COURT FILE NO.: CV-15-11172-00000
DATE: 20180615
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
THE MANUFACTURERS LIFE INSURANCE COMPANY
Applicant
– and –
PARC-IX LIMITED
Respondent
Phillip L. Sanford and Lisa Constantine, for the Applicant
Jonathan C. Lisus, Shaun Laubman and Bradley Vermeersch, for the Respondent
HEARD: October 31, 2017 and April 18, 2018.
Additional written submissions received January 29, 2018, February 12, 2018, and February 20, 2018.
REASONS FOR DECISION
Mr. justice t. mcewen
[1] Parc-IX Limited (“Parc-IX”) is the owner of an apartment building located at 9 Deer Park Crescent, Toronto (the “Property”). Manufacturers Life Insurance Company (“Manulife”) is the owner of the Property. This dispute concerns the interpretation of the 99 year lease (the “Ground Lease”) governing their relationship.
[2] The Ground Lease was originally executed in 1964. In order to link the rent to the value of the underlying land, the parties agreed to re-set the rent every 25 years. Section 4 of the Ground Lease, where the re-set provision is contained, states that the rent for each 25 year interval shall be calculated as a percentage of the Property’s fair market value. In addition, the parties agreed that the Property would be valued on a hypothetical basis “as if it were unimproved”. This hypothetical (or ‘notional’) value is defined in the contract as the “land market value” (the “Land Market Value”).
[3] When the first 25 year interval expired in 1989, the parties could not agree on the Land Market Value. In particular, the parties could not agree on how the words “as if it were unimproved” factored into the calculation of the Property’s value. This resulted in an arbitration decision (the “1990 Arbitration Decision”) and a subsequent application for judicial review to the Ontario Divisional Court (Standard Life Assurance Co. v. Parc-IX Ltd. (1991), 1991 CanLII 7350 (ON SC), 3 O.R. (3d) 782 (Div. Ct.) (“Standard Life”)). Both found in favour of Parc-IX.
[4] In 2014, the second 25 year interval expired. The parties again do not agree on how the Property should be valued. In advance of the second round of arbitration, Manulife seeks a determination from this court pursuant to s. 8(2) of the Arbitration Act, 1991, S.O. 1991, c. 17, for the following relief:
• A Declaration that the interpretation of Land Market Value contained in s. 4 of the Ground Lease is res judicata and/or subject to issue estoppel between Manulife and Parc-IX as a result of the decision of the Ontario Divisional Court in Standard Life.
• Alternatively, a Declaration that the correct interpretation of the Land Market Value in the Ground Lease should be interpreted to include the highest and best possible use of the land, as if the Property were unimproved and unencumbered, including the value of the Property as if it were available for freehold condominium development as of the valuation date.
[5] Parc-IX, on the other hand, submits that the doctrines of res judicata and issue estoppel apply in its favour. Alternatively, it submits that the correct interpretation of Land Market Value in the Ground Lease must account for the legal encumbrances restricting Parc-IX’s ability to develop the Property for freehold condominium use.
[6] For the reasons below, I find that the interpretation of s. 4 of the Ground Lease is governed by the 1990 Arbitration Decision and Manulife is estopped from re-litigating it. Second, even if I were to decide the correct interpretation of the contract, I would find in favour of Parc-IX.
BACKGROUND
[7] In 1964 the Ennis family sought financing in order to develop an apartment building on the Property.[^1] That year the family company, Parc-IX, entered into a sale and 99 year commercial lease-back transaction with The Royal Trust Company who was the trustee of Manulife’s predecessor in title, the Standard Life Assurance Company of Canada.[^2] As a condition of the Ground Lease, the apartment building was later built. The genesis of the dispute between the parties stems from the rent re-set clause contained in s. 4 of the Ground Lease. It provides that rent shall be calculated as follows:
- AND YIELDING and paying therefor unto the Lessor yearly and every year during the remainder of the said term the greater of the sum of Forty Thousand, Five Hundred Dollars ($40,500.00) and
(a) for the twenty-five year period from the fifteenth day of August, 1989 to the fourteenth day of August, 2014, both days inclusive, a sum equal to 6¾ % of the fair market value of the property as if it were unimproved (hereinafter called the “land market value”) as of the fifteenth day of March, 1989;
(b) for the twenty-five year period from the fifteenth day of August, 2014 to the fourteenth day of August, 2039, both days inclusive, a sum equal to 6¾ % of the fair market value of the property as if it were unimproved (hereinafter called the “land market value”) as of the fifteenth day of March, 2014; [Emphasis Added]
[8] As can be seen, the rent is re-set every 25 years. The calculation is based on a figure equal to 6.75% of the fair market value of the Property, whereby the Property is valued on a notional basis “as if it were unimproved.” The resulting value is the Land Market Value. If the parties are unable to agree on this value, then the lease provides that the parties shall submit the dispute to arbitration.
[9] After the lease was executed, a number of provincial legislative changes occurred that sowed the seeds of the current dispute. These changes began with the Condominium Act, 1967 S.O. 1967, c. 12 which first appeared in 1967 and later the Residential Premise Rent Review Act, S.O. 1975, c. 12 of 1975 and the Rental Housing Protection Act, 1986, S.O. 1986, c. 26 of 1986.
[10] The combined effect of these three pieces of legislation created a situation where, as a result of the Ground Lease, the Property’s development potential was restricted. Because Parc-IX only holds a leasehold interest, they are prohibited from using the Property for a freehold condominium development. In addition, the emergence of municipal demolition controls and provincial rent restrictions impacted the value that Parc-IX can generate from the apartment building. Overall, the current use of the Property as an apartment is far less profitable than it would be if it were vacant land available for a freehold condominium development. The introduction of the Condominium Act, 1998, S.O. 1998, c. 19 has not materially changed this restriction.
[11] Manulife, on the other hand, as owner of the freehold interest, has no such restriction. If they owned the Property as vacant land, then they could develop a freehold condominium. If the Land Market Value in s. 4 of the Ground Lease reflected this potential, then it would dramatically increase the notional value of the Property and hence the rent that Parc-IX must pay.
[12] Manulife’s position in this dispute is that the Land Market Value must account for the potential of a freehold condominium development. Parc-IX disagrees. Their position is that the Land Market Value cannot reflect a potential that they are legally prohibited from exploiting.
[13] The words “as if it were unimproved” have been put forward by the parties as the focal point of the dispute. Their interpretation governs whether the parties must account for the aforementioned development restrictions when calculating the Property’s Land Market Value.
PRIOR PROCEEDINGS
[14] The Ground Lease first came up for renewal in 1989. Like now, the parties could not agree on the Land Market Value. Pursuant to the Ground Lease the dispute was referred to arbitration. The three member arbitration panel (the “Arbitration Panel”) was required to interpret s. 4 of the Ground Lease, particularly the words “…the fair market value of the property as if it were unimproved (herein after called the “land market value”) as of the 15th day of March, 1989” [Emphasis Added]
[15] Parc-IX argued that the Land Market Value of the Property as it existed in March 1989 was the total value of the land and apartment building. This meant that the Property’s value would be measured by its use as an apartment. Alternatively, Parc-IX submitted that if the words “as if it were unimproved” required the parties to notionally disregard the presence of the apartment building, then they were still bound to account for the fact that Parc-IX was prohibited from developing a freehold condominium as a consequence of the Ground Lease and the aforementioned legislation.
