COURT FILE NO.: CV-18-593601 DATE: 20180816
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
Morguard Corporation and Bramalea City Centre Equities Inc. Plaintiffs
– and –
6753060 Canada Inc. t/a Sugar Mountain Defendant
Counsel: Dina Peat for the Plaintiffs
HEARD: August 14, 2018
REASONS FOR DECISION
PERELL, J.
[1] Morguard Corporation and Bramalea City Centre Equities Inc. (collectively, Morguard), own a shopping centre known as the Bramalea City Centre, which is located in Brampton, Ontario.
[2] By a written lease agreement dated May 6, 2011, Morguard leased premises, store 221C, in the Bramalea City Centre to 6753060 Canada Inc., which carried on business as Sugar Mountain.
[3] The Lease was for a ten-year term commencing on June 6, 2011 and ending on June 30, 2021.
[4] Under the Lease, Sugar Mountain agree to pay minimum rent in accordance with section 4.02 and 1.0l (g) of the Lease as follows:
(a) for rental years 1 to and including 5, the annual sum of $40.00 per square foot, payable in monthly installments of $3,970.00; and
(b) for rental years 6 to and including 10, the annual sum of $45.00 per square foot, payable in monthly installments of $4,466.25.
[5] Under section 5.03 of the Lease, Sugar Mountain agreed to pay taxes that are imposed against the Shopping Centre on the basis of its proportionate share of the taxes.
[6] Pursuant to sections 6.02 and 6.03 of the Lease, Sugar Mountain agreed to pay its proportionate share of the costs and expenses of owning, administering, operating, managing, maintaining, improving, insuring, cleaning, supervising, rebuilding, replacing, and repairing the Shopping Centre.
[7] Pursuant to sections 8.01 and 1.01 (i)(A) of the Lease, Sugar Mountain agreed to pay as additional rent, the greater of $1.35 per square foot per annum or $1,350.00 per annum towards a promotion fund for the benefit of the Shopping Centre, which is to be increased by the consumer price index.
[8] Pursuant to section 8.02 and 1.01(i)(B) of the Lease, Sugar Mountain agreed to pay as additional rent, the greater of $1.35 per square foot per annum or $1,350.00 per annum (such amount not to exceed $4,920.00) towards an advertising fund for the benefit of the Shopping Centre, which is to be increased by the consumer price index.
[9] Pursuant to section 4.11 of the Lease, Sugar Mountain agreed that any unpaid rent bears interest from the due date to the date of payment at the "Stipulated Rate" in force on the due date. The "Stipulated Rate" is defined in section 1.02 of the Lease as the rate of interest per annum that is the lesser of five percent (5%) more than the Prime Rate or the maximum rate permitted by law.
[10] Pursuant to section 16.03 of the Lease, if legal proceedings are brought for recovery of possession of the Premises, for recovery of rent or sales taxes or because of a default by the Tenant, the Tenant will pay to the Landlord its expenses including its legal fees on a solicitor and client basis.
[11] On January 1, 2018, Sugar Mountain breached the Lease by failing to pay rent. Morguard delivered a notice of default requiring that the default be cured; however, Sugar Mountain failed to bring the Lease into good standing. Morguard issued a Kelly Douglas notice and terminated the Lease.
[12] More precisely, on January 17, 2018, Morguard re-entered the premises and terminated the Lease and delivered a notice of termination advising that as a result of Sugar Mountain’s failure to remedy the breaches set out in the notice of default dated January 9, 2018, Morguard had exercised its right to re-enter. The notice of termination stated that it was without prejudice to the Landlord's rights under the Lease and at law to: (a) all payments of rent and other sums and charges payable under the Lease which are in arrears; (b) all payments of rent and other sums and charges in arrears or accruing due over what would have been the unexpired term of the Lease had it not been terminated; and (c) any and all expenses incurred by the Landlord and caused by the forfeiture of the Lease, including all legal and professional fees on a full-indemnity basis.
[13] On March 8, 2018, the Landlord issued a Statement of Claim claiming damages for breach of the lease.
[14] Sugar Mountain did not defend, and it was noted in default on May 31, 2018.
[15] Morguard moved for a default judgment and claimed $477,499.05. It calculated its damages as follows:
a. Arrears of rent $61,441.03
b. Lost Future Rent $471,767.82
c. Less 2017 Year-End Adjustment ($2,675.05)
TOTAL: $477,499.05
[16] To date, notwithstanding its efforts to re-let the premises, Morguard has been unable to find a replacement tenant. It is continuing its efforts to re-let the premises.
