COURT FILE NO.: 07-CV-345840PD2 DATE: 20180904 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
WESTMOUNT-KEELE LIMITED Plaintiff – and – ROYAL HOST HOTELS AND RESORTS REAL ESTATE INVESTMENT TRUST and NORTH YORK (KEELE ST.) PURCHASECO INC. Defendants
COUNSEL: Kris Borg-Olivier, Emily Home, for the Plaintiff Jason Woycheshyn, Gannon Beaulne, for the Defendants
HEARD: January 29, 30, 31, February 1, 2, 5, 6, March 2, August 24, 2018
KOEHNEN J.
Overview
[1] In 2005 Westmount-Keele Limited bought the Yorkdale Travelodge from the defendant North York (Keele Street) Purchaseco Inc. and its co-owner Chimo Hotels Canada Inc. Westmount wanted to convert the hotel into residential condominiums.
[2] North York Purchaseco is a wholly-owned subsidiary of the defendant Royal Host Real Estate Investment Trust [^1]. For ease of reference I will refer to the defendants collectively as Royal Host because the distinction between the two entities is of no importance to this proceeding.
[3] Royal Host was a publicly traded entity with a large portfolio of hotel properties. It managed the Yorkdale Travelodge. As part of the sale, Royal Host would have to shut down the hotel and incur costs in doing so. Westmount agreed to reimburse Royal Host for up to $2 million of those costs provided Royal Host terminated any obligations it had in respect of the hotel on commercially reasonable terms.
[4] Westmount’s obligation to pay those costs was initially secured by a collateral mortgage on the property in favour of Royal Host in the amount of up to $2 million. The mortgage was discharged on July 14, 2011 pursuant to the order of Belobaba J. In place of the mortgage, Westmount paid $2,200,000 into court to the credit of this action.
[5] The fundamental issue before me is to determine how much of the funds paid into court Royal Host is entitled to.
[6] Royal Host submits it is entitled to $1,881,924.10 reflecting principle of $1,229,560.19 and prejudgment interest of $652,364.19. Royal host calculates prejudgment interest at the default rate under the Rules of Civil Procedure of 4.8%.
[7] Westmount submits it should pay $361,221 if Royal Host was obligated to shut down the hotel on February 21, 2005 or $498,042 if Royal was obligated to have shut down the hotel on April 5, 2005 as it actually did.
[8] For the reasons set out below, I find that Royal Host is entitled to the sum of $638,201 of the amount paid into court plus prejudgment interest at the rate of 1.72%. Westmount is entitled to the return of all other funds paid into court.
[9] I have set out below in summary form Royal Host’s claim and the deductions I have made in these reasons to reflect expenses I have found to be improper or credits to which Westmount is entitled.
| ITEM | AMOUNT |
|---|---|
| Royal Host claim [^2] | $ 2,136,688 |
| Travelodge franchise termination fee | $ (722,000) |
| Adjustment for CN termination | $ (311,699) |
| Inaccurate recording of revenue | $ (156,960) |
| Linens | $ (92,437) |
| Miscellaneous costs withdrawn by Royal host | $ (85,127) |
| Security expenses for March 2005 | $ (22,084) |
| Internal charges for Royal Host staff | $ (1,802) |
| Internal charges for Royal Host staff | $ (593) |
| March laundry charges | $ (680) |
| Kerstens' expenses | $ (237) |
| Cable and phone charges for March 2005 | $ (4,868) |
| Total Valid Expenses | $ 738,201 |
| Westmount payments to date | $ (100,000) |
| Judgment in favour of Royal Host | $ 638,201 |
I. Preliminary Matters
[10] Before addressing the specific cost items at issue, it will be useful to address three preliminary matters that have a bearing on the resolution of at least some of the specific claims: (a) the commercial background to the underlying transaction; (b) delays in the proceeding; and (c) credibility issues.
A. Commercial Background
[11] The Yorkdale Travelodge was a 361 room hotel that was underperforming and was near the end of its economic life. Royal Host held a one half interest, Chimo held the other half.
[12] The hotel came to the attention of Joseph Ieradi, the principal of Westmount. He developed the idea of converting it into residential condominium units. He raised the idea with Randy Royer, the CEO of Royal Host. Randy founded Royal Host together with his brothers Greg and Terry. I will refer to Mr. Royer as Randy to distinguish him from his brother Greg who will become part of the narrative shortly. I mean no disrespect in doing so.
[13] Mr. Ieradi and Randy got on well together. Both had visionary, entrepreneurial personalities. Both appeared to have a business approach based on trust in which parties knew they would face issues but would work those issues out transparently with each other.
[14] In November 2003 they agreed upon a joint venture, pursuant to which Royal Host would continue to hold its 50% interest in the hotel and another of Mr. Ieradi’s companies, Dacapa, would purchase Chimo’s interest. Royal Host and Dacapa would then re-develop the property together as joint venturers. The costs associated with closing down the hotel were not an issue in this structure because both parties would generally share costs and revenues equally.
[15] By the spring of 2004 Mr. Ieradi had built both model suites and a sales office in the hotel and had begun selling units in the proposed re-development. The re-development was well advertised inside and outside the hotel.
[16] By mid-2004, Halifax business person, George Armoyan had acquired a substantial stake in Royal Host. The fortunes of the hotel business in Toronto were flagging at the time as were those of Royal Host. The combination of adverse economic conditions and a significant new investor led to a change of management and culture within Royal Host.
[17] Randy was relieved of his duties as CEO and was replaced by his brother Greg. Randy and Greg were candid about each other’s approaches. Randy was the entrepreneurial visionary. Greg was the conservative administrator. As Greg put it, if they both looked at a scrubby patch of land, Randy saw a beautiful resort; Greg saw dirt.
[18] Greg reviewed the condominium project and was bearish. In January 2005, he persuaded the board to abandon the joint venture. It was replaced by a straight purchase transaction in which Dacapa fell away and was replaced by Westmount which would buy 100% of the property from Royal Host and Chimo.
[19] The agreement of purchase and sale called for Westmount to reimburse Royal Host for up to $2,000,000 in net costs that Royal Host would incur to close the hotel. The business rationale underlying this obligation was that the purchase was conditional on financing. Until Westmount’s financing was certain, Royal Host had a business interest in running the hotel. For Royal Host to close the hotel before Westmount’s financing was certain would leave Royal Host with considerable execution risk. If Westmount could not get financing, Royal Host would be left without an operating hotel and without a sale.
[20] However, even when Royal Host was satisfied that Westmount had financing, Royal Host could not simply close the hotel from one day to the next. It would have to terminate employees, cancel supply contracts, cancel existing hotel reservations and terminate its obligations to CN Rail, a hotel customer that took approximately 50 rooms per night.
[21] As a result, the parties agreed that the sale would close on a particular date but that Royal Host would deliver vacant possession only some time after closing. Royal Host would wind down the hotel during this interim period and would initially bear the cost of doing so. Westmount would then reimburse Royal Host for its net costs of closing the hotel (i.e. costs minus revenue) up to a limit of $2 million. As security for this obligation, Westmount granted Royal Host a collateral mortgage of equal amount.
B. Delays in the Proceeding
[22] The transaction closed on February 21, 2005 [^3]. Royal Host delivered vacant possession on April 5, 2005. The trial occurred 13 years later in February 2018.
[23] Royal Host submits that Westmount behaved unreasonably after April 5, 2005 by refusing to pay the hotel closing costs and by forcing Royal Host to prove every category of those costs. According to Royal Host, Westmount’s behaviour made this action take 13 years to get to trial.
[24] I cannot accept that submission.
