2284064 Ontario Inc. v. Shunock, 2017 ONSC 7146

CITATION: 2284064 Ontario Inc. v. Shunock, 2017 ONSC 7146

COURT FILE NO.: CV-16-560179

DATE: 20171129

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

2284064 ONTARIO INC.

Applicant

– and –

MICHAEL STEWART SHUNOCK

Respondent

COUNSEL:

Mark Adilman, for the Applicant

Jeffrey E. Feiner and Hilary A. Brown, for the Respondent

HEARD: October 30, 2017

REASONS FOR DECISION

SANFILIPPO J.

A. Overview

[1] This application is brought by 2284064 Ontario Inc. (“2284064 Inc.” or the “applicant”) as owner of a property identified municipally as 820 Mount Pleasant Road, Toronto (the “Property”) for interpretation of a “right of first refusal to purchase” granted by 2284064 Inc. on its acquisition of the Property. The applicant seeks a declaration that this right is void on the basis of frustration.

[2] In May 2011, 2284064 Inc. acquired the Property from Michael Stewart Shunock (“Shunock” or the “respondent”) for use in a land assembly together with other neighbouring properties on the corner of Mount Pleasant Road and Roehampton Avenue in Toronto and thereafter for re-development into a multi-storey complex. All agree that Shunock bargained for, and obtained as part of his sale of the Property, a right to purchase main floor commercial space of between 3,000 to 3,500 square feet in size in the re-developed property, at a stipulated price. This right is referred to in the agreement as a “right of first refusal to purchase”, a term that melds, and to an extent conflates, a “right of first refusal” with a “right to purchase”.

[3] 2284064 Inc. contends that the “right of first refusal to purchase” was intended to apply to a development project that was anticipated by 2284064 Inc. to have the participation of an adjacent landowner who controls the largest of the properties targeted for inclusion in the land assembly. The neighbour is to date unwilling to partner with the applicant in the development project. As a result, only a smaller development project is currently possible.

[4] In a smaller scale project, the right granted to Shunock to purchase a specified area of commercial space on the main floor takes on a different proportion than it would in a larger space. 2284064 Inc. submits that it should be relieved of the obligation to make this space available for purchase by Shunock because the “right of first refusal to purchase” contemplated a larger land assembly than is currently available. The applicant contends that the “right of first refusal to purchase” has been frustrated by the supervening event of the neighbour’s withdrawal rendering it impossible to make available for purchase a main floor space of the size required.

[5] Shunock submits that the “right of first refusal to purchase” was granted without condition pertaining to the size of the land assembly, that the reduced potential size of the project does not render impossible the ability on the part of 2284064 Inc. to develop space of the size and quality to which Shunock claims entitlement to purchase and that the alleged supervening event by the adjacent landowner was foreseen by 2284064 Inc. at the time of contracting.

[6] I have determined that the “right of first refusal to purchase” is a valid right to purchase that constitutes a contingent interest in land that is applicable to a development project involving the Property. I have determined further that the applicant has not established the applicability of the doctrine of frustration. For the reasons set out herein, this application is dismissed.

B. The 2011 Agreement to Sell the Property

[7] The Property was a two-storey building owned and occupied by Shunock from May 2003 to May 2011 as a residence and an office for his practice as an orthodontist.

[8] In 2011, Shunock was approached by Steven Leyzac who sought to purchase the Property as part of a land assembly that Leyzac anticipated would include three contiguous properties: (i) 808 Mount Pleasant Road (“808 Mount Pleasant”), a Hotel on the Property’s south boundary; (ii) 249 Roehampton Avenue (“249 Roehampton”), a house located on the Property’s western boundary; and (iii) its neighbouring property, 247 Roehampton Avenue (“247 Roehampton”).

[9] These four contiguous properties would allow for the assembly of a land development parcel fronting on Mount Pleasant Road situated mid-block from the corner of Eglinton Avenue to the south and continuing to Roehampton Avenue to the north.

[10] Leyzac had already negotiated agreements of purchase and sale for 247 Roehampton, on November 5, 2010, and for 249 Roehampton, on December 6, 2010. These agreements were conditional on the acquisition of the Property. No mention was made of any acquisition of 808 Mount Pleasant.

[11] Shunock testified that he was initially unwilling to sell as the Property was useful to him both personally and professionally and was well-situated for his needs. If he was to sell, Shunock wanted a right to purchase commercial space in the proposed re-developed property.

[12] By agreement of purchase and sale dated February 13, 2011 (the “2011 Sale Agreement”), Shunock agreed to sell the Property to Build Plus Group Inc. (“BPG Inc.”), in exchange for the following consideration:

a) A monetary payment on closing of $1,500,000, as adjusted (the “purchase price”);

b) The right to rent the Property for a period of 12 months after closing, subject to a lease to be entered into with Shunock as tenant and BPG Inc. as landlord;

c) A “right of first refusal to purchase” 3,000 to 3,500 square feet of commercial space on the main floor in the “development project” at a cost of $375.00 per square foot (the “Disputed Right”); and

d) A Closing Purchase Price Adjustment Agreement (the “Price Adjustment Agreement”), wherein Shunock would receive an increase in the Purchase Price if the buyer acquired additional lands that increased the size of the project beyond the gross floor area of the Property, 247 & 249 Roehampton and 808 Mount Pleasant.

[13] Shunock’s negotiation for the sale of the Property thereby produced the immediate monetary consideration on closing of $1,500,000, the short-term benefit of a 12 month lease, and the long-term potential benefits of the Disputed Right and the Price Adjustment Agreement.

[14] The 2011 Sale Agreement was conditional only on BPG Inc. being satisfied that the Property had “potential for redevelopment”. The 2011 Sale Agreement was not conditional on the purchase of 808 Mount Pleasant or the inclusion of 808 Mount Pleasant in the development project.