[16] Standard Life, who still owned the Property at this time, submitted that the words “as if it were unimproved” required the parties to value the Property as if it were both unimproved and unencumbered. For them, this accorded with the notional sale principle which required the Property to be valued as if it were vacant land sold on the open market. Because the highest and best possible use of the Property was a freehold condominium development, Standard Life argued that this potential should be accounted for in the Land Market Value.
[17] In September 1990 the Arbitration Panel issued its decision. They noted that the legislation had resulted in a situation that was “virtually the opposite” of what the parties might have reasonably contemplated when they entered into the Ground Lease. The apartment building had, in essence, become a burden rather than an asset given the inability to develop the Property for freehold condominium use. In interpreting the contract, however, the Arbitration Panel found that the word “unimproved” only allowed the Land Market Value to disregard the existence of the physical improvements. It did not, however, permit the parties to disregard the existence of the Ground Lease and the legal encumbrances that accompanied it. If Parc-IX was legally prohibited from exploiting the potential of a freehold condominium development, then it would be “commercially absurd” to allow Standard Life to charge rent based on this value.
[18] Since, pursuant to the terms of the parties’ arbitration agreement, the 1990 Arbitration Decision was final and binding, there was no right of appeal. Standard Life brought an application for judicial review to the Divisional Court.
[19] The Divisional Court dismissed the application for judicial review. Ultimately, their decision was based on the fact that the Arbitration Panel’s interpretation of the word “unimproved” was supported by some of the existing jurisprudence and was therefore not “patently unreasonable.”
[20] In the course of their decision, however, the Divisional Court made comments stating that they disagreed with the Arbitration Panel’s interpretation of the contract. Had the case come before them de novo, they would have interpreted the word “unimproved” to also mean “unencumbered.” This would have resulted in a Land Market Value that accounted for the potential of a freehold condominium development, regardless of whether Parc-IX was legally positioned to take advantage of this possibility.
[21] In coming to their conclusion on the correct interpretation of the contract, the Divisional Court relied on two decisions. The first was the Ontario Court of Appeal’s decision in Roywood Investments Ltd. v. London Life Insurance Co. et. al., 1972 CanLII 448 (ON CA), [1972] 1 O.R. 777, 24 D.L.R. (3d) 249 (C.A.) (“Roywood”). The second was the Ontario Supreme Court decision of Justice Osborne (as he was then) in Royal Trust Corp. of Canada v. Gardenview Properties Ltd., May 24, 1989 (unreported) (Sup. Ct.), aff’d, [1991] O.J. No. 3353, 1991 CarswellOnt 2491 (C.A.) (“Royal Trust”).
[22] First, according to the Divisional Court in Standard Life, the decision of Chief Justice Gale in Roywood confirmed that in a rent re-set situation, the parties must value the property on a notional basis as both unimproved and unencumbered. The Divisional Court stated:
We are all of the view that the interpretation argued by Standard Life is correct. The “land market value” would be based on a notional value of the land unimproved and unencumbered and would be as found by the arbitrators the “condominium value” of $13.5 million. This would result in a ground rent of 6.75 per cent per annum of $13.5 million (or $911,250) for the next 25 years of the lease commencing in August 1989 and running to 2014. This principle is established in the case of Roywood Investments Ltd. v. London Life Insurance Co., 1971 CanLII 367 (ON SC), [1971] 3 O.R. 385 (H.C.); 1972 CanLII 448 (ON CA), 24 D.L.R. (3d) 249 (C.A.). In the High Court, Keith J. dealt with the wording of the lease, which was:
Provided also and it is hereby further declared and agreed by and between the Lessors and the Lessee that the rental of the said demised lands for the second and each succeeding 21 years of the said term on the basis of the value of the land only without buildings or improvements on it.
In the Court of Appeal, Gale C.J.O. speaking for the unanimous Court of Appeal held: “We are in agreement with the substance of the order in appeal.”
[23] As can be seen, the relevant wording of the lease in Roywood was different, but similar to, the wording in this case. In particular, it also contained language stating that the property was to be valued on a notional basis as if it were “without buildings or improvements on it.” The Roywood case made its way to the Court of Appeal one more time and once again it upheld the High Court decision of Justice Keith.
[24] Second, and more importantly, the Divisional Court also considered the Supreme Court of Ontario decision of Justice Osborne in Royal Trust.
[25] The lease in Royal Trust had an identical provision as s. 4 of the Ground Lease to the case at bar. Interestingly, the arbitration panel in Royal Trust came to the same conclusion as the Arbitration Panel in this case. However, when the decision was appealed to the Supreme Court of Ontario, Justice Osborne overturned the panel and came to an opposite conclusion.
[26] Justice Osborne, in an unreported decision, held that the word “unimproved” showed that the parties intended to also disregard encumbrances impacting the value of the land:
Both parties agree that some meaning must be given to the word “unimproved” as the word is used in par. 4(a) of the lease. The parties do not agree as to the extent to which the word “unimproved” in its context in the lease should, control the valuation process.
In my view the words of the lease should be given the meaning and construction as suggested by the Applicant. It is clear to me that in concluding their deal in 1968, (a deal that was to extend for 66 years), the parties agreed to link rent to land value. Property improvements were to be ignored. This contractually established linkage bore with it the risk that fair market value would be affected by potential land use not necessarily within the contracting parties contemplation.
In my view, it is not consistent with the parties agreement to ignore condominium development potential in an attempt to determine fair market value. Both appraisers agree that potential exists. It should not be ignored as the Respondent appraiser did. As indicated, if the parties cannot agree the fair market value of the land will have to be determined by arbitration. The arbitrators will have to consider issues such as the problems to be encountered were the land to be best used for condominiums.
[27] Justice Osborne’s decision was before the Arbitration Panel in the 1990 Arbitration Decision but they chose not to follow it. When Standard Life applied for judicial review, the Divisional Court agreed with Justice Osborne’s interpretation of the contract but, as noted, did not overturn the 1990 Arbitration Decision on the basis that it was not patently unreasonable.
[28] When the Divisional Court released Standard Life, Justice Osborne’s decision in Royal Trust was under appeal. Four months later, the Ontario Court of Appeal released their decision upholding Justice Osborne’s interpretation of the rent re-set clause. In very brief reasons, the Court confirmed that the use of the word “unimproved” in the contract was correctly interpreted to mean “as if the property were vacant land without regard to its existing improvements and as if unencumbered”.
[29] As of 1991, therefore, the jurisprudence of the Ontario Court of Appeal favoured Manulife’s position. As a result of the Divisional Court’s earlier decision to dismiss Standard Life’s application for judicial review, however, the parties carried on for the next 25 years with a calculation of Land Market Value that took into account Parc-IX’s inability to develop freehold condominiums. The Property was valued as if it was unimproved – i.e. as if there was no apartment building on it – but yet encumbered by the Ground Lease and the legislative restrictions that it triggered. Had the case law ended there I would have been bound by the result in Royal Trust which dealt with an identical lease provision.
[30] The state of the law, however, did not end with those two decisions. In my respectful view, the subsequent decisions of the Supreme Court of Canada in Musqueam Indian Band v. Glass, 2000 SCC 52, [2000] 2 S.C.R. 633 (“Musqueam”) and the Court of Appeal in Board of Regents of Victoria University v. G.E. Canada Real Estate Equity, 2016 ONCA 646, 2016 CarswellOnt 13524, leave to appeal refused, 2017 CarswellOnt 3571 (S.C.C.) (“Victoria University”) have resulted in an evolution in the case law.
