Court File and Parties

COURT FILE NO.: CV-16-551194 DATE: 20160621 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

FIP MUNROE INC. Applicant – and – CC CAPITAL INC. Respondent

Counsel: Jeffrey P. Hoffman, for the Applicant Richard Quance, for the Respondent

HEARD: June 16, 2016

M. D. FAIETA, J.

Introduction

[1] The Applicant purchased a property. It then assigned its rights and obligations under the Agreement of Purchase and Sale to the Respondent. A few days before closing, the Vendor claimed that it was owed $100,000.00. The Respondent deducted that amount from the price of the Assignment payable to the Applicant. This Application raises the question of whether the Applicant was entitled to deduct $100,000.00 from the price paid by the Respondent for the Assignment.

[2] For the reasons described below, I have granted this Application and have found that the Respondent was not entitled to withhold $100,000.00 from the Applicant for the price paid for the Assignment.

Background

Agreement of Purchase and Sale

[3] On October 22, 2014 the Applicant agreed to purchase an 11 acre property in Grimsby, Ontario (the “Property”) from Dancor Stoney Creek Inc. (the “Vendor”) for the amount of $9,091,000.00 (the “APS”).

[4] Schedule A of the APS states that:

The Buyer agrees to pay the balance of the purchase price, subject to adjustments, to the Seller on the completion of this transaction with funds drawn on the Buyer’s lawyers trust account in the form of a bank draft, certified cheque or wire transfer … .

[5] Paragraph 18 of the APS states:

ADJUSTMENTS; Any rents, mortgage interest, realty taxes including local improvement rates and unmetered public or private utility charges and unmetered cost of fuel, as applicable, shall be apportioned and allowed to the day of completion, this day of completion itself to be apportioned to the Buyer.

Lease

[6] On November 14, 2014 the Vendor and Fedex Ground Package System, Ltd. (the “Tenant”) entered a lease for a building to be constructed on the Property (“Lease”). The Vendor agreed to construct the building at its sole cost and expense. Under Section 4 of the Lease, the Tenant agreed to pay $56,280.51 plus HST in “Minimum Rent” on a monthly basis for the initial term.

[7] Exhibit “C” of the Lease further provides that:

Landlord shall, at its sole cost and expense, including payment of any applicable impact fees, perform the following Landlord’s Improvement Work referred to in Lease Section 7 by constructing Landlord’s Building and the Premises to suit Tenant and complete Landlord’s Improvement Work described in the Specifications and Drawings attached hereto …

After the Drawings under Section 7.2(A) are complete and without invalidating the Lease, Tenant may order changes in the Specifications and/or Drawings …

Except as expressly provided below, the parties will authorize all changes by signing change orders (individually a “Change Order” and collectively the “Change Orders”). The parties agree that a $100,000.00 CAN change order allowance (the “Allowance”) has been included in the Rent under Section 4 which is allocated to address anticipated Change Orders . …

To the extent that the aggregate change order costs resulting from Change Orders requested by Tenant are less than the Allowance, the Landlord shall pay in one lump-sum to Tenant within thirty (30) days after the Rent Commencement Date the portion of the Allowance not spent .

To the extent that the aggregate change order costs resulting from Change Orders requested by the Tenant are more than the Allowance, annual Rent during the Primary Term of the Lease shall be increased by the amount actually spent capitalized at the rate of 7.38 per cent per annum or $73.80 for each $1,000 CAN by which the aggregate change order costs are in excess of the Allowance. [Emphasis added]

Assignment Agreement

[8] On February 20, 2015, the Applicant agreed to assign its interest in the APS to the Respondent (“Assignment Agreement”). The purchase price is described in various provisions of the Assignment Agreement.

[9] Paragraph 4 of the Assignment Agreement states:

In consideration for granting this Assignment to the Assignee/New Purchaser, the Assignee/New Purchaser shall pay to the Assignor/Original Purchaser the following sums:

(a) $1,259,000.00 representing the price of the Assignment, inclusive of any land transfer tax upon such amount, as well as inclusive of any additional adjustments in favour of the Vendor as contemplated by the Purchase Agreement or any expenses as contemplated by section 8 of Schedule B of this Agreement (the “Assignment Fee”);

(b) $100,000, in addition to the Assignment Price representing the first deposit remitted by the Assignor/Original Purchaser to the Vendor; and