[15] The purchase transaction was scheduled to close on March 15, 2011 but was extended at the applicant’s request in exchange for additional concessions to Shunock. By amendment dated March 31, 2011 the Disputed Right was enhanced to provide Shunock with a right to purchase a minimum of two parking spaces in the development project (the “1^st Amendment Agreement”). By agreement dated May 2, 2011, as consideration for a further extension in the closing date, the sale price for Shunock’s purchase of the commercial space referred to in the Disputed Right was reduced from $375 to $275 per square foot (the “2^nd Amendment Agreement”).

[16] The purchase of 247 Roehampton and of 249 Roehampton were both completed by registration of transfers on May 3, 2011 in favour of Kartelle Mount Pleasant Inc. (“Kartelle Inc.”), which is directed by Joseph Iaccino (“Iaccino”) who was brought into this land assembly and development deal by Leyzac.

[17] The purchase of the Property shortly thereafter by registration of a transfer on May 16, 2011 in favour of 2284064 Inc. in its capacity as an assignee of BPG Inc. 2284064 Inc. is related to Kartelle Inc. in that it is also directed by Iaccino.

[18] On February 13, 2012, Shunock registered the Disputed Right on title to the Property, further to s. 71 of the Land Titles Act, R.S.O. 1990, c. L.5.

C. The Memorandum of Intent

[19] At the time that BPG Inc. entered into the 2011 Purchase Agreement, 808 Mount Pleasant was not owned, or capable of being owned, by the applicant or any entity related to the applicant. There is no evidence that 808 Mount Pleasant was, at any time, available for purchase.

[20] 808 Mount Pleasant was, throughout, owned by 2245883 Ontario Inc., Nor Sham Inc. and 1334413 Alberta ULC (collectively “Norsham Inc.”). It was understood that 808 Mount Pleasant could only form part of the development project if Norsham Inc. was willing to participate.

[21] On or about March 31, 2011, Kartelle Corporation, an entity directed by Leyzac, entered into a Memorandum of Intent with Norsham Inc. wherein a mutual intention was confirmed to enter into a partnership for the joint development and construction of a residential, retail, commercial complex (the “Partnership Project”). Norsham Inc. agreed, subject to several conditions, to contribute 808 Mount Pleasant to the Partnership Project, while Kartelle Corporation agreed to contribute the Property as well as 247 & 249 Roehampton.

[22] In committing the Property and 247 & 249 Roehampton to the proposed Partnership Project, Leyzac, through Kartelle Corporation, and Norsham Inc. had the agreement of Iaccino (q. 96, cross-examination of Iaccino) who through the applicant and Kartelle Inc. owned the Property and 247 & 249 Roehampton. Indeed, we will see later that the Memorandum of Intent will be assigned from Kartelle Corporation to Kartelle Inc.

[23] The Memorandum of Intent contemplated that a partnership agreement would be executed by Norsham Inc. and Kartelle Corporation for the purpose of jointly developing or selling as a development parcel the Property together with 247 & 249 Roehampton and 808 Mount Pleasant. For their contribution of real estate to the Partnership Project, Norsham Inc. would receive an interest of 72.22% and Kartelle Corporation an interest of 27.78% in an eventual partnership. The execution of a partnership agreement was conditional on Norsham Inc. and Kartelle Corporation obtaining, within three years of execution of any partnership agreement, the zoning and site plan approval necessary to permit development of the Partnership Project.

[24] The Memorandum of Intent was not executed at the time that Leyzac committed BPG Inc. to enter into the 2011 Sale Agreement for the purchase of the Property from Shunock. It is not referred to in the 2011 Sale Agreement. Rather, two parallel but distinctly separate negotiations were underway in March 2011 that had as their common nexus the development of four properties in the area of Mount Pleasant Road and Roehampton Avenue. Leyzac was at the intersection of both deals as he was negotiating with Shunock for the acquisition of the Property, with the acquisition of 247 & 249 Roehampton Avenue underway, while negotiating with Norsham Inc. for its participation in the project through contribution of 808 Mount Pleasant.

[25] The deal that Iaccino and his companies, including the applicant, was brought into involved a risk in purchasing the Property without first securing the participation of Norsham Inc. because 808 Mount Pleasant was the largest piece of the anticipated project. Leyzac proceeded on the aspiration that this could be accomplished, testifying as follows:

107. …Why would you have entered into an Agreement of Purchase and Sale with Mr. Shunock in February 2011, if the hotel memorandum [Memorandum of Intent] wasn’t finalized until March 2011?

A. Because we felt it would get done.

108. You were taking a bit of a chance there?

A. Yes, I was risking money.

[26] There was not only a recognized risk that Norsham Inc. might not proceed with a partnership, but this risk was sufficiently obvious that provision was made for just such an eventuality. The Memorandum of Intent states that if Kartelle Corporation and Norsham Inc. were not able to obtain appropriate zoning and approvals, and thereby not able to proceed with the Partnership Project, Norsham Inc. would not independently sell 808 Mount Pleasant without including the Property and 247 & 249 Roehampton (the “Piggyback Provision”).

[27] By Amending Agreement dated July 7, 2011, the involvement of Kartelle Corporation in the Memorandum of Intent was replaced by Kartelle Inc. By reason of Kartelle Inc. and the applicant being directed by the same person, Iaccino, the details of the Memorandum of Intent, including the possibility that Norsham Inc. could withdraw, was known to the applicant prior to completing the purchase of the Property.

[28] One year later, by letter dated June 28, 2012, Norsham Inc. provided notice to Kartelle Inc. of termination of the Memorandum of Intent on the basis that the parties had not settled the terms of the Partnership Agreement within the time period provided by the Memorandum of Intent.