SHORT ANSWER
[31] As I outline below, as a result of that evolution, it is my respectful view that the correct interpretation of the words “fair market value of the property as if it were unimproved” only allows the parties to disregard the physical improvements to the Property. Having used no language showing that the parties intended to disregard legal encumbrances, I find that the Land Market Value must account for the fact that Parc-IX is legally prohibited from developing freehold condominiums by virtue of the existence of the lease and the legislative restrictions that it attracts.
[32] I am further of the view that the interpretation of the Ground Lease in the 1990 Arbitration Decision governs the parties and Manulife is estopped from re-litigating it.
[33] I will first begin my analysis with issue estoppel and later turn to the interpretation of the Ground Lease.
ISSUE 1: ISSUE ESTOPPEL
[34] Both parties submit that the doctrine of issue estoppel applies in its favour.
[35] Parc-IX submits that issue estoppel properly applies to the 1990 Arbitration Decision.
[36] Manulife, on the other hand, argues that issue estoppel applies to the Divisional Court’s comments where they provided their view regarding the correct interpretation of the contract. Manulife also relies on the doctrines of abuse of process by re-litigation and Stare Decisis.
[37] For the reasons below, I accept that issue estoppel applies to the interpretation of the contract as decided in the 1990 Arbitration Decision. I am also of the view that there are no special circumstances that would justify departing from the doctrine of issue estoppel. I reject Manulife’s submissions that issue estoppel applies to the comments made by the Divisional Court or that the doctrines of abuse of process by re-litigation or Stare Decisis apply in their favour.
The Law
[38] The three pre-conditions of issue estoppel are well established:
the same question has been decided;
the decision was final; and
the parties to the decision, or their privies, were the same in both proceedings.[^3]
[39] The goal of the doctrine is to avoid duplicative litigation, inconsistent results, unnecessary costs, and inconclusive proceedings.[^4]
Analysis
[40] The parties agree that the same question has been decided, a final decision was rendered, and the parties were the same.
[41] The fundamental disagreement between the parties relates to which decision should attract the doctrine of issue estoppel. Manulife submits that the Divisional Court rendered a final decision on the correct interpretation of the contract. Parc-IX submits that this issue was determined in the 1990 Arbitration Decision.
[42] I agree with Parc-IX.
[43] The law is settled that issue estoppel applies to decisions rendered in consensual commercial arbitration proceedings, including arbitration decisions interpreting a contract: Scotia Realty Ltd. v. Olympia & York SP Corp. (1992), 1992 CanLII 7553 (ON SC), 9 O.R. (3d) 414, 1992 CarswellOnt 470 (Gen. Div.), at para. 20; Enmax Energy Corp. v. TransAlta Generation Partnership, 2015 ABCA 383, [2016] 4 W.W.R. 631, at paras. 35, 40; and Canadian National Railway v. Ramara (Township), 2016 ONSC 7985, 2016 CarswellOnt 20388, at para. 51.
[44] In my view it is the 1990 Arbitration Decision that properly attracts the doctrine of issue estoppel.
[45] As noted, the Divisional Court dismissed the application for judicial review on the basis that the 1990 Arbitration Decision was not patently unreasonable. Its discussion, wherein it disagreed with the Arbitration Panel’s interpretation of the contract, was obiter dicta. The ratio of the Divisional Court decision was that the Arbitration Panel’s interpretation of the Ground Lease was not to be disturbed. As a result, the parties have conducted their affairs over the last 25 years in accordance with the Arbitration Panel’s interpretation of the Ground Lease.
[46] Manulife submits that the Divisional Court’s discussion concerning the correct interpretation of s. 4 of the Ground Lease was an “essential” point or “fundamental” to the decision and therefore attracts issue estoppel. I disagree. The Court’s discussion in this regard was not fundamental to its determination.
[47] In this regard, I adopt the comments made by Justice Polowin in Kaymar Rehabilitation Inc. v. Champlain Community Care Access Centre, 2010 ONSC 2248, 2010 CarswellOnt 6906, at para. 206, where she states:
However, it will not suffice if the question or issue arose collaterally or incidentally in the earlier proceedings. The question or issue out of which the estoppel is said to arise must have been fundamental to the decision arrived at in the earlier proceedings. According to the case law, only determinations which are necessary to the decision, which are fundamental to it and without which it cannot stand, will found an issue estoppel. Estoppel extends to the material facts and the conclusions of law or of mixed fact and law that were necessarily, even if not explicitly, determined in the earlier proceeding. Further, as noted by Donald J. Lange, in the text The Doctrine of Res Judicata in Canada, 2nd ed. (Markham: Butterworth, 2004), obiter dicta is not fundamental and may not create an estoppel.
[48] Manulife, in support of its position, also relies on two cases: Salasel v. Cuthbertson, 2015 ONCA 115, 329 O.A.C. 324 (“Salasel”) and Clayton v. Garrett, 1995 CanLII 1793 (BC CA), [1995] 7 W.W.R 109, 1995 CarswellBC 264 (B.C.C.A.) (“Clayton”).
[49] In my view, both are unhelpful to Manulife as they are entirely distinguishable. There is nothing in Salasel or Clayton that assists the court in determining whether a decision made under the patent unreasonableness standard of review attracts the operation of issue estoppel.
[50] Rather, the Supreme Court of Canada held in Ryan v. Law Society (New Brunswick), 2003 SCC 20, [2003] 1 S.C.R. 247 (“Ryan”), that a court undertaking a ‘reasonableness’ analysis should not ask itself what the correct decision should have been. At para. 50 of Ryan, Justice Iacobucci explained:
At the outset it is helpful to contrast judicial review according to the standard of reasonableness with the fundamentally different process of reviewing a decision for correctness. When undertaking a correctness review, the court may undertake its own reasoning process to arrive at the result it judges correct. In contrast, when deciding whether an administrative action was unreasonable, a court should not at any point ask itself what the correct decision would have been. Applying the standard of reasonableness gives effect to the legislative intention that a specialized body will have the primary responsibility of deciding the issue according to its own process and for its own reasons. The standard of reasonableness does not imply that a decision-maker is merely afforded a "margin of error" around what the court believes is the correct result. [Emphasis Added]
[51] The comments made by the Divisional Court in Standard Life were not findings required to reach the ultimate outcome. The fact that the Court stated that they would have adopted a different interpretation had the issue been brought before them de novo was not a fundamental or necessary aspect of their ultimate finding. It therefore cannot form the basis of issue estoppel (see also: Novaquest Finishing Inc. v. Abdoulrab, 2009 ONCA 491, 251 O.A.C. 28, at paras. 43-47; Canadian Westinghouse Co. v. Draftsmen's Assn. of Ontario, Local 164 (1961), 1961 CanLII 135 (ON CA), 30 D.L.R. (2d) 673, [1962] O.R. 17 (C.A.); and Huronview Home for the Aged v. S.E.I.U., Local 210 (2000), 2000 CanLII 16893 (ON CA), 144 O.A.C. 308, 50 O.R. (3d) 766 (C.A.)).
