CITATION: Northridge Property Management Inc. v. Champion Products Corp., 2016 ONSC 2715
COURT FILE NO.: CV-13-004SR
DATE: 20160425
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Northridge Property Management Inc.
Erroll G. Treslan, for the Plaintiff
Plaintiff
- and -
Champion Products Corp.
Ross H. Thomson, for the Defendant
Defendant
HEARD: April 12 and 13, 2016
REASONS FOR JUDGMENT
LEMAY J
[1] The Plaintiff, Northridge Property Management Inc. ("Northridge") is a property management company based in Owen Sound. The Defendant, Champion Products Corp. ("Champion") had both a cleaning supply business and a party supply business with operations in Owen Sound.
[2] In 2011, Champion was looking to move its operations to a new location in Owen Sound. They discussed space with Northridge, agreed on its dimensions, and moved into the space. Northridge thought they had a five year lease with Champion for the space. Champion disagreed and asserted that Northridge had failed to complete significant work necessary to allow Champion's businesses to function in the space. Champion vacated the space three weeks after they moved into it, and refused to pay any rent for the space.
[3] Northridge has brought this action, seeking damages for breach of contract. Champion resists this claim on the basis that there was no agreement between the parties or, in the alternative, that there was a fundamental breach of the existing agreement.
[4] For the reasons that follow, Northridge's claim is allowed. There was a binding lease agreement between the parties, and none of the concerns that Champion has raised demonstrate either that there was no agreement or that there was a fundamental breach on the part of Northridge.
The Issues
[5] There are three issues that must be resolved in this case:
a) Whether the parties had a valid and binding lease agreement?
b) If they did have a valid and binding lease agreement, should it be set aside on the basis of a fundamental breach on the part of Northridge?
c) If there is a lease and there has not been a fundamental breach, what should the quantum of damages be in this case?
The Background Facts
a) Northridge
[6] Northridge is a property management company that purchases distressed buildings, renovates them extensively and then re-lets them to various tenants. They have at least a dozen larger commercial properties in the Owen Sound area.
[7] The principals of this company are Mr. John Smith and Mr. Trevor Heathers. Mr. Smith is the President of the Company, and is responsible for following up on leads for properties and obtaining initial commitments for properties. Mr. Heathers is responsible for ensuring that Northridge's deals are properly documented and managed.
[8] During the course of the hearing, I heard testimony from Mr. Heathers. I did not hear testimony from Mr. Smith. I will return to that issue below.
b) Champion Products
[9] Champion had two business lines in Owen Sound. First, it purchased a company called Northern Sanitation Supplies some years ago. The principal of Champion, Mr. Ashok Sood testified that he paid $300,000.00 for the goodwill of Northern Sanitation when he purchased it, along with additional amounts for other parts of the business.
[10] Northern Sanitation provides a large range of products to various restaurants and other organizations. These products range from cleaning supplies to gloves to paper products to knives, forks, plates and food containers.
[11] Second, Champion has a business called the Party Warehouse. This business is a warehouse/retail operation that sells supplies for various events. Although the two businesses are based out of the same facility, they are run separately, and I understand that they may have separate corporate identities. However, for the purposes of these reasons I will refer to both businesses as Champion.
[12] In 2011, Champion had been leasing premises in Owen Sound, on 16th Avenue East, in an area that was zoned for industrial use, the M-2 Classification under Owen Sound's zoning by-laws. They had been there for a number of years without any complaints from the City about their business.
[13] Champion had been asked by their previous landlord to vacate their property early as he had another tenant who wished to lease it. They had agreed to do so, and they were required to vacate the property by October 31st, 2011.
c) The Property in Question
[14] Northridge had been one of Champion's customers for cleaning supplies. Discussions began between the parties about a potential property that Champion could lease for its businesses. The parties had a discussion, and toured both the old and the new facilities.
[15] The new premises were part of a larger building that had been owned by a local marina. The larger building had been sold shortly before the marina filed for bankruptcy, and the trustee had originally stored some possessions in the building.