The parties hereto agree that the total price payable by the Assignee/New Purchaser for the Property is the Assignment Price of $1,259,000.00 (subject to adjustments contemplated in section 4(a) above), plus the original Purchase Price as set out in the Purchase Agreement, being a total of $10,350,000.00, inclusive of the adjustments due pursuant to the Purchase Agreement and land transfer tax as contemplated in section 4(a) above”. [Emphasis added]

[10] Paragraph 5 of the Assignment Agreement provides that the price described in paragraph 4 shall be paid in three instalments, with the final payment payable as follows:

(c) the sum of $1,009,000.00 (subject to adjustment as per section 4(a) above or any other adjustment provision of this Agreement), by certified cheque, … representing the balance of the Assignment on the Closing Date as contemplated by the Purchase Agreement payable to the Assignor’s/Original Purchaser’s solicitor … to be held by them in trust pending final completion of the transaction and to be returned forthwith to the Assignee/New Purchaser without deduction if the transaction fails to close by reason of the Assignor’s/Original Purchaser’s or the Vendor’s default.

[11] Paragraph 6 of the Assignment Agreement states:

It is hereby acknowledged and agreed that the consideration paid by the Assignee/New Purchaser to the Assignor/Original Purchaser herein shall be solely in consideration for the granting of this assignment and in fulfillment of this contract and such consideration is inclusive of any Land Transfer Tax payable on the Assignment Price, if applicable, and all adjustments as contemplated by section 4(a) above.

[12] Paragraph 5 of Schedule B of the Assignment Agreement further provides:

The parties hereby agree that the purchase price as contained in the Purchase Agreement, plus the Assignment Price contained in this Agreement (subject to the adjustments contained in section 4(a) of this Agreement) is equal to $10,350,000.00, exclusive of the adjustments due pursuant to the Purchase Agreement (collectively the “Purchase and Assignment Price”). The Purchase and Assignment Price has been agreed to by the Assignee/New Purchaser based upon the Minimum Rent for the initial term of the Lease being $56,280.51 plus HST per month. It is agreed that should the Minimum Rent for the initial term of the Lease be less than $56,280.51 plus HST per month, the Purchase and Assignment Price for this transaction shall be reduced by the same percentage decrease in the Minimum Rent for the initial term of the Lease, and such reduction shall be an adjustment to the Assignment Price. For clarity, if the actual Minimum Rent for the initial term of the Lease is 3% less than $56,280.51 plus HST per month, the Purchase and Assignment Price for this transaction shall be reduced by $310,500.00 (3% of $10,350,000.00) resulting in the Assignment Price being $948,500 ($1,259,000.00 less $310,500).

[13] The “Minimum Rent” for the initial term did not change. As a result, there was no adjustment to the purchase price under the APS under Article 5 of Schedule B to the Assignment Agreement.

[14] The Assignment Agreement was amended on March 2, 2015. Coincidentally, it resulted in the reduction of the Assignment Price by $100,000.00 to $1,159,000.00.

[15] The Respondent was provided with a copy of the APS and Lease prior to entering the Assignment Agreement.

[16] Both the APS and the Assignment Agreement were completed on November 5, 2015.

[17] In accordance with paragraph 9 of the APS, the Respondent took an assignment of and assumed the obligations under the Lease.

[18] A few days prior to the closing of the APS, the Respondent was provided with a Tenant Estoppel Certificate. It stated that the Tenant had an outstanding Allowance of $74,321.00 and the Tenant was owed that amount by the Vendor. Further, a Statement of Adjustments, dated November 4, 2015, was provided to the Respondent on closing by the Vendor. It reflected a credit to the Vendor for a Tenant Allowance of $25,679.00. No explanation was provided by the Vendor for claiming the above amounts which total $100,000.00. As a result of the above claims, the Respondent requested that the purchase price under the Assignment be reduced by $100,000.00 and, on closing of the APS, $100,000.00 was held back by the Respondent from the Applicant to facilitate closing of the APS.

[19] The above facts are not in dispute. By way of this Application, the Applicant and the Respondent agreed to submit their respective positions to the Court with respect to whether the above-mentioned Allowance of $100,000.00 should be deducted from the price paid to the Applicant by the Respondent for the assignment of the APS.

Analysis

[20] The goal in interpreting a contract is to discover, objectively, the parties’ intention at the time the contract was made. Eli Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129, at para. 54; Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] S.C.J. No. 53, at para. 47. This same goal was expressed by the House of Lords in Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 W.L.R. 896 (H.L.), at page 912, as follows:

Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”.