[29] The applicant submits that by reason of Norsham Inc.’s termination of the Memorandum of Intent, and the resultant unavailability of 808 Mount Pleasant, Kartelle Inc. is not able to proceed with a development project of the size and scale that the applicant had anticipated at the time of contracting to purchase the Property.

D. The Conditional Sale of the Property by Kartelle Inc.

[30] By Agreement of Purchase and Sale of July 4, 2016, All-Borough Millennium Inc. (“All-Borough Inc.”) offered to purchase the Property and 247 & 249 Roehampton for a purchase price of $7,200,000 (the “All-Borough Purchase Agreement”). The All-Borough Purchase Agreement expressly acknowledged that the purchase of the Property was subject to the Disputed Right.

[31] The All-Borough Purchase Agreement was amended by Waiver and Amendment Agreement executed October 14, 2016 (“All-Borough Amendment Agreement”). The purchase price of the Property, together with 247 & 249 Roehampton, was reduced to $6,000,000 with a bonus payment of up to $1,200,000 if Kartelle Inc. is able to obtain rezoning of the Property and 247 & 249 Roehampton and site plan approval to allow for construction of a residential or mixed residential/commercial building with a gross floor area in excess of 60,000 square feet. The bonus would be calculated at $30 for each square foot of gross floor area successfully approved and permitted in excess of 60,000 square feet.

[32] The All-Borough Amendment Agreement was made specifically conditional on a release of Shunock’s registered Disputed Right:

4. The obligations of the parties to complete the transaction contemplated by the Purchase Agreement shall be conditional:

… (i) in favour of both the Purchaser and the Vendor, upon the Vendor, on or before the 30^th day of April, 2017, having obtained a binding release, at its sole cost and expense, of the Notice of Right of First Refusal registered against the Property (or a portion thereof) by Michael Shunock (“Shunock”) … (the “ROFR Release Condition”). The Vendor covenants and agrees to proceed diligently, using reasonable commercial efforts, to satisfy the ROFR Release Condition which shall include, if appropriate, making an application to the Superior Court of Justice (Ontario) (the “Court Proceeding”) for the required release; provided that it is acknowledged and understood by the Purchaser that the Vendor shall not be obligated to (i) negotiate with and/or pay a settlement amount to Shunock in order to obtain such release, and/or (ii) appeal any decision to the court in the Court Proceeding if the Court Proceeding is unsuccessful.

[33] The applicant seeks a declaration that the Disputed Right is void, invalid and no longer of any force or effect and for an order that the registration of the Disputed Right against title to the Property be expunged, vacated and discharged.

E. Analysis

[34] The applicant contends that the Disputed Right was throughout intended to apply to a development project that included 808 Mount Pleasant in addition to the Property and 247 & 249 Roehampton. The applicant submits that the termination of Norsham Inc.’s participation, and the resultant unavailability of 808 Mount Pleasant as a component of the project, causes the Disputed Right to be frustrated. These submissions call for consideration of the nature of the Disputed Right and the doctrine of frustration.

Issue #1: Defining the Disputed Right

[35] The Disputed Right states as follows:

The Seller shall retain a first right of refusal to purchase commercial/professional space in the development project on an exclusive basis for a dental/ orthodontic/ hygiene office. Said space shall be considered as prime commercial space located on main floor with frontage on Mount Pleasant Road up to 3500 square feet but not less than 3000 square feet at a sale price of $375 per square foot plus applicable taxes and the usual closing adjustments, delivered as shell only, with all electrical and mechanical connections available for tenant fit-out. This first right of refusal must be exercised before commencement of the Developers marketing/ sales program. In the event that this right of first refusal is not exercised, then this right of first refusal becomes null and void. The Seller retains the right to transfer this right of first refusal up until the commencement of the Developers marketing/ sales program. The Buyer agrees to notify the Seller of the Developers intention to initiate the sales/ marketing program 30 days in advance. [Emphasis added.]

Is the Disputed Right a Right to Purchase or a Right of First Refusal?

[36] The first issue is how to characterize the Disputed Right. Is it a right of first refusal, which is not an interest in land but rather a personal right, or is it an option to purchase, which creates an interest in land? The term used in the 2011 Sale Agreement is not helpful, in that it melds both rights: “first right of refusal to purchase”.

[37] This distinction between a right to purchase as opposed to a right of first refusal was addressed in 2123201 Ontario Inc. v. Israel Estate, 2016 ONCA 409, 130 O.R. (3d) 641 (Ont. C.A.). In that case, the vendor had conveyed land that contained a gravel pit and contracted for a “first option to purchase” the land upon the gravel being removed. The discretion and authority to determine when all the gravel had been removed, as was necessary to trigger the right, was controlled by the purchasers. The application judge had determined that the “first option to purchase” was “something akin to a right of first refusal – which does not create any interest in land”: 2123201 Ontario Inc. v. Israel Estate, 2015 ONSC 538, [2015] O.J. No. 369 (Ont. S.C.J.), at para. 38.

[38] The Court of Appeal disagreed. In defining a right to purchase, the court referred to the following definition stated by Martland J. in Canadian Long Island Petroleums Ltd. v. Irving Wire Products, 1974 CanLII 190 (SCC), [1975] 2 S.C.R. 715, at p. 732:

In other words, the essence of an option to purchase is that, forthwith upon the granting of the option, the optionee upon the occurrence of certain events solely within his control can compel a conveyance of the property to him.