[52] To find against Parc-IX on this issue, in my view, would also result in a fundamental unfairness. Notwithstanding the obiter comments by the Divisional Court, Parc-IX was successful in having the application for judicial review dismissed. It had no reason to, and could not have, appealed the Divisional Court decision to the Court of Appeal. Standard Life, for whatever reason, chose not to pursue an appeal.
[53] In these circumstances a finding that the parties were bound by the Divisional Court’s obiter comments would permit Manulife to do indirectly what it was not able to do directly. It would also run contrary to the agreement struck by parties that was to have them bound by the provisions of the Ground Lease. This included an arbitration clause that resulted in the 1990 Arbitration Decision, which resulted in them organizing their affairs over the last 25 years in accordance with that decision.
[54] Last, for the sake completeness, I will deal with a number of other arguments raised by Manulife as follows:
• The legal test employed by the Divisional Court in Standard Life was “patent unreasonableness”. Manulife submits that that standard of review has eroded over time as a result of the decision of the Supreme Court of Canada in Dunsmuir v. New Brunswick, 2008 SCC 9, [2008] 1 S.C.R. 190 (“Dunsmuir”) and this is a fact that should be taken into consideration in exercising my discretion. I disagree. In Dunsmuir, at para. 41, the court stated that “notwithstanding the increased clarity that Ryan brought to the issue and the theoretical differences between the standards of patent unreasonableness and reasonableness simpliciter, a review of the cases reveals that any actual difference between them in terms of their operation appears to be illusory.”
It is difficult, therefore, to conclude that the Divisional Court would have come to a different conclusion had it had the benefit of the later decision in Dunsmuir. Second, in any event, a reading of the Divisional Court decision discloses that they expressly considered whether there were two reasonable interpretations available and, if that is the case, a suggestion of a reviewable error of law in a consensual arbitration disappears. The Divisional Court ultimately concluded that the Arbitration Panel’s decision was not “unreasonable”. This conclusion renders any analysis of Dunsmuir unnecessary.
• Manulife also relies upon the doctrine of abuse of process by re-litigation. My findings above apply equally to this argument. While I appreciate that the doctrine of abuse of process can preclude re-litigation in circumstances where the strict requirements of issue estoppel are not met, I do not accept Manulife’s argument that the doctrine applies against Parc-IX. As mentioned above, the issue which Manulife claims Parc-IX is attempting to re-litigate – the correct interpretation of the contract – was not before the Divisional Court. Furthermore, and once again, Parc-IX was successful in the Divisional Court.
• Subsequent to the hearing of this application, I requested additional written submissions from counsel on one discrete issue. I wanted to know whether the 1991 Standard Life decision could support a finding of issue estoppel on the correct interpretation of the contract, given that the court reviewed the matter using the standard of patent unreasonableness. For the reasons just stated, I find that it cannot.
In providing those submissions, Manulife also introduced for the first time, two additional arguments that it did not raise at the original hearing of the application.
As a result, I met with counsel and scheduled a subsequent hearing for April 18, 2018 to deal with the additional arguments.
In its first argument Manulife submits that Parc-IX cannot even raise issue estoppel on its own behalf. It submits that because the Notice of Application only raised the Divisional Court decision, Parc-IX is prohibited from raising issue estoppel as it arises from the 1990 Arbitration Decision.
I do not accept Manulife’s submission for a number of reasons. First, in my view, it is purely procedural. Manulife had clear notice that Parc-IX would be raising the argument, at the latest from the date that Parc-IX delivered its factum, and it was not a surprise at the hearing on October 31, 2017 that Parc-IX did so. Manulife did not object to this argument at the hearing but only raised it later in a non-responsive submission to my request for specific additional written submissions.
In these circumstances I do not accept that Manulife did not consent to Parc-IX properly raising the issue before the court as per s. 8(2) of the Arbitration Act, 1991, S.O. 1991, c. 17.
Second, I do not accept Manulife’s argument that I lack jurisdiction to hear Parc-IX’s argument on issue estoppel. Manulife’s own application record, at para. 1(d), allows me to grant “other relief”. Given the above I intend to do so.
Third, Parc-IX never waived or released its rights or arguments in respect to the interpretation of s. 4 of the Ground Lease. Last, I do not accept Manulife’s submission that it has suffered any form of prejudice because of Parc-IX’s issue estoppel argument. It is perplexing that Manulife would only discover this prejudice after it fully prepared for and argued the issue months ago. As noted, it was not objected to at the hearing. Surely, if true prejudice existed at the time of the initial hearing it would have been obvious.
Even if these reasons are incorrect, I view Manulife’s attempt to craft the proceedings in a manner that restricts Parc-IX’s ability to raise issue estoppel as an abuse of process. Counsel for Manulife has made no secret of their intention to avoid the impact of the 1990 Arbitration Decision by only raising the Divisional Court’s decision in their Notice of Application. In doing so, it is Manulife’s hope the court will be prohibited from taking into account the fact that the 1990 Arbitration Decision rendered a final decision on the correct interpretation of the contract, a decision that was subsequently upheld on judicial review. I see this as an appropriate circumstances to exercise this court’s inherent jurisdiction to control its own process and prevent the re-litigation of an issue already determined (see: Arbour J. in Toronto (City) v. C.U.P.E., Local 79, 2003 SCC 63, [2003] 3 S.C.R. 77, at paras. 35-37).
• For the first time in the written submissions, Manulife also made unrequested submissions arguing that the doctrine of Stare Decisis applied to the interpretation of the Ground Lease. I also reject this submission.
As will be discussed when I deal with the Second Issue, I do not accept that the law was definitively settled by the Court of Appeal in Royal Trust given the evolution of the case law in Musqueam and Victoria University, cited above.
Special Circumstances
[55] Where the criteria of issue estoppel are met, the court must then decide whether the interests of justice will be served by enforcing its operation.[^5] It is my view that special circumstances do not exist in this case.
[56] First, in accordance with the reasons above, I do not see any unfairness to Manulife by maintaining the 1990 Arbitration Decision, as upheld by the Divisional Court.
[57] Second, as discussed below, I find that there has been no intervening change in the law in Manulife’s favour that would justify re-opening the 1990 Arbitration Decision.
[58] Accordingly, there are no special circumstances.
ISSUE 2: THE CORRECT INTERPRETATION OF SECTION 4 OF THE GROUND LEASE
[59] The second question involves the correct interpretation of the words in the Ground Lease “fair market value of the property as if it were unimproved”. This calculation determines the Land Market Value and hence the rent owed by Parc-IX under the Ground Lease.
[60] Manulife submits that the interpretation given to the word “unimproved” in Royal Trust is binding on me. This, in their view, mandates the Property to be valued as both unimproved and unencumbered. The result would be a Land Market Value that disregards the existence of the Ground Lease and instead values the land at its highest and best possible use, including a freehold condominium development.
[61] Parc-IX concedes that the Ground Lease permits the land to be valued as if it were hypothetically free of improvements. They submit, however, that the word “unimproved” does not permit the parties to also disregard legal encumbrances impacting the value of the land. Rather, Parc-IX argues that the interpretation of “unimproved” set out in Royal Trust is not binding on me and, in any event, the case law has evolved as a result of the decisions in Musqueam and Victoria University. These cases, which Parc-IX argues are binding upon me, mandate an interpretation of Land Market Value which accounts for the fact that Parc-IX is legally prohibited from developing freehold condominiums by virtue of the existence of the lease and the legislative restrictions that it attracts.
