2016 ONSC 2256

COURT FILE NO.: 50057/08 (St. Catharines)

DATE: 2016/04/04

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

lundy’s regency arms Corp., 1498611 Ontario Inc. and 1519481 ontario Inc.

Peter A. Mahoney, for the Plaintiffs

Plaintiffs

• and -

niagara hospitality hotels inc. and kerrio Corporation

Clark Peddle, for the Defendants

Defendants

HEARD: January 18, 19, 20, 21 and 22, 2016

R. A. Lococo, J.

REASONS FOR JUDGMENT

I. Introduction

[1] This action arose out of the sale and leaseback of commercial property in Niagara Falls, Ontario. The property included a hotel, a restaurant, a fast-food outlet and a miniature golf course as well as vacant land held for development.

[2] During the five year term of the lease, the previous owner continued to operate the hospitality businesses as tenant of the property. Upon the expiry of the lease, the landlords took possession of the property and assumed the operation of the hospitality businesses.

[3] The plaintiffs are the owners of the property. They are seeking damages in the amount of approximately $1.7 million from their former tenant (the previous owner) as well as from a related company that is jointly and severally bound with the tenant to fulfill the tenant’s obligations under the lease.

[4] The plaintiffs allege that the defendants breached the lease terms by failing to repair and maintain the leased premises, chattels and equipment to the standard required by the lease. Among other things, the lease terms required the defendants (a) to make needed repairs and replacements to keep the premises in such condition as a “careful owner” would in keeping with the nature of the business the defendants carried on, and (b) to surrender the premises to the landlords at the lease’s expiry in good and substantial repair and condition, excepting reasonable wear and tear not inconsistent with the maintenance of the premises. The lease also required the defendants (a) to repair or replace any damaged chattels and equipment covered by the lease, and (b) to return the chattels and equipment to the landlords in the same condition and state of repair, reasonable wear and tear excepted.

[5] The defendants deny that they failed to repair and maintain the premises, chattels and equipment as required by the lease terms. According to the defendants, any diminution in the state of the premises, chattels and equipment upon their surrender to the landlords was due to reasonable wear and tear. The defendants allege that the amounts that the plaintiffs expended on renovations and reconstruction after they took possession of the property constituted a substantial upgrade to the premises beyond that existing prior to and during the lease term.

[6] The issues to be determined are therefore as follows:

1. Breach of contract – Did the defendants breach their repair and maintenance obligations under the lease? In particular, did they breach the requirements to repair and maintain the premises, chattels and equipment to the required standard and to surrender it to the landlords in the required condition upon the lease’s expiration, reasonable wear and tear excepted?

2. Damages – If the defendants are liable, what damages are the plaintiffs entitled to recover?

[7] I will deal with each of these issues in turn.

II. Breach of contract

(a) Factual background – sale and leaseback

[8] Did the defendants breach their repair and maintenance obligations under the lease? In order to consider this issue, it would be helpful to set out further details about the parties, the circumstances relating to the sale and leaseback of the property, and the parties’ interactions during the term of the lease and following its expiration.

[9] The plaintiffs’ background was in real estate development in western New York State. The principals of the plaintiff companies were Fred Hanania (President), William Stark (Vice President and Controller) and Frank Ciminelli, who is now deceased. Mr. Hanania and Mr. Stark testified at the trial.

[10] The defendants owned and operated several commercial properties in the hospitality business in Niagara Falls, Ontario, including hotels and restaurants operated under franchise or licensing arrangements with national hotel and restaurant chains. The principal of the defendant companies was Vince Kerrio. Douglan Birrell was responsible for the defendants’ day to day operations in his capacity as General Manager. Michael Papetti was the Maintenance Manager for the defendants’ hotel and restaurant operations. Mr. Birrell and Mr. Papetti were defence witnesses at the trial. Mr. Kerrio did not testify at trial, but after the defence closed its case, plaintiffs’ counsel read in passages from Mr. Kerrio’s examination for discovery in reply.

[11] In early 2002, through a business associate, the principals of the plaintiffs became aware of an opportunity to purchase from the defendants a substantial parcel of property in the Lundy’s Lane tourist/commercial area of Niagara Falls. The property consisted of three contiguous parcels of land. The first parcel included a 135 unit hotel operated as a Days Inn, one of several hotels that the defendants operated in Niagara under the Days Inn flag. That parcel also included a 168 seat restaurant operated under the Denny’s Restaurant flag. The second parcel included a Dairy Queen restaurant and a miniature (Putt-Putt) golf course. The third parcel consisted of approximately 20 acres of vacant land intended for future development.

[12] In February 2002, one of the plaintiff companies entered into an agreement to purchase the Lundy’s Lane property. The purchase agreement provided that the purchaser was not purchasing any of the businesses then operated on the property, and that the defendants would continue to operate the businesses under a lease to be negotiated by the parties. The purchase agreement contemplated that the lease would include the following terms:

1. The term of the lease would be five years, renewable for a further five years;

2. The lease would be net to the landlord (that is, the tenant would be required to pay property expenses that would otherwise be payable by the owner/landlord);

3. The landlord would be responsible for “structural repair”, and the tenant responsible for “maintenance and repair” as well as “all other taxes and operational expenses”; and

4. If the lease was not renewed at the end of its term, the landlord would assume all business operations existing at that time and pay for any franchise/licencing transfer fees for the Days Inn, Denny’s, Dairy Queen and Putt-Putt operations.