[16] In September of 2011, the building only had one tenant, FedEx. The rest of the building was vacant. The parties discussed terms of a lease, and an Offer to Lease was signed by the parties in September. As a result of this Offer to Lease, Northridge conducted renovations on the portion of the building that was to be occupied by Champion. Some of the renovations were to be completed prior to Champion moving into the building, and some of them were to be completed after the fact. I will return to the issue of the renovations below.
[17] Champion moved into the property at the beginning of November, 2011. They set up racking and moved several truckloads of their product into the building. I was provided with numerous colour photographs that showed the condition of the building, as well as the fact that Champion had been able to move into the building and set some of their product up.
[18] However, after some discussions and exchanges of e-mails, which I will return to below, Champion decided that they could no longer operate out of the space. They left sometime in late November, and advised their customers that they would be returning in January.
[19] There were then some exchanges of e-mails between counsel about this matter, but a resolution was not reached and Champion decided not to return to the premises in January.
[20] Since 2011, Northridge has managed to lease much of the building out to other tenants. I will return to that issue in my discussion of damages below.
Issue #1 - Was There an Agreement?
[21] Determining whether there was an agreement requires me to consider the discussions leading up to the lease, the documentation itself and the complaints that Champion made after they took possession of the property.
a) The Discussions Leading Up to the Agreement
[22] As noted above, the parties began discussions in late August of 2011 for a new lease. Mr. Heathers testified that there was a site meeting in late August. He testified that, at this meeting, the parties discussed the zoning, the nature of Champion's business, the work to be done, the rent, and the boundaries of the premises.
[23] Mr. Sood has a somewhat different recollection of this meeting. He does not recall discussing the zoning. However, he recalls being told that the work that Northridge was going to do would be at least as good as what he had at his current location. He did not provide evidence about what, precisely, was agreed to between the parties.
[24] There are some credibility issues between the two main witnesses in this case. Therefore, it is useful to set out my views on the limited credibility issues. I start by noting that I am of the view that both Mr. Heathers and Mr. Sood told the truth as they recalled it, and that neither of them was trying to mislead the Court. However, witnesses sometimes have imperfect recollections because of the passage of time.
[25] In this case, I generally accept Mr. Heathers' evidence where it differs from that of Mr. Sood, for the following reasons:
a) Mr. Heathers had precise recollections of events, whereas Mr. Sood was vague on details.
b) Mr. Heathers' evidence was consistent with the contemporaneous documents that were part of the evidence. Mr. Sood's evidence was not entirely so.
c) Mr. Sood's complaints were not raised either consistently or in a timely way. I will return to this issue below.
[26] As a result, I find that there was a discussion between the parties in late August. The topics canvassed included zoning, the space that was to be demised, the rent and the fit-up work that Northridge was going to perform. The parties moved towards putting this discussion into a formal offer to lease. I now turn to the documents in this case.
b) The Documentation Itself
[27] In this case, the parties are agreed that there was no lease that was actually signed. Instead, there was an Offer to Lease that was signed after an exchange of correspondence. This correspondence started with an e-mail from Mr. Heathers to Mr. Sood on September 7th, 2011. This e-mail provided a draft Offer to Lease and a floor plan, which was Schedule "A" to the lease. It also appears to have included Schedule "B", which is the scope of the landlord's work.
[28] Between September 7th and September 19th, a number of e-mails were exchanged between Mr. Heathers and Mr. Sood. One of the last e-mails from Mr. Sood was on September 19th, 2011, when he asked Mr. Heathers to send the schedules. Mr. Sood also advised Mr. Heathers that everything looked good, and he would sign the Offer to Lease when he got the schedules.
[29] Later that same day, Mr. Heathers then sent the document back to Mr. Sood. On September 22nd, 2011, Mr. Vince Sasso sent the Offer to Lease, signed by Mr. Sood, back to Mr. Heathers. Mr. Sasso is the Comptroller of Champion. The Offer to Lease was signed by Mr. Sood.
[30] For Mr. Heathers, getting the lease back signed was important because he had started to do the smaller work in the premises, but he was holding off on the "big ticket" items until he had a confirmed agreement.