Contractual Interpretation
[62] The parties also disagree as to the applicable rules of contractual interpretation.
[63] Manulife submits that the rent re-set clause in s. 4 is a standard-form provision that is used across Manulife’s commercial lease portfolio. According to the affidavit of their Leasing Manager James Dow, commercial landlords across the industry routinely use these identical words and have arranged their affairs over the past 25 years on the assumption that Royal Trust and the obiter dicta of the Divisional Court in Standard Life would be upheld as their correct interpretation. With many rent re-set intervals expiring soon, the entire industry will be negatively impacted if the court now deviates from this interpretation. Their position is that the interpretation of the words “as if it were unimproved” is a question of law that must be interpreted in line with the precedent established by Royal Trust and Standard Life.
[64] Manulife, therefore, submits that the court should not engage in any meaningful investigation into the factual matrix and merely has to ensure that the words are given their correct interpretation.
[65] It relies upon the decision of Justice Wagner (as he then was) in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23 (“Ledcor”) where, at para. 4, he stated:
Where, like here, the appeal involves the interpretation of a standard form contract, the interpretation at issue is of precedential value, and there is no meaningful factual matrix that is specific to the particular parties to assist the interpretation process, this interpretation is better characterized as a question of law subject to correctness review.
[66] Manulife takes the position that, based on the above, the court must be concerned with ensuring that s. 4 of the Ground Lease is interpreted correctly in accordance the meaning given to it in past precedent.
[67] Parc-IX submits that there is no evidence supporting Manulife’s position that the rent re-set clause was, or has ever become, a standard-form provision. Furthermore, they submit that there is no evidence that the commercial leasing industry has arranged their affairs on the basis of the Royal Trust decision or the Divisional Court’s obiter dicta. Parc-IX argues that I ought to rely upon affidavit of Parc-IX director George Gantcheff. They have also submitted evidence through Andrew Ferancik showing that the Property is encumbered by a number of municipal and provincial land-use development restrictions. Their position is that the court must look for an interpretation that accords with the intention of the parties as revealed by the plain, literal and ordinary meaning of the words considered in the context of the contract as a whole. If there is any remaining ambiguity, Parc-IX argues that I must interpret the contract in a manner that leads to the most commercially reasonable outcome.
[68] It is worth noting that Manulife objects to the aforementioned evidence of Mr. Gantcheff. They assert, primarily, that the evidence is inadmissible hearsay made by the deceased declarant Mr. Ennis. I disagree. First, most of this evidence is reproduced in the 1990 Arbitration Decision. Second, it is settled law that Parc-IX is able to rely upon the statements of a deceased person and it boils down to a question of weight. Nothing in the statements contributed by Mr. Ennis is surprising or, based on the 1990 Arbitration Decision, particularly controversial.
[69] I accept Parc-IX’s submission that Manulife has failed to establish that the Ground Lease constitutes a standard-form contract. There is nothing in Mr. Dow’s affidavit showing that the clause was received by Parc-IX in the 1960’s on a take-it-or-leave-it basis. Nor is the there any evidence, other than Mr. Dow’s bald statement, suggesting that the clause has become standard form. Rather, the cases submitted by the parties show that the wording of rent re-set clauses vary considerably. As just one example, Manulife submitted a range of cases showing how parties may choose a number of different variables and benchmarks in determining how to measure fair market value. All of these show how rent re-set clauses are the product of negotiation and tailored to the specific parties and property in issue. I further accept Parc-IX’s submission that I ought to determine the intention of the parties, as revealed by the plain, literal and ordinary meaning of the words considered in the context of the contract as a whole. In this regard I adopt the finding in Creston Moly Corp. v. Sattva Capital Corp, 2014 SCC 53, [2014] 2 S.C.R. 633 (“Sattva”), where Justice Rothstein re-stated this principle at para. 47 as:
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. [Citations Omitted]
[70] The purpose of this exercise is to find a construction which gives expression to, rather than defeats, the overall objective of the parties entering into the contract.
[71] In conducting the analysis of the Ground Lease it is my view that I ought to follow the reasoning in Sattva. That being said, I have also considered s. 4 of the Ground Lease as if it were a standard-form contract reviewable on a correctness standard. Either way, it is my view that the correct interpretation is the one advanced by Parc-IX.
The Correct Interpretation - Areas of Agreement
[72] The parties agree on two areas. First, they agree that the rent re-set provision in s. 4 of the Ground Lease is designed to link rent to the changing value of the underlying Property. This function was confirmed in Musqueam, at para. 40, where Justice Gonthier stated for the majority that rent re-set provisions carry this economic rationale.
[73] Second, the parties also agree that the words “value of the property” in s. 4 refer to the landlord’s freehold interest. While an older line of cases suggested that value could be measured in relation to the tenant’s leasehold interest (i.e. Parc-IX’s development potential), this area of the law was settled by Justice Gonthier at paras. 37 and 38 of Musqueam.
Areas of Disagreement
[74] The parties disagree over the controlling authority governing the correct interpretation of “unimproved.”
[75] As noted, Manulife submits that I am bound by the decision in Royal Trust which dealt with an identical re-set clause.
[76] It submits that later case law, Musqueam and Victoria University, is entirely distinguishable. For ease of reference I have included as Appendix A the re-set clauses at issue in this case, Musqueam and Victoria University.
[77] In a nutshell, Manulife submits that Musqueam is entirely distinguishable because it dealt with reserve land as opposed to commercial real estate. It further submits that Victoria University is distinguishable since the rent re-set clause in that case did not use the words “as if it were unimproved” which, admittedly, are of importance in this case. As such, they submit that Royal Trust remains the binding authority.
[78] Parc-IX agrees that the word “unimproved” allows for the Land Market Value to be calculated on a notional basis as if the land were free of improvements. It disagrees, however, that the word permits the land to be valued as if it were unencumbered. It submits that Musqueam and Victoria University are not meaningfully distinguishable from the case at bar and have superseded Royal Trust. Their position is that is that the Land Market Value cannot be premised on a use (freehold condominium development) that is not legally permitted.
[79] I agree with Parc-IX.
[80] In order to better understand the position of the parties a brief review of the case law, as it pertains to the interpretation of s. 4 of the Ground Lease is in order.
[81] Manulife’s strongest argument is that in Royal Trust, the Ontario Court of Appeal upheld Justice Osborne’s handwritten endorsement, holding that “unimproved” may be defined as meaning the: “fair market value as if the property were vacant land without regard to its existing improvements and as if unencumbered.” [Emphasis Added]
[82] For reasons of which I am uncertain both the Court of Appeal in Royal Trust and the Divisional Court in Standard Life inserted the word “unencumbered” into the equation so that in both decisions the fair market value was based on a notional value of the land that was not only unimproved, but also unencumbered.
[83] I cannot locate any explanation in the case law as to how or why this occurred.
[84] Interestingly, Justice Steele identified this incongruity in the definition of “unimproved” when he dealt with the first rent re-set event in Revenue Properties Co. v. Victoria University (1993), 1993 CanLII 9432 (ON SCDC), 101 D.L.R. (4th) 172, 62 O.A.C. 351 (Div. Ct.) at para. 18 (“Revenue Properties #1”).[^6] At para. 18, Justice Steele wrote:
In Roywood and Gardenview [Royal Trust] the Court of Appeal held that words such as “unimproved” or “without buildings or improvements” included “unencumbered”. I am bound by those decisions even if I have some difficulty understanding them. In my opinion an encumbrance is a legal interest in the land that diminishes its value as opposed to physical buildings placed upon the land or physical improvements made to the land.
