6524443 Canada Inc. v. City of Toronto, 2016 ONSC 7147

CITATION: 6524443 Canada Inc. v. City of Toronto, 2016 ONSC 7147

COURT FILE NO.: CV-16-11455-00CL and CV-15-538062

DATE: 2016-11-23

SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: IN THE MATTER OF the Arbitration Act, 1991, S.O. 1991, c.17;

AND IN THE MATTER OF an Arbitration Award dated September 8, 2015;

AND IN THE MATTER OF an Arbitration between the City of Toronto and 652443 Canada Inc.;

AND IN THE MATTER OF Clause 7(c) of a Ground Lease from the Municipality of Metropolitan Toronto to Upper Canada Place Limited dated as of the 1^st day of December, 1971 – Bloor and Yonge Streets, Toronto.

BETWEEN: 6524443 Canada Inc., Appellant

AND: City of Toronto, Respondent

BEFORE: Conway J.

COUNSEL: Ronald G. Slaght, Q.C. and Nadia Campion, for the Appellant Cynthia B. Kuehl and Christopher T. Shorey, for the Respondent

HEARD: November 18, 2016

reasons for decision

[1] City of Toronto (the “City”) brings this motion to quash an appeal by 6524443 Canada Inc. (“Brookfield”) from an arbitration award dated September 8, 2015 (the “Award”).[^1] The Award determined the rent payable by Brookfield to the City for the property located at Yonge and Bloor Streets in Toronto, known as the Hudson’s Bay Centre (the “Property”), commencing December 1, 2011.

Background

[2] The City, as landlord, and Brookfield, as tenant, are parties to a 99 year ground lease dated December 1, 1971 for the Property (the “Lease”).[^2] The initial rental period was 40 years from December 1, 1971 to November 30, 2011, with an annual rent of $167,549.20.

[3] The Lease provides for two additional rental periods. The second rental period is from December 1, 2011 to November 30, 2037 (the “Second Rental Period”). The annual rent for the Second Rental Period is to be adjusted to the “Fair Market Rental” for the Property as at December 1, 2011 (the “Effective Date”). Fair Market Rental is defined as “the annual rental for the demised lands which would be paid as between persons dealing in good faith and at arms’ length, as if the demised lands were vacant, unencumbered and unimproved” on the Effective Date and taking into accounts the easements set out in Schedule “A” to the Lease.

[4] The Lease provides that if the parties cannot agree on the Fair Market Rental, the matter may be submitted to arbitration in accordance with Article 7 of the Lease. That Article applies where any provision of the Lease provides for arbitration of a dispute or issue. It provides, in four sub-paragraphs, for the procedure to appoint three arbitrators; for the arbitrators to hear the submissions of the parties and make their decision all “in accordance with the Arbitrations Act of Ontario or any successor Act”; and for the costs of the arbitrators to be borne equally by the parties.

[5] Article 7(c) of the Lease sets out the appeal rights of the parties from the arbitrators’ decision. It states:

The decision of the arbitrators shall be subject to appeal in accordance with the provisions of The Arbitrations Act, R.S.O. 1970, as amended, or any successor Act.

[6] On November 30, 2011, the City gave Brookfield notice of arbitration to determine the Fair Market Rental for the Second Rental Period. Over the course of the next 18 months, the parties and their senior counsel negotiated the terms on which the arbitration would proceed.

[7] On July 13, 2013, the parties agreed to Terms of Appointment for the Arbitral Tribunal and an Arbitration Agreement (the “2013 Agreement”). The 2013 Agreement is a detailed seven page document. It describes the dispute that is the subject of the arbitration – namely, the determination of the Fair Market Rental for the Second Rental Period pursuant to the terms of the Lease. It identifies the arbitrators and the Chair of the tribunal, the procedure to be followed for the arbitration (including productions, oral discovery, exchange of expert reports), the jurisdiction of the arbitrators to hear motions, the fees payable to the arbitrators, and includes various confidentiality, immunity and indemnity provisions. The 2013 Agreement was signed by counsel for the parties and by the arbitrators.