[13] In the purchase agreement, the seller represented and warranted that, among other things, (a) the seller was not aware of any material defect in the structure of the buildings and improvements or any material deficiency in the mechanical systems, and (b) the chattels, fixtures and equipment were in good operating condition. The seller’s representations and warranties survived the closing. The purchase agreement was subject to a number of conditions for a period of 30 days, including a condition permitting the buyer to inspect the buildings and real property and finding the results of the inspection satisfactory in all respects.

[14] Mr. Hanania testified that the plaintiffs’ primary interest in the property was the vacant development land, given the plaintiffs’ background in property development. However, the property was being offered as a package deal, which excluded the option of purchasing only the vacant development land. The plaintiffs were nonetheless willing to purchase the whole property, even though they lacked experience operating hotels and restaurants pursuant to franchise or licensing arrangements. The defendants would fill that gap by continuing to operate the businesses under the contemplated lease arrangements. According to Mr. Stark’s testimony, the plaintiffs did not inspect the property prior to closing, other than a brief walk-through of the Days Inn lobby and the Denny’s Restaurant on one occasion by Mr. Stark and Mr. Ciminelli.

[15] The plaintiffs’ purchase of the property ultimately closed on September 13, 2002, and a lease agreement with the defendants was executed the same day. Certain terms of the lease agreement differed from lease terms contemplated in the purchase agreement. In particular, under the lease agreement, the tenant was responsible for both structural repairs and maintenance, rather than the landlord being responsible for structural repairs and the tenant for maintenance as contemplated in the purchase agreement. Mr. Hanania testified that the defendants’ assumption of responsibility for structural repairs was important to the plaintiffs, consistent with the plaintiffs’ primary interest in the property as a development play. To the extent that there was any difference between the lease terms contemplated by the purchase agreement and the terms of the lease agreement entered into on closing, there was no issue that the lease agreement governed.

(b) During the lease period

[16] The period following the closing of the purchase was initially uneventful from the viewpoint of this litigation. Mr. Hanania testified that the plaintiffs pursued development opportunities for the vacant land, but their plans were frustrated by municipal land use requirements and substantial development fees. According to the plaintiffs’ witnesses, there was little day-to-day interaction between the parties in the period after closing. That interpretation of events was challenged by Mr. Birrell, who testified that contact between the parties was more frequent. To the extent it exists, the documentary evidence is more consistent with the plaintiffs’ version of events, indicating periodic but infrequent contact between the parties. However, at least in the period prior to the fall of 2006, nothing of significance turned on this discrepancy between the parties’ versions of events.

[17] In March 2004, employees of the plaintiffs conducted an inspection of the Days Inn hotel premises, exercising the landlord’s entitlement under the lease to enter the premises to inspect their condition. The results of that inspection were contained in a document dated March 31, 2004 entitled Days Inn Lundy’s Lane – Simple Building Condition Assessment. By letter dated May 3, 2004, Mr. Stark followed up with Mr. Birrell about certain maintenance issues identified in that report that needed prompt attention, including issues relating to moisture and water leakage. Among other things, Mr. Stark’s letter identified the following issues: (i) roof drainage/ponding; (ii) on the exterior elevations of the hotel tower, caulking and tuck pointing required; (iii) in the guest rooms, water damaged ceilings to be sealed and painted, carpets to be steamed and stains removed, interior window glazing and caulking required, and in one room in the motel section, water leakage over the bed to be addressed; and (iv) in the parking lot, crack filling and sealing required.

[18] Mr. Birrell responded by letter dated May 18, 2004. The letter expressed surprise, noting that the building’s condition had not materially changed since its purchase by the plaintiffs, and that all items identified as areas of concern pre-existed. The letter also acknowledged that some items such as painting and parking lot repair were “ongoing discretionary items.” In a brief written response, Mr. Stark noted the tenant’s need “to balance its resources and address all areas of the property and/or business”, and expressed the hope that the landlords’ comments “will aid you in this process.”

[19] As indicated by Mr. Stark’s testimony and supporting documentation, the next significant contact between the parties relating to the condition of the property occurred in October 2006. At that time, the plaintiffs became aware that the property taxes on the Lundy’s Lane property were in arrears due to the defendants’ default in payment. The defendants agreed to pay the tax arrears in part by December 2006 (in order to avoid a municipal tax sale), and to pay the balance owing before the lease expired the following year.

[20] According to Mr. Stark’s testimony, the plaintiffs also became aware in this period that the defendants had been in discussions with the franchisor/licensor relating to the Days Inn and Denny’s Restaurant operations on the property. In each case, the franchise agreement required the defendants to maintain certain standards for the franchise operations during the term of the franchise agreement, which term extended beyond the expiry of the lease between the plaintiffs and the defendants. In each case, the franchisor would have required significant renovations to the premises in order for the operations to continue under the franchisor’s flag.