[25] I find that delays in the payment of expenses were caused largely by a change in approach at Royal Host brought about by the ever greater influence that Mr. Armoyan assumed over its affairs. By mid 2004 Mr. Armoyan ousted Randy as CEO. In August 2006, he removed Greg as CEO. Mr. Armoyan has retained effective control of Royal Host ever since. Mr. Armoyan did not testify at trial but was involved in discussions and correspondence with Mr. Ieradi about expenses.
[26] As Randy put it during his testimony, if there was money on the table, Mr. Armoyan wanted it. In Randy’s view Mr. Armoyan adopted interpretations of the agreements with Westmount that were contrary to what the agreements stipulated.
[27] A review of the history of the expense claims makes this clear.
[28] By October, 2005 Mr. Ieradi was becoming concerned about the closing costs because he had received no information about them even though the hotel was shut down on April 5, 2005.
[29] In response, Royal Host advised that its costs were still accruing but had already exceeded $2,000,000. Royal Host provided no details of its costs.
[30] Royal Host submits that this action was delayed because Westmount did not have funds to discharge the mortgage. By way of example it points to a letter from Mr. Ieradi’s lawyer dated February 20, 2006 in which he states that Westmount is unlikely to have more than $500,000 from the net sale proceeds from Phase I of the project to pay towards the mortgage when it becomes due in August 2006.
[31] Mr. Ieradi testified that the letter was written to get Royal Host to the table with a detailed list of expenses and supporting documentation. The February 20, 2006 letter when read in its entirety is consistent with Mr. Ieradi’s explanation.
[32] The letter begins by repeating past complaints that Royal Host has not provided information about its closing costs. Westmount proposes an immediate payment of $500,000 in exchange for which the mortgage would be discharged. The balance of any costs would then be secured by a personal guarantee of Mr. Ieradi and Dacapa Construction Limited. Within 60 days of the $500,000 payment, Royal host would provide Westmount with all documents and calculations supporting its net cost claim after which the parties would come to an agreement as soon as possible.
[33] Royal Host did not provide any details until May 9, 2006 when it produced three, one page schedules that broke net closing costs down into general categories which totaled $2,136,688.
[34] Royal Host’s assertion that it had incurred over $2 million in closing expenses caused Mr. Ieradi concern. Randy had told him that he expected costs to be approximately $600,000. Moreover, the single largest expense in Royal Host’s schedules was a franchise termination fee payable to the Travelodge in the amount of $722,000. Randy had told Mr. Ieradi that it was unlikely that Royal Host would have to pay anything to Travelodge.
[35] Mr. Ieradi asked for more detailed information to support the payments than three pages of schedules.
[36] The mortgage in favour of Royal Host was payable in August 2006 yet Royal Host did not give Westmount any additional materials until September 25, 2006. Even then, Royal Host provided only three additional schedules and no backup information.
[37] Westmount responded on September 26, 2005 through its lawyer.
[38] Royal Host relies on this letter as further evidence that Westmount could not pay the mortgage because the letter says: “based on current sales… there would be no money available to disperse” under the mortgage.
[39] Mr. Ieradi provided the same explanation of this letter as for the letter of February 20, 2005: it was an effort to get Royal Host to the table. I accept that explanation.
[40] By September 26, 2006 Westmount had still not received documentation to show that the amounts Royal Host claimed had actually been paid. Although the letter says there would be no money based on current sales, it again asks for a timetable for supporting materials and discussions to arrive at a costs figure. There would be no need for materials or discussions unless Westmount intended to pay something.
[41] Royal Host also relies on Mr. Ieradi’s admission during cross-examination that Westmount did not have $2 million to discharge the mortgage as of September 26, 2006 when the letter was sent. This misses the point. Westmount did not owe $2 million but $738,201. There was no evidence about whether Westmount could have paid that amount in September 2006.
[42] On October 24 and 25, 2006 Royal Host delivered supporting materials and a statutory declaration of its Vice-President and Treasurer, Patrick Lambie, attaching the schedules that Royal Host had already sent and declaring under oath that Royal host had incurred the costs referred to in the schedules.
[43] The supporting materials that Royal Host had delivered contained no evidence that the franchise termination fee had been paid.
[44] Westmount’s attitude towards Royal Host’s claims was understandably coloured by Royal Host’s failure to provide any evidence about payment of the franchise termination fee. In those circumstances, any reasonable commercial party would want to examine the other expenses that Royal Host claimed with a fine toothed comb to ensure they were legitimate.
[45] In 2011, Westmount was required to enter into a commercial transaction that could not close unless the mortgage was removed from title. To discharge the mortgage, Westmount was obliged to pay $2,200,000 into court. The payment into court puts pay to Royal Host’s assertion that Westmount could not pay the mortgage.
[46] The payment into court included $722,000 for the franchise termination fee.
[47] Eleven days before trial Royal Host conceded that the franchise termination fee had never been paid. It was not a cost that it had incurred in closing the hotel as Royal Host’s statutory declaration claimed. Its payment was a fiction.
[48] I reject the suggestion that the delay in the proceedings was caused by Westmount’s alleged inability to discharge the true amount owing on the mortgage in a timely fashion. Westmount willing to pay Royal Host’s legitimate closing costs. Royal host refused to limit itself to legitimate costs. Westmount was able to and did discharge the mortgage at its full amount when it was required to pay funds into court.
C. Credibility Issues
[49] Despite maintaining a claim for a fictitious expense for 13 years, Royal Host spent some time in its closing arguments asking me to make adverse credibility findings about Mr. Ieradi.
[50] Royal Host focuses on Mr. Ieradi’s sometimes emotional, argumentative or impatient nature in making that submission.
[51] Mr. Ieradi displays the energy, impatience and enthusiasm that are sometimes stereotypically attributed to self-made entrepreneurs. Those traits did sometimes make him emotional, argumentative or impatient during cross-examination. That does not necessarily translate into lack of credibility. Mr. Ieradi’s evidence was internally consistent and was largely supported by contemporaneous documents. I find him to be a credible witness and do not accept Royal Host’s submissions to the contrary.
[52] I have some concerns about the reliability of Royal Host’s evidence. While I do not find that any of their witnesses lacked credibility in the sense that they were deliberately attempting to mislead the court, I do have concerns about the reliability of some of Royal Host’s evidence. By way of example, Royal Host’s assertion in a statutory declaration that it had incurred the franchise fee when it had not, Royal Host’s efforts to depart from its own internal records when it appeared to be in its interests to do so and the contrast between some of Royal Host’s general assertions and the detailed evidence led me to prefer the evidence of Westmount over that of Royal Host.
II. Specific Cost Items
A. CN Termination
[53] Next to the Travelodge termination fee, the largest expense in dispute is the cost to operate the hotel between the closing date of February 21, 2005 and the vacant possession date of April 5, 2005, costs for which Westmount is liable.
[54] Royal Host advised CN on February 4, 2005 that the hotel would be closing. Royal Host submits it was obliged to give CN 60 days notice under its agreement with CN as a result of which it could not compel CN to leave the hotel before April 5, 2005.
[55] Westmount submits that: (i) Royal Host should have given CN notice before February 4, 2005; (ii) Royal Host had no obligation to give CN 60 days notice; (iii) even if CN was entitled to 60 days notice, Royal Host failed to make reasonable commercial efforts to have CN leave the hotel earlier as it was obliged to; and (iv) Westmount should bear none of the operating costs associated with keeping CN in the hotel until April 5, 2005.
[56] As set out in greater detail below, I find that: (i) Royal Host was under no obligation to terminate its relationship with CN before February 4, 2005. (ii) Royal Host had no contractual obligation to give CN 60 days notice of termination. (iii) Royal Host did not make reasonable commercial efforts to have CN leave the hotel in less than 60 days. (iv) Royal Host’s failure to make commercially reasonable efforts to have CN vacate the hotel earlier unnecessarily increased its closing costs by $311,699.