[31] The Offer to Lease was then sent back to Mr. Sood by Mr. Heathers, countersigned by himself and Mr. Smith. Mr. Heathers and Mr. Smith initialed each page, including the schedules, and Mr. Sood was asked by way of e-mail to initial each page. Although Mr. Heathers followed up with Mr. Sood several times, Mr. Sood never sent back a copy with initials on each page.
[32] The parties agree that the Offer to Lease set out the term, the premises to be rented, the rent and the parties. The parties also agree on the commencement date, November 1st, 2011. Ultimately, the question is whether the lease is an agreement or merely an agreement to agree at some later date.
[33] In addition to these terms, paragraph 7 of the Offer to Lease states:
Lease
The Landlord has attached its Standard Form of Lease as Schedule "C", which the Tenant shall execute. The Landlord shall undertake to negotiate reasonable nonfinancial changes and incorporate the terms of the Offer to Lease; both the Landlord and Tenant acting reasonably and in good faith, though no change shall materially alter the intent and scope of the Lease (the Tenant having reviewed the document upon signing and finding the document to be reasonable). The Lease shall be executed by December 31st, 2011. In the event the Landlord and Tenant cannot agree to the terms of the Lease by December 31st, 2011, the matter shall be resolved by Binding Arbitration and the Lease shall be executed based on the findings of said Binding Arbitration.
[34] In other words, the agreement to lease contains a provision allowing for arbitration over any non-monetary terms that the parties cannot resolve in the final agreement. It also contains the following provisions relating to the landlord's work:
Condition of Premises/Landlord's Work
The Tenant shall accept the Premise in an "as is, where is" condition except that the Landlord shall complete the scope of work as outlined in Schedule "B".
[35] Mr. Sood testified that he had not seen this schedule, and did not recall it being attached to the Offer to Lease. Mr. Sood also testified that he had been promised a place that was better than Champion's old premises. He also testified that Champion should not have to perform any work on the building. His view was that he should not have to improve the landlord's building for the landlord.
[36] In determining whether the parties reached a deal, I reject Mr. Sood's testimony about the scope of the renovations for the following reasons:
a) All of the copies of the Offer to Lease provided by Mr. Heathers had the schedules attached to them.
b) On the last communication from Mr. Sood, on September 19th, 2011, he specifically requested the schedules before he signed the Offer to Lease. The signed Offer to Lease was then sent to Northridge three days later.
c) Mr. Sood acknowledged that he signed the Offer to Lease, which specifically references Schedule "B".
d) Champion actually took possession of the premises.
[37] As a result, I find the Offer to Lease was signed by both parties, and both parties were aware of the terms of this Offer to Lease when Champion took possession of the premises. I will return to the question of whether this was an agreement or an agreement to agree below.
c) The Post-Move in Complaints
[38] I heard a great deal of testimony from Mr. Sood and Mr. Heathers about Champion's complaints when they moved into the premises. I also heard evidence from Mr. Laframboise, who was Champion's warehouse clerk and a member of the Company's Occupational Health and Safety Committee.
[39] I start with the documentation. Mr. Sood's son, Amit Sood, sent an e-mail to John Smith on October 31st, 2011 outlining three deficiencies in each area of the premises. They dealt with paint, heating and cooling and other issues.
[40] Mr. Amit Sood followed up with an e-mail to Mr. Smith, that was forwarded by Mr. Smith to Mr. Heathers on November 9th, 2011 listing some issues that needed to be addressed, as follows:
Champion
- Grade level door still not complete and no work has been done since last visit
- The furnace in the Champion side does not shut off
- Paint is not complete
Party warehouse
- Front door is still not completed
- Parking lot is still gravel
[41] The list of issues in this e-mail had some overlap with the list of issues in the October 31st, 2011 e-mail. Amit Sood advised that they could not open the party store or operate Champion until these issues were addressed. Mr. Heathers provided a response to this list of issues on November 11th, 2011. He advised that, with the exception of the paving, the issues would be completed by the following week.
