Court File and Parties
Court File No.: CV-15-11173-00CL Date: 2016-08-02 Ontario Superior Court of Justice
Between: THE TORONTO-DOMINION BANK Applicant – and – THE HOCKEY ACADEMY INC., CHAMPAGNE CENTRE LTD., ANTHONY CORNACCHIA AND LETITIA WONG Respondents
Counsel: Jeremy Nemers for the Applicant M. O’Connor for the Respondent Champagne Centre Ltd Chris Junior for the Respondent Letitia Wong
Heard: July 6, 2016
Before: Penny J.
Overview
[1] This is an application under s. 67(1) of the Personal Property Security Act for an order authorizing BDO Canada Limited, in its capacity as a private receiver appointed by the Toronto Dominion Bank, to take possession of all property and undertaking of the Hockey Academy Inc. located at certain premises known as 1107 Finch Avenue West and 2 Champagne Drive in Toronto (owned by Champagne Centre Ltd.) and to sell or dispose of that property and make distributions to TD on account of the debtor’s secured indebtedness.
Background
[2] Toronto Dominion Bank is a secured creditor of the Hockey Academy Inc.
[3] The Academy developed a commercial hockey rink facility, leased on premises in Toronto from the landlord, Champagne Centre Ltd. In early January 2014, the landlord terminated the Academy’s lease. About the same time, the Academy defaulted on payments owed to TD. Demand for repayment of TD’s indebtedness was made. Only a modest payment was forthcoming. As of November 2015, TD was owed over $480,000. Since January 2014, TD and the landlord have been in a dispute over who is entitled to the rink equipment used by the debtor Academy at the Champagne Drive premises.
[4] TD secured the debtor’s obligations by way of a general security agreement, registered in November 2011, over “all the property of the [debtor] in which the [debtor] now has, or hereafter has, any right title and interest’, together with all “accretions and accessions thereto”.
[5] The debtor’s original lease, dating from August 2004, provided that, “nothing herein prevents or bars the tenant from pledging and borrowing against its leasehold improvements”. That lease also provided that “all alterations and additions to the Premises made by or on behalf of the Tenant, other than the Tenant’s Trade Fixtures, shall immediately become the property of the Landlord without compensation to the Tenant”. The original lease defines trade fixtures as items designated as such on a plan of proposed alterations or additions to the premises.
[6] The original lease allowed the debtor to make alterations or additions with the landlord’s consent and to designate any alterations or additions as trade fixtures. Trade fixtures did not become the property of the landlord. The provisions of ss. 7(6) to (9) of the original lease allowed the debtor to remove trade fixtures at the end of the term of the lease. Section 7(9) of the original lease specifically required the debtor, upon termination of the lease, “to remove all rinks, sand, boards, and piping and related rink equipment” and to remove all fixtures and equipment not permanently attached to the Premises”.
[7] The original lease was amended on two occasions. The First Amendment was in December 2010, when CCL acquired the property and the lease. The Second Amendment was in February 2012. Both amendments were made in contemplation of a substantial expansion of the rink facilities at the leased premises.
[8] The first lease amendment extended the term of the lease and expanded the lease to include the contemplated new facilities. It also provided that the debtor would “not commence the Tenant’s Work without the prior written approval of the Landlord (and, if applicable, the Landlord’s engineer and architect), which approval will not be unreasonably withheld if adequate plans and specifications are produced”.
[9] The Second Amendment terminated the first lease amendment but immediately reintroduced many of its provisions. In the Second Amendment, the landlord confirmed that “it and its architect, Nino Rico, have approved the Tenant’s plans and approved the specifications”.
[10] It is clear that the first and second amendments were entered into in contemplation of a very substantial expansion of the rink facilities at the premises. The Second Amendment, which is the more comprehensive the two, was done when the expansion plans were more developed and close to being finalized. Article 9 of the Second Amendment specifies the landlord’s work. Article 11 of the Second Amendment specifies the tenant’s work.
[11] Article 20 of the Second Amendment deleted ss. 7(7), (8) and (9) of the original lease; these provisions were replaced by Article 20.2. Article 20.2 provides, similar to the original lease, that on the expiration or early termination of the lease the debtor shall not be required to remove any additions or improvements “save and except rinks, sand, boards, piping, refrigeration and related rink equipment”.
[12] Thus, under the terms of the Second Amendment, the debtor was required to remove all rink equipment upon lease termination. It was not required to repair any damage caused by the removal of the rink equipment. The debtor also had the right “to remove other trade fixtures and equipment not permanently attached to” the premises. In the case of other trade fixtures (not rink equipment), the debtor was required to repair any damage caused by the removal of these latter items.