(i) Royal Host Had No Obligation to Notify CN Before February 4, 2005
[57] Royal Host advised CN on February 4, 2005 that the hotel would be closing imminently. Westmount submits that Royal Host should have advised CN of the hotel’s closure far earlier.
[58] Had this been done, more of the 60 day notice that Royal Host gave CN would have arisen before the closing date of February 21, 2005 as a result of which costs between the closing date and vacant possession date would have been lower.
[59] Royal Host submits that it could not have advised CN of the hotel’s closure earlier because Mr. Ieradi did not have financing in place to close the transaction. Royal Host says Greg was in regular contact with Pencor Capital Corp., the financier with whom Mr. Ieradi was negotiating. Royal Host says it notified CN of the hotel’s closure as soon as Pencor gave Royal Host a level of comfort that financing would actually proceed. Royal Host notes that even when it did advise CN of the hotel’s closure, Westmount’s financing arrangements remained conditional.
[60] Westmount submits that, as a general rule, all financing commitments remain conditional until the last minute. As a practical matter, parties know that the financing will proceed even though the documentation continues to indicate it is conditional. Greg admitted that Pencor had a reputation for providing conditional financing arrangements only if it was serious and intended to close. Pencor was unlike many others in this respect who readily entered conditional agreements only to use the conditions to back out at a later stage.
[61] During his cross-examination, Greg was challenged on his evidence that he gave instructions to terminate arrangements with CN once Pencor told him financing was pretty much certain.
[62] Royal Host had given an answer to an undertaking arising on discovery to the effect that Greg had no recollection of conversations with Pencor. His evidence at trial contradicted the answer to the undertaking.
[63] Greg recalls speaking with Royal Host’s former litigation counsel about the undertakings but finds it hard to believe that he denied any recollection of conversations with Pencor. According to Greg, it is possible that he told the lawyer that he had no recollection of a specific conversation or specific dates of conversations with Pencor and that Royal Host’s former lawyer misunderstood the answer.
[64] I accept Greg’s explanation. It is agreed that Greg did have regular conversations with Pencor’s principal, Mr. Lee, in the period leading up to the closing. Greg was familiar with Pencor and Mr. Lee. Pencor had financed the property for Royal Host. In those circumstances I would expect Greg to be following up with Mr. Lee about the status of Westmount’s financing.
[65] I also find that it was commercially reasonable for Royal Host to advise CN of the termination when it had the level of comfort it obtained from Pencor and no earlier.
[66] Royal Host’s obligation was to use commercially reasonable efforts to terminate any obligations it had in connection with the hotel. That is not a standard of perfection. The standard of commercial reasonableness allows Royal Host to take its own commercial interests into account. There was no obligation on Royal Host to assume for itself the risk of terminating CN only to see Westmount’s financing fall through. It was for Royal Host to decide how much risk it wanted to assume in that regard.
(ii) CN Had no Contractual Right to 60 Days Notice
[67] Although Royal Host submits that its written contract with CN required 60 days notice to terminate, it produced no such agreement.
[68] The reference to 60 day notice does not arise not in any contract with CN but in the contract between Royal Host and Westmount.
[69] Royal Host points to its agreements with Westmount and submits that they contain admissions that CN is entitled to 60 days notice; admissions that now bind Westmount. I do not agree.
[70] As of February 4, 2005, Royal Host’s obligations were governed by Article 10 of the Agreement of Purchase and Sale between Royal Host and Westmount. It provides:
“The Vendor and the Purchaser acknowledge that the CN Agreement requires 60 days advance notice to terminate. The Vendor shall use reasonable commercial efforts to relocate the hotel users under the CN Agreement prior to the Vacant Possession Date, but if the Vendor cannot renegotiate a termination or relocation of the hotel users under the CN Agreement the Purchaser acknowledges that the Vendor may extend the Vacant Possession date to meet the requirements of the CN Agreement. ”
Article 10 (b) of the Agreement of Purchase and Sale defines the CN Agreement as “the agreement between CN Railway and Royal Host Real Estate Investment Trust”.
[71] Article 1.1 (e) of the Post Closing Possession Agreement which came into effect as of February 21, 2005 defines the “CN Agreement” as:
“the agreement between the Vendor and Canadian National Railway dated _______ it which requires sixty (60) days’ notice to terminate.”
As noted in the quotation, the Post Closing Possession Agreement left the date of the CN Agreement blank.
[72] These provisions do not assist Royal Host.
[73] That the agreements between Royal Host and Westmount contain these definitions or acknowledgements does not mean that there actually is an agreement between CN and Royal Host that requires 60 days notice to terminate. The definitions and acknowledgement flow from the actual the agreement, not the other way around. If no such agreement actually exists, Westmount has simply been misled.
[74] The weight of the evidence points against a 60 day notice period in any agreement with CN. Examples of such evidence include the following: (a) Neither Royal Host nor CN was able to produce a copy of the CN Agreement. (b) Neither Royal Host nor CN alleged an oral agreement requiring 60 days notice. (c) Although Royal could not produce a signed agreement with CN, it did produce an unsigned draft agreement which allowed Royal Host to terminate on 30 days notice. (d) The person with primary carriage of the CN relationship was James Kerstens, the hotel manager. He agreed that it would be important for him to know the terms of any agreement with CN. He had never seen any agreement with CN and was not aware of any obligation to provide 60 days notice. (e) After Karen Poitras, the CN employee with carriage of the Royal Host relationship, discovered from her own employees that the hotel was closing, Mr. Kerstens wrote her on January 21, 2005, saying that CN would receive four weeks notice before the hotel closed. (f) Although CN responded angrily, to the email January 21, 2005, it never asserted any right to 60 days notice. (g) Greg admitted that, given the level of frustration CN expressed about the termination, had it believed it was owed 60 days notice, one would expect them to have raised it.
[75] As a result of the foregoing, I find that there was no contractual obligation by Royal Host to give CN 60 days notice to vacate the hotel.
[76] That said, CN took approximately 50 rooms per night. A relationship of that sort would likely have required some type of common-law notice to terminate.
(iii) No Commercially Reasonable Effort to Have CN Vacate Earlier
[77] Both the Agreement of Purchase and Sale and the Post Closing Possession Agreement required Royal Host to deliver vacant possession within four weeks of closing, or in effect by March 21, 2005.
[78] The Agreement of Purchase and Sale requires Royal Host to “use reasonable commercial efforts” to relocate CN before the Vacant Possession Date. The Post Closing Possession Agreement requires Royal Host to deliver vacant before the Vacant Possession Date “subject to the termination of the CN Agreement on commercially reasonable terms”.
[79] I do not draw anything from the slightly different wording in the two agreements, nor did the parties. Both agreements impose the same obligation. That is to use reasonable commercial efforts to have CN vacate the property before the Vacant Possession Date, provided Royal Host can do so on commercially reasonable terms.
[80] Geoff R. Hall usefully summarized the concept of reasonable commercial efforts in Canadian Contractual Interpretation Law, 3d ed. at p. 286-289. The critical elements of the concept are as follows: (a) It is a lower standard than best efforts. (b) The “reasonable” element implies sound, sensible judgment, somewhat akin to business judgment. (c) The “commercial” element allows a party to have profit or financial gain as opposed to loss as a primary objective. It allows the party bearing the obligation to have regard for its own economic well-being. It does not require the obligor to subordinate its economic interests to those of the beneficiary. (d) It does not require the obligor to exhaust all possible means of fulfilling a condition. The obligor can cease making efforts when the economics of those efforts from its own perspective cease to make sense. (e) While a court will not closely scrutinize commercially reasonable efforts or second-guess them, the obligation nevertheless imposes a constraint on the obligor. The obligor does not have an option about whether to perform. A self-created incapacity to achieve a particular result does not constitute a commercially reasonable effort.