[17] On August 14, 2018, I granted Morguard a partial judgment with reasons to follow. I made the following endorsement:
The defendant defaulted its lease and the plaintiff delivered a Kelly Douglas notice, and in this action, it sues the defendant for unpaid rent and for damages for the loss of future rents over the term of the lease. The defendant did not defend and was noted in default. The plaintiff moves for a default judgment. For written reasons to follow, I am satisfied that the plaintiff is entitled to a partial judgment for the rent arrears in the amount of $84,118.68 plus pre-judgment interest of $3,096.22 plus costs in accordance with the lease of $6,721.41. This judgment is without prejudice to the plaintiff setting the action down for an assessment of damages for its claim for lost future rents.
[18] The reason for a partial judgment was that I was satisfied that Morguard had proven its claim for unpaid rent to date; however, it had not proven its claim for damages for lost future rents.
[19] On a motion for a default judgment under rule 19.05, the facts pertaining to liability are deemed to be true but facts pertaining to damages must be proven. The plaintiff must adduce evidence to support his or her claim. The court must make a judicial determination with respect to the quantum of damages to be awarded against the defendant in default.[^1]
[20] A landlord, having terminated the lease and given proper notice to the tenant, may assert the full panoply of contractual remedies arising from the lease.[^2] One such contractual remedy is the “present recovery of damages for losing the benefit of the lease over its unexpired term.”
[21] In Highway Properties Ltd. v. Kelly, Douglas & Co.,[^3] Justice Laskin described the landlord’s several remedial alternatives as follows:
The developed case law has recognized three mutually exclusive courses that a landlord may take where a tenant is in fundamental breach of the lease or has repudiated it entirely, as was the case here. He may do nothing to alter the relationship of landlord and tenant, but simply insist on performance of the terms and sue for rent or damages on the footing that the lease remains in force. Second, he may elect to terminate the lease, retaining of course the right to sue for rent accrued due, or for damages to the date of termination for previous breaches of covenant. Third, he may advise the tenant that he proposes to re-let the property on the tenant's account and enter into possession on that basis. Counsel for the appellant, in effect, suggests a fourth alternative, namely that the landlord may elect to terminate the lease but with notice to the defaulting tenant that damages will be claimed on the footing of a present recovery of damages for losing the benefit of the lease over its unexpired term. One element of such damages would be, of course, the present value of the unpaid future rent for the unexpired period of the lease less the actual rental value of the premises for that period.
[22] The proper measure of damages for a terminated lease is the unpaid rent to the date of the breach (the arrears of rent) plus the present value of the loss of the future rent, which is the present value of the unpaid rent for the unexpired period of the lease less the actual rental value of the premises for that period.[^4]
[23] Thus, where the landlord terminates the lease and delivers what has come to be known as a “Kelly Douglas notice,” the proper measure of damages for the tenant’s breach is not the total of the rental payments for the balance of the lease term.[^5] Such a measure would fail to account for the costs saved by the breach and fail to take into account that the landlord is free to benefit from its property by leasing to a new tenant. The landlord’s claim for lost future rentals also must be “present valued”, which is to say that the claim must be reduced to the current worth of a future sum of money or stream of cash flows given a specified rate of return.
[24] In the simplest case, the landlord re-rents the premises and the actual rental value for the balance of the lease is proven by what will be paid by the new tenant. If the income stream from the new lease is less than the income stream of the terminated lease, then the present value of the difference is the landlord’s damages. If the income stream of the new lease is greater than the income stream from the terminated lease, then the landlord will have fully mitigated its damages for lost future rentals and may also have mitigated its losses for the arrears of the rent or consequential damages.