[8] Section 10 of the 2013 Agreement set out the parties’ appeal rights for the arbitration. It states:

The decision of the arbitrators shall be subject to appeal in accordance with the provisions of the Arbitration Act, 1991, S.O. 1991, c. 17 as amended, or any successor Act.

The Arbitration

[9] The arbitration proceeded over 68 days, including five days of submissions, beginning in June 2014 and ending in July 2015. The arbitration was conducted based entirely on expert evidence (except for one Toronto Transit Commission (TTC) witness), which was submitted in the form of expert reports. The reports were submitted instead of pleadings and framed the issue for the arbitral tribunal.

[10] Both parties put forth expert evidence supporting development proposals that they submitted represented the highest and best use for the Property. The City submitted expert evidence that a mixed-use, high density condominium proposal was the highest and best use for the Property. It sought an annual rental of $3,900,000 to $4,950,000, based on a land value of $78,000,000 to $99,000,000 at a lease rate of 5%.

[11] Brookfield put forth expert evidence that a retail-only development proposal was the highest and best use for the Property. It sought an annual rental of $2,000,000, based on a land value of $50,000,000 at a lease rate of 4%.

[12] Brookfield also put forward an additional valuation theory called a “Speculative Threshold Value”. That theory was based on the value of the land in light of the uncertainty and risk associated with the potential for the TTC to expand the Yonge-Bloor subway station, if the Property had been vacant, unencumbered and unimproved on the Effective Date. Brookfield sought an annual rent under the Speculative Threshold Value theory of $1,144,000, based on a land value of $28,600,000 at a lease rate of 4%. Brookfield submitted evidence with respect to the value of the land based on this theory. The City opposed the Speculative Threshold Value theory on the basis that the TTC had no plans to expand the Yonge-Bloor subway station as at the Effective Date. The City did not tender any appraisal evidence with respect to the Speculative Threshold Value theory.

[13] The arbitration tribunal (the “Tribunal”) accepted Brookfield’s retail-only development proposal as the highest and best use for the Property. It rejected both the City’s mixed-use, high density condominium proposal and Brookfield’s Speculative Threshold Value theory. However, the Tribunal accepted some of the City’s valuation considerations. The majority of the Tribunal determined that the annual rental for the Second Rental Period would be $4,210,000, based on a valuation of $84,000,000 and a lease rate of 5%. The dissenting member of the Tribunal determined that the annual rental should be $3,844,600 based on a lease rate of 4.7%.

[14] The Tribunal rendered the Award on September 8, 2015. Brookfield subsequently issued and served a notice of appeal (the “Notice of Appeal”) pursuant to s. 45 of the Arbitration Act, 1991, S.O. 1991, c. 17 (the “1991 Act”), as well as a notice of application to set aside the Award pursuant to s. 46 of the 1991 Act. Brookfield alleges that the majority made numerous reversible errors in determining the Fair Market Rental for the Property and further alleges that Brookfield was denied natural justice.

[15] The City has moved to quash Brookfield’s Notice of Appeal.[^3]

The Issues

[16] There are two issues to be decided on this motion:

a. What are the parties’ rights of appeal from the Award of the Tribunal?

b. If the parties’ rights of appeal are limited to questions of law and require leave of the court, does Brookfield’s Notice of Appeal raise questions of law?[^4]

[17] Brookfield’s position is that s. 7(c) of the Lease grants it broad rights of appeal from an arbitral award – namely the right to appeal “in accordance with the provision of The Arbitrations Act, R.S.O. 1970, as amended, or any successor Act” (the “1970 Act”).

[18] The 1970 Act provided for full rights of appeal. It did not differentiate between appeals on questions of law, fact or mixed fact and law. Section 16(1) of the 1970 Act reads:

Where it is agreed by the terms of the submission that there may be an appeal from the award, an appeal lies to the Divisional Court.

[19] By contrast, the 1991 Act provides more circumscribed rights of appeal. Sections 45(1) to (3) of the 1991 Act read:

45. (1) If the arbitration agreement does not deal with appeals on questions of law, a party may appeal an award to the court on a question of law with leave, which the court shall grant only if it is satisfied that,

(a) the importance to the parties of the matters at stake in the arbitration justifies an appeal; and

(b) determination of the question of law at issue will significantly affect the rights of the parties.