[81] Royal Host did not meet these standards.
[82] James Kerstens was the hotel manager and the Royal Host employee with carriage of the CN relationship. It was his responsibility to make arrangements for CN to leave the hotel. He was not aware of any obligation to have CN leave the property in less than 60 days. He had never seen the Post Closing Possession Agreement and was never advised of any obligation have CN leave the hotel before April 5, 2005.
[83] Royal Host submitted that it nevertheless had an incentive to have CN leave in less than 60 days to reduce costs because Royal Host did not believe it would ever collect on the mortgage that secured the hotel’s closing costs.
[84] I do not accept that submission because it is inconsistent with: (a) Royal Host’s failure to advise Mr. Kerstens of the obligation to have CN leave before April 5, 2005. (b) Greg’s admission that Royal Host prioritized its relationship with CN over its obligations to Westmount. (c) Royal Host’s recognition of the mortgage in its financial statements of March 31, 2005.
[85] While an obligation to use reasonable commercial efforts is not a standard of perfection, Royal Host could not possibly meet the required standard if the people with the obligation to carry it out are not even aware of the duty.
[86] While I agree that the standard of reasonable commercial efforts allowed Royal Host to have regard for its own economic well-being and place some weight on the value of its relationship with CN, it does not allow Royal Host to ignore the obligation entirely.
[87] Royal Host submits that CN “stridently refused” any help to find replacement accommodation. I do not accept that submission. Instead, I find that Royal Host ignored its obligation to make reasonable commercial efforts to have CN leave sooner.
[88] Given that Royal Host was in the hotel business, it would have been commercially reasonable for Royal Host to have prepared a spreadsheet of other hotels in the area that were capable of servicing CN. That spreadsheet could have included information like: the address of the hotel, its distance from the CN depot, the name and contact information of the person to speak with about a booking of this size, the size of the hotel, and information about hotel facilities that CN employees might have found attractive, like a gym or pool.
[89] It would also have been useful to include on that spreadsheet a directional sense of the rates that hotel might charge CN. At a minimum that could have included the hotel’s standard room rate.
[90] Once the spreadsheet was prepared, it would have been appropriate to arrange a personal meeting with Karen Poitras, advise her of the closing in person and walk her through the spreadsheet.
[91] It may also have been appropriate for Royal Host to approach the hotels on the spreadsheet, indicate that it had a client who took approximately 50 rooms per night that they could no longer service and ask the hotel what directional rates it could offer Royal Host’s customer. I am mindful that this latter suggestion might have required some sensitivity because CN might have wanted to preserve for itself control of the commercial negotiation with the new hotel. There would of course have been nothing wrong with offering that sort of help in the meeting during which Royal Host presented the spreadsheet.
[92] While there was no evidence about the suggestions made in the previous four paragraphs, it does not require any particular expertise to appreciate that a proposal tending in that direction would make common sense from a customer relations perspective.
[93] None of those proposed steps would have required much time or effort by Royal Host. Much of the information could have been obtained through Internet searches or relatively short conversations with the hotels in question.
[94] I turn now to what Royal Host actually did.
[95] As noted earlier, Royal Host did not even advise Ms. Poitras about the hotel’s possible closure. Instead, she found out about it from CN employees staying at the hotel. That this would occur should come as no surprise. By the spring of 2004, the hotel contained model condominium suites, a condominium sales office and large signs advertising its conversion to condominiums.
[96] After Ms. Poitras learned about the possible closure, she wrote to Royal Host understandably upset that she had not been advised in advance. Royal Host replied, on January 21, 2005 telling her that, although it was proceeding with the sale, there was no guarantee that the sale would occur but that if it did, the hotel would stay open for a minimum of four weeks.
[97] In addition, Royal Host wrote:
“Hypothetically speaking, (Greg Royer) has asked me to start thinking of hotels CN Rail could be relocated to should the hotel be closing in the foreseeable future. I assume you would want the crew to be in close proximity to the depot.”
[98] This was not a particularly assuring message to CN. Although a sale could occur at any time, Royal Host was only now starting to think about alternatives. It was not actually doing anything. It was only starting to think. Moreover, the email does not even apologize for the manner in which Ms. Poitras found out about the potential closure.
[99] Ms. Poitras sent an understandably angry response which began by saying “I want to express my dissatisfaction in the way Royal Host does business and would request that you pass this info on to the necessary individuals.” Ms. Poitras ended the email saying: “In closing, don’t worry about looking for a new property as I will be doing this myself.”
[100] That was an invitation to restore a customer relationship that had soured. It should have prompted some sort of proactive response, perhaps something directionally like what I have described earlier.
[101] Instead, Royal Host’s conduct became even more passive.
[102] On February 4, 2005 Royal Host told Ms. Poitras by email that the hotel would be closing “imminently” and that the most likely scenario suggested the end of February or early March at the latest.
[103] This gave an already irate customer even more reason to be angry. In its first email, Royal Host had told Ms. Poitras that she would get four weeks notice. CN was now being given as little as 24 days and no alternatives.
[104] Ms. Poitras spoke with Royal Host within two hours. An internal email at Royal Host reporting on the call states:
“She said she will start phoning around immediately to relocate her crew & asked what hotels in the area could handle her crew… She asked what would happen if she couldn’t get CN rail relocated to another hotel by the beginning of March.”
[105] Any degree of client service should have seen this is a cry for help. Ms. Poitras specifically asked for information about other hotels in the area. She also asked what would happen if she could not get her employees re-located by the beginning of March. Both requests signaled anxiety on the part of Ms. Poitras. This was a further occasion on which Royal Host could have jumped into action.
[106] There is no evidence that Royal Host gave Ms. Poitras the names of hotels in the area that she had asked for.
[107] The only evidence of anything approaching help is an email that Royal Host sent Ms. Poitras on March 9, 2005 stating:
“I’m not sure if you have considered the Montecassino Hotel at 3710 Chesswood Drive, phone 416 630-8100.
They are located further north off of Keele St. For what it is worth, if you are interested in them, they may be interested in CN.”
[108] This too could only infuriate Ms. Poitras more. Although Ms. Poitras had asked for help on February 4, the only evidence of help is an email over a month later. The email is singularly unhelpful. It does not help Ms. Poitras situate the hotel in relation to the CN depot. It does not provide a contact name to call. It indicates only that the hotel “may” be interested in CN if CN is interested in them. How would CN even know if it should be interested in this hotel? Royal Host has given CN no information to make that determination.
[109] In these circumstances, Royal Host made no reasonable commercial efforts to have CN leave sooner than April 5, 2005. It was completely passive and relied on the reference to 60 days in its agreements with Westmount.
[110] Royal Host submits that Westmount cannot complain about the failure to have CN leave earlier because Westmount did not complain at the time. I reject that submission.
[111] Royal Host had the obligation to make commercially reasonable efforts to have CN leave sooner. It was not up to Westmount to demand daily reports about what Royal Host was doing to meet its obligations. The matter became acute for Westmount when it was faced with a $2 million bill for the hotel’s closing costs. When faced with that demand, Westmount had the absolute right to test whether Royal Host had met its contractual obligations.
(iv) Damages
[112] There was some debate at trial about just how much it cost Royal Host to keep the hotel open between February 21, 2005 and April 5, 2005. I find as a fact that that the operational costs of doing so came to approximately $500,000.
[113] Given that there was some dispute about this at trial, I will take a moment, to set out the basis of my finding in greater detail.