[21] With respect to the Denny’s Restaurant, correspondence between the franchisor and Mr. Kerrio in July 2005 indicated that the franchisor would have required the expenditure of $100,000 to $150,000 on renovations to allow the defendants to continue operating under the Denny’s flag. Rather than complete the required renovations, Mr. Kerrio entered into a Mutual Termination Agreement dated August 23, 2005 with the franchisor, under which the defendants’ right to operate as a Denny’s Restaurant at that location would cease on July 1, 2007 provided that certain less extensive repairs were made by an earlier agreed date.

[22] In the case of Days Inn, the renovations and modifications that the franchisor sought would have required the expenditure of at least $600,000. Rather than carry out the renovations and to avoid payment of liquidated damages under the franchise/license agreement, the defendants reached an accommodation with the franchisor in May 2006 under which (i) the Lundy’s Lane hotel would cease operating as a Days Inn by November 1, 2006, and (ii) the defendants would invest $140,000 in renovations of a different hotel that the defendants owned and operated under the Days Inn flag.

[23] In the period from October 2006 and extending into 2007, there were discussions between the parties (as well as between the defendants and the franchisors) relating to the possible extension or renewal of the franchise/license arrangements to allow the hotel and restaurant on the property to continue to operate under the flags of Days Inn and Denny’s Restaurant. As proposed by the defendants, these arrangements would have involved renovations to the premises being carried out at the plaintiffs’ expense. As well, in order to provide the necessary operating expertise for the hotel and restaurant, the defendants would have continued as operator of the businesses under revised lease and management arrangements, which would have required the plaintiffs to pay a management fee to the defendants. However, by letter dated March 6, 2007, Mr. Stark notified the defendants that the plaintiffs would not be proceeding with these proposed arrangements, and would be continuing with the existing lease arrangement until its expiry in September 2007. After being closed for the winter months, the hotel on the Lundy’s Lane property reopened in the spring of 2007 as an independent hotel, that is, not under the Days Inn flag, as the defendants had previously agreed with the franchisor.

[24] By letter dated August 29, 2007, Mr. Stark notified the defendants that the plaintiffs were invoking their inspection right under the lease agreement in order to assess the property’s condition prior to the lease’s expiry. On September 28, 2007, the plaintiffs’ through their counsel notified the defendants that a preliminary inspection of the leased premises indicated numerous serious deficiencies resulting from the defendants’ failure to maintain the premises as required by the lease. The letter also indicated that a more comprehensive engineering inspection of the property would take place, and that the plaintiffs expected the defendants to remedy deficiencies that were revealed.

(c) Following expiry of the lease

[25] The plaintiffs took possession of the Lundy’s Lane property and assumed the operation of the hospitality businesses upon termination of the lease on September 30, 2007. A building assessment of the hotel and restaurant on the property was carried out under the supervision of Venerino V. P. Panici Architect Inc. (“Panici Architect”), with the participation of Hallex Engineering Ltd. and D. F. Brown Roofing. The resulting building assessment report is described further below.

[26] Prior to completion of the building assessment report, plaintiffs’ counsel wrote to the defendants by letter dated January 9, 2008, providing notice of the following: (i) the plaintiffs had retained contractors to complete the necessary repairs to the premises resulting from the defendants’ breach of their maintenance obligations under the lease; (ii) the cost to rectify the deficiencies was estimated at $2 million; (iii) construction to replace the roof and pool deck would commence in approximately two weeks, and the balance of the remedial work shortly after; (iii) the plaintiffs’ architect was conducting an assessment, which the plaintiffs intended to rely on in court if an amicable settlement could not be reached; and (iv) the defendants were provided an opportunity to inspect the premises and conduct their own assessment within the next ten days.

[27] In the following weeks, the plaintiffs proceeded with renovations to the hotel and restaurant premises. According to Mr. Kerrio’s discovery testimony read in at the trial, Mr. Kerrio, Mr. Birrell and possibly other employees of the defendant inspected the premises prior to the commencement of the renovations. However, the defendants did not conduct a detailed inspection and assessment of the premises nor did they retain third party consultants to do so.

(d) Building assessment results

[28] The results of the building assessment commissioned by the plaintiffs were contained in a report entitled Existing Condition Assessment – The Inn and Diner on Lundy’s Lane dated February 5, 2008 (referred to below as the Panici report). On consent of the parties, the Panici report was filed in evidence at trial. Mr. Venerino Panici as supervising architect also testified at trial. Mr. Panici’s background as an architect included significant experience with the hospitality industry in the Niagara area.

[29] As indicated in the Panici report, the building assessment consisted of an architectural assessment completed by Panici Architect for the purpose of evaluating the hotel and restaurant on the property. With respect to “related disciplines”, Panici Architect coordinated with Hallex Engineering Ltd. (regarding structural, mechanical and electrical engineering) and D. F. Brown Roofing (regarding roofing condition).