[42] Mr. Sood testified that he came up the following week, sometime before the 19th of November, 2011, and met with Mr. John Smith. I did not hear from Mr. Smith in testimony, in spite of the fact that he continues to be the President of the Company. I had no explanation for his failure to testify, which is of concern to me.
[43] As a result, I am prepared to accept Mr. Sood's evidence that he had this mid-November meeting with Mr. Smith, and that the purpose of the meeting was to complain about deficiencies with the premises that had been leased to Champion.
[44] However, I am not prepared to accept Mr. Sood's evidence that he raised significant deficiencies and obtained no action from Northridge for two reasons. First, as discussed elsewhere in these reasons, the list of concerns that Champion raised at trial was inconsistent with what Champion raised in writing in November of 2011. Second, Mr. Smith sent a follow-up e-mail after this meeting, and Champion did not respond to it.
[45] This brings me to the follow up e-mail, which was sent by Mr. Smith to Mr. Sood after this meeting, in which Mr. Smith says "front door completed yesterday at Party Warehouse... good to open the store." Mr. Sood acknowledged that he had no communications with Mr. Smith after this email was sent.
[46] In his testimony, Mr. Sood outlined a number of issues that he had with the premises. These concerns were different from the list that his son, Amit Sood, sent to Mr. Heathers on November 9th, 2011, and are as follows:
a) The property had not been properly paved.
b) There was an opening in the side of the warehouse that led into other parts of the warehouse, and it was not secure.
c) The electrical work was not done
d) The painting was not done.
e) The mudding of the walls was not done.
f) The dock was not working.
g) There was dirt all over the premises.
[47] Mr. Laframboise provided testimony that suggested that he also observed some of these issues. For example, he noted that there was dirt in the premises and that the Northern Sanitation business in particular could not afford to be dirty. He also noted that the hole in the wall existed, but that by the time Champion left the space, the hole was being filled in, and had been framed.
[48] In terms of the remaining list of items to be completed in Schedule "B" of the Offer to Lease, Mr. Laframboise noted that the bathroom was working but without hot water by the time Champion left the space, and that the offices were completed by the time they left the space. He was not aware of there being any other issues with the completion of the list of work on Schedule "B".
[49] I make the following factual findings about the work on the building:
a) The items listed in Schedule "B" of the lease were completed by the time that Champion moved out of the premises.
b) The issues raised by Mr. Sood at trial were not particularly significant to Champion. I make this finding because these issues were not raised by Champion when it was in the space, and something could have been done about the issues.
c) The significant issues for Champion were raised by Mr. Sood' son, and had all been dealt with by Mr. Heathers before Champion moved out of the space.
d) The Law and its Application
[50] Champion argues that the parties did not have an agreement, but only an agreement to agree. As a result, there is no binding contract in this case. Northridge argues that the parties actually had a complete agreement. Analyzing the opposing arguments requires a consideration of two legal issues.
[51] First, there is the difference between an agreement and a mere agreement to agree. The principles relating to this difference are set out in the Ontario Court of Appeal's decision in Bawitko Investments Ltd. v. Kernels Popcorn Ltd. ((1991) 1991 2734 (ON CA), 79 D.L.R. (4th) 97 at paragraphs 20 and 21) where Robins J.A. stated:
...When they agree on all of the essential provisions to be incorporated in a formal document with the intention that their agreement shall thereupon become binding, they will have fulfilled all the requisites for the formation of a contract. The fact that a formal written document to the same effect is to be thereafter prepared and signed does not alter the binding validity of the original contract.
However, when the original contract is incomplete because essential provisions intended to govern the contractual relationship have not been settled or agreed upon; or the contract is too general or uncertain to be valid in itself and is dependent on the making of a formal contract; or the understanding or intention of the parties, even if there is no uncertainty as to the terms of their agreement, is that their legal obligations are to be deferred until a formal contract has been approved and executed, the original or preliminary agreement cannot constitute an enforceable contract. In other words, in such circumstances the "contract to make a contract" is not a contract at all. The execution of the contemplated formal document is not intended only as a solemn record or memorial of an already complete and binding contract but is essential to the formation of the contract itself.