(2) If the arbitration agreement so provides, a party may appeal an award to the court on a question of law.

(3) If the arbitration agreement so provides, a party may appeal an award to the court on a question of fact or on a question of mixed fact and law.

[20] Brookfield submits that when the parties entered into the Lease and used the language in s. 7(c), they intended to have full rights of appeal from any arbitration award. It argues that when the parties entered into the Arbitration Agreement in 2013, and agreed in s. 10 that the decision of the arbitrators would be subject to appeal in accordance with the 1991 Act, they intended to preserve the broad rights of appeal that they contracted for in the Lease. Brookfield submits that the court must look at the appeal rights set out in s. 10 of the Arbitration Agreement in the context of the entire factual matrix, which requires an examination of the appeal rights the parties originally agreed to in the Lease. It argues that s. 10 should be interpreted to permit an unrestricted right of appeal, as there is no objective evidence that the parties intended to restrict the broad rights under the Lease. Finally, Brookfield argues that the language of s. 10, in referring to the 1991 Act, does not restrict the parties to appeals on matters of law with leave.

[21] The City’s position is that the parties entered into the Arbitration Agreement as a stand-alone agreement and that there is no need to interpret s. 10 with reference to the terms of the Lease. The City argues that s. 10 of the Arbitration Agreement, properly interpreted in accordance with the provisions of the 1991 Act, restricts the parties to appeals on a question of law, and only with leave. The City argues that even if the court does consider the appeal rights in s. 7 of the Lease, they are consistent with those provided for in s. 10 of the Arbitration Agreement, as the parties agreed in the Lease that their appeal rights would be subject to whatever the relevant legislation was in effect at the relevant time.

[22] Brookfield’s position is that even if it is restricted to an appeal on matters of law, its Notice of Appeal raises errors of law made by the Tribunal. The City argues that any alleged errors are questions of fact or mixed fact and law and, as such, are not subject to appeal.

Admissibility of Affidavit Evidence

[23] Brookfield tendered two affidavits of John Keefe, counsel to Brookfield, describing the chronology and manner in which the Arbitration Agreement was prepared. In response, the City tendered an affidavit of Peter Jervis, its own counsel on the arbitration.

[24] In my view, none of the affidavit evidence is admissible and the affidavits are struck. The law is clear that evidence with respect to the factual matrix consists only of objective evidence of the background facts at the time of execution of the contract: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (“Sattva”), at para. 58. It does not include evidence of negotiations, except perhaps in the most general terms, and evidence of a contracting party’s subjective intentions: The Canada Trust Company v. Browne, 2012 ONCA 862, at para. 71, citing Geoff R. Hall, Canadian Contractual Interpretation Law, 2d ed. (Markham: LexisNexis, 2012), at p. 27.

[25] The affidavits are not, as Brookfield suggests, evidence of the factual matrix in which the Arbitration Agreement was concluded. Rather, they set out detailed evidence of the negotiations leading up to the signing of the Arbitration Agreement and the parties’ subjective intentions with respect to the scope of their appeal rights pursuant to s. 10 of the Arbitration Agreement. This evidence is inadmissible in interpreting the parties’ rights under that agreement and I have disregarded it.

Interpretation of Appeal Rights in s. 10 of the Arbitration Agreement

[26] Whether the Arbitration Agreement is interpreted as a stand-alone agreement or with reference to the terms of the Lease, the result is the same – the parties are entitled to appeal the Award in accordance with the 1991 Act, and may appeal only on questions of law with leave of the court.

[27] The factual matrix in which the Arbitration Agreement was concluded is that the parties had a long term ground lease; the Lease provided for an initial rental for the first 40 years; the Fair Market Rental for the two subsequent rental periods was to be agreed by the parties, failing which either party could submit the issue to arbitration; the City provided notice of arbitration to Brookfield; and the parties negotiated and entered into the Arbitration Agreement for the determination of the Fair Market Rental for the Second Rental Period.