[30] As described in the Panici report, the premises being assessed consisted of the hotel previously operated as The Days Inn and the diner previously operated as Denny’s Restaurant. The hotel was 52,000 square feet, consisting of: (i) Block A, a five-story tower built in 1989, which included a lobby and pool area; (ii) Block B, a two-story motel block built in 1955 (first floor) and 1964 (second floor addition), which was attached to the tower; and (ii) Block C, the original two-story motel block built in 1945, which was attached to the 1955/1964 motel block through an external passage. The diner (Block D) was 5,500 square feet, built in 1989 at the same time as the hotel tower.

[31] The methodology for the building assessment was set out in the introductory section of the Panici report. In this regard, the report set out a rating system used by “all disciplines” for each of the four “Blocks” of the premises. This assessment was carried out room by room, area by area, as detailed in the assessment report. In each case, one of five ratings was assigned to each area, as follows:

1. Excellent condition (like new);

2. Good condition (no need of repair or replacement);

3. Fair condition (in need of refurbishment, repair or replacement);

4. Poor condition (worse than its age would suggest, in need of repair or replacement); and

5. Very bad condition (possibly unsafe or unhealthy, in need of immediate repair or replacement).

[32] According to the Panici report, that rating system was based on the “Repair” provision of the lease, quoting the lessee’s obligation to maintain the premises “in good order and condition … as a careful owner would” (section 6(i) of the lease agreement). The assessment report then provided prices for bringing individual areas of the premises rated as being in “fair condition” or lower up to the standard of “good condition.” Under the heading “Recommendations and Budget Costing”, those prices were aggregated to provide “an overall price for bringing the entire building back to what would be considered ‘good’ condition as defined in the lease agreement.” Those amounts totaled $1,937,460, which included $227,305 for repairs to Block C, the original two-story motel building.

[33] In his closing submissions, plaintiffs’ counsel indicated that his clients are seeking to recover approximately $1.7 million in damages from the defendants. They are relying on evidence of their actual expenditures on remediation work totaling in excess of that amount, as noted further below. Those expenditures did not include any amount for repairs to the original motel building, which the plaintiffs chose to demolish rather than remediate. As further support for assessing damages in approximately that amount, the plaintiffs rely on the evidence provided in the Panici report and Mr. Panici’s testimony. As set out in the Panici report, the total estimated cost for remedial work to the hotel and diner premises was $1,710,155 after deducting the estimated cost for remediating the original motel structure.

[34] The defendants did not materially dispute the observations in the Panici report, as indicated by Mr. Birrell’s testimony as well as in the defendants’ response (through counsel) to undertakings given at Mr. Kerrio’s discovery, that response being read in at the trial. However, the defendants deny responsibility for any amounts that the plaintiffs claim. As previously indicated, they deny that they failed to maintain the premises, chattels and equipment as required by the lease terms, and take the position that any diminution in their condition was due to reasonable wear and tear. As well, the defendants allege that the amounts the plaintiffs expended on renovations and reconstruction after they took possession of the property constituted a substantial upgrade to the premises beyond that existing prior to and during the lease term. In support of their position, the defendants relied on the testimony of Mr. Birrell (General Manager), who among other things, testified as to the state of the hotel and restaurant premises at the time of the sale and leaseback of the Lundy’s Lane property, during the currency of the lease and at the time of the lease’s expiry. They also relied on the testimony of Mr. Papetti (Maintenance Manager) with respect to the maintenance regime for the premises at the relevant times.

(e) Lease provisions and legal principles

[35] In order to determine whether the defendants breached their lease obligations relating to maintenance and repair, it is helpful to set out the relevant lease provisions in more detail. In that regard, the lease dealt with the tenants’ repair and maintenance obligations relating to the premises separately from their obligations relating to chattels and equipment.

[36] The lease provisions relating to repair and maintenance of the premises are summarized below.

(a) Under the subheading “Repair” (paragraph 6(i)), the tenants/lessees are required at their expense “to maintain and keep the Premises … in good order and condition and promptly to make needed repairs and replacements to keep the Premises well painted, clean and in such condition as a careful owner would in keeping with the nature of the business carried on by the Lessee.”

(b) Under the subheading “Structural Repairs (paragraph 6(j)), the tenants are required at their expense to “make such repairs as may be due to any inherent structural defect (faulty workmanship, materials or installations) and to the roof of all buildings ….”

(c) Under the subheading “Surrender” (paragraph 6(l)), the tenants are required to surrender to the landlords at the lease’s expiry the premises “in good and substantial repair and condition reasonable wear and tear not inconsistent with the maintenance of the Premises excepted.”

[37] The lease provisions relating to repair and maintenance of the chattels and equipment are summarized below.

(a) Under the subheading “ Chattels” (paragraph 6(p)), the tenants have the right during the lease’s term to use the chattels and equipment set out in a schedule to the lease, and upon the lease’s expiry “the chattels and equipment shall be returned to the Lessee in the same condition and state of repair, reasonable wear and tear excepted.” The tenants are also required at their expense to repair or replace “any chattels or equipment … damaged, broken or lost, in any way by any person for any reason” during the currency of the lease. Any replacement chattels are required to be “of equal or superior quality”, and “shall be the property of, and owned absolutely by the Lessor.”

(b) Under the subheadings “Heating” (paragraph 6(e)) and “Air-conditioning” (paragraph 6(f)), the tenants are required to maintain in operating condition at their expense all heating equipment and to pay for the costs of maintenance and repair to the air-conditioning equipment.