[52] This principle requires the Court to look at what the parties have signed and determine whether it is an agreement. It is an analysis that turns on the facts of each case.
[53] This brings me to the second legal issue I must consider. Leases have their own complexities, and there are certain requirements that must be met in order for an agreement to lease to be a binding contract.
[54] A detailed discussion of these principles is set out in a number of cases provided to me by both counsel. I have considered all of these cases, but have focused on the detailed discussion of various principles in Upper Room Alliance Group Ltd. v. John Volken Foundation ([2008] O.J. No. 3960 (S.C.J.)).
[55] In that decision, Justice Linhares de Sousa was faced with a case where the parties had negotiated over the terms of a lease and had signed an offer to lease. However, the lessee had not taken possession of the premises.
[56] A number of requirements for a valid lease were identified in both this decision, and in others that were cited to me. A valid lease:
a) Identifies the parties
b) Provides a description of the premises to be leased.
c) Provides a commencement date
d) Provides a term
e) Sets out the rent.
f) Sets out all of the material terms of the contract not being matters incident to the relation of landlord and tenant, including any covenants and conditions.
[57] In addition to these requirements, there are some other principles respecting leases that emerge from the case law. First, in looking at the Offer to Lease to determine whether it provides certainty over all of the essential elements, the Court should not construe the document narrowly. Rather, it should be construed broadly and fairly.
[58] Second, a written agreement can be a valid lease in spite of an express stipulation that a formal lease agreement will be entered into in the future.
[59] When the principles are applied to this case, two conclusions emerge. First, it is clear to me that the Offer to Lease was a complete agreement between the parties for the following reasons:
a) It contains all of the essential elements of a lease, and I do not have any difficulties in understanding its terms.
b) It contains an arbitration provision that allows the parties to resolve any disputes over the non-monetary terms of the lease.
c) The parties both conducted themselves as if there was an agreement between them.
[60] Second, it is clear that the list of deficiencies Champion relies upon are not issues covered by the contract. I reach that conclusion for the following reasons:
a) From a contractual perspective, Northridge was only required to perform the work set out in Schedule "B" to the lease. Otherwise, the lease was on an as-is, where-is basis. This work had all been completed before Champion moved out.
b) There were inconsistencies in the issues that Champion raised about the property. Many of the complaints that Champion raised only came to light after it had vacated the property.
e) Conclusion
[61] I find that the Offer to Lease was sufficiently clear that it was a binding agreement between the parties, and not merely an agreement to agree.
Issue #2 - Fundamental Breach
[62] Champion claims that there are two fundamental breaches of the contract in this case. First, there is the zoning issue. Champion's argument, in essence, is that the property was zoned for industrial uses only and that as a result Champion could not carry on its business there. Second, there are the issues relating to the condition of the property when Champion moved in on November 1st, 2011. Champion asserts that the property they were moving into was unsuitable because of a number of significant deficiencies in the renovations that were supposed to have been performed by Northridge.
[63] When Champion argues fundamental breach, I take them to mean that these are breaches of the contract by Northridge that go to the root of the contract and relieve Champion from performing its obligations under the contract. A fundamental breach deprives a party of essentially the whole benefit of the contract- see Spirent Communications of Ottawa Ltd. v. Quake Technologies (Canada) Ltd. (2008 ONCA 92 at paragraph 35). However, given my factual findings, the legal characterization of these alleged breaches is not particularly relevant.
a) The Zoning Issues
[64] Mr. Heathers testified that the issue of zoning was discussed between the parties. Mr. Sood testified that zoning was not discussed, but that they discussed the nature of Champion's business. I find that zoning was discussed by the parties.
[65] It is also clear from the evidence that the issue of the zoning of the property was not raised as a concern by the Defendant at any time before the commencement of this action. It was not raised as a deficiency when Champion moved into the property, and it was not raised as a reason that Champion had to move out of the property.