In any event the present leases do not use any of the words unencumbered or vacant or unimproved, they merely refer to the lands. Therefore I am of the opinion that none of the above cases are directly applicable to the present situation. The overall intention found in the words of the leases must be considered.
[85] I presume that Justice Steele shared my uncertainty given the fact that the terms unimproved and unencumbered mean two very different things.
[86] According to Black’s Law Dictionary, 6th ed. (St. Paul: West Publishing Co., 1990), “improvement” is defined in reference to a physical modification:
A valuable addition made to property (usually real estate) or an amelioration in its condition, amounting to more than mere repairs or replacement, costing labour or capital, and intended to enhance its value, beauty or utility or to adapt it for new or further purposes. Generally has reference to buildings, but may also include any permanent structure or other development, such as a street, sidewalks, sewers, utilities, etc. [Emphasis Added]
[87] “Encumbrance,” on the other hand, is defined by Black’s Law Dictionary as a legal interest:
Any right to, or interest in, land which may subsist in another to diminution of its value but consistent with the passing of the fee by conveyance.
[88] A property can be unimproved yet encumbered. Conversely, it may be improved and unencumbered. The two words are not synonymous.
[89] Of further interest is the fact that the case law demonstrates that commercial lease agreements routinely employ language that distinguishes between improvements and encumbrances.
[90] For example, in Montreal Trust Company v. Spendthrift Holdings Limited, [1984] O.J. No. 296 (H.C.) (“Montreal”) the contract used language stating that the fair market value was to be determined based on: “the value of the land exclusive of buildings or other improvements and as if free and unencumbered.” [Emphasis Added]
[91] This distinction was also the deciding factor in the 1990 Arbitration Decision involving the parties in the case at bar. After reviewing Montreal as well as a number of other cases, the Arbitration Panel found that express language was used in several cases where the parties intended to disregard encumbrances. In Ruth v. SZB Corporation (1956), 153 N.Y.S. 2d 163 (N.Y. Sup. Ct.), aff’d (1956), 158 N.Y.S. 2d 754 (N.Y. Sup. Ct. – App. Div.) (“Ruth”), a case reviewed by the Arbitration Panel, the rent re-set clause included the words “unimproved” but also “free of lease and unencumbered.” The Arbitration Panel concluded at pp. 18-19:
We accept that as a valid point of distinction. As we indicated above, we accept that it is possible for landlords and tenants to draft documents which would require them to ignore some aspects of market reality existing as of the valuation date. However, we do not find that the document we have before us is such a document in relation to the relevant legislation.
[92] This was the distinction upheld by the Divisional Court in Standard Life as not being patently unreasonable.
[93] Perhaps it had something to do with the fact that prior to the introduction of the condominium legislation the fact that a lease could attract legal restrictions did not exist and such an expansion of the wording was inconsequential. This position was not argued by the parties and I do not consider it here. In any event, Ruth reveals that the distinction between encumbrances and improvements was already appearing in commercial lease agreements by the time that the Ground Lease was executed in 1964.
[94] Notwithstanding my uncertainty and the brevity of the decisions of Justice Osborne and the Court of Appeal in Royal Trust, as noted, I am of the view that Royal Trust would be binding upon me were it not for the later decisions of Musqueam and Victoria University.
The Notional Sale Principle and Evolution of the Law Post Royal Trust
[95] In order to explain my finding that there has been an evolution in the law a review of Musqueam and Victoria University is in order.
[96] In Victoria University the leases commenced in 1960. They were entered into between the owner of the property, the Board of Regents of Victoria University (“Victoria University”) and predecessors of a number of tenants including Revenue Properties Company Limited (“Revenue Properties”).
[97] The parties were unable to agree on rent for the re-set interval commencing in 1990. This resulted in an arbitration award in 1991 in which the majority of the panel found that the land was to be valued as vacant, unencumbered by the lease and not subject to statutes affecting the land or the buildings (a decision favourable to the landlord). The matter was appealed to the Divisional Court. Justice Steele, in his majority decision in Revenue Properties #1, overturned the arbitration decision and held that legal encumbrances arising from the lease agreement had to be accounted for in the calculation of fair market value. Justice Steele distinguished his decision from the Court of Appeal’s decision in Royal Trust on the basis that the wording of the lease in Revenue Properties #1 did not include the word “unimproved”.
[98] Prior to the advent of the second re-set dealt with in Revenue Properties #2, Musqueam came before the Supreme Court of Canada. By way of background, the Musqueam Indian Band, in 1960, surrendered approximately 40 acres of reserve land to the Crown for the purposes of leasing. The Crown subsequently entered into an agreement with a company unrelated to the Band which serviced and subdivided the land. The Crown then provided the company with an individual lease for each lot with a term of 99 years. The company thereafter signed leases with individuals who built houses on the lots.
[99] The 99 year leases had a rent re-set clause which can be seen at Appendix A. Importantly, the leases in Musqueam stated that for the purpose of the re-set, the parties “shall assume that” the lands are “unimproved lands”, although, admittedly, it dealt with reserve land and not commercial properties as is the case here and in Revenue Properties #1 and Royal Trust.
[100] In analyzing how the rent should be calculated in Musqueam, Justice Gonthier, writing for the majority, held that legal restrictions impacting the value of the landlord’s interest must be taken into account when determining the value of the land (see: paras. 45-49).
[101] Musqueam, therefore, does not support a construction of “unimproved” as also showing an intention to disregard legal encumbrances impacting the value of the land. Rather, the majority decision concluded that the land valuation process must account for and “accept the realities of the market” (see: para. 44).
[102] In my view, Musqueam has therefore superseded Royal Trust with respect to the correct interpretation of the words “unimproved.”
Is the word “unencumbered” implied?
[103] After the Musqueam decision was released the second rent re-set occurred between Revenue Properties and Victory University. The new arbitration panel dealing with the second rent re-set refused to follow the decision of Justice Steele in Revenue Properties #1. The panel instead held that encumbrances impacting the value of the land should be disregarded and the potential for freehold condominium development should be included in the assessment of the property’s fair market value. This decision was appealed to Justice Wilton-Siegel who agreed with the arbitration decision’s interpretation of the contract, but found that the arbitrators were nonetheless bound to follow the earlier decision of Justice Steele based on the doctrine issue estoppel: Board of Regents of Victoria University v. G.E. Canada Real Estate Equity, 2014 ONSC 7435, 2014 CarswellOnt 19029 (“Revenue Properties #2”).
[104] At the time he rendered his decision Justice Wilton-Siegel had the benefit of Musqueam, which he distinguished. Instead, Justice Wilton-Siegel shared a similar view to the Divisional Court in Standard Life and the Court of Appeal in Royal Trust. At paras. 165-166 he explained why the word “unencumbered” should be implied into the lease’s rent re-set provisions:
The fair market value of land subject to a lease for purposes of rent re-set arrangements, i.e. the value of the capital asset, is the value of the land without regard to the existence of a lease. […]
Given that the existence of any long-term lease is to be disregarded in approaching the notional sale, I see no basis for doing otherwise when considering the impact of applicable land use legislation on the market value of a property. In addition to being inconsistent, the fair market value of lands is determined by reference to its highest and best use. In the case of lands upon which a freehold condominium project can be developed, the highest and best use is such a project.