[114] During his examination for discovery, Mr. Lambie was taken to a schedule that showed an operating loss of $1,074,688 for the period between February 21, 2005 and April 5, 2005. He disputed on discovery that this loss could have been avoided had CN left the property earlier. He noted that $445,302 was attributable to severance and approximately $132,889 was attributable to the termination of a number of contracts. Both of these expenses would have been incurred regardless of when CN left the property. Deducting these expenses would reduce the operating loss to $496,497.
[115] In its closing argument Royal host took issue with the fact that Mr. Lambie continued his answer during his examination for discovery and noted that property taxes and utilities would have been incurred even if CN had left the property earlier. I would not allow any further adjustment for property taxes because Schedule 1 to Mr. Lambie’s statutory declaration notes that Westmount paid the property taxes directly. As a result they are effectively not charged on Schedule 1. Schedule 1 charges $67,918 for utilities. If that is subtracted from the net operating loss we arrive at a figure of $428,579 as an operating loss to keep the hotel open between February 21 and April 5, 2005.
[116] The question then is for how much of that loss should Westmount be responsible given Royal Host’s failure to use reasonable commercial efforts to have CN leave earlier.
[117] I find that four weeks notice to CN would have been more than ample time to have CN vacate the hotel.
[118] I arrive at that at number for several reasons. First, it is the amount of notice required by the draft agreement between Royal Host and CN. Although not signed, it was the closest evidence of an agreement to which I was taken at trial. Second, when Royal Host advised CN of its intention to close the hotel imminently, it spoke of four weeks’ notice. CN did not object. Third, there was ample evidence that Toronto hotels suffered from high vacancy rates in 2005 and had been in that position since the SARS crisis of 2003. In those circumstances, it should have been possible to find alternative accommodation relatively easily.
[119] I am comfortable that four weeks notice would have been generous. Royal Host knew well before February 4, 2005 that it would be closing the hotel. It could have prepared a spreadsheet of alternative hotels before February 4, 2005 with little effort. Had Royal Host done so, it would have been relatively easy to transition CN into a new hotel quickly.
[120] I was given no evidence to suggest that transitioning to another hotel was particularly complicated or that it could not be done within a relatively short time. Hence my view that four weeks is generous had Royal Host made reasonable commercial efforts to do so.
[121] Royal host notified CN on February 4, 2005 that it would have to vacate the hotel. CN did so on April 5, 2005.
[122] Four weeks notice would have required CN to vacate the hotel on March 4, 2005.
[123] At trial, the parties made submissions based on the assumption that CN could be forced out on or before February 21, 2005 or on April 5, 2005. They made no submissions about the financial result if I found, as I now have, that CN could be forced out sometime between the two dates.
[124] I have done my best without the benefit of submissions to determine what that result should be. In arriving at my results, I have adopted a pro-rata calculation based on the number of days at issue. I have done so in the hope that I do not need to burden the parties with further submissions and a further attendance. That said, I recognize this may lead to arithmetic errors, a failure to take certain expenses into account or that parties may be of the view that a pro-rata approach is not appropriate for some or all of the adjustments. If either party wishes to make further submissions about such issues, I will remain seized in order to let them do so.
[125] Turning then to the pro-rata credit for costs in light of the principle that CN should have left the hotel on March 4, 2005.
[126] As noted above, the operating loss of keeping the hotel open for the 44 days between February 21, 2005 and April 5, 2005 was $428,579 or $9,740 per day. Westmount is responsible for the period between February 21 and March 4 or 12 days. A 12 day liability comes to $116,880. The difference between the 60 day operating loss of $428,579 and the 12 day period for which Westmount is responsible is $311,699. I find that Westmount is entitled to a credit of this amount from the sums paid into court.
B. Inaccurate Accounting for Revenues
[127] Article 3.1 of the Post Closing Possession Agreement provides that Westmount shall be credited with any hotel revenues during the post closing period when calculating the net costs of closing the hotel.
[128] The operating loss that Royal Host has charged to Westmount is based, among other things, on the fact that revenues for the hotel between February 1, 2005 and April 5, 2005 were $213,498. This is the figure contained in the statutory declaration Royal Host prepared to support its cost claim.
[129] However, it appears those revenues are understated.
[130] Royal Host’s tax filings suggest that this was the revenue for March 2005 alone. Royal Host’s internal reporting documents also indicate that the revenue of $213,498 relates only to March 2005 and not to February or April.
[131] During cross-examination, Mr. Lambie testified that he assumed Royal Host had simply booked all of the post-closing revenue into one month rather than having separate statements for February, March and April. Mr. Lambie conceded that it would be important for Royal Host to be accurate in its tax filings because of the significant penalties that could arise from inaccurate statements.
[132] I find that the $213,498 in revenue that Royal Host credited to Westmount was revenue for the month of March alone. My difficulty with Mr. Lambie’s assumption that all the revenue was booked into one month is that it is just that: an assumption. Although the assumption is contained in Mr. Lambie’s statutory declaration, that is the same statutory declaration in which Mr. Lambie stated that Royal Host had incurred a cost of $722,000 in terminating the Travelodge franchise. That too was based on information that Mr. Lambie received from others and that he assumed was correct.
[133] If Royal Host tenders evidence based on assumptions that are inconsistent with its internal documentation and tax filings, Royal Host must bear the risk of doing so. It was for Royal Host to establish its revenues for the entire post closing period based on evidence, not assumptions.
[134] If Westmount is to be charged for the cost of operating the hotel between February 21 and 28, it must also be credited with the revenue during that period.
[135] Mr. Kerstens agreed that a revenue figure of $19,620 per day was a reasonable proxy for the daily revenue of the hotel to the end of February 2005. If that revenue figure is applied to the 8 days in February for which Westmount has not received credit, we arrive at a figure of an additional $156,960 in revenue for which Westmount must be given credit from the amount paid into court.
C. Employee Terminations
[136] Article 3.2 (a) of the Post Closing Possession Agreement requires Westmount to reimburse Royal Host for the termination of all employees provided the termination arrangements are commercially reasonable.
[137] Westmount submits that the termination payments were commercially unreasonable because: (i) Royal Host should not have paid common law notice to employees. (ii) Royal Host should not have made payments to employees who were hired at other Royal Host properties. (iii) Royal Host could have avoided all payments during the post closing possession period by terminating employees earlier and/or giving them longer periods of working notice. I do not accept any of those submissions.
(i) Common Law Notice
[138] Royal Host made termination payments pursuant to the Employment Standards Act and common law principles. Westmount submits that the common law notice payments of $104,823.28 were commercially unreasonable.
[139] I do not agree. It is clear that common-law notice obligations are in addition to statutory obligations.
[140] Royal Host relied on the advice of a reputable employment law firm in determining what amounts should be paid to employees either pursuant to their statutory or common-law entitlements.
[141] The amounts Royal Host paid to employees on account of common-law notice were conservatively calculated. By way of example, Mr. Nadim, a 49-year-old employee with 19 years of service was given five months’ notice of which two months were working notice. Mr. Helmut Wegenschimmel, a 50-year-old executive chef with nine years service received 27 weeks’ notice. Royal Host’s employment lawyers had recommended notice of between 28 weeks and 11 months.
[142] Mr. Wegenschimmel and a number of other employees retained Heenan Blaikie to challenge their severance packages. Royal Host stood firm and all of the employees ultimately accepted Royal Host’s offer.
(ii) Employees Hired at Other Royal Host Properties
[143] Westmount objects to termination payments to several other employees who were subsequently hired at other Royal Host properties.
[144] To avoid liability, Westmount must establish that Royal Host acted in a commercially unreasonable manner in making those payments.