[28] The Arbitration Agreement is a comprehensive document in which the parties agreed to proceed to arbitration to determine the Fair Market Rental for the Second Rental Period. In the Arbitration Agreement, the parties agreed on who the arbitrators were and how the arbitration was to proceed. They clearly and comprehensively set out all of the terms that were to govern the arbitration. In particular, the parties used clear and unambiguous language to describe their appeal rights, stating that the decision of the arbitrators would be subject to appeal in accordance with the 1991 Act. Although the Arbitration Agreement refers to the Lease in describing the dispute being arbitrated, all of the terms governing the arbitration are set out in the Arbitration Agreement. There is no need to refer back to the Lease in order to interpret any of the terms of the Arbitration Agreement.

[29] However, even if I consider the arbitration provisions in the Lease as part of the factual matrix in interpreting s. 10 of the Arbitration Agreement, I come to the same result. Section 7(c) of the Lease provides that any arbitration award is subject to appeal in accordance with the provisions of 1970 Act, “as amended, or any successor Act”. While the 1970 Act provided unrestricted rights of appeal, the parties did not contract to maintain those unrestricted rights throughout the term of the Lease. They did not, for example, agree that the appeal rights in the 1970 Act would apply throughout the term, nor did they agree that they would have full appeal rights regardless of any changes in the legislation.

[30] Rather, they agreed that their appeal rights would be tied to whatever the prevailing legislation was at the time. They agreed that any appeal would be in accordance with the provisions of the 1970 Act, as amended, or any successor Act. In my view, that is a clear recognition that: (i) the arbitration legislation might change or be replaced over time; and (ii) the parties’ rights of appeal would be in accordance with whatever legislation was in effect at the relevant time.

[31] Therefore, even considering the provisions of s. 7(c) of the Lease, the result is the same. Under the Arbitration Agreement, the Award is subject to appeal in accordance with the 1991 Act. Under the Lease, the Award is subject to appeal in accordance with the successor to the 1970 Act, namely the 1991 Act.

[32] The next issue is what those appeal rights are. Brookfield argues that the language of s. 10 of the Arbitration Agreement, read in the context of the Lease, provides an unrestricted right of appeal on questions of fact and mixed fact and law.

[33] I disagree.

[34] The parties agreed that appeals would be in accordance with the provisions of the 1991 Act. The appeal provisions of the 1991 Act are straightforward. If the arbitration agreement “so provides”, a party may appeal on a question of law, fact or mixed fact and law without leave (s. 45(2) and (3)). If the arbitration agreement does not so provide, a party may only appeal on a question of law and only with leave.

[35] In this case, the parties simply stated that the appeal would be in accordance with the 1991 Act. They did not provide for a right of appeal on questions of law, fact or mixed fact and law. The parties were represented by senior counsel who are presumed to know that the 1991 Act requires the agreement to specify whether the parties have the right to appeal questions of law, fact or mixed fact and law, failing which they are entitled to appeal only on questions of law, with leave.

[36] I agree with the observations of Czutrin J. in Costa v. Costa, 2008 CanLII 9609 (ON SC), at para. 34:

When redrafting the appeal provision, the parties were represented by counsel. Counsel for the parties should be presumed to be aware of the provisions of the Arbitration Act, especially since they limited their right of appeal to the options provided for under that statute. Therefore, they should be presumed to know that the Arbitration Act requires the arbitration agreement to specify whether the parties have the right to appeal questions of fact or mixed fact and law. The parties chose not to include a right of appeal on questions of fact and mixed fact and law in their arbitration agreement. Therefore, the only reasonable interpretation of the arbitration agreement is that parties intended to restrict their right of appeal to questions of law with leave pursuant to s. 45(1) of the Arbitration Act.[^5]

[37] I conclude that the parties intended that any appeal of the Award be in accordance with the 1991 Act and that by not providing for appeals on questions of law, fact or mixed fact and law, the parties intended to restrict their right of appeal to questions of law, with leave, pursuant to s. 45(1) of the 1991 Act.