[39] A right of first refusal, on the other hand, is an agreement on the part of the owner to allow the right holder the first opportunity to acquire the land should the owner decide to sell: 2123201 Ontario Inc., at para. 22. The Disputed Right does not fit neatly into this definition as there is no decision to be made by 2284064 Inc. as to whether to sell to Shunock the requisite space in the development project upon it being created. 2284064 Inc. does not control the decision to sell.

[40] In outlining the distinctions between a right to purchase and a right of first refusal, Laskin J.A. stated as follows, at para. 24:

As the discussion above shows, the jurisprudence establishes that options to purchase create immediate interests in land; rights of first refusal do not. Options to purchase are specifically enforceable; rights of first refusal are not. And options to purchase are subject to the rule against perpetuities; rights of first refusal are not. Finally, according to Canadian Long Island Petroleums, options to purchase give the option holder control over the decision to effect a conveyance. Rights of first refusal give the land owner control over the decision to convey. But, as I will discuss, other case law shows that in some circumstances control over the exercise of the option is not determinative.

[41] As in our present case, the right analyzed in 2123201 Ontario Inc. did not fit precisely into either a right of first refusal or a right to purchase. The triggering event of the right under consideration in 2123201 Ontario Inc. (determination of removal of gravel) was not in the control of the option holder, just as the triggering event in the Disputed Right (completion of development project) is not within the control of Shunock. Laskin J.A. referred to the Court of Appeal’s decision in Jain v. Nepean (City) (1992), 1992 CanLII 7629 (ON CA), 9 O.R. (3d) 11 (Ont. C.A.), wherein a clause was determined to be a right to purchase even in the absence of control on the part of the right holder on the basis that the absence of control by the right holder was not determinative. Rather, as Laskin J.A.’s comments make clear, the court must resolve the issue of whether a clause is a right to purchase not by strict adherence to who controls the triggering event but rather by examining what the parties intended (paras. 37-38):

In both Jain and the case before us, the right to repurchase was not within the control of the holder of the right. In Jain, Carthy J.A. concluded that control was not decisive. By their agreement, the parties still intended that Nepean maintain an interest in the land. Similarly, in the appeal before us, control over the exercise of the option does not resolve whether the Agreement gave Israel an immediate interest in the land. That issue can only be resolved by looking at what the parties intended.

Instead of focusing on the question of control, I view the issue as one of contract interpretation: to determine the true intent of the parties at the time the Agreement was made. In my opinion, the purpose of the Agreement, the context in which it was made, its terms, and the conduct of the parties under it, show an intention to give Israel an option to repurchase the land, which gave rise to an immediate, equitable interest in the land.

[42] The analysis applied by the court in 2123201 Ontario Inc. is directly applicable to this case. To properly determine the nature and character of the Disputed Right, contract interpretation must be conducted to ascertain the intention of the parties.

Interpretation of the Disputed Right

[43] In Creston Moly Corp. v. Sattva Capital Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 47, we see the modern-day statement of contract interpretation:

Regarding the first development [the adoption of an approach to contract interpretation which directs courts to have regard for the surrounding circumstances of the contract – often referred to as the factual matrix], the interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction. The overriding concern is to determine “the intent of the parties and the scope of their understanding” …. To do so, a 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 of formation of the contract. Consideration of the surrounding circumstances recognizes that ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning….

[44] This common-sense approach to contract interpretation builds upon the Supreme Court’s statements in Eli Lilly & Co. v. Novopharm Ltd., 1998 CanLII 791 (SCC), [1998] 2 S.C.R. 129, that contractual intention of the parties is to be ascertained by reference to the words used in the contract read in light of the surrounding circumstances, with the objective of achieving a contract interpretation that is a fair and sensible commercial result. It is the surrounding circumstances that are paramount in this analysis, not evidence concerning the subjective intentions of the parties: Eli Lilly, at para. 54; Healy v. Gregory, 75 C.C.P.B. 178 (Ont. S.C.J.), at para. 61.

[45] Shunock was approached to sell the Property for only one purpose: its inclusion in an intended land assembly that had as its objective the realization of a development project. Leyzac and Iaccino had in mind the scope of project that they wanted to market or to construct and, in their planning, this included 808 Mount Pleasant.

[46] The contract interpretation exercise requires analysis of the 2011 Sale Agreement to determine whether it reflected the objective that the development project include 808 Mount Pleasant. Three distinct rights were negotiated as part of the 2011 Sale Agreement that are in some manner referable to the development potential of the project to which the Property was to form part: namely, the Price Adjustment Agreement, the Disputed Right, and as discussed below, the 2011 Purchase Condition.

[47] The 2011 Purchase Condition is a condition precedent that gave the buyer the ability to withdraw from the purchase of the Property if not satisfied of its “potential for redevelopment”. It provides as follows:

The Buyer being satisfied with all aspects of the Property and potential for redevelopment, in its sole and unfettered discretion, including, without limitation, with the environmental condition of the property and with any restrictions, rights-of-way, easements and/or encroachments which may affect the Property.

[48] The 2011 Purchase Condition does not specify the number of adjacent or other properties with which the potential for redevelopment would be assessed. It does not stipulate whether the potential for redevelopment to be assessed was of the Property alone or otherwise. Most importantly, the inclusion of the 2011 Purchase Condition demonstrates that the buyer was alert to the use of a condition precedent as a means by which to withdraw from the 2011 Sale Agreement if unsatisfied of the potential for redevelopment of the Property. This makes starker the lack of any condition precedent allowing the buyer to withdraw from the purchase of the Property if the buyer is unable to secure the inclusion of 808 Mount Pleasant in the proposed land assembly.

[49] The applicant had made the purchase of 247 & 249 Roehampton conditional on the purchase of the Property. Had the inclusion of 808 Mount Pleasant been critical to the applicant’s development project, the purchase of the Property could have been made conditional on this.