[13] Following the landlord’s termination of the debtor’s lease and TD’s demand for payment, TD obtained appraisals of the rink equipment which it maintained was subject to its security. There was talk of the landlord making an offer to purchase the rink equipment but no offer was ever forthcoming. The landlord, however, went on to operate the rink facility. TD became frustrated with the delays in realizing on its security and appointed BDO Canada Limited as a private receiver. The landlord refused BDO all access to the rink equipment and the premises. It was at that point that TD initiated these proceedings.
[14] The landlord admitted during cross examination that: (a) the landlord entered into a lease with a company under the landlord’s control in October 2014 and an arm’s-length management firm was engaged by the landlord to run the rink facility; (b) the landlord never advised TD of the new tenant or the landlord’s arrangements with the management company; (c) the new, related-party tenant ran the hockey facility using the chattels claimed to be subject to TD’s security; (d) while the landlord leased the space and operated the rink facility in order to earn income and so as not have the space sitting empty, no payments were actually made to CCL by the related-party tenant.
The Issues
[15] In light of this background, the issues for determination are: (1) Does TD’s security interest in the rink equipment have priority over any interest of the landlord? (2) If so, ought the landlord to surrender possession of that equipment to TD? (3) Does TD have the right to receive the net value obtained by the landlord resulting from the landlord’s use of the rink equipment while operating the rink facility post-lease termination? and (4) If so, is a reference required to determine that value?
Analysis
The Priority of the TD Security Interest
[16] The rink equipment in issue is listed in a Schedule A attached to the notice of application. At the commencement of oral argument, the landlord conceded that a number of the items listed were the property of the debtor and therefore subject to TD’s prior security interest. The remaining items which are in dispute are: (i) two Toromont Cimco dehumidifiers (ii) one Berg “AQR-22V-2/2-4P” Refrigeration Chiller System S/N W02597A-A12-0912 with related pumps and piping (iii) refrigerated transmission lines (iv) rink dasher boards (v) one Zamboni “440” LPG ice resurfacer S/N 7885 and (vi) approximately 225 hockey lockers
[17] Given the landlord’s concession on the remaining items listed in Schedule A, the relief sought with respect to the undisputed items is therefore granted. In the remainder of these Reasons, the term “rink equipment” shall therefore refer to the items in dispute, listed above.
[18] At the heart of the main dispute is whether, on lease termination, the debtor retained ownership of the disputed items or whether these items became fixtures of the premises and therefore owned by the landlord. It is common ground that this dispute principally falls to be determined by an interpretation of the debtor’s lease with CCL, as amended.
[19] The principles of interpretation of commercial contracts are helpfully set out in the decision of the Court of Appeal for Ontario in Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673 particularly helpful (at para. 16):
When interpreting a contract, the court aims to determine the intentions of the parties in accordance with the language used in the written document and presumes that the parties have intended what they have said. The court construes the contract as a whole, in a manner that gives meaning to all of its terms, and avoids an interpretation that would render one or more of its terms ineffective. In interpreting the contract, the court must have regard to the objective evidence of the “factual matrix” or context of the underlying negotiation of the contract, but not the subjective evidence of the intention of the parties. The court should interpret the contract so as to accord with sound commercial principles and good business sense, and avoid commercial absurdity.
[20] The Supreme Court of Canada has also recently considered the principles of contract interpretation in Sattva Capital Corp. v. Creston Moly Corp. 2014 SCC 53. The overriding concern is to determine the intent of the parties. To do so the decision-maker must read 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. Consideration of the surrounding circumstances recognizes that ascertaining contractual intention can be difficult when looking at words on their own. No contract is made in a vacuum (para. 47).
[21] However, while the surrounding circumstances will be considered in interpreting the terms of the contract, they must never be allowed to overwhelm the words of the agreement. The goal of examining such evidence is to deepen the decision-maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract. Interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract. While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement (para. 57).
[22] The landlord argues that the debtor was only entitled to retain ownership of those trade fixtures specifically identified on the plans for construction. Since no trade fixtures were identified in this way, the landlord says, all the rink equipment became, upon installation at the premises, the property of the landlord.
[23] The landlord argues, in the alternative, that the rink equipment is a fixture at common law, to which the landlord is therefore entitled.
[24] Finally, the landlord argues that any right that the debtor had to trade fixtures was overridden by the debtor’s conduct in abandoning the premises.
[25] The landlord relies on an expansive view of the factual matrix to argue that interpreting the lease so as to permit the debtor to remove the rink equipment would produce a commercially unreasonable result. In this regard, the landlord argues that, in anticipation of the tenant-added improvements, the tenant was given almost a year of free rent. In addition, the landlord contends that the removal of the rink equipment will damage the landlord’s premises and render the premises incapable of being operated commercially as a hockey arena.
