiff could not have been compelled to continue to be bound by the terms of the Lease agreement. Clause 17.03 simply gives the Defendant an additional right of termination.
[55] In contrast, the interpretation offered by the Plaintiffs fails to recognize the additional option granted to the Defendants by Clause 17.03. The Plaintiff inserts the concept of consent, (and thus, imports the operation of 17.01) into all three of the options granted to the Defendant by Clause 17.03. However, on a plain reading, the concept of consent is present only in the first and second options. To add it to the option to terminate the Lease is to go beyond the plain text of the document. Furthermore, the Plaintiff's interpretation renders the last sentence of Clause 17.01 meaningless. This is inconsistent with the principle that all words in a contract should be taken to have meaning.
[68] Finally, the Plaintiff argues that to adopt the Defendant's interpretation would lead to an absurd commercial result. I do not agree. In fact, I find the contrary to be true. Here, the Lease, because it was considerably below market rate, was of significant value to the Plaintiff and a liability to the Defendant. The circumstance here pertaining support my interpretation of the contract. In essence, the Defendant's option to terminate the contract instead of consenting to its transfer permitted it (rather than the Plaintiff) to get the benefit of the then current market lease rates. There is nothing commercially absurd about that. It was simply astute bargaining on the part of the Defendant - if market rates were less than lease rates at the time of a requested assignment, the Defendant could consent to the transfer and preserve the lease rate. If market rates were higher, the request for an assignment of the lease gave the Defendant the opportunity to terminate the lease and enter into another one at the higher current market rate, to its commercial advantage.
[13] The wording of s. 17.01 and 17.03 in the lease under consideration in Orbus is similar to the wording of s. 12.1 and s. 12.2 of the lease in the case before the court. The position of the plaintiff in Orbus is analogous to the position the tenant in the case before the court and the position of the defendant is analogous to that of the landlord. In Orbus, the defendant entered into a separate lease agreement with the purchaser of the plaintiff’s assets. In the case before the court, the tenant exercised its right under the lease to reinstate the lease. The plaintiff in Orbus could have chosen to have done so. The lease in Orbus as set out above stated the following:
In the event the Landlord elects to cancel this Lease as aforesaid, the Tenant shall notify the Landlord in writing within fifteen (15) days thereafter of the Tenant's intention either to refrain from such assigning, subletting or parting with or sharing possession or to accept the cancellation of this Lease.
[14] In Orbus, as in the case before the court, the market value of the rented premises had increased. If the tenant had chosen to accept the termination of the lease by the landlord in the case before the court he could have sued the landlord for the lost value to him of the lease. He would only have been successful if the defendant was unable to terminate the lease under the terms of the lease as he maintains. This is what the plaintiff did in Orbus. Justice Brooker dismissed his case because he found that the term in the lease permitting the defendant to cancel the lease upon the plaintiff seeking to assign the lease was valid. Notwithstanding this difference in the facts the analysis of Justice Brooker of the terms of the lease in Orbus is analogous to the lease in this case.
[15] I adopt Justice Brooker’s reasoning in Orbus. The application is dismissed. The landlord may make written submissions on costs within 10 days and the tenant may have 10 days upon receipt of the landlord’s submissions to respond.
“P.B. Hambly”
P.B. HAMBLY, J.
Released: January 29, 2015
Schedule A
CITATION: Smith v. 2249778 Ontario Inc. , 2015 ONSC 674
COURT FILE NO.: C-1227-14
DATE: 2015-01-29
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Glenn Smith
Applicant
2249778 Ontario Inc.
Respondent
REASONS FOR JUDGMENT
P.B. HAMBLY
Released: January 29, 2015