(c) Under the subheading “Proper condition of the Premises” (paragraph 6(o)), the tenants are required at their expense “to keep the Premises properly furnished.”

[38] In their closing submissions, counsel referred to previous decisions of this court in Norbury Sudbury Ltd. v. Normont Steel (1981) Ltd.[^1] and Canpaco Inc. v. CREIT Management Limited/Gestion CREIT Limitée.[^2] In these decisions, the court considered the contracting parties’ rights and obligations relating to repair and maintenance under a lease, including interpretation of the exception for “reasonable wear and tear.” In both decisions, the court noted that “a tenant’s covenant to repair does not require the tenant to put the premises in repair if they were not in that condition at the beginning of the term of the lease”,[^3] relying on and following the Ontario Court of Appeal decision in Manchester et al. v. Dixie Cup Co. (Canada) Ltd.[^4] In its later decision in Stellarbridge Management Inc. v. Magna International (Canada) Inc.,[^5] the Ontario Court of Appeal also recognized that at least in the absence of clear language to the contrary, the repair obligation under a lease would not require the tenant to put the leased premises “into the same condition as that of a pristine, new building”, even if the building was new at the time the lease was executed.

[39] As well, while recognizing that the outcome of an individual case will depend on the specific wording of the relevant lease provisions, the Norbury and Canpaco decisions both quoted the following passage from Haskell et al. v. Marlow et al.[^6] as providing a useful statement of the relevant principles relating to a tenant’s repair and maintenance obligations under a lease:

The meaning is that the tenant (for life or years) is bound to keep the house in good repair and condition, but is not liable for what is due to reasonable wear and tear. That is to say, his obligation to keep in good repair is subject to that exception. If any want of repair is alleged and proved in fact, it lies on the tenant to show that it comes within the exception. Reasonable wear and tear means the reasonable use of the house by the tenant and the ordinary operation of natural forces. The exception of want of repair due to wear and tear must be construed as limited to what is directly due to wear and tear, reasonable conduct on the part of the tenant being assumed. It does not mean that if there is a defect originally proceeding from reasonable wear and tear the tenant is released from his obligation to keep in good repair and condition everything which it may be possible to trace ultimately to that defect. He is bound to do such repairs as may be required to prevent the consequences flowing originally from wear and tear from producing others which wear and tear would not directly produce.

For example, if a tile falls off the roof, the tenant is not liable for the immediate consequences; but, if he does nothing and in the result more and more water gets in, the roof and walls decay and ultimately the top floor, or the whole house, becomes uninhabitable, he cannot say that it is due to reasonable wear and tear, and that therefore he is not liable under his obligation to keep the house in good repair and condition. In such a case the want of repair is not in truth caused by wear and tear. Far the greater part of it is caused by the failure of the tenant to prevent what was originally caused by wear and tear from producing results altogether beyond what was so caused. On the other hand, take the gradual wearing away of a stone floor or staircase by ordinary use. This may in time produce a considerable defect in condition, but the whole of the defect is caused by reasonable wear and tear, and the tenant is not liable in respect of it.

[40] As is ordinarily the case when alleging breach of contract, the plaintiffs have the onus of establishing a breach of the relevant lease provisions and any resulting damages. However, as indicated by the foregoing passage from the Haskell decision, if the plaintiffs prove a “want of repair”, an evidentiary burden falls on the defendants to show that the want of repair comes within the exception for reasonable wear and tear. That aspect of the Haskell decision was cited with approval by the Ontario Court of Appeal in the Stellarbridge decision.[^7] As well, when considering the degree of wear and tear that is reasonable, previous decisions indicate that it is appropriate to consider all relevant factors, which may include the duration of the tenancy, the leased property’s age and nature, and its intended and actual use.[^8]

[41] In the Canpaco decision,[^9] the court provided the following useful summary of the approach followed in interpreting the repair and maintenance provisions of the lease in that case:

(1) The landlord must show that the condition of the premises (as defined in the lease) at the surrender of the lease was inferior to its condition at the time possession was first delivered to the tenant. This determination must be made taking account that "the question of repair ... is in every case one of degree"….

(2) If it is shown that the condition is inferior then the tenant is liable for the cost of the repairs reasonably necessary to bring the premises up to the required condition except to the extent that the inferior condition is attributable to "reasonable wear and tear or structural defect”.[^10]

(3) Since the tenant is liable only for the cost of repairs determined on the basis set out, the tenant is not liable for the cost of repairs which improve the premises beyond the required repairs.

(f) Analysis

[42] In his closing submissions, defence counsel referred to the above statement of principles in the Canpaco decision as a framework for analyzing the defendants’ compliance with their repair and maintenance obligations in this case.

[43] Applying the first part of that framework, defence counsel argued that the plaintiffs had not met their onus of establishing a breach of the defendants’ obligations under the lease agreement. In particular, in the absence of anything more than a cursory walk-through of the public areas of the hotel and restaurant premises, the plaintiffs had not established the benchmark condition of the premises at the time of the sale and leaseback of the property, leaving unchallenged defence evidence that any significant repair and maintenance issues existing at the lease’s expiry pre-dated the sale and leaseback of the premises.