Brookfield’s Notice of Appeal

[38] Brookfield’s Notice of Appeal states that the majority of the Tribunal made reversible errors in its determination of the Fair Market Rental for the Property:

a. It adopted its own valuation theory with respect to the risk of a possible expansion of the Yonge-Bloor subway station;

b. It applied incorrect legal principles in determining that a lease rate of 5% was appropriate;

c. It failed to apply an objective approach to the valuation of the land and instead included in the value of the Property enhancements to the value arising from possible off-site loading facilities on an adjoining property and the possible redevelopment of the RBC building on an adjoining property;

d. It erred in law in requiring “clear, cogent and convincing evidence” that as of December 1, 2011 there would probably be a subway platform expansion rather than applying the normal civil standard of proof on a balance of probabilities.

[39] In my view, none of these grounds of appeal raises a question of law.

[40] The arbitration was conducted for the sole purpose of determining the Fair Market Rental for the Second Rental Period. In order to render its decision, the Tribunal was required to interpret the term “Fair Market Rental” under the Lease, determine the valuation of the Property as at the Effective Date, and determine the appropriate lease rate to apply to the valuation. To do so, it relied on the expert evidence tendered by the parties.

[41] The Tribunal’s contractual interpretation of the Lease is a question of mixed fact and law: Sattva, at para. 50.

[42] With respect to issues concerning the valuation of the land, those are, at most, questions of fact or mixed fact and law. For example, Brookfield argues that the Tribunal did not accept its Speculative Threshold Value theory with respect to the risk of a subway expansion but nonetheless applied a risk premium due to the uncertainty of building over the subway. Evaluating the risks associated with building over a subway station and determining the appropriate risk premium are highly specific factual determinations: see, for example, Musqueam Indian Band v. Glass, 2000 SCC 52, at para. 52, in which the Supreme Court of Canada held that the amount of a discount to be applied to the risk of developing on reserve land (compared to off-reserve land) was a question of fact.

[43] Similarly, the Tribunal, in taking into account potential improvements on adjacent properties in its valuation of the Property, did so based on its interpretation of the Lease and its evaluation of the expert evidence. Those are matters of fact or mixed fact and law.

[44] With respect to the appropriate lease rate to be applied to the valuation, the Tribunal made this finding based on its evaluation of the expert evidence tendered by the parties. It is a matter of fact.

[45] Finally, in referring to the need for clear, cogent and convincing evidence of a probable subway expansion, the Tribunal was referring to the sufficiency of the evidence, not the standard of proof. This does not raise a question of law.

[46] I find that Brookfield’s Notice of Appeal does not raise any questions of law that would give it the right to appeal the Award with leave pursuant to Section 45(1) of the 1991 Act.

Decision

[47] The City’s motion to quash Brookfield’s appeal of the Award is granted.

[48] If the parties are unable to agree on the costs of this motion, written submissions not exceeding 3 pages (double spaced) may be made to me, by the City within 15 days and by Brookfield within 10 days thereafter.

Conway J.

Date: November 23, 2016

[^1]: The City moves pursuant to Section 134(3) of the Courts of Justice Act, R.S.O 1990, c. C.43 which provides: “On motion, a court to which an appeal is taken may, in a proper case, quash the appeal.”

[^2]: The Lease was originally entered into by the Municipality of Metropolitan Toronto, as lessor, and Upper Canada Place Ltd., as lessee. The City became the successor to the Municipality of Metropolitan Toronto and Brookfield took an assignment of the rights and interests of Upper Canada Place Ltd.

[^3]: The City took no position on this motion with respect to the notice of application. Counsel agreed that any rights with respect to the notice of application were preserved and were not being addressed on this motion.

[^4]: The City concedes that if the Notice of Appeal raises questions of law, leave may be granted.

[^5]: See also S.(A.) v. G.(J.), 2008 CanLII 63190 (ON SC), at para. 24; Moran v. Cunningham, 2009 CanLII 74726 (ON SC), at para. 47. Brookfield relies on the case of Harder v. Sheehan & Rosie, 2002 CanLII 7914 (ON SC), in which the court considered a general clause referring to an appeal in accordance with the provisions of the 1991 Act and concluded that the parties intended to permit appeals on matters of fact and mixed fact and law. I respectfully prefer the approach taken in Costa, particularly since the parties in this case were represented by senior counsel.