[145] If an employee of the Yorkdale Travelodge were terminated and hired at another Royal Host property several months later, it would not have been commercially unreasonable to pay severance at the time of termination. Indeed, a termination payment would have been legally required. The simple fact that a former Yorkdale employee was subsequently hired at another Royal Host property does not make the termination payment commercially unreasonable.
[146] I was given no basis to conclude that the payments to the few employees who were later hired at other Royal Host properties were commercially unreasonable.
(iii) All Termination Payments Unreasonable
[147] Westmount submits it should avoid liability for all employee termination costs because Royal Host should have given conditional notice to employees in December 2004 instead of on February 8, 2005 as it did. Had Royal Host given notice in December, the employees would have worked for a greater portion of their notice period as opposed to being paid in lieu of notice.
[148] I do not accept that submission.
[149] Royal Host gave its employees notices of termination when it was comfortable that Westmount’s financing would close. I find that Royal Host was under no obligation to give employees termination notices at an earlier stage for the same reasons that I found that Royal Host was not obligated to terminate its arrangements with CN earlier than it did.
D. Equipment Leases
[150] Royal Host claims $199,000 for the cost of terminating certain equipment leases associated with the property. Westmount contests this claim.
[151] Westmount argues that it agreed to purchase Royal Host's interest in the property together with all equipment for $10.8 million. At the last minute, Royal Host told Westmount that it did not own approximately $150,000 worth of equipment on the property.
[152] Westmount submits that the parties reached a business deal whereby the price was reduced from 10.8 million to 10.65 million to reflect the loss of this equipment, but, if Royal Host could get a court order allowing it to transfer the equipment, Royal Host would do so and the purchase price would remain unchanged. Royal Host got a court order and the price remained unchanged.
[153] According to Westmount, it is being charged twice for the same equipment; once with the $10.8 million purchase price and a second time with the lease termination charges.
[154] Westmount argues that I should look to the foregoing factual matrix when determining this issue because the relevant agreements are ambiguous. In the alternative, Westmount submits that the obligation requiring Westmount to pay for the leases is void for want of consideration.
[155] While the transaction as Westmount describes it appears unfair, I cannot accept Westmount’s submissions on this point.
[156] The Agreement of Purchase and Sale between Royal Host and Westmount provided that Westmount would pay $10.8 million for Royal Host's interest in the property including all equipment. In Article 7(1) of that agreement Royal Host represented and warranted that all equipment on the property has been fully paid for and is clear of any encumbrances with the exception of two pieces of equipment listed in a separate schedule which are not at issue in this action.
[157] On February 18, 2005, the parties entered into an Amended Agreement of Purchase and Sale. It reduces the purchase price to $10,650,000.
[158] Paragraph 8 of the Amended Agreement of Purchase and Sale addresses the leased equipment but differently than the way in which Westmount describes the business deal.
[159] Paragraph 8 provides that, if Royal Host obtains an order exempting the equipment from the Bulk Sales Act, then Westmount will purchase Royal Host's interest in the equipment for $150,000 subject to the security interests in the equipment. The security interests are then set out in Schedule A to the Amended Agreement of Purchase and Sale.
[160] Paragraph 8 goes on to provide that Royal Host can, with Westmount's consent, negotiate with the holder of the security and retain the equipment for itself or release its interest in the equipment at the lowest cost that Royal Host can negotiate with the security holder. If Royal Host pursues the latter course, then the cost of the negotiated settlement will be added to the hotel closing costs for which Westmount is responsible.
[161] I agree that the wording of paragraph 8 of the Amended Agreement of Purchase and Sale appears to undermine the concept associated with the price reduction as Westmount has described it. That, however, is clearly what the language of paragraph 8 provides.
[162] Both Royal Host and Westmount were sophisticated parties who were represented by reputable law firms. It is not unusual in the dynamic of a commercial negotiation that one party might appear to offer a concession but then remove its benefit elsewhere in the agreement. That dynamic can come about in a variety of ways. On occasion it is the product of a hard-nosed, aggressive negotiator whom one must watch carefully. On other occasions the contradiction may be a face-saving device which is the best that could be negotiated and that the parties insert in the hope that the issue never arises. On still other occasions there are fair and equitable business reasons for structuring the transaction as it is but those reasons can no longer be recalled at the time of trial.
[163] Whatever the reason here, the language of paragraph 8 of the Amended Agreement of Purchase and Sale is clear.
[164] Westmount directed me to a number of cases for the proposition that the Amended Agreement of Purchase and Sale is void for lack of consideration.
[165] I cannot agree. Apart from the fact that the Amended Agreement of Purchase and Sale expressly refers to consideration of $10 and other good and valuable consideration, the presence of consideration going both ways is clear from the agreement. By way of example, the original Agreement of Purchase and Sale calls for a closing on January 31, 2005. Westmount did not have financing in place by that time. The Amended Agreement of Purchase and Sale calls for a closing date of February 21, 2005. That is valid consideration. It allowed Westmount to preserve the transaction. In the absence of an extension, Royal Host could have taken the position that the agreement was at an end on January 31, 2005.
[166] The Post Closing Possession Agreement also bears on this issue. It was entered into as of February 21, 2005, that is to say after the Amended Agreement of Purchase and Sale.
[167] Article 3.2(a) of the Post Closing Possession Agreement specifically imposes on Westmount the obligation to pay for the lease termination costs provided they are incurred in a commercially reasonable manner.
[168] Article 5.3 of the Post Closing Possession Agreement contains an entire agreement clause which provides that the agreement "cancels and supersedes any prior agreements, undertakings, declarations, representations, written or verbal, in respect thereof."
[169] Even if I were to take into account Westmount's description of the factual matrix, the Post Closing Possession Agreement, would form part of that matrix and would supersede the understanding Westmount had about the purpose behind the Amended Agreement of Purchase and Sale.
[170] After the Post Closing Possession Agreement was entered into, Royal Host asked Westmount which leases it wanted to assume and which leases it wanted Royal host to the terminate. On April 1, 2005, Westmount gave Royal Host specific instructions about what leases it would assume and what leases it wanted Royal Host to deal with. On April 7, 2005, Royal Host confirmed those instructions in writing and confirmed that the cancellation costs of the leases would be added to the Vendor Closing Costs for which Westmount would be liable.
[171] Westmount responded on April 8, 2005 confirming that it would dispose of certain leases and continued:
"As per the "Vendor Closing Cost" I will discuss the situation further with Greg and determine what might be eligible."
[172] In other words, Westmount recognized that there was an issue but was content to have Royal Host continue to negotiate the termination of the leases. Mr. Ieradi says he then discussed the matter with Greg and reached an agreement that was consistent with Mr. Ieradi's understanding of the commercial deal concerning the leases. Mr. Ieradi did not reduce that agreement to writing. While Greg recalls discussing leased equipment with Mr. Ieradi, he has no recollection of those discussions or of reaching any compromise to change the terms of the written agreements.
[173] Westmount is effectively asking me to change the express language of the written agreement based on Mr. Ieradi's recollection of the commercial purpose of an agreement and of discussions he had with Greg 13 years ago. Although I might have sympathy with Westmount's position, in light of the evidence available to me today, it would be inappropriate to contradict the language of the written agreements.
E. Linens
[174] Westmount submits that it obtained a 50% interest in the hotel’s linens as that term is defined in the agreements between the parties.
[175] Westmount submits that it is entitled to a credit of $92,437.04 on account of linens because Royal Host removed them from the property without consulting Westmount and without giving Westmount credit for their value.
[176] Royal Host submits that Westmount surrendered any right to the linens by virtue of article 3.9 of the Post Closing Possession Agreement.
[177] For the reasons set out below I find that Westmount is entitled to a credit of $92,437.04 on account of linens.