[66] I also heard evidence on the zoning of this property from Ms. Pamela Coulter, who is the Director of Community Services for the City of Owen Sound. She testified that she had been involved in the creation of a new zoning by-law for the City of Owen Sound. This by-law came into effect in April of 2010.
[67] She testified about the zoning for both the old and the new property where Champion carried on business. She testified that, in both cases, the zoning was rated M-1. In the Owen Sound official plan, this means that the area is zoned for industrial uses. This includes warehouses, as well as retail uses that are incidental to a warehouse.
[68] The by-law specifies that not more than ten (10) percent of the amount of gross floor area used for the warehouse can be used for the retail component of the operation.
[69] There was also evidence about the process for obtaining a business licence. Champion had obtained a business licence when they first started to operate in Owen Sound. However, there is no evidence that Champion attempted to obtain a business licence when it moved to Northridge's premises.
[70] Given the foregoing, I do not view the zoning issue as establishing a fundamental or substantial breach of the contract on the part of Northridge for the following reasons:
a) It is clear on the evidence that the premise was suitable for the operation of the Northern Sanitation business. It was a warehouse operation where people could pick up product that they had ordered. The evidence did not disclose any limitation on Champion's ability to carry on the Party Warehouse business from this facility.
b) The zoning at the property where the Party Warehouse business had operated was the same as the zoning at the Northridge premises. Given that the Party Warehouse had operated at the old location for five years, it is quite possible that they would have been able to continue operating at the Northridge site.
c) The issue of the zoning was discussed between the parties, and it was clear to me that Mr. Heathers knew that Champion's old facility had the same zoning as its new facility.
d) Champion did not raise the zoning issue at the time that it occupied the premises, or at the time that it left the premises. It only raised this issue as a defence once the litigation commenced. This strongly suggests that Champion did not view the zoning as a substantial concern when it left the premises.
[71] In the circumstances, the alleged deficiencies in the zoning do not give Champion grounds to breach its contract with Northridge.
b) The Deficiencies in the Property
[72] I have set out the facts relating to Champion's claimed deficiencies above. When I consider those deficiencies, I am of the view that none of them amount to a fundamental breach for the following reasons.
[73] First, the list of complaints advanced by Champion was inconsistent. Those inconsistencies are detailed above. However, if one of the deficiencies amounted to a fundamental breach, Champion would have complained about it consistently and regularly from the time that they moved in.
[74] Second, the complaints advanced by Champion in Amit Sood's e-mail of November 9th, 2011 were all addressed by Mr. Heathers' e-mail of November 11th, 2011. There are then no further complaints in writing from anyone at Champion until they vacated the premises at the end of November, 2011.
[75] Third, the cost of remediating the issues that Champion raised, even the list that was presented at trial, was in the range of $25,000.00. Given the value of the lease, and the fact that Champion needed the space to continue its business, the most logical way for Champion to resolve these issues would have been to fix them and then advance a claim against Northridge. This is especially true when the Price that Champion paid for Northern Sanitation is considered.
[76] Fourth, many of the complaints that Champion raised were not Northridge's responsibility. As set out above, Champion accepted the premises on an as-is where-is basis, except for the list of work contained in Schedule "B'. Given that this work was mostly completed prior to Champion's move-in date, and entirely completed prior to when they moved out, Champion simply cannot establish a fundamental breach on this basis.
[77] Champion has failed to establish a fundamental breach in this case. The contract remains binding on Champion. This brings me to damages.
Issue #3 - Damages
[78] In his testimony, and in the exhibits, Mr. Heathers has provided a detailed calculation of the damages that Northridge is claiming in this case. Mr. Heathers calculated the total damages by starting with the rents that Northridge would have had to pay over the course of the lease. He has then deducted the rents, net of the fit-up costs that Northridge received and is expecting to receive for the space during Champion's lease period. Champion's lease would have ended on October 31st, 2016. As a result, we do not know if the tenants that are currently in the building will continue to pay rents. However, Mr. Heathers' calculations assume that the new tenants will continue to pay their rent.
