Court File and Parties

COURT FILE NO.: CV-18-589400 DATE: 20180516

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: 2197088 Ontario Limited, Applicant AND: Cadogan Corporation and Metro Ontario Real Estate Limited, Respondents

BEFORE: Ferguson J.

COUNSEL: Scott A. Rosen, for the Applicant Aryan Ziaie, for the Respondent, Cadogan Corporation Nafisah Chowdhury, for the Respondent, Metro Ontario Real Estate Limited

HEARD: April 12, 2018

ENDORSEMENT

Overview

[1]. The applicant, 2197088 Ontario Limited (“Foody Mart”), operates a supermarket in Markham, Ontario, located at 5221 Highway 7 East in Markham (the “premises”). It leases part of the premises pursuant to an agreement made with the respondent, Metro Ontario Real Estate Limited (“Metro”). It leases the other part of its premises pursuant to an agreement made with the respondent, Cadogan Corporation (“Cadogan”).

The Various Leases

[2]. (i) The premises are subject to a head lease (the “land lease”) now between John Hurlburt Holdings Ltd. (“Hurlburt”) and Cadogan. (There were prior corporate involved entities as this lease dates back to December of 1989. The change in the entities over the years is not relevant to this application);

(ii) On September 3, 2003, Cadogan and Metro (formerly A&P Properties Limited) entered into a sublease concerning 32,421 square feet of the premises for an initial term of 15 years (“Cadogan/Metro Sublease) with extension provisions;

(iii) On March 24, 2009, Foody Mart entered into a sub‑sublease with Metro with respect to the 32,421 square feet. That lease has a guarantor;

(iv) On June 1, 2009, Cadogan and Foody Mart entered into a sublease concerning 11,800 square feet of the premises. That lease has an indemnifier and required Foody Mart to pay a total of three months’ rent as advance and prepaid rent on account of the first full month’s rent and $51,641.52 as prepaid rent due for the last two months of that sublease.

[3]. Foody Mart seeks an assignment of the Cadogan/Metro sublease so that it can exercise the renewal option contained therein (“proposed assignment”). Metro is not seeking to exercise the option to renew and as such Metro will be released from its lease with Cadogan and will no longer be Cadogan’s tenant.

[4]. Article 21.1 of the Cadogan/Metro sublease requires Metro to obtain Cadogan’s consent to an assignment of the lease “which consent shall not be unreasonably withheld or delayed”. Cadogan has agreed to the assignment if Foody Mart meets certain conditions, including making a security deposit.

[5]. Foody Mart commenced this application under s. 23(2) of the Commercial Tenancies Act, R.S.O., c.L.7 (“the CTA”) on its allegation that Cadogan has acted unreasonably in withholding consent. Foody Mart seeks an order permitting the proposed assignment of the lease in issue. Cadogan’s position is that the application should be dismissed, on the basis that it has not withheld consent unreasonably. Rather, it is prepared to consent to the proposed assignment, subject to reasonable security terms whose purpose is solely to mitigate against risks that arise in light of the commercial realities of the market place.

[6]. For the reasons that follow, I agree that this application should be dismissed. Cadogan has not withheld consent unreasonably.

The Other Players

[7]. Delcom Management Services Inc. (“Delcom”) is a non-party to this application and is a property services company that manages the shopping centre on Cadogan’s behalf. It has done so since October of 2017.

[8]. In June of 2016, Royal Trust became estate trustee of the estate which owns Cadogan. The estate trustee (Greg Woolston) has been extensively criticized by Foody Mart on the allegation that he has improperly delegated the responsibilities regarding Cadogan to Delcom (its agent) with respect to the premises. I comment at this point that it was entirely appropriate for the corporate estate trustee to retain Delcom and delegate the decision making processes regarding Cadogan to Delcom. Royal Trust is an estate trustee, not an expert in commercial leasing. Delcom is that expert.

Negotiations

[9]. In the fall of 2017, Lorena Kissoon (“Kissoon”) of Delcom started communications with Foody Mart’s representatives concerning the proposed assignment. Initially she was dealing with Foody Mart’s lawyer Robert Kligerman (“Kligerman”).

[10]. Exhibit “G” to the affidavit of Wen Qing He (“Wen”), sworn January 12, 2018, provides Kissoon’s email to Kligerman of December 1, 2017 and Kligerman’s reply of December 4, 2017. Kissoon sets out the rationale of the proposed security in view of the fact that Cadogan was losing an indemnifier (Metro). The initial request was six months’ rent but then the request was reduced to half. This was their standard practice when losing an indemnifier. Kligerman’s response was to propose a deposit of three months’ rent to be allocated to certain months. It is clear that the only issue which was being discussed at that point regarding the security deposit was with respect to the apportionment of the three months’ rent deposit.