[178] The Post Closing Possession Agreement is dated February 21, 2005. Conceptually it was entered into immediately after the closing of the purchase. Recital A makes clear that Westmount acquired 50% of Royal Host's interest in the property except for Royal Host’s interest in the linens. Recital C makes clear that Westmount acquired Chimo's 50% interest in the linens.
[179] Under article 3.9 of the Post Closing Possession Agreement, Westmount released to Royal Host all of its rights in respect of the linens. On the face of the agreement that could only refer to the linens that Westmount had acquired from Chimo because those were the only linens in respect of which Westmount had acquired an interest which it could release.
[180] If that were the end of the analysis, Westmount would have no entitlement to a credit for the linens. However, contemporaneous documents make it clear that this should not be the end of the analysis.
[181] It appears that the Post Closing Possession Agreement, although dated February 21, 2005 was entered into sometime after that.
[182] This is evident from an email exchange on February 22, 2005 between Lou Natale, Westmount's external counsel, and Paul Blundy, Royal Host's external counsel.
[183] The exchange begins with Mr. Blundy setting out his discussion with Mr. Natale about the definition of linens in the Post Closing Possession Agreement. Mr. Blundy asks Mr. Natale to confirm the understanding.
[184] Mr. Natale responds indicating that their clients have spoken and agreed that Westmount would retain the interest in the linens it had acquired from Chimo and that Westmount and Royal Host would work out an acceptable arrangement between themselves regarding Westmount's interest in the linens. As a result, Mr. Natale says that the section of the Post Closing Possession Agreement dealing with the release of Westmount's interest in the linens should be deleted.
[185] Mr. Blundy forwards this email string to Greg saying:
"Given your discussions with Joe I presume we will leave the agreement as it is and just not agree on the meaning, leaving it to you and Joe to sort out?"
[186] Pausing there, it is clear that the parties disagree about the meaning of the Post Closing Possession Agreement. They are not ad idem on the linens issue and will sort it out between themselves.
[187] Greg agreed during his cross-examination that Westmount was entitled to half of the linens and Royal Host was entitled to the other half.
[188] Further internal documentation at Royal Host confirms this. On March 23, 2005 Mr. Kerstens wrote an email to Greg attaching a list of linen inventory saying:
"Greg, I believe you were saying you would now discuss this with [Mr. Ieradi] to agree on a figure & then presumably I can get the linen off the property to whoever we choose to give it to."
[189] Mr. Kerstens' email of March 23, 2005 is consistent with Mr. Blundy's email of February 22, 2005 and consistent with Greg's description of the agreement during cross-examination.
[190] It is undisputed that Royal Host removed the linens from the property without consulting Westmount and without crediting Westmount for its share of the linens.
[191] Although giving Westmount a credit for 50% of the value of the linens would appear, on its face, to contradict the written words of the Post Closing Possession Agreement, that is an appropriate result because both parties agree that the language of the Post Closing Possession Agreement does not reflect their intentions.
[192] The overriding object of contractual interpretation is to enforce the mutual intention of the parties. It is clear that the mutual intention of the parties was for Westmount to retain a 50% interest in the linens.
[193] We come next to the question of value. The parties agree that the amount of the beverage inventory which is included in the definition of linens is $29,565.79. They disagree on the balance.
[194] Royal Host's internal balance sheet ascribes a value of $155,308.29 to the balance of the linen inventory that was transferred to other properties.
[195] At trial, Royal host submitted that if Westmount were to receive any credit for linens, the value was not $155,308.29 but $53,526.
[196] Royal Host derives this number from an email Mr. Kerstens wrote on March 23, 2005 in which he says he calculated the “book value” of “just bed linen & towels” to be $53,526.
[197] I cannot accept Royal Host’s submission about the value of the linens.
[198] Mr. Kerstens does not indicate how or where he obtained the “book value” of $53,526. The balance sheet Royal Host produced in the litigation shows a value of $155,308.29. Royal Host never explained the difference between the two values. Moreover, Mr. Kerstens’ calculation is of “just bed linen & towels”. The definition of linens in the Post Closing Possession Agreement is broader. Royal Host never explained why Mr. Kerstens took a narrower approach than the agreement requires.
[199] In the absence of any acceptable explanation from Royal Host I can only conclude that it accurately recorded the value of the linens on its balance sheet. Both parties agree that the $29,565.75 for beverages should be added to the value of the linens which I find to be $155,308.29 for a total of $184,874.04 of which Westmount is entitled to one half or $92,437.02. Westmount is entitled to a credit in this amount from the funds paid into court.
F. Miscellaneous Amounts
[200] Royal Host claimed $181,904 in miscellaneous expenses. During the course of the trial, it withdrew $85,127.81 of those expenses after examination and cross-examination disclosed issues with them. Westmount is entitled to a credit in that amount against the funds paid into court.
[201] That leaves $96,776.19 of which approximately $67,000 relate to lease buyout expenses that have been disposed of above. This leaves $29,776.19 of miscellaneous expenses that are at issue in this proceeding.
[202] These expenses are not included in the calculation of the net operating loss that was incurred to keep the hotel open between February 21, 2005 and April 5, 2005 and which was discussed earlier in these reasons when dealing with the CN termination. As a result, if the expense is commercially unreasonable or if it relates to the period after March 4, 2005, it is appropriate to give Westmount a commensurate credit.
(i) Security Expenses
[203] The single largest miscellaneous expense to which Westmount objects is the payment of $22,084.40 to an outside firm for security services between March 6, 2005 and April 5, 2005. Given my earlier finding that Royal Host should have closed down the hotel by March 4, 2005 that is not an appropriate expense for Westmount to bear.
[204] If I am incorrect in my determination that the hotel should have been closed on March 4, 2005 then the payments to third-party security providers are commercially reasonable and are sums for which Westmount should be liable.
[205] Westmount also objected to the expense on the basis that the expense could have been reduced by having the hotel’s existing security staff work through their entire notice period.
[206] I do not accept that basis for challenging the security expense.
[207] This submission fails to take into account that an employee who is given working notice is under no obligation to complete the working notice period, nor would such an employee have an incentive to do so if he/she found another job. Existing security staff would have been free to stop working at any point thereby leaving Royal Host without adequate security for the property. Royal Host avoided that risk by ensuring that it had third-party security providers during the entire interim period. That was a reasonable way to balance the risk Royal Host faced.
[208] It would also not have been reasonable for Royal host to require other non-security staff to take on security duties as part of a longer working notice as Westmount suggests.
[209] The Post Closing Possession Agreement allows Royal Host to operate the hotel “in a manner consistent with past operations.” It was Royal Host's past practice to use properly trained security personnel for security. It was entitled to continue to do so.
[210] Quite apart from the issue of using untrained people as security staff, the significant change in the nature of the duties that Westmount proposes [e.g. asking a chambermaid to become a security guard] may in and of itself constitute constructive dismissal for which notice would be required.
(ii) 50+ Seminar
[211] Westmount objects to an expenditure of $1,500 paid to provide employees over the age of 50 with employment counseling services. Providing job hunting help to terminated employees is a commercially reasonable expenditure. While such counseling may not be required by law, that does not make it commercially unreasonable. Royal Host had a legitimate interest in avoiding a reputation as a cutthroat employer. An expenditure of $1,500 to that end is commercially reasonable.
[212] The $320.47 in meeting room and restaurant charges for the 50+ counseling seminar to which Westmount objects are also commercially reasonable and are allowed.
[213] Westmount objects to a further expenditure of $750.03 relating to the 50+ seminar. Of that amount, $593 relates to internal human resources charges which bill to Westmount the time that Royal Host Human Resources staff spent on closing the hotel. Westmount should be credited for that amount. It would not be appropriate to bill this time to Westmount. Just as Greg's or Mr. Lambie's time was not billed to Westmount, human resource time should not be either.