[79] Although the question of whether Northridge took sufficient steps to mitigate its damages was raised in cross-examination it was an issue that Mr. Thomson, quite rightly in my view, did not press in argument on behalf of Champion. Northridge took significant steps, consistent with its business practices, to try and rent the space that Champion had vacated. By the time of trial, virtually all of the space had been rented. Northridge's efforts to mitigate were entirely reasonable in my view.
[80] There were three issues that Mr. Thomson argued on damages, as follows:
a) Whether, in calculating mitigation, Mr. Heathers should have discounted the rents that were received from the new tenants by the fit-up costs that Northridge incurred.
b) Can Northridge charge interest on the lease payments and, if so, at what rate?
c) Should Northridge have applied for the rebate that was available for them because the building was not rented?
[81] Northridge stated that they would attempt to re-let the premises on the tenant's account. Given the principles set out in Highway Properties Ltd. v. Kelly, Douglas and Co.(1971 123 (SCC), [1971]S.C.R. 562), it appears to me that the approach adopted by Mr. Heathers to calculating damages is otherwise correct.
a) The Fit Up Costs
[82] Mr. Heathers testified that the fit-up costs were costs that were incurred to get the property ready for rental. They were costs that Northridge built into its rents, and it was expected that they would be recovered over the course of the lease. In calculating the value of the rents that were received by Northridge for the purposes of mitigation, Mr. Heathers deducted the fit-up costs from these rents.
[83] Mr. Thomson argued that these fit-up costs should not be deducted as they were costs that were included in the rent, and amortized over the course of the lease. I disagree.
[84] The fit-up costs incurred to prepare the space for Champion were properly excluded from the damages claim in this case for two reasons. First, they were costs that the landlord was required to incur in order for Champion to agree to be a tenant. Second, they were costs that were to be recouped over the course of the rent. It would not be appropriate to claim those costs both as part of the lost rent and as a separate head of of the damages in the case. That would be claiming double recovery.
[85] However, when the costs associated with the other tenants are considered, it is clear that the fit-up costs are costs that must be incurred in order to have the tenants agree to rent the space. In other words, the rent would not be earned if Northridge did not spend the fit-up costs. It is an expense related to earning mitigation income, and is properly deducted from the income that was earned.
[86] As a result, the damages will be calculated on the basis of the rents earned by Northridge less the fit-up costs.
b) The Interest Rate
[87] The provisions of the lease relating to interest raise a couple of problems. The provision states:
3.5 Rent Past Due
If the Tenant fails to pay any Rent when the same is due and payable, such unpaid amount shall bear interest at the rate of twelve percent (24%) per annum (calculated monthly at the rate of two percent (2%), such interest to be calculated from the time such Rent becomes due until paid by the Tenant.
[88] The first problem is what rate of interest is to be charged under the contract. In argument, Mr. Treslan resolved this problem by conceding that the rate of interest should be the 12% per annum, calculated monthly.
[89] The second problem is the Interest Act. Mr. Thomson argues that the rate of twelve percent is compounded monthly, and is more than 12% on an annual basis. As a result, Mr. Thomson argues that the contract is contrary to the provisions of the Interest Act.
[90] Mr. Thomson bases his argument on section 4 of the Interest Act, which states:
- Except as to mortgages on real property or hypothecs on immovable, whenever any interest is, by the terms of any written or printed contract, whether under seal or not, made payable at a rate or percentage per day, week, month, or at any rate or percentage for any period less than a year, no interest exceeding the rate or percentage of five per cent per annum shall be chargeable, payable or recoverable on any part of the principal money unless the contract contains an express statement of the yearly rate or percentage of interest of interest to which the other rate or percentage is equivalent.
[91] Based on this provision, Mr. Thomson argues that the most I should permit Northridge to recover is an annual rate of 5%. He also argues that I should exercise my discretion under section 130 of the Courts of Justice Act to limit the claim for interest to the prejudgment interest rate or less.
[92] There was no evidence that the parties specifically discussed this term. However, it was included in the draft Schedule "C" that was part of the Offer to Lease that Mr. Sood signed. As a result, it is clear that the parties were both aware of this provision.