[105] Like Royal Trust and the Divisional Court’s comments in Standard Life, Justice Wilton-Siegel’s analysis relied on the notional sale principle. This is the idea that the underlying purpose of a rent re-set clause is to allow the landlord to charge rent based on a hypothetical property value equivalent to what the landlord could receive if they sold the property as vacant land on the open market. These authorities all state that rent re-set provisions should proceed on the implied understanding that the property is valued as if it were unencumbered. If the parties intend to deviate from this principle, then the onus is on them to include express language to that effect.
[106] Despite the significant weight of these authorities it is my view, given the decision in Musqueam and the subsequent appeal decision in Victoria University, that they do not represent the current state of the law.
[107] First, when the majority in Musqueam adopted the notional sale principle, the question in front of them was whether fair market value was measured in relation to the tenant’s leasehold interest or the lessor’s freehold interest. At para. 41, Justice Gonthier expressly differentiated that question from the issue at bar:
Valuing the Musqueam land at its freehold value is consistent with an interpretation of the leases that sees the rent review clause as an attempt to generate an annual fair market return on a capital asset. The freehold value better approximates this return than does the leasehold value. But this reasoning does not lead to the Federal Court of Appeal’s conclusion that it must be the freehold value of land outside the reserve that should be used to determine the rent. On the contrary, the capital asset here is reserve land surrendered for leasing, not land surrendered for sale. The nature of the capital asset at issue is reserve land. [Emphasis Added]
[108] The Supreme Court accepted that even though the valuation process begins with the landlord’s freehold interest, it must still consider legal encumbrances impacting the value of the land.
[109] The same argument was again put to the Ontario Court of Appeal in Victoria University. In that case, the landlord argued that Musqueam had effectively superseded Justice Steele’s decision in Revenue Properties #1. The landlord argued that if parties wanted to value the property as unencumbered, then they ought to have included language to that effect. Because the lease in their case was entirely silent, the word “unencumbered” ought to have been implied. The parties would then be permitted to disregard the existence of the lease and value the property as if it were available for freehold condominium development.
[110] The tenant, Revenue Properties, argued the opposite. They argued that the holding in Musqueam was consistent with Justice Steele’s holding in Revenue Properties #1: If parties intend to disregard the impact of legal encumbrances affecting the value of the land, then they must include express language to that effect. If the lease is silent, then the default position is to account for encumbrances impacting the land’s fair market value.
[111] The Court of Appeal dismissed the landlord’s appeal and found in favour of Revenue Properties. Justice Pepall, writing for the court, explained the current state of the law as she saw it arising from Musqueam. At para. 40, Justice Pepall stated:
In conclusion, Musqueam Indian Band establishes that, absent a contrary intention in the lease: (a) the word "land" refers to the freehold or fee simple interest in the lands at issue; (b) the word "value" means the exchange value of the land, calculated by determining the "highest and best use" possible; and (c) fair market value should reflect legal restrictions on the land but should ignore any particular restrictions imposed by the lease itself. [Emphasis Added]
[112] I interpret this as saying: if the parties wish to embark on a hypothetical valuation exercise that departs from the legal realities of the marketplace, then they must include express words in the contract to make that intention clear. They are not otherwise free to ignore the nature of the capital asset being valued.
[113] As such, when a lease is silent, the controlling authority continues to be the line of cases starting with the Divisional Court’s decision in Revenue Properties #1. In that case, Justice Steele found that development restrictions triggered by the existence of the lease must be accounted for when determining the property’s fair market value. At para. 29:
Whether or not any building was erected on the lands there was a lease. In my opinion the Condominium Act was an encumbrance upon the lands. The owner should not be entitled to increased value of the lands as a result of the Condominium Act when in fact it does not apply to its lands as a result of the very lease that it entered into. Without clear language to the contrary saying that the lands were to be deemed to be unencumbered it is the fair market value of the lands subject to legal encumbrances applicable to the lands that was to be determined. [Emphasis Added]
[114] In the concurring decision, Justice Adams elaborated on this point at para. 51:
… legislation which affects fair market value as a result of the very nature of the agreement entered into between the parties must be given consideration absent language to the contrary. In this latter regard, any value associated with the potential development of lands pursuant to the Condominium Act which, however, precludes such development of leased or demised lands ought not be taken into account in the assessment of fair market value without clear language to that effect. … It would be unreasonable to assume rent was intended to be based on a value the tenant could never exploit due to the very existence of the lease. [Emphasis Added]
[115] Even though Justice Pepall appreciated that Musqueam was dealing with reserve land, she nevertheless held that the same principle applied to the commercial lands in the case before her. Again relying on a passage from Musqueam, she stated at para. 127 of Victoria University:
The FMV [fair market value] assessment is to consider the application of land use legislation. The cases that speak of the valuation being done without reference to the lease (or the restricted use found in a lease) refer to the terms of the lease and not to the existence of a lease. The fact of the matter is that given the presence of the leases, the Landlord was unable to develop freehold condominiums. This limits the highest and best use that was “legally permissible, physically possible, financially feasible, and maximally productive” of which Gonthier J. wrote in Musqueam Indian Band. The issue in both Revenue Properties #1 and the Majority Award is not what use the Tenants could put the lands to as the Appeal Judge interpreted Revenue Properties #1 (and particularly Adams J.’s commentary), but whether the condominium statutes imposed any restrictions on land use given the fact of the long-term leases. In this sense, it would be wholly unfair for the Landlord to benefit from a value divorced from the basis of the landlord and tenant relationship and the nature of the precise agreement that it had entered into with the Tenants. This analysis does not extend to include a consideration of the terms of the leases, simply the fact of the leases. [Emphasis Added]
[116] Simply put: fair market value (or in the case at bar, Land Market Value) must account for legal encumbrances impacting the value of the land. Interestingly, both Roywood and Royal Trust were before the Court of Appeal in Victoria University and Justice Pepall chose not to refer to them in her reasons (see: 2106 CarsPleadingW 25170).
[117] With respect to the interpretation in Revenue Properties #2 wherein the interpretation of the contract driven by the notional sale principle, Justice Pepall explained at para. 133:
Without definitively deciding the issue, I would not necessarily endorse the Appeal Judge’s de novo interpretation. As I have discussed, in my view, Musqueam Indian Band and the notional sale principle articulated therein do not require that we ignore the nature of the asset that is being valued. In this case, the nature of that asset is a freehold estate that is subject to a lease. There is a live issue as to whether the issue is examined from the Landlord’s or the Tenants’ statutorily restricted use. However, here this distinction made no difference as neither could construct freehold condominiums on lands subject to a lease. [Emphasis Added]
Conclusion
[118] It is with considerable trepidation that I stray from the decisions in Roywood, Royal Trust, and Revenue Properties #2.
[119] It is my respectful view, however, that these decisions have been superseded by Musqueam and Victoria University.
[120] In this regard, I accept Parc-IX’s submission that there has been an evolution in the case law regarding the correct interpretation of the word “unimproved” since Royal Trust was decided. In particular, Musqueam held that a lease using the word “unimproved” must still account for legal encumbrances impacting the fair market value of the land.