[11]. On December 19, 2017, Foody Mart made an offer to settle the security issue (the details were omitted in the materials because of settlement privilege). On December 21, 2017, in response to that offer Kissoon advised Kligerman that Cadogan was “inclined to accept the offer” but awaited an opinion concerning the governing land lease. These emails are found at Exhibit “I” of the Wen affidavit.

[12]. Exhibit “I” sets out further emails between Kissoon and Kligerman. On December 21, 2017 (four days before the holidays), Kissoon informed of a potential issue involving the land lease. Kissoon advised that (i) Cadogan expects to exercise its option to renew the land lease; (ii) in the event that it did not, it expects to get the consent of the land owner to the proposed assignment; and (iii) while they did not anticipate an issue, it would be wise to reach an understanding on how to proceed with the landowner or obtain legal advice in absence (as the landowner may currently be out of town with limited access to email).

[13]. Cadogan agreed to extend the deadline for exercising the option to renew to February 9, 2018 and executed an extension of the date of renewal option on December 22, 2017 (the “extension”). I agree that this was done to ensure that Foody Mart was not prejudiced by ongoing negotiations involving the issues which also involved Hurlburt. The exchanges between Kissoon and Kligerman were very cordial up to that point.

[14]. Following the execution of the extension, Foody Mart then rescinded the proposed terms which Cadogan had advised it was inclined to accept and on January 3, 2018 Foody Mart commenced this application. On January 4, 2018 after the litigation was commenced, counsel for Cadogan added the term of the requirement of a release.

[15]. Prior to the commencement of this application, the amount of security sought by Cadogan constituted three months’ rent applicable against future rent. According to the proposed Assignment of Lease Agreement found at Exhibit “D” to the affidavit of Paul Smith (“Smith” – the Chief Administrative Officer of Delcom) sworn February 5, 2018, one month of rent was to be payable in the second calendar month of the initial term of the assignment, and would therefore be applied almost immediately against rent. As such, the security requested effectively amounted to two months’ rent.

[16]. Smith’s affidavit evidence includes the following:

(a) Delcom always recommends that landlords require some form of security or guarantee or both when consenting to assignments;

(b) In cases involving public companies, such as Metro, Delcom can review publicly available information, assess the commercial operations of the corporation, determine the strength of its assets and request a corporate guarantee;

(c) In cases involving private companies, Delcom recommends a personal guarantee, which Cadogan had obtained in relation to the Cadogan/Foody Mart sublease;

(d) Delcom’s recommendation accounted for the banking and credit information and timely payment of rent, which is why it reduced its request to three months’ rent;

(e) It is Delcom’s experience that in the current market it is not easy to replace tenants for large retail properties such as the leased premises; and

(f) The evolution of online shopping has affected the commercial viability of retail stores and decreased demand for larger retail spaces such as the leased premises, because stores are substituting physical space with e‑commerce.

[17]. Foody Mart did not adduce any evidence to contradict Smith’s evidence. Rather, it relies on its historic rent payments and credit information.

The Law

[18]. The applicable contractual provision concerning the proposed assignment is Article 21 of the Cadogan/Metro lease, which reads as follows:

Tenant may sublet all or any part of the Demised Premises or licence the use of any portion thereof or assign this Lease to … In all other cases the Tenant must obtain the Landlord’s consent, which consent shall not be unreasonably withheld or delayed.

[19]. The applicable statutory provisions are found at subsections 23(1) and (2) of the CTA, relevant portions of which read as follows:

(1) In every lease made after the 1st day of September, 1911, containing a covenant, condition or agreement against assigning... such covenant, condition or agreement shall, unless the lease contains an express provision to the contrary, be deemed to be subject to a proviso to the effect that such licence or consent is not to be unreasonably withheld.

(2) Where the landlord refuses or neglects to give a licence or consent to an assignment or sub-lease, a judge of the Superior Court of Justice, upon the application of the tenant or of the assignee or sub-tenant, made according to the rules of court, may make an order determining whether or not the licence or consent is unreasonably withheld and, where the judge is of opinion that the licence or consent is unreasonably withheld, permitting the assignment or sub‑lease to be made, and such order is the equivalent of the licence or consent of the landlord within the meaning of any covenant or condition requiring the same and such assignment or sub-lease is not a breach thereof.

[20]. The principles to be applied in determining whether a landlord acted reasonably in withholding consent were discussed by Cullity J. in 1455202 Ontario Inc. v. Welbow Holdings Ltd. (2003), 2003 CanLII 10572 (ON SC), 33 B.L.R. (3d) 163 (Ont. S.C.J.) (“Welbow”), at para. 9, and are summarized by Lederman J. in Suncor Energy Products Inc. v. 2054889 Ontario Ltd., 2010 ONSC 6159, 195 A.C.W.S. (3d) 831 (“Suncor”), at para. 26, as follows:

(i) the burden is on the tenant to satisfy the court that the refusal to consent was unreasonable.

(ii) in determining the reasonableness of a refusal to consent, it is the information available to - and the reasons given by - the landlord at the time of the refusal - and not any additional, or different, facts or reasons provided subsequently to the court - that is material.