[25] In Falwyn Investors Group Ltd. v. GPM Real Property (6) Ltd.,[^6] Justice Lederman awarded no damages for lost rent because the landlord re-let at a higher price. The additional profit was credited against the landlord’s other losses arising from the breach. In this case, Justice Lederman stated at para. 47:
- According to the reasons in Highway Properties, supra, where a tenant breaches a lease agreement, the landlord, under the fourth option, is entitled to claim for prospective losses of the "present value of the unpaid future rent for the unexpired period of the lease less the actual rental value of the premises for that period." However, the fourth option envisages the application of the principles of contract law to commercial leases. Therefore, the landlord is subject to the duty to mitigate, and where "actual rental value" of the premises is not determined prior to trial, an estimate of the expected rental income that will be received can be inferred based on the evidence adduced at trial. […]
[26] In West Edmonton Mall Ltd. v. McDonald's Restaurants of Canada Ltd.,[^7] the landlord terminated a commercial lease with a term of 20 years. At the date of trial, there was an unexpired term of approximately 11 years. Justice Bielby relied on expert evidence of the ability of the landlord to re-let the premises within 24 months of the termination of the lease at the rental rates then prevailing in Edmonton. She then referred the matter to an actuary to assess the landlord's losses on the basis of her findings. The landlord was also held entitled to recover the expenditures to attract new tenants, including rental abatements and costs for configuring the premises to the requirements of the new tenants.
[27] In First Avenue Market Place (1986) Inc. v. Manthos,[^8] the British Columbia Court of Appeal did not award damages for the post-termination period because the landlord failed to provide information on the rental rate being paid by the new tenant. In this case, the tenant abandoned a 10-year lease in a shopping centre after approximately one and one-half years. The landlord immediately re-rented the tenant’s premises for a five-year period. Chief Justice McEachern did not award damages for the period in which the landlord had secured a new tenant because the landlord’s evidence did not clearly show the rate at which the premises were rented. At para. 33 of the judgment, Chief Justice McEachern stated:
On this basis, it is difficult to recognize any loss for the four years of the lease following termination. If there was any loss, it would have to be reduced to present value. While the onus of establishing mitigation is upon the wrongdoer, I think that that burden was discharged when the evidence disclosed re-rental, possibly at the same rate, and full or nearly full occupancy. After that, it became necessary for the lessor to prove its damages and its witnesses should have been able to give the straightforward factual information requested by the guarantor's counsel such as the actual rent being charged to the new tenant. This was information that was fundamental to the proof of the lessor's claim. I would not award any damages for this period.
[28] Where there is no replacement tenant by the time of the motion for a default judgment, the landlord will have to lead evidence regarding the actual rental value of the premises and evidence of how long it would take a landlord acting reasonably to find a new tenant.
[29] In Cormier v. Federal Business Development Bank,[^9] the court relied on the evidence of a valuations expert to determine the amount of the landlord’s damages. In this case, the tenant agreed to a five-year lease of a building but repudiated the lease before entry into possession. Justice Ryan calculated the damages as follows:
In the present case, it is my opinion the proper method of assessing the plaintiffs' loss is to calculate the present value of the difference between the contractual rent of $1,200.00 per month as reserved by the agreement to lease and the average [future] monthly rental value of the premises at the time of the breach, namely $738.00 [as determined by a valuations expert at trial]. The present value as of June 1, 1978 of the right to receive $462.00 per month for 36 months at a discount rate of 6% is, according to standard mathematical tables, $15,203.00. However, as was conceded by the defendant, this calculation makes no allowance for the fact that it would take a reasonable time for the plaintiffs to obtain a new tenant at the established market rent and that an additional amount would have to be added to account for this fact. I think a reasonable time within which a tenant should have been obtained was six months and accordingly the appropriate adjustment upward would be $4,352.00. Additionally, it is to be noted that the plaintiffs rented the premises for a period of 14 months at a monthly rental of $500.00 and, accordingly, there must be a reduction of $7,000.00 in the sum assessed as damages. Taking these various calculations into account, I would assess the plaintiffs' damages for loss of rentals at $12,555.00.
[30] A similar methodology was applied in B.G. Preeco (3) Ltd v. Universal Explorations Ltd.[^10] Justice MacCallum concluded that the value of unpaid future rent under the breached lease was $5 per square foot, but based on the appraisal evidence, the market value per square foot was $2 per square. Thus, the damages were the $3 per square foot rent reduced to its present value. At para. 76, Justice MacCallum stated:
- Dealing next with the period from the date of trial to the end of the ten-year term, namely, 30th September 1990, it was shown at trial that the property might reasonably be expected to be let with an aggressive effort within about six months, namely, 1st January 1988. It was suggested that damages should be assessed at a rate of $5 per square foot […] up to 1st January 1988 but reduced to present value, and thereafter, in keeping with the principles of mitigation, at that basic rate less whatever its market rental value is judged to be as of 1st January 1988, but not including taxes or operating costs, the resulting amount to be also reduced to its present value by reference to actuarial evidence. I accept the appraisal evidence which fixed the present market value of the property at $2 per square foot. Therefore, the plaintiff would be entitled to the present value of damages at $5 per square foot only up to the point when it should reasonably be expected to rent the property, namely, 1st January 1988, plus operating costs and taxes, and thereafter only on the difference between what should have been received ($5) and what the plaintiff expects to receive ($2), being $3 per square foot reduced to its present value. Operating costs and taxes would be paid by the prospective tenant, so they form no part of the prospective damages after 1st January 1988.