[50] Likewise, the Disputed Right refers only to “the development project”; it provides that “[t]he Seller shall retain a first right of refusal to purchase commercial/professional space in the development project”. The term “development project” is not defined in the Disputed Right just as the term “potential for redevelopment” is not defined in the 2011 Purchase Condition. The term “development project” does not specify the number or scope of properties that are intended to constitute the “development project”.

[51] Once again, like the 2011 Purchase Condition, the Disputed Right’s reference to “development project” could have been drafted to necessitate the inclusion of 808 Mount Pleasant in the “development project” had that been the intention of the parties at the time of contracting.

[52] The applicant submits that the interpretation of the Disputed Right should be informed by reference to the wording of the third right identified in the 2011 Sale Agreement that refers to the property redevelopment, the Purchase Price Agreement, which provides as follows:

The parties acknowledge that the Purchaser will be applying for a rezoning of the property and adjacent properties (the “Project”) to permit the maximum GFA for a proposed residential/commercial condominium development project on the properties forming the Project. At the present time the Project is anticipated to include those lands municipally known as 247 Roehampton Ave., 249 Roehampton Ave., 820 Mount Pleasant Road and 808 Mount Pleasant Road all as shown outlined in red on the site plan attached as Schedule ‘B’ herein (the “Original Lands”).

In the event that the final approved zoning for the Project (including any other lands acquired and which will form part of the Project for zoning purposes)(the “Total Approved GFA”) is more than 263,750 square feet of gross floor area (the “Original GFA”) then the Post Closing Purchase Price Adjustment will be calculated as follows: … [Emphasis added.]

[53] The applicant submits that the defined terms “Project” and “Original Lands” ought to be imported into the Disputed Right to restrict Shunock’s right to purchase floor space to a “Project” that includes 808 Mount Pleasant. This importation is required to achieve the applicant’s proposed limitation on the Disputed Right because the applicant did not, at the time of negotiating and agreeing to the 2011 Sale Agreement, do either of the following: (i) insert a condition in the Disputed Right to make it contingent on a “development project” that included 808 Mount Pleasant; or (ii) engraft on the Disputed Right a definition for the term “development project” that included 808 Mount Pleasant. Either one of these steps would have caused the Disputed Right to be contingent on the inclusion of 808 Mount Pleasant in the development project. Neither of these steps was taken by the applicant at the time of bargaining and contracting with Shunock in 2011.

[54] The Disputed Right served a different purpose than the Purchase Price Agreement. The Purchase Price Agreement set a bar above which Shunock would receive a top-up in the purchase price. Its activation is contingent on that bar being exceeded. The Disputed Right contains no such bar to its activation. It was created to grant Shunock an immediate right to purchase a specified part of the development project once completed. There was no control on the part of the applicant to decide to sell this space to Shunock upon it becoming available. There was no requirement that the project be large or small so long as the floor space specified by the Disputed Right was constructed in a development project.

[55] There is insufficient evidence of surrounding circumstances at the time of contracting in 2011 to support a finding that the parties intended that the threshold established in the Purchase Price Agreement for activation of an escalation of the purchase price was also a threshold necessary for the activation of the Disputed Right. The following evidence suggests the contrary:

(a) The Memorandum of Intent was not executed at the time of execution of the 2011 Sale Agreement such that no one had certainty of knowledge at that moment of the eventual size of the development project;

(b) The Purchase Price Agreement states that the inclusion of 808 Mount Pleasant in the land assembly is anticipated, but not certain;

(c) The applicant had made the acquisition of 247 & 249 Roehampton conditional on the acquisition of the Property and could have made the provision of the Disputed Right conditional on the acquisition of 808 Mount Pleasant, had that been the intention;

(d) Through the 1^st Amendment Agreement and the 2^nd Amendment Agreement, Shunock negotiated enhancements to the Disputed Right: namely, a decrease in cost from $375 per square foot to $275 per square foot and the right to purchase two parking spaces. These two amendments were agreed upon after the time the applicant’s conclusion of the Memorandum of Intent. Had there been any intention that the Disputed Right was to be conditional on the participation of 808 Mount Pleasant it would reasonably be expected to have emerged through these negotiations.

[56] Further, the applicant’s submission that the phrase “development project” used in the Disputed Right must be read consistently with the term “Project” as defined in the Purchase Price Agreement is not supported by the principle of presumption of consistent language, which is succinctly summarized by Perell J. in Healy v. Gregory, at para. 79, as follows:

With respect, although the Respondents purport to rely on a principle of interpretation, which they describe as the presumption of consistent expression, they misapply the principle. The presumption of consistent language entails that: (a) a draftsperson will use language consistently; (b) a draftsperson’s use of different words indicates an intention to refer to different things; (c) a draftsperson will not use different words to refer to the same thing; and (d) different words should not be interpreted to mean the same thing. See: Prestcold (Central) Ltd. v. Ministry of Labour, [1969] 1 W.L.R. 89 (Eng. C.A.) at p. 97; Jarvis (John) Ltd. v. Rockdale Housing Association Ltd. [1986] 3 Const. L.J. 24 at p. 30. K. Lewison, Interpretation of Contracts (London: Sweet & Maxwell, 1989) at para. 6.02.

[57] It is consistent with the 2011 Sale Agreement, that the term “development project” used in the Disputed Right was intended to have a different meaning than the term “Project” used in the Purchase Price Agreement.