(iii) the question must be considered in the light of the existing provisions of the lease that define and delimit the subject matter of the assignment as well as the right of the tenant to assign and that of the landlord to withhold consent.

(iv) a probability that the proposed assignee will default in its obligations under the lease may, depending upon the circumstances, be reasonable ground for withholding consent.

(v) the financial position of the assignee may be a relevant consideration.

(vi) the question of reasonableness is essentially one of fact that must be determined on the circumstances of the particular case, including the commercial realities of the market place and the economic impact of an assignment on the landlord.

[21]. A landlord’s decision to withhold consent must be objectively reasonable in light of all the facts and circumstances: Welbow, at para. 9; Dominion Stores Ltd. v. Bramalea Ltd., 38 R.P.R. 12, (Ont. Dist. Ct.), at para. 24. Further, a landlord may not refuse consent for reasons which are collateral to the terms of the governing lease. Where a landlord refuses consent in order to achieve a collateral or ulterior purpose, the refusal is unreasonable: Zellers Inc. v. Brad‑Jay Investments Ltd. (2002), 117 A.C.W.S. (3d) 814 (Ont. S.C.J.) (“Zellers”), at para. 29.

[22]. The modern approach to a determination of whether consent has been unreasonably withheld focuses on the commercial realities of the market place and economic impact of the assignment on the landlord, rather than on the tenant’s financial history or credit information: Windsor Apothecary Ltd. v. Wolfe Group Holdings Ltd., [1996] S.J. No. 119 (Sask. U.F.C.), at para. 3; Suncor, at para. 26.

[23]. Cadogan must demonstrate only that a reasonable person might have reached the same conclusion under the same circumstances. The court’s function excludes a determination of whether consent should or should not have been granted. The court is not entitled to substitute its own decision for Cadogan’s decision: Loblaws Inc. v. 1098748 Ontario Ltd., (2002) 114 A.C.W.S. (3d) 312 (Ont. S.C.J.), at para. 27; Zellers, at para. 35; Welbow, at para. 9(2).

Analysis

[24]. As set out above, the Cadogan/Foody Mart sublease required Foody Mart to pay prepaid and advance rent in the total amount of three months. I note that this was for a significantly smaller portion of the premises (11,800 square feet as opposed to 32,421 square feet). This is also indicative that Cadogan agreed to the reduction in the security because of Foody Mart’s history and status. The request by Delcom as agent for Cadogan was not an attempt to re‑write the assignment covenant ex post facto. This is consistent with Smith’s affidavit evidence that it is industry standard to seek security from private companies, particularly as Delcom was not property manager at the time the Cadogan/Foody Mart sublease was negotiated.

[25]. In this case, Cadogan has not unreasonably withheld consent to the assignment. To the contrary, it has acted reasonably. This litigation should never have been commenced. Negotiations regarding settlement terms after the litigation commenced are not relevant to Cadogan’s reasonableness before the litigation was commenced. The commercial realities of the market place and potential economic impact on Cadogan of this proposed assignment were important.

[26]. The required number of months was negotiated in good faith and it was in fact Kligerman who proposed the three months which was found to be acceptable by Cadogan.

[27]. In any event, Cadogan has accounted for Foody Mart’s strong financial status by reducing the security from the amount it customarily seeks (six months) – to three months, with one month applied almost immediately against rent. I agree that Cadogan agreed to this reduction because of, not in spite of, Foody Mart’s financial history and status.

[28]. In determining reasonableness, deference should be afforded to Cadogan’s business judgment, which was derived from Delcom, who is best placed to assess market place conditions and risks arising from the proposed assignment. This court should be slow to substitute its judgment for the business judgment of the landlord. Delcom’s expertise is substantial and includes similar properties. There is no evidence to contradict or undermine the reasonableness of Delcom’s assessments on the economic realities of the market place.

[29]. The request for the security was not collateral to the bargain between Cadogan and Metro. The proposed assignment eliminates Metro’s security as indemnifier because Metro will be released from its lease with Cadogan.

[30]. The security requested by Cadogan allows it to continue to protect its business interests and, in this respect, performs a similar function to its lease with Metro as indemnifier.

[31]. I also agree that Cadogan’s request for a release is irrelevant to the question of whether it acted reasonably. Releases on resolution of negotiations are the norm. In any event the issue of the release only surfaced after the litigation was commenced.

Conclusion

[32]. Cadogan has not acted unreasonably in all of the circumstances. Cadogan’s position is objectively reasonable in light of all the facts and circumstances.

[33]. The application is dismissed.

Costs

[34]. If the parties cannot agree on costs, I am prepared to receive the respondents’ submissions on costs within 20 days; the applicant’s submissions within 10 days thereafter; and the respondents’ response (if any) within 7 days thereafter. They can be sent by email to my assistant at Lorie.Waltenbury@ontario.ca.

Ferguson J.

Date: May 16, 2018