[26] I am unable to agree with these arguments. The landlord is correct to say that the factual matrix is almost always relevant to the interpretation of a commercial contract. But the Supreme Court of Canada made it clear that the primary objective of the interpretation of commercial contracts is to give effect to the intention of the parties as revealed in the words they used in the foundational document. The factual matrix, although necessary to a full understanding of the parties’ intentions and the purpose of the contract, can never be used to overcome or to contradict the language of the document itself.
[27] The tenant’s work under Article 11 of the Second Amendment is clearly different from the rink equipment dealt with in Article 20.2. The tenant’s work involves leasehold improvements having entirely to do with the building itself, such as: column removal; structural frameworks; drains for washrooms; cinder block walls; and provision for exterior access to the building’s sprinkler system.
[28] The words of Article 20.2 could not be clearer. At the expiration or early termination of the lease, the tenant is required to remove the “rinks, sand, boards, piping, refrigeration and related rink equipment.” The tenant, therefore, is not only permitted but required to remove the rink equipment. The overwhelming and only inference available from that obligation is that the tenant, not the landlord, continued to hold title to those items.
[29] The landlord argues that it would be commercially unreasonable to allow the tenant to remove the rink equipment where it has defaulted on its obligations, in view of the fact that the debtor received free rent in exchange for doing the tenant’s work which it performed under the terms of the lease.
[30] I do not find this argument persuasive. The landlord required the tenant to finance a good deal of the leasehold improvements. As an incentive to do so, the landlord deemed it appropriate to give the debtor several months’ abatement on its rent obligations. The fact that that may have turned out, with the benefit of hindsight, to have been a bad bargain does not render the result commercially unreasonable. It is, in fact, entirely reasonable for the tenant to retain the ownership of the rink equipment because it was the tenant, not the landlord, that was in the hockey rink facility business. The landlord was simply renting premises which the tenant turned into a commercial hockey arena operation. The factual matrix cannot be used to relieve the landlord from the consequences of having made a less than optimal deal, now that the tenant’s business has failed.
[31] The evidence supports the conclusion that the Second Amendment was in place before the disputed equipment was installed at the premises. The terms of the Second Amendment show that the tenant was to continue to own the rink equipment. It is clear that the reference in the Second Amendment to “other trade fixtures” being removable by the debtor as long as they are not “permanently attached” to the premises is a reference to items other than those listed as rink equipment in article 20.2.
[32] For these reasons, I find on a proper interpretation of the lease that the rink equipment remained of the property of the debtor and was, and remains, subject to TD’s security interest which ranks in priority to any interest of the landlord.
[33] This conclusion essentially deals with the landlord’s alternative arguments as well. Because the Second Amendment specifically addresses ownership of the rink equipment, there is no room for the operation of the common law regarding fixtures. Had it been necessary to do so, however, I would have concluded that the rink equipment is not a fixture at common law, nor was the debtor’s right to retain possession of trade fixtures overridden by the by the tenant’s conduct or by the exception at law for trade fixtures which are required for the “better use and enjoyment of the premises”.
The Right to Possession of the Rink Equipment
[34] Having found that TD has a valid security interest which ranks in priority ahead of any interest of the landlord, I find that TD, through its privately appointed receiver, BDO, is entitled to possession of the rink equipment.
[35] The sealing order regarding the appraised value of the rink equipment is granted. That information must remain confidential pending TD’s attempts to sell the rink equipment. The request falls within the parameters of the two-part test established by the S.C.C. in Sierra Club v. Canada, 2002 SCC 41, as there is a public interest in enabling secured creditors and other stakeholders to maximize value on the realization of assets in an insolvency situation.
The Value Earned by the Landlord’s Use of the Rink Equipment
[36] Having wrongfully withheld the rink equipment contrary to TD’s valid security interest, and having used that equipment to generate revenues, it logically follows (assuming there is a shortfall from TD’s realization on these assets) that CCL is liable to account for revenues reasonably attributable to the use of that equipment while it was being wrongfully withheld from TD.
The Need for a Reference
[37] I agree with the applicant that, particularly due to CCL’s failure to produce relevant financial information, there is insufficient evidence in the present record to make any determination of the amount earned by the landlord’s use of the rink equipment, if any. That is a potentially complex determination and certainly requires full access to CCL’s accounting records dealing with its operation of the hockey arena business post-lease termination.
[38] CCL must produce this information and, if the parties are unable to agree, there must be a reference to a Master for the determination of what, if any, amounts may be owed to TD resulting from the landlord’s use of the rink equipment.
Costs
[39] TD filed a bill of costs seeking partial indemnity costs of $76,000. CCL, had it been successful, would have sought something in the order of $25-$30,000. Having regard to the factors governing costs, including what the losing party might reasonably expect to pay, I fix partial indemnity costs payable by CCL to TD in the amount of $50,000 inclusive of all fees, disbursements and applicable taxes.