[58] In 2123201 Ontario Inc., the Court of Appeal stated that doubt concerning the intention of the contracting parties can be clarified by considering how the parties acted under the agreement. Referring to Montreal Trust Co. of Canada v. Birmingham Lodge Ltd. (1995), 1995 CanLII 438 (ON CA), 24 O.R. (3d) 97 (Ont. C.A.), at p. 108, the Court of Appeal stated, at para. 41:

The way parties act under an Agreement may be helpful in determining its intended meaning when there is doubt about the appropriate interpretation. The parties’ later conduct may show what meaning they gave to the Agreement after it was made, which in turn may show the parties’ intent when the Agreement was made ….

[59] In the All-Borough Purchase Agreement, executed by the applicant on July 4, 2016, some five years after the closing of the 2011 Sale Agreement, an express acknowledgment and provision was made for Shunock’s Disputed Right even though the applicant, through related entity Kartelle Inc., had by then known for some four years that Norsham Inc. was not agreeable to 808 Mount Pleasant being used as part of the land assembly for the project. The All-Borough Purchase Agreement provides as follows:

The Purchaser’s obligation to complete the transaction contemplated by this Agreement is conditional upon title to the Property being good and free from all registered restrictions and registered easements (except those registered restrictions and easements existing as of the date hereof provided same have been complied with), mortgages, charges, liens and encumbrances except as otherwise specifically provided in this Agreement. For clarity, the Purchaser is required to accept title on the Closing Date subject to a Notice of Right of First Refusal registered against the Property (or a portion thereof) …. [Emphasis added.]

[60] We see then acknowledgment by conduct five years after closing that the Disputed Right was valid and affected the Property notwithstanding that 808 Mount Pleasant was not part of any development project involving the Property.

[61] Also, Shunock registered the Disputed Right against title to the Property in 2012 but the applicant did not take any step to challenge the Disputed Right until September 2016 and then in the context of a proposed sale to All-Borough Inc. in which removal of the Disputed Right was required by the prospective purchaser.

[62] This conduct validates a finding that the parties intended that Shunock receive a right to purchase space in the development project and that Shunock’s right reflect an interest in land. Interpretation of the 2011 Sale Agreement, in its entirety, and the Disputed Right in particular, results in a conclusion that it was the parties’ intention that Shunock continue to have an interest in the Property to the extent of the Disputed Right.

[63] I have determined that the Disputed Right is a right to purchase. I have determined further that the circumstances surrounding the formation of the 2011 Sale Agreement establish that the agreement struck and documented in the contract reflects the parties’ intentions that the Disputed Right was to be available to Shunock regardless of the eventual size of the development project.

Issue #2: Has the Right to Purchase Been Frustrated?

The Law of Frustration

[64] The applicant submits that it ought to be relieved of any obligation under the Disputed Right on the basis that the termination by Norsham Inc. of any continued participation in the Partnership Project was an unforeseen supervening event, which occurred without fault of the applicant, that rendered impossible the ability to make available to Shunock the commercial space contemplated by the Disputed Right.

[65] The Supreme Court provided guidance on the doctrine of frustration in Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58, [2001] 2 S.C.R. 943. Here, a general contractor entered into a subcontract with an electrical firm to supply services to a construction project. A ruling by the Labour Relations Board confirmed the obligation of the general contractor to use only electrical subcontractors who belonged to a specified union that excluded the electrical firm to which the general contractor had contractually committed the project work. The general contractor sought to avoid the obligations under the subcontract on the basis of frustration, maintaining that the decision by the Labour Relations Board rendered impossible the subcontract in place with the non-qualifying electrical sub-contractor.

[66] The doctrine of frustration was stated by the court as follows, at p. 967:

Frustration occurs when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes “a thing radically different from that which was undertaken by the contract”: Peter Kiewit Sons Co. of Canada v. Eakins Construction Ltd., 1960 CanLII 37 (SCC), [1960] S.C.R. 361, per Judson J., at 368, quoting Davis Contractors Ltd. v. Farehan Urban District Council, [1956] A.C. 696 (U.K. H.L.), at p. 729.

[67] The doctrine of frustration operates to “relieve the parties of their bargain because a supervening event … has occurred without the fault of either party” (p. 968). In the Naylor decision, the court determined that the contract could not be voided on the basis of frustration as the decision of the Labour Relations Board was not a supervening event that was unforeseen or unforeseeable by the contracting parties. As a result, there was no need to “consider court-imposed remedies based on the allegation of a radical change to the significance of the contractual obligation” (p. 970).

[68] In Capital Quality Homes Ltd. v. Colwyn Construction Ltd. (1975), 1975 CanLII 726 (ON CA), 9 O.R. (2d) 617 (Ont. C.A.), the court addressed the applicability of the doctrine of frustration to contracts involving the sale of land. At issue was whether a substantial change in legislation that had the effect of prohibiting and restricting the conveyance of lands, passed in the days prior to the closing date established by an agreement of purchase and sale, had the effect of relieving the purchaser from fulfillment of the contract. In holding that the agreement of purchase and sale, which involved the purchase and sale of 26 lots, had been frustrated by the enactment of legislation that prevented the required creation of the lots, the court stated the following principles, at para. 29:

There can be no frustration if the supervening event results from the voluntary act of one of the parties or if the possibility of such event arising during the term of the agreement was contemplated by the parties and provided for in the agreement. … In my opinion the legislation destroyed the very foundation of the agreement. The purchaser was purchasing 26 separate building lots upon which it proposed to build houses for re-sale involving a reconveyance in each instance. This purpose was known to the vendor. The lack of ability to do so creates a situation not within the contemplation of the parties when they entered into the agreement. I believe that all the factors necessary to constitute impossibility of performance have been established and that the doctrine of frustration can be invoked to terminate the agreement.

[69] The principles that emerge are that frustration occurs when an unforeseen supervening event takes place without the fault of either party that radically alters the contractual obligations and makes it impossible for one of the parties to carry out the contract. A party claiming that the contract has been frustrated has the onus of proving the constituent elements necessary to establish frustration: Gerstel v. Kelman, 2015 ONSC 978, 40 B.L.R. (5th) 314 (Ont. S.C.J.).