[31] In A.B. Investments Ltd. v. Khan,[^11] on a motion for summary judgment by the landlord, following Highway Properties Ltd. v. Kelly, Douglas & Co., supra, Justice Ricchetti stated that the proper measure of those damages is not the total of the rental payments for the balance of the lease term. Justice Ricchetti was unwilling to speculate on the landlord’s claim for prospective loss, and he ordered a damages trial. He held:
I am not satisfied that there is not some rental rate at which the leased premises would rent in the future. Granting judgment for the full amount of the future rental payments becomes a windfall for the Landlord if he rents the leased premises after judgment is granted even if only at $1 per month. […] Alternatively, the Landlord could assess its future damages and seek to recover those damages now. However, this requires some evidence as to what the leasehold values of the premises are […] I am left to speculate on what the Landlord's damages might be. I should not do so and I am not prepared to do so.
[32] In the immediate case, Morguard did not provide the court with the evidence it needs to calculate its claim for damages for future lost rentals. There has been an undoubted breach of the lease and, therefore, I grant Morguard a partial judgment that is without prejudice to its right to set the action down for an assessment of its damages claim.
Perell, J.
Released: August 16, 2018
COURT FILE NO.: CV-18-593601 DATE: 20180816
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
Morguard Corporation and Bramalea City Centre Equities Inc. Plaintiffs
– and –
6753060 Canada Inc. t/a Sugar Mountain Defendant
REASONS FOR DECISION
PERELL J.
Released: August 16, 2018
[^1]: Umlauf v. Umlauf (2001), 2001 24068 (ON CA), 53 O.R. (3d) 355 at paras. 8-9 (C.A.). [^2]: Canadian Medical Laboratories Ltd. v. Stabile (1997), 7 R.P.R. (3d) 170 at para. 40 (C.A.). [^3]: 1971 123 (SCC), [1971] S.C.R. 562. [^4]: Highway Properties Ltd. v. Kelly, Douglas & Co., 1971 123 (SCC), [1971] S.C.R. 562; Windmill Place v. Apeco of Canada Ltd. (1976), 1976 1230 (NS CA), 72 D.L.R. (3d) 539 (N.S.C.A.); Cormier v. Federal Business Development Bank (1982), 1982 4236 (NB CA), 40 N.B.R. (2d) 155 (N.B.C.A.); Ossory Canada Inc. v. Wendy's Restaurants of Canada Inc. (1997), 1997 2212 (ON CA), 36 O.R. (3d) 483 (C.A.); Morguard Corporation v. Bramalea City Centre Equities, 2013 ONSC 7213; Penretail Management Ltd. v. 2380462 Ontario Inc. (c.o.b. Bolton Health Centre) 2016 ONSC 600; Boyce v. Labelle (c.o.b. Herbal Magic Cornwall), 2016 ONSC 3503; M. Thompson Holdings Ltd. v. Haztech Fire and Safety Services Inc., 2017 SKCA 56. [^5]: A.B. Investments Ltd. v. Khan, 2011 ONSC 4491 at para. 29. [^6]: (1998), 22 R.P.R. (3d) 1 (Gen. Div.). [^7]: (1993), 1993 7181 (AB KB), [1994] 2 W.W.R. 230 (Alta. Q.B.) aff'd (1995), 1995 ABCA 503, [1996] 3 W.W.R. 191 (Alta. C.A.). [^8]: (1994), 43 R.P.R. (2d) 282, at para. 33. [^9]: (1982), 1982 4236 (NB CA), 40 N.B.R. (2d) 155 (N.B.C.A.). [^10]: (1987), 1987 3187 (AB KB), 80 A.R. 225 (Alta. Q.B.). [^11]: 2011 ONSC 4491.