[44] Applying the second part of the Canpaco framework, defence counsel argued that in determining whether repairs undertaken fell within the “reasonable wear and tear” exceptions in the lease, it was appropriate to take into account the age of the premises, part of which was over 60 years old at the time of the lease expiry. It was also appropriate to consider the use of the premises as a lower-end, high-volume hospitality enterprise both before and during the lease’s term. In defence counsel’s submission, taking those and other relevant factors into account, any “wear and tear” that required remediation after the lease’s expiry fell within the “reasonable wear and tear” exceptions in the lease.

[45] Applying the third part of the Canpaco framework, defence counsel argued that with respect to repairs that the plaintiffs undertook after the lease’s expiry, the defendants were not liable for the cost of repairs that go beyond what is required by the lease. Put another way, the defendants were not responsible for the cost of providing the plaintiffs with new or upgraded premises following the lease’s expiry, consistent with the Stellarbridge decision.

[46] Having considered the defence submissions in the context of the evidence at trial, I have concluded that the defendants breached the repair and maintenance provisions of the lease in this case.

[47] A relevant factor in reaching this conclusion was the nature of the tenants’ repair and maintenance obligations with respect to the leased premises. I agree with plaintiffs’ counsel that the general repair obligation to keep the premises in such condition as a “careful owner” in keeping with the business being carried on by the tenants was consistent with an enhanced standard that goes beyond what would otherwise be required of a tenant in the absence of such wording. This enhanced standard is also reflected in the tenants’ obligations upon the lease’s expiry to surrender the premises to the landlord “in good and substantial repair and condition reasonable wear and tear not inconsistent with the maintenance of the Premises excepted” [emphasis added]. As well, contrary to what might otherwise be expected (as in the Canpaco decision, for example), the tenant was responsible in this case for repairs that were due to “inherent structural defect”, with specific reference to “the roof of all buildings.”

[48] Referring to the Canpaco analytical framework, I acknowledge that from an evidentiary standpoint, a detailed assessment of the condition of the leased property at the time of the sale and leaseback would have provided a more definitive basis for establishing the extent to which the defendants complied with the repair and maintenance provisions of the lease. However, there is other evidence before me that I am entitled to take into account in making that determination. As noted by plaintiffs’ counsel, in determining the state of the property at the commencement of the lease, I am entitled to take into consideration the seller’s representations and warranties in the purchase agreement, including that (a) the seller was not aware of any material defect in the structure of the buildings and improvements or any material deficiency in the mechanical systems, and (b) the chattels, fixtures and equipment were in good operating condition. I also have before me the report dated March 31, 2004 entitled Days Inn Lundy’s Lane – Simple Building Condition Assessment prepared by employees of the plaintiffs following an inspection of the hotel premises approximately 18 months after commencement of the lease. I have also heard Mr. Stark’s testimony relating to that assessment. In his testimony, Mr. Stark indicated that as a result of that assessment, he had certain maintenance concerns, as set out in his letter to Mr. Birrell dated May 3, 2004, but that on an overall basis, the 2004 assessment did not give rise to significant concerns with respect to the overall condition of the premises.

[49] In contrast, the Panici report nearly four years later painted a different picture with respect to the condition of the premises. Perhaps most significantly, as indicated by that report and Mr. Panici’s testimony, moisture leakage (including through the roof and windows) resulted in more significant damage to the hotel premises over time. Among other things, failure to maintain the dehumidification equipment in the pool area also resulted in moisture-related damage.

[50] Based on the Panici report and Mr. Panici’s testimony, I find that there was significant deterioration to the state of the leased property, including the premises and equipment, beyond that indicated in the 2004 assessment report. I also find that the defendants have not satisfied their burden of providing evidence sufficient to establish that such deterioration fell within the reasonable wear and tear exceptions in the lease.

[51] In reaching those conclusions, I took into account Mr. Birrell’s testimony relating to the condition of the property upon sale to the plaintiffs as well as upon termination of the lease, and I also considered Mr. Papetti’s testimony with respect to the system of maintenance for the defendants’ various business operations, including the hotel and diner. However, that testimony and the other evidence before me do not address or explain how the leased property could have fallen into such a state of disrepair by the lease’s expiry. As well, there is no other independent third party evidence to support the defendants’ position in counterpoint to the Panici report and Mr. Panici’s testimony.

[52] In this regard, I consider it instructive that the defendants were unwilling to undertake the significant repairs and renovations that would have been necessary to continue operating the hotel and diner under the flags of Days Inn and Denny’s Restaurant. As indicated by Mr. Birrell in his testimony, the defendants did not consider it economic to undertake these expenditures close to the end of the lease term if the defendants were not going to continue operating the enterprises beyond that time. However, that economic logic would not assist in the defendants’ position in this litigation if the need for such remedial work resulted from the defendants’ failure to repair and maintain when required earlier in the lease. The defendants’ repair and maintenance obligations applied throughout the currency of the lease. Logically, failure to comply with those obligations as and when required would tend to have increasingly serious consequences as time went on. In that regard, the example provided in the Haskell decision relating to serious moisture damage caused by the failure to replace a roof tile was eerily apposite in this case, given the moisture damage to the premises indicated by the Panici report.