Application of Principles

[70] There is no question that the doctrine of frustration applies to contracts affecting land: Capital Quality Homes, at p. 629; Dinicola v. Huang & Danczkay Properties (1996), 1996 CanLII 8000 (ON SC), 29 O.R. (3d) 161 (Ont. Gen. Div.), aff’d (1998), 1998 CanLII 4462 (ON CA), 40 O.R. (3d) 252 (Ont. C.A.).

[71] The starting point is the identification of an unforeseen supervening event. The applicant submits that this occurred when Norsham Inc. terminated the Memorandum of Intent by letter dated June 28, 2012, causing 808 Mount Pleasant to be unavailable for inclusion in the land assembly for the Partnership Project. The evidence shows that this event was foreseen by the applicant, in that Clause 11 of the Memorandum of Intent, referred to as the “Piggyback Clause”, specifically provided for the very contingency that Norsham Inc. might decide not to proceed with the Partnership Project:

If the parties failed to settle and execute the Partnership Agreement or if the Partners are unable to satisfy the Transfer Condition or the Partnership is terminated upon the mutual agreement of the Partners, no sale of the Norsham Property [808 Mount Pleasant] shall be made thereafter that does not include the [Property and 247 & 249 Roehampton], and the proceeds of sale shall be shared in accordance with the Partnership Proportions.

[72] Specific provision was made in the Memorandum of Intent for the very occurrence that is now submitted to constitute an unforeseen, supervening event. The applicant had involvement in the Memorandum of Intent, even though it was initially entered into by Kartelle Corporation, by reason of the fundamental role that the Property (owned by the applicant) and 247 & 249 Roehampton (owned by related entity Kartelle Inc.) had in the Memorandum of Intent which was, in any event subsequently assigned to Kartelle Inc.

[73] In Capital Quality Homes, Evans J.A. stated as follows at para. 29:

There can be no frustration if the supervening event results from the voluntary act of one of the parties or if the possibility of such event arising during the term of the agreement was contemplated by the parties and provided for in the agreement.

[74] The applicant has failed to establish that the supervening event was unforeseen. The withdrawal of Norsham Inc., and with it 808 Mount Pleasant, was a foreseen, expected possible outcome of the project initiatives directed by the applicant.

[75] In terms of the issue of fault, it is unclear, on the current record, whether the withdrawal of Norsham Inc. from the joint development project occurred without any fault on the part of the applicant, as would be required to establish frustration. Iaccino testified in an affidavit sworn October 20, 2016 (the “Iaccino Affidavit”), at para. 21, that “[d]isputes between Nor Sham and Kartelle led to the unilateral termination of the MOI by Nor Sham” but without providing any detail. In light of my finding that the applicant has failed to establish that there was an unforeseen supervening act, I do not consider it necessary to determine whether the withdrawal of Norsham Inc. from the Memorandum of Intent was caused, in whole or in part, by conduct of the applicant. In any event, if this were a determinative issue for this application, I would find that the record presented by the applicant is insufficient to make an assessment of fault for the withdrawal of Norsham Inc. from the joint development project.

[76] The last element required to be established by the applicant is that the unforeseen supervening event rendered it impossible for the applicant to provide the Disputed Right. To establish the required element of impossibility, the applicant has the burden of proving that the development project is not able to provide prime commercial space located on the main floor of the re-developed complex, up to 3,500 square feet but not less than 3,000 square feet, as is required for operation of the Disputed Right.

[77] Iaccino testified in the Iaccino Affidavit that the Property and 247 & 249 Roehampton are not able to accommodate main floor commercial space of the size required by the Disputed Right (para. 23). Iaccino did not identify the source of this belief. Cross-examination of Iaccino, at questions 177-78, clarified that the plan by the current buyer, All-Borough Inc., does not produce main floor commercial space of the size required for the Disputed Right but that Iaccino did not intend to say that this plan was the only possibility for development.

[78] The Iaccino Affidavit annexed as exhibits two documents that are tendered to establish impossibility: a statement by a lawyer in an undated letter, and an unidentified feasibility study. The undated letter from the applicant’s lawyer to the lawyer for Shunock states, in pertinent part:

We both know that [808 Mount Pleasant] was never acquired, and the Property as it now stands, does not allow for a development of a sufficient size to allow for a commercial unit of 3,000 to 3,500 square feet on the main floor of any building that could be constructed on the Property.

[79] This statement presumes that an analysis has been conducted, of a planning or building nature, concerning the square footage of commercial space that could be constructed on any development project involving the Property together with 247 & 249 Roehampton. The statement does not identify the source of the evidence or that person’s qualifications.

[80] A document entitled “Mid-Rise Feasibility Study” bearing date of August 22, 2016 and on the banner of Quadrangle Architects Limited is also annexed as an exhibit to the Iaccino Affidavit and suffers from the same evidentiary defects as the undated lawyer’s letter. The author of the report is not identified. The author’s qualifications are not specified.

[81] These two documents purport to state opinions and to thereby purport to provide expert input without meeting the requirements for admission of expert testimony. Further, as exhibits to the Iaccino Affidavit, they are hearsay. In Ontario v. Rothmans Inc., 2011 ONSC 2504, 5 C.P.C. (7th) 112, at para. 111, Perell J. stated as follows:

In technical terms, evidence of an out of court statement repeated in court for the purposes of establishing the truth of the statement is inadmissible hearsay. Hearsay is not evidence of the witness’ own experiences, observations, or perceptions and subject to the hearsay exceptions, the hearsay declarant is not a substitute for the genuine witness of the events. The essential defining feature of hearsay are: (1) the statement is adduced as proof of its contents; and (2) the opportunity for a contemporaneous cross-examination of the actual speaker is absent. [Citing R. v. Khelawon, 2006 SCC 57, [2006] 2 S.C.R. 787.]