[93] Neither party provided me with any case law or other authorities on this issue. As a result, I must consider this contract against the provisions of the Interest Act. It is clear that a rate of 12% annual interest, compounded monthly, produces an actual annual rate greater than 12%. Further, the phrase "any written or printed contract" is a very broad term. It is likely that it includes this contract. As a result, it is possible that this contract is contrary to section 4 of the Interest Act. It is also possible that this contract is not caught by section 4 of the Interest Act.
[94] In analyzing the Interest Act issue, however, there are a number of competing legislative and policy considerations that would arise. For example, is the legislation intended as consumer protection legislation and should it apply to sophisticated contracting parties? Should I interfere with an arms-length contract by applying the legislation after the fact? What is meant by any written or printed contract? These are all challenging questions. I do not intend to resolve any of them with this decision.
[95] Even if Mr. Thomson is correct in his interpretation of the Interest Act, the Court still has a residual discretion in assessing interest on damages. Specifically, section 130 of the Courts of Justice Act provides me with discretion to award interest that is either higher or lower than the rates prescribed by the Courts of Justice Act. There is no specific limit set out in this section about what the interest rate should be. Section 130(2) sets out a number of factors for me to consider in exercising that discretion.
[96] In the unique circumstances of this case, I have determined to exercise my discretion and award Northridge interest in the amount of 12% per annum, compounded monthly for the following reasons:
a) The parties had an exchange of documentation that arguably demonstrated an intent to have an even higher rate of interest (24% per annum) charged on lease payments. Certainly, interest in excess of 5% per annum on overdue lease payments was envisioned by both parties.
b) The parties are sophisticated commercial parties, and should be entitled to negotiate their own contracts, and have those contracts enforced.
c) The Property Tax Reimbursement
[97] I heard testimony that the City of Owen Sound would provide a rebate for property taxes for buildings that were empty. Mr. Heathers also testified that he was aware of the rebate, but did not obtain it. This rebate is something that Champion should be entitled to a credit for.
[98] I expect that the amount is not significant. However, the parties are to discuss the amount and agree upon it. If they are unable to agree on the amount within seven (7) days of the release of these reasons, then the Plaintiff may make written submissions, including Affidavits, about the issue. The Defendant will have seven (7) days to provide its response and the Plaintiff shall have a further seven (7) days to provide its reply.
[99] As a result, the damages calculation set out in Tab 23 of Exhibit 2 appears to me to be correct, subject to the property tax issue.
Disposition
[100] For the foregoing reasons, Northridge's action is allowed to the following extent:
a) They are entitled to damages in the amount of $233,146.30, less the property rebate discussed in paragraph (c).
b) In terms of the interest to be paid, it is to be calculated on the basis of 12 percent per annum, compounded monthly.
c) The rebate that Northridge would be entitled to for property taxes is to be used to reduce the damages in paragraph (a). Any issues relating to this amount are to be adjudicated as set out above.
[101] This brings me to the issue of costs. The Plaintiff is to provide its costs submissions in this matter within twenty-one (21) days of the release of these reasons. These submissions are not to exceed four (4) single spaced pages, exclusive of bills of cost, case-law and offers to settle.
[102] The Defendant is to provide its costs submissions in this matter within fourteen (14) days of receiving the Plaintiff's costs submissions. These submissions are not to exceed four (4) single spaced pages, exclusive of bills of cost, case-law and offers to settle.
[103] There shall be no reply submissions on costs without leave of the Court.
[104] Given that the costs submissions are due on or after the date that final written submissions on the rebate issue are due, the costs of completing the written rebate are to be dealt with in the course of the submissions describe above. In the event that a further appearance to address the issue of the rebate is necessary, those costs will be dealt with separately.
LEMAY J
Released: April 25, 2016
CITATION: Northridge Property Management Inc. v. Champion Products Corp., 2016 ONSC 2715
COURT FILE NO.: CV-13-004SR
DATE: 20160425
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Northridge Property Management Inc.
Plaintiff
- and -
Champion Products Corp.
Defendant
REASONS FOR JUDGMENT
LEMAY J
Released: April 25, 2016