III. Damages

[53] Having concluded that the defendants breached their repair and maintenance obligations under the lease, what damages are the plaintiffs entitled to recover?

[54] The plaintiffs’ are seeking to recover approximately $1.7 million in damages from the defendants. According to Mr. Stark’s testimony, the plaintiffs’ total expenditures on remediation work amounted to $1,761,097, as set out in an Excel spreadsheet included in the Plaintiff’s Document Brief. Those expenditures did not include any amount for repairs to the original motel building (Block C), which the defendants chose to demolish rather than remediate. The plaintiffs also provided two large volumes of invoices and quotes, as back up those expenditures. As further support for assessing damages in approximately that amount, the plaintiffs relied on the Panici report and Mr. Panici’s testimony. As set out in the Panici report, the total estimated cost for remedial work to the hotel and diner premises was $1,710,155 after deducting the estimated cost for remediating the original motel building.

[55] As noted previously, the defendants allege that the amount that the plaintiffs expended went beyond what was required by the repair and maintenance provisions of the lease, and would in fact result in a substantial upgrade to the property. Through Mr. Birrell’s testimony and the cross-examination of Mr. Stark, the defendants challenged certain specific expenditures totaling $383,607, as follows:

Furniture – hotel rooms $209,218

Furniture – hotel lobby 26,310

Televisions & wall mounts 86,082

Air conditioners 24,241

Closets – hotel rooms 8,930

Uniforms 1,836

Hot tubs 18,928

Refrigerators 1,062

Niagara Falls Best Hotels (subscription fee) 7,000

$383,607

[56] Having considered the parties submissions and the evidence before me, I am assessing the plaintiffs’ damages at $1,734,107.

[57] In making that assessment, I took into account the defendants’ position that expenditures of that amount would result in a substantial upgrade to the property. Consistent with the analysis in the Stellarbridge decision, I agree that the defendants were not responsible for the cost of providing the plaintiffs with new or upgraded premises following the lease’s expiry. However, as is clear from the Haskell, Norbury and Stellarbridge decisions, the defendants bore the evidentiary burden of establishing what portion of the remediation cost was attributable to reasonable wear and tear. Except as indicated below, that burden was not met in this case.

[58] I accept Mr. Stark’s testimony and the documentary evidence provided by the plaintiffs as supporting the assessment of damages in substantially the amount claimed. In particular, except to the limited extent indicated below, I am satisfied that the plaintiffs included in their expenditure summary only those items for which the defendants would be responsible under their repair and maintenance obligations in the lease.

[59] As explained further below, I calculated the damages amount as follows:

Plaintiffs’ total expenditures (per spreadsheet) $1,761,097

Deductions:

Subscription fee (Niagara Falls Best Hotels) $ 7,000

Refrigerators 1,062

Hot tubs 18,928 26,990

Total damages $1,734,107

[60] In his testimony, Mr. Stark conceded that the defendants were not responsible for the subscription fee for Niagara Falls Best Hotels. He also conceded that the defendants should not be responsible for the cost of additional hot tubs beyond repairs to the few existing units. Since there was no break down indicating the cost of additional units, I have deducted the whole of this relatively small item. I have also deducted the cost for hotel room refrigerators, based on Mr. Birrell’s testimony that there were no refrigerators in the hotel rooms during the lease term. However, I do not consider the defendants to have met the evidentiary burden to justify further deductions, including in relation to the balance of the specific items they challenged.

[61] I also agree with the plaintiffs that the Panici report and Mr. Panici’s testimony provide further support for assessing damages in approximately the amount the plaintiffs claimed. As set out in the Panici report, the total estimated cost for remedial work to the hotel and diner premises was $1,710,155 after deducting the estimated cost for remediating the original motel building. The overall amount was based on the participants’ estimates of the cost of putting into “good condition” aspects of the property that fell below that standard. Given the repair and maintenance standard provided for in the lease, I am satisfied that this methodology would be appropriate to calculate damages in this case. I am also satisfied that reliance on estimates of this nature would be an appropriate way to assess damages, consistent with the approach taken in the Court of Appeal decision in Stellarbridge.

[62] In addition to an award of damages, the plaintiffs’ are also seeking pre-judgment and post-judgment interest at the rate of 18 per cent per annum, the rate prescribed under paragraph 6(r) of the lease. Under that provision, if the tenant defaults in payment of any sum the tenant is required pay to under the lease, the landlord has the right, but not the obligation, to pay any sum in default and to recover that amount from the tenant together with interest at 18 per cent per annum in the same manner as if it were rent in arrears.

[63] Plaintiffs’ counsel argued that pre-judgment interest should start running in this case commencing in June or July 2008 and should be at the lease rate of 18 per cent. In this regard, he noted that on the evidence at trial, the plaintiffs’ expenditures commenced in early 2008 and continued through the summer of that year. He suggested a commencement date for pre-judgment interest in the latter part of that period as a matter of convenience rather than attempting to calculate from the date of each invoice or quote.