[82] Rule 39 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, permits hearsay in motions and on applications in a very limited manner for non-contentious facts. However, the inclusion of hearsay evidence on a key point is not proper. I agree with the statement of the law on this point made by Brown J., as he then was, in Beach v. Toronto Real Estate Board, 2010 ONSC 30001, 97 C.P.C. (6th) 127, at para. 5: “[a]lthough the rules permit a party to include evidence based on information and belief in an affidavit in support of a motion, the inclusion of hearsay evidence on a key point is not proper. Direct evidence should be filed.”

[83] The undated lawyer’s letter and the unidentified feasibility study are unreliable hearsay, improperly tendered as exhibits to the Iaccino Affidavit, and therefore of minimal probative value. They do not, in any event, establish the impossibility of advancing a development project on the land assembly consisting of the Property and 247 & 249 Roehampton to produce commercial space of the size required to activate the Disputed Right. The feasibility study does not state that a development project constructed on a land assembly consisting of the Property and 247 & 249 Roehampton cannot be of a sufficient size to allow for a main floor commercial space measuring between 3,000 to 3,500 square feet.

[84] For the doctrine of frustration to apply, the supervening event must radically change the contract between the parties, in a manner that was unforeseen and without fault of the parties, rendering performance of the contract impossible. Mere inconvenience is not enough: KBK No. 138 Ventures Ltd. v. Canada Safeway Ltd., 2000 BCCA 295, [2000] 5 W.W.R. 588 (B.C.C.A.), at para. 28. That circumstances may make the performance of a right less advantageous for one of the contracting parties than initially contemplated is insufficient to declare void a right that was bargained for, contracted for and long-acknowledged by the parties through their conduct as valid.

[85] As the applicant has failed to discharge its burden of proving that an unforeseen supervening event has occurred without the fault of either party that has made it impossible for the applicant to carry out the Disputed Right, I find that the elements of the doctrine of frustration have not been established.

Issue #3: Does the Disputed Right Contravene the Rule Against Perpetuities?

[86] The applicant submits that the Disputed Right ought to be declared void on the basis that it offends the rule against perpetuities. The rule against perpetuities and its statutory successor, the Perpetuities Act, R.S.O. 1990, c. P.9, apply to property rights but not to personal rights. In Sutherland Estate v. Dyer (1991), 1991 CanLII 7120 (ON SC), 4 O.R. (3d) 168 (Ont. Gen. Div.), Killeen J. determined, at p. 172, that the rule against perpetuities applies to holders of interest in land, including rights and options to purchase. My determination that the Disputed Right is a right to purchase, and thereby affects an interest in land, makes this issue pertinent.

[87] The rule against perpetuities is stated in Sutherland, at p. 171 as follows: “No interest is good unless it must vest, if at all, not later than twenty-one years after some life in being at the creation of the interest.” As such, the Disputed Right must vest within 21 years of its granting to be valid, which in this case is May 16, 2032.

[88] The Perpetuities Act, in s. 3, states that no contingent interest in land shall be treated or declared as invalid by reason of the possibility that it will not vest until after the perpetuity period:

3. No limitation creating a contingent interest in property shall be treated as or declared to be invalid as violating the rule against perpetuities by reason only of the fact that there is a possibility of such interest vesting beyond the perpetuity period.

[89] Section 4 of the Perpetuities Act addresses circumstances in which a contingent interest that is capable of vesting within the perpetuities period is presumptively valid:

4 (1) Every contingent interest in property that is capable of vesting within or beyond the perpetuity period is presumptively valid until actual events establish,

(a) that the interest is incapable of vesting within the perpetuity period, in which case the interest, unless validated by the application of section 8 or 9, shall be treated as void or declared to be void; or

(b) that the interest is incapable of vesting beyond the perpetuity period, in which case the interest shall be treated as valid or declared to be valid.

[90] The applicant has not established that the Disputed Right is incapable of vesting within the perpetuity period. To the contrary, the applicant is currently actively engaged in the potential for sale and development of the Property, together with 247 & 249 Roehampton, such that there is a corresponding potential for activation of the Disputed Right. Further, the Piggyback Clause also provides for the potential that the Property will be part of a development that might be advanced by Norsham Inc. in connection with its ownership of 808 Mount Pleasant.

[91] I have determined that the Disputed Right does not contravene the rule against perpetuities. It is presumptively valid, in accordance with the Perpetuities Act.

F. Disposition

[92] The elements required for the applicant to obtain the declarations sought in this application have not been established. The application is dismissed.

[93] The present application proceeded even though no development project was before the court in regard to which 3,000 to 3,500 square feet of commercial/professional space may become available. The application might have been considered premature but for its connection to the pending sale to All-Borough Inc. The issue before the court, as now decided, called for a determination of the validity of the Disputed Right, not its application to a specific project that might or might not be developed on the Property, whether alone or with adjacent lands, which is expressly left unresolved.

G. Costs

[94] The parties exchanged cost outlines at the time of the hearing of this application. The parties are encouraged to discuss the issue of costs and reach resolution, if possible.

[95] In the event that the parties are not able to reach agreement on the issue of costs, the respondent shall, within seven days of the release of these Reasons, deliver written cost submissions of no more than five pages in length. The applicant shall, within 14 days of the release of these Reasons, deliver written cost submissions of no more than five pages in length. I will then determine the issue of costs and release my decision in an endorsement.

Sanfilippo J.

Released: November 29, 2017