[214] The balance relates to the cost of a lunch for the attendees of the 50+ seminar. It is reasonable to provide a modest lunch for employees attending a seminar of this sort.
[215] In a similar vein, Westmount objects to an expenditure of $1802.36 at page 3456 of the Joint Book of Documents to assist terminated employees. Westmount is entitled to a credit for that amount. This is an internal charge for the time of Robin Chow, a Royal Host human resources employee which is not appropriate to charge to Westmount for the reasons set out a moment ago.
(iii) Laundry
[216] Westmount objects to an expenditure of $811.29 for March 2005. Given my finding that the hotel should have closed on March 4, Westmount should be responsible for $130.85. Westmount should receive a credit of $680.44.
(iv) Mr. Kerstens’ Expenses
[217] Westmount objects to the payment of $237.32 to Jim Kerstens to reimburse him for various expenses incurred in February and March 2005. There was no evidence that expenses of this sort were a charged by Royal host against the individual hotel before entering the transaction with Westmount. Some of the expenses do not appear to be related to the transaction including expenses for the Trevor Gaskin court hearing, a department head dinner, and a meeting with RE/MAX.
[218] I allow Mr. Kirsten’s expensive $1127.81 for a trip to Calgary. The evidence before me was that the Calgary trip related to the closing of the hotel.
(v) Cable and Phone
[219] The charges of $3,884.55 payable to NTFC Capital Co. for the hotel’s phone system for and the charge of $1,705.02 for cable television services, both for the month of March, 2005 should be prorated to provide for the March 4 closing date. The charges come to a total of $5589.57 which comes to a daily charge of $180.31. The charge for March 1 to March 4 should be $721.24 resulting in a credit to Westmount of $4,868.33.
(vi) Delivery Charge
[220] Finally, Westmount objects to $577.03 paid to Canada Cartage for the delivery of various products from the hotel to other Royal Host properties. That does relate to a hotel closing cost, was paid to a third party and was commercially reasonable.
G. Pre-Judgment Interest
[221] Royal Host claims pre-judgment interest of $652,364.19. It bases that claim on what it submits is the prevailing rate of 4.8% as determined under sections 127-128 of the Courts of Justice Act when the action was commenced in the fourth quarter of 2006.
[222] Westmount submits that the pre-judgment interest rate should be set at 1.72% which reflects the average rate of pre-judgment interest from the fourth quarter of 2006 to the present.
[223] For the reasons set out below, I have determined that the appropriate rate of interest is a blended rate of 1.72%.
[224] The test to determine the rate of prejudgment interest is not in dispute. A litigant has a prima facie right to pre-judgment interest as calculated under sections Courts of Justice Act and should not ordinarily be subject to a reduced rate. Averaging remains the exception to the rule. The court should apply the pre-judgment interest rate unless it finds special circumstances to justify departing from it.
[225] Section 130 of the Courts of Justice Act gives the court the discretion to disallow interest entirely or to adjust the interest rates upwards or downwards. In exercising that discretion the court is required to take into account: (a) changes in market interest rates; (b) the circumstances of the case; (c) the fact that an advance payment was made; (d) the circumstances of medical disclosure by the plaintiff; (e) the amount claimed and the amount recovered in the proceeding; (f) the conduct of any party that tended to shorten or to lengthen unnecessarily the duration of the proceeding; and (g) any other relevant consideration. R.S.O. 1990, c. C.43, s. 130.
[226] Factor (d), medical disclosure is not relevant to this case. The remaining factors all point to the blended rate of 1.72%.
[227] Changes in market interest rates: There has been a substantial drop in interest rates since the litigation began. Canada and other large economies have experienced abnormally low interest rates since 2008. The pre-judgment interest rate has fallen as low as 0.5% and has never exceeded 1.3%.
[228] These abnormally low rates have been widely recognized as a legitimate basis for applying a blended or lower rate of prejudgment interest than that calculated under the rules.
[229] The circumstances of the case: The events out of which this litigation arises stretch back to 2005. The action was commenced in 2006. It has taken 12 years to get to trial. The litigation has moved through an entire economic cycle from a near collapse of financial markets and historically low interest rates to a full recovery with the exception of interest rates.
[230] The fact that advance payment was made: While not exactly an advance payment, Westmount was required to pay $2.2 million into court in 2011. Since 2011 the funds paid into court have earned interest at a rate significantly lower than the 4.8% Royal Host claims.
[231] Westmount did make an advance payment of $100,000 for which it received no credit when funds were paid into court in 2011.
[232] The amount claimed and the amount recovered in the proceeding: Until shortly before trial, Royal Host claimed total costs of $2,136,680. I have found that it had a valid claim to costs of $738,201 of which $100,000 had already been paid. As a result, the principal amount of the judgment Royal is being awarded is $638,201 a recovery of less than 30% of the expenses it asserted until shortly before trial.
[233] The conduct of any party that tended to shorten or lengthen unnecessarily the duration of the proceeding: As noted, both parties blame the other for the length of the proceeding.
[234] Royal Host argues that Westmount should have made a payment of $600,000 upfront because that was the estimate Greg had allegedly given to Westmount. Recall however, that Westmount at one point offered to pay $500,000 without any supporting documentation if it could replace the mortgage with a guarantee and establish a schedule for the delivery of supporting documentation and discussions to agree on a final figure.
[235] Westmount points to Royal Host’s delay in providing information to support its expense claims and its unreasonable insistence on payment of the fictitious franchise termination fee.
[236] The evidence before me suggests that Royal Host played a larger role in lengthening the proceedings than Westmount. Royal Host’s insistence on payment of the Travelodge franchise termination fee while refusing to provide any supporting documents understandably coloured Westmount's view of the entire claim. If a party so brazenly insist on payment of an amount to which it was not entitled, Westmount had good grounds for wanting to examine the balance of its claim with great care.
[237] Any other relevant consideration: Royal submits that decreasing the interest rate would reward Westmount. I cannot see how that would be the case. Westmount was required to pay $2 million into court in 2011. As a result, it was not earning any return on that money elsewhere.
Conclusion on Pre-Judgment Interest
[238] Each of the foregoing factors speaks to the application of a blended rate.
[239] The fundamental purpose of prejudgment interest is compensatory. It is to compensate a party for the time value of money; it should not punish or reward a litigant.
[240] Awarding the rate of 4.8% from 2006 on would reward Royal Host with 12 years of interest at a rate that would have been very difficult to obtain elsewhere, particularly given that its principal was secured initially against real estate and then against monies paid into court.
[241] A further goal of pre-judgment interest is to foster settlement. Much of the barrier to settlement in this action appears to be the failure to produce information and insistence on “reimbursement” of a franchise termination fee that was never paid. Awarding a higher rate of interest would in effect reward that conduct.
[242] As a result of the foregoing, I fix pre-judgment interest at a blended rate of 1.72%.
[243] In closing I would like to thank counsel for both parties. Although the proceeding appears to have been aggressively fought by the parties, counsel were thoroughly professional and co-operative before me. The proceeding before me was conducted as an electronic trial that required co-ordination and co-operation of counsel. The assistance both sets of counsel provided to me was exemplary throughout.
Koehnen J.
Released: September 4, 2018
[^1]: Misnamed Royal Host Hotels and Resorts Real Estate Investment Trust in the statement of claim and style of cause. [^2]: Taken from the statutory declaration of Patrick Lambie [^3]: Although the actual closing was February 23, 2005, the parties agreed in the Post Closing Possession Agreement that the closing date was February 21, 2005. Moreover, it is agreed that Royal Host billed Westmount for closing costs incurred between February 21, 2005 and April 5, 2005