[121] I also do not accept Manulife’s argument that the word “unencumbered” can be implied into the lease. What makes Musqueam and Victoria University similar to the case at bar is that they both dealt with lease agreements that contained no language indicating how the parties intended to account for legal encumbrances. While I accept that the nature of the land was different in each case, I find that the overarching principle from each decision was the same.
[122] In particular, the rule emerging from this line of cases is that absent language to the contrary, legal encumbrances triggered as a result of the very nature of the agreement entered into between the parties must be accounted for in the calculation of fair market value. In Musqueam, it was the land’s character as reserve land. In Victoria University, it was the condominium legislation triggered as a result of the lease. In my view, the rule therefore is: if parties to a rent re-set situation wish to disregard an aspect of market reality when valuing the property, then the contract must expressly provide for this.
[123] In this case, the parties chose to disregard improvements. With this comes a set of consequences for Parc-IX beyond the scope of this application. But the parties did not use any language showing that they intended to disregard encumbrances. In my view, this must be interpreted as meaning that the parties did not intend to ignore the impact of development restrictions that accompany the existence of the Ground Lease.
[124] If there is any further ambiguity regarding the interpretation of the word “unimproved” I find that Parc-IX’s interpretation is the most commercially reasonable outcome of the two available options. In my respectful view, it would be wholly unfair for the landlord to benefit from a value divorced from the basis of the underlying landlord and tenant relationship. If the Property were valued as Manulife wanted, it would likely result in a rent that is entirely disproportionate to the existing lease agreement and untenable for Parc-IX. In my view, I cannot find for an interpretation of the re-set provision that could potentially overwhelm the rest of the agreement, undermine the relationship, and potentially lead to its termination. This is not, in my view, an interpretation of s. 4 that fits with the larger landlord-tenant relationship established by the contract as whole.
[125] I accept that if Parc-IX had agreed to land-use restrictions or encumbrances as a condition of the Ground Lease then the parties would not have to account for these. But I do not accept that the lease itself, which governs the relationship between the parties and results in development restrictions can be ignored. The fact of the matter is that the land is encumbered by a lease. It is this lease that has spawned the rent re-set provision. In my view, any interpretation of s. 4 of the Ground lease must take into account the fact that it operates within a larger landlord-tenant relationship.
[126] It is therefore my view that the correct interpretation of s. 4 of the Ground Lease should be on the basis that the Property is unimproved but subject to the restrictions brought forth as a result of the existence of the lease. I further find that this is an interpretation in line with a plain, literal and ordinary reading of the words, as well as one that promotes the most commercially reasonable outcome.
Disposition
[127] Based on the foregoing I dismiss Manulife’s application and find that the doctrine of issue estoppel applies in favour of Parc-IX and that the interpretation of the Ground Lease contained in the 1990 Arbitration Decision governs the parties.
[128] If the parties cannot agree on the issue of costs they may submit written submissions to me. Parc-IX is to provide their submissions, not to exceed five pages, excluding the bill of cost within 21 days. Manulife shall respond within 10 days thereafter.
Mr. Justice T. McEwen
Released: June 15, 2018
APPENDIX “A”
The Manufacturers Life Insurance Company v. Parc-IX Limited
- AND YIELDING and paying therefor unto the Lessor yearly and every year during the remainder of the said term the greater of the sum of Forty Thousand, Five Hundred Dollars ($40,500.00) and
(a) for the twenty-five year period from the fifteenth day of August, 1989 to the fourteenth day of August, 2014, both days inclusive, a sum equal to 6¾ % of the fair market value of the property as if it were unimproved (hereinafter called the “land market value”) as of the fifteenth day of March, 1989;
(b) for the twenty-five year period from the fifteenth day of August, 2014 to the fourteenth day of August, 2039, both days inclusive, a sum equal to 6¾ % of the fair market value of the property as if it were unimproved (hereinafter called the “land market value”) as of the fifteenth day of March, 2014;
Musqueam Indian Band v. Glass, 2000 SCC 52, [2000] 2 S.C.R. 633
2 (2) The rent for each year of the three succeeding twenty (20) year periods and for the final nine (9) period of the term hereof, shall be a fair rent for the land negotiated immediately before the commencement of each such period. In conducting such negotiations the parties shall assume that, at the time of such negotiations, the lands are
(a) unimproved lands in the same state as they were on the date of this agreement;
(b) lands to which there is public access;
(c) lands in a subdivided area, and
(d) land which is zoned for single-family residential use,
(4) An annual clear total rental which represents six percent (6%) of the current land value, calculated at the time of renegotiation, and on the basis set out in subparagraph (2) hereof, shall be regarded as a “fair rent” for the purposes thereof.
Victoria University v. GE Canada Real Estate Equity, 2016 ONCA 646, 2016 CarswellOnt 13524
WITNESSETH that in consideration of the rents, covenant and agreements hereinafter reserved and contained on the part of the Lessee to be paid, observed and performed, the Lessor has demised and leased, and by these presents both demise and lease under the Lessee, its successors and assigns all that certain parcel of land more particularly described in Part I of the Schedule hereto and forming part hereof, together with and subject to the rights-of-way described in Part II of the Schedule hereto, the said parcel of land together with and subject to the rights-of-way being hereinafter called the “demised lands”.
For each of the three succeeding periods of twenty years and the last period of ten years during the term of this Lease, in the event that the Lessor and Lessee cannot, prior to six (6) months before the end of the previous thirty (30), twenty (20), twenty (20) or twenty (20) year periods, as the case may be, agree in writing upon a new rental, the amount of the new annual rental shall be the greater of the rental for the current thirty (30), twenty (20), twenty (20) or twenty (20) year period then ending, or the amount fixed after arbitration, as hereinafter stated. The provisions of Clause 1 of Paragraph VI . . . shall apply to the appointment of an arbitrator or arbitrators who shall thereupon, within the six (6) months’ period aforesaid, appraise and determine the fair market value of the demised lands. Six percent (6%) of such evaluation of fair market value, or the same annual rental as for the current period, whichever is greater, shall be payable in equal monthly installments in advance as the annual rental for the next succeeding period.
[^1]: 1990 Arbitration Decision, page 1. [^2]: Later in 1964 Standard Life acquired The Royal Trust Company’s interest in the Property. In 2015 the Property was transferred from Standard Life to Manulife. [^3]: Danyluk v. Ainsworth Technologies Inc., 2001 SCC 44, [2001] 2 S.C.R. 460 (“Danyluk”); British Columbia (Worker’s Compensation Board) v. Figliola, 2011 SCC 52, [2011] 3 S.C.R. 422 (“Figliola”). [^4]: Danyluk, para. 33. [^5]: Danyluk, paras. 66-67. [^6]: Like the case at bar, Victoria University also involved two separate proceedings occurring at the expiry of 20 year rent re-set intervals. Both proceedings commenced in front of arbitrators and subsequently went to appeal. In Justice Pepall’s 2016 Court of Appeal decision, she used the term Revenue Properties #1 to refer to the first round of proceedings that took place in the early 1990s. I have adopted that terminology here to assist the reader. Revenue Properties #1 is the 1993 decision of Justice Steele in the Ontario Divisional Court. Revenue Properties #2 is the 2014 decision of Justice Wilton-Siegel that reviewed the second arbitration proceeding that took place in the early 2010s. Victoria University is Justice Pepall’s decision reviewing Revenue Properties #2. See Appendix “B” for a diagram showing the evolution of the cases.