[64] I agree with plaintiffs’ counsel that it makes sense as a practical matter to set a single commencement date for the calculation of pre-judgment interest. In all the circumstances, I consider July 1, 2008 to be the appropriate commencement date. However, as noted further below, I am inclined to defer making a final determination relating to pre-judgment and post-judgment interest without further submissions from counsel.

[65] Issues relating to pre-judgment and post-judgment interest were considered by the Ontario Court of Appeal in the Stellarbridge case.[^11] The landlord in that case sued and recovered damages for the tenant’s breach of its repair and restoration obligations under the lease. The trial judge awarded pre-judgment and post-judgment interest at the rate prescribed for “additional rent” under the lease (rather than at the statutory rates prescribed under the Courts of Justice Act[^12]), citing the desirability of giving legal effect to the contractual bargain the parties reached and relying on the Supreme Court of Canada decision in Bank of America Canada v. Mutual Trust Co.[^13] The Court of Appeal in Stellarbridge varied the trial judge’s decision, imposing the lease rate for only the small portion of the damages recovered that the landlord actually spent on repair and restoration of the premises. Interest on the balance of the damages, which were calculated based on estimates for repair and restoration work that the landlord chose not to undertake, was awarded at the lower statutory rate.

[66] While there may be valid factual or other reasons for distinguishing the result in Stellarbridge relating to pre-judgment and post-judgment interest, I am hesitant to make a final determination with respect to that aspect of the current action without further submissions from counsel, including with respect to sections 128 to 130 of the Courts of Justice Act and relevant case law. The amounts involved are potentially significant, given the difference between the lease rate and statutory rate in this case. Plaintiffs’ counsel made only brief reference to this subject in his closing submissions without referring to legal authorities. Defence counsel did not refer to the subject at all, consistent with his position that no amount was payable in damages by the defendants.

IV. Conclusion

[67] For the foregoing reasons, judgment in the plaintiffs’ favour will issue as follows:

1. The plaintiffs are entitled to recover damages from the defendants in the amount of $1,734,107.

2. The plaintiffs are entitled to pre-judgment interest and post-judgment interest to the extent to be determined following written submissions.

3. The issue of costs shall be determined following written submissions.

[68] If the parties cannot agree on pre-judgment interest and post-judgment interest, the plaintiffs may serve and file brief written submissions (not to exceed three pages) within 21 days. The defendants will have 21 days after receipt of the plaintiffs’ submissions to respond by brief written submissions. The plaintiffs may reply by brief written submissions within seven days. For greater certainty, each side is also free to provide a book of pertinent legal authorities. All such submissions are to be forwarded to me at my chambers at 59 Church Street, 4th Floor, St. Catharines ON L2R 7N8. If no submissions are received within the specified timeframe, the parties will be deemed to have settled the interest issue.

[69] If the parties cannot agree on costs, the plaintiffs may serve and file brief written submissions (not to exceed three pages) together with a bill of costs and any pertinent offers within 21 days. The defendants will have 21 days after receipt of the plaintiffs’ submissions to respond by brief written submissions. The plaintiffs may reply by brief written submissions within seven days. All such submissions are to be forwarded to me at my chambers at 59 Church Street, 4th Floor, St. Catharines ON L2R 7N8. If no submissions are received within the specified timeframe, the parties will be deemed to have settled the costs issue.

The Honourable Mr. Justice R.A. Lococo

Released: April 4, 2016

Hospitality Hotels Inc., 2016 ONSC 2256

COURT FILE NO.: 50057/08 (St. Catharines)

DATE: 2016/04/04

SUPERIOR COURT OF JUSTICE - ONTARIO

BETWEEN:

lundy’s regency arms Corp., 1498611 Ontario Inc. and 1519481 ontario Inc.

Plaintiffs

• and -

niagara hospitality hotels inc. and kerrio Corporation

Defendants

REASONS FOR JUDGMENT

R. A. Lococo, J.

Released: April 4, 2016

[^1]: 1984 CanLII 2181 (ON SC), [1984] O.J. No. 3310, 47 O.R. (2d) 548 (H.C.). [^2]: 2010 ONSC 1093, [2010] O.J. No. 674 . [^3]: Supra note 1 at para. 18, note 2 at paras. 37 and 40. [^4]: 1951 CanLII 67 (ON CA), [1951] O.R. 686 (C.A.) at p. 702. [^5]: 2004 CanLII 9852 (ON CA), [2004] O.J. No. 2102, 71 O.R. (3d) 263 (C.A.) at para. 47; leave to appeal denied [2004] S.C.C.A No. 271. [^6]: [1928] 2 K.B. 45 at pp. 58-59. [^7]: Supra note 5 at para. 62. [^8]: See Norbury, supra note 1 at para. 19. [^9]: Supra note 2 at para. 40. [^10]: The exception to the repair obligation in Canpaco extended beyond “reasonable wear and tear” to include “structural defect”, unlike the lease between the parties in the current action. [^11]: Supra note 5 at paras. 78 and 82-92. [^12]: R.S.O. 1990, c. C.43. [^13]: 2002 SCC 43, [2002] 2 S.C.R. 601.