[21] The intention of the parties is determined by reading the contract “as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract.” Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] S.C.J. No. 53, at para. 47. Accordingly, the interpretation of a contract is a question of mixed fact and law as “… it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix.” Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] S.C.J. No. 53, at para. 50.

[22] “Surrounding circumstances” (also referred to as the “factual matrix”) is limited to any objective evidence of knowledge that was or reasonably ought to have been within the common knowledge of the parties at the time of the execution of the contract. Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] S.C.J. No. 53, at para. 58. Such knowledge includes “… anything that would have affected the way in which the language of the document would have been understood by a reasonable man.” Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 W.L.R. 896 (H.L.), at page 913; Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] S.C.J. No. 53, at para. 58. It includes the purpose of the contract, its background and the relationship between the parties, but it does not include the previous negotiations of the parties or their declarations of subjective intent. Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 W.L.R. 896 (H.L.), at page 913.

[23] The principle that words should be given their ordinary and grammatical meaning “… reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes particularly in formal documents.” Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 W.L.R. 896 (H.L.), at page 913. The interpretation of a contract “… must always be grounded in the text and read in light of the entire contract.” Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] S.C.J. No. 53, at para. 57. The surrounding circumstances cannot be used “…to deviate from the text such that the court effectively creates a new agreement.” Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] S.C.J. No. 53, at para. 57. Evidence of the surrounding circumstances of a contract is only “… an interpretive aid for determining the meaning of the written words chosen by the parties, not to change or overrule the meaning of those words”. Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] S.C.J. No. 53, at para. 60. However, such evidence may enable the court to choose between the possible meanings of a contract by avoiding an interpretation that leads to an “unrealistic result” in favour of a “commercially sensible result”. Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., [1980] 1 S.C.R. 888, at page 901; Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 W.L.R. 896 (H.L.), at page 913.

[24] If there is an ambiguity in the meaning of a contract despite the application of the above principles, then the ambiguous words used will be construed against the author of the contract if the other contracting party did not have an opportunity to modify its wording. Hillis Oil & Sales Ltd. v. Wynn's Canada Ltd., [1986] 1 S.C.R. 57, at para. 17.

Issue: Should the Allowance be Deducted from the Purchase Price of the Assignment?

[25] The Respondent submits that it was the intention of the parties that the maximum purchase price to be paid by the Respondent for the Assignment and the APS was to be $10,350,000.00 (“Total Price”). As noted, paragraph 4 of the Assignment Agreement states:

The parties hereto agree that the total price payable by the Assignee/New Purchaser for the Property is the Assignment Price of $1,259,000.00 (subject to adjustments contemplated in section 4(a) above), plus the original Purchase Price as set out in the Purchase Agreement, being a total of $10,350,000.00, inclusive of the adjustments due pursuant to the Purchase Agreement and land transfer tax as contemplated in section 4(a) above”. [Emphasis added]

[26] In my view the Allowance of $100,000.00 is not an adjustment due pursuant to the Purchase Agreement because it does not come within the plain meaning of the term “Adjustments” which is defined as “any rents, mortgage interest, realty taxes including local improvement rates and unmetered public or private utility charges and unmetered cost of fuel”.

[27] This leaves the question of whether the obligation under the Lease for the Landlord to reimburse the Tenant for the unspent portion of the Allowance is part of the price for the Property. In my view it is not. There is nothing in the Assignment Agreement which suggests that the Purchase Price of the Property shall be adjusted to account for any of the obligations being assumed by the Respondent under the Lease. The Respondent had been provided a copy of the Lease and the APS before it signed the Assignment Agreement. It could have expressly provided that the price paid for the Assignment be adjusted to account for any adjustments contemplated not only by the Purchase Agreement but also for certain obligations under the Lease.

[28] I also note that the Lease explains that the Allowance essentially is an advance of $100,000.00, which will be repaid by the Tenant through increased rent over the term of the Lease. Accordingly, it is commercially sensible to interpret the Assignment Agreement in the above manner given that the Respondent will be reimbursed for the Allowance under the Lease by the Tenant. To do otherwise would result in a windfall for the Respondent.

Conclusions

[29] I grant this Application. I encourage the parties to make best efforts to resolve the issue of costs. However, if the parties are unable to do so, the Applicant shall deliver its costs submissions and an outline of costs within ten days of today’s date. The Respondent shall deliver its reply costs submissions and its outline of costs within seventeen days of today’s date. The costs submissions shall be no more than three pages long.

M.D. FAIETA, J. Released: June 21, 2016