COURT FILE NO.: CV-16-555863
REFERENCE HEARD: 20180115, 20180116, 20180117, 20180118
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Melanie Hurn, Applicant
AND:
Rawle Brathwaite and Ian Braithwaite, Respondents
BEFORE: Master Jolley
COUNSEL: Gillian Fournie, Counsel for the Applicant Christopher Thiesenhausen, Counsel for the Respondent Ian Braithwaite Rawle Brathwaite, in person
HEARD: January 15, 16, 17 and 18, 2018
REASONS FOR DECISION
Overview
[1] On 27 October 2006 the applicant Melanie Hurn (“Melanie”), the respondent Rawle Brathwaite (“Rawle”), the respondent Ian Braithwaite (“Ian”) and a fourth party who was subsequently bought out, purchased 1917 Gerrard Street East, Toronto (the “Property”), a two storey mixed commercial and residential building. The plan was for Rawle to rent the main floor space and operate a restaurant there and for the upper floor apartment to be rented out.
[2] Melanie, Ian and the fourth party took title to the Property but it was common ground that Rawle had an equal beneficial interest. All parties treated their arrangement as a partnership. At the time of the application, the Property was owned equally by Melanie, Rawle and Ian.
Terms of Reference
[3] By order made 31 March 2017 Justice Kurke approved an agreement of purchase and sale of the Property and that closing took place on 27 April 2017. The court order directed that the balance of the application be referred to a Master for a Reference to conduct an accounting of all expenses and profits derived from or associated with the Property from 1 January 2012 to the date of the Reference hearing.
[4] The order further provided that the Master shall have the full authority to determine the accounts pursuant to rule 55.04 of the Rules of Civil Procedure, including:
- taking into account money received or that might have been received but for the wilful neglect or default of any party, make allowance for occupation rent and to determine the amount, take into account and determine any necessary repairs, lasting improvements costs, and other expenses properly incurred, and make all just allowances.
[5] The reference proceeded before me on January 15-18, 2018 inclusive.
[6] It was agreed by all parties that the net proceeds available for distribution, taking into account certain advances and payments made on closing was $396,824.51.
The Issues
[7] There are three areas of disagreement that impact the distribution calculation:
Occupation Rent - rental arrears for the upstairs apartment and the main floor restaurant space;
Responsibility for advances made by Melanie to pay Property expenses, including the renovation of the apartment; and
Responsibility for the cost of removing the kitchen equipment belonging to Rawle from the main floor space and storing it.
[8] Three additional issues were agreed:
Amount of each partner’s capital contribution ($44,865.76 from Melanie, $43,868.26 from Ian and $10,332.50 from Rawle);
Repayment of a personal loan from Melanie to Rawle ($12,248.00); and
Treatment of advances received on closing ($25,000 received by Rawle and $39,822.40 received by Melanie).
[9] Each party filed affidavit evidence and also testified and was cross examined. Melanie filed an affidavit sworn 3 August 2017 and a reply affidavit sworn 1 December 2017. Rawle filed an affidavit sworn 31 July 2017 and a supplementary affidavit sworn 15 January 2018 (which had been sworn earlier on 3 November 2017). Ian filed an affidavit sworn 19 November 2017.
Legal Framework
(a) Applicable Partnership Act Provisions
[10] There are four relevant provisions of the Partnership Act, R.S.O. 1990, c.P.5 which are reproduced here. I have not included the definition of a partnership in section 2 as all parties agree they were partners and carrying on a partnership.
Section 10(1) states:
10(1) Except as provided in subsection (2) [limited liability partnerships], every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while the person is a partner, and after the partner’s death the partner’s estate is also severally liable in a due course of administration for such debts and obligations so far as they remain unsatisfied, but subject to the prior payment of his or her separate debts.
Section 24 states, in part:
24 The interests of partners in the partnership property and their rights and duties in relation to the partnership shall be determined, subject to any agreement express or implied between the partners, by the following rules:
All the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses, whether of capital or otherwise, sustained by the firm, but a partner shall not be liable to contribute toward losses arising from a liability for which the partner is not liable under subsection 10(2).
The firm must indemnify every partner in respect of payments made and personal liabilities incurred by him or her,
(a) in the ordinary or proper conduct of the business of the firm; or
(b) in or about anything necessarily done for the preservation of the business or property of the firm.
Every partner may take part in the management of the partnership business.
No partner is entitled to remuneration for acting in the partnership business.
No person may be introduced as a partner without the consent of all existing partners.
Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners, but no change may be made in the nature of the partnership business without the consent of all existing partners.
The partnership books are to be kept at the place of business of the partnership, or the principal place, if there is more than one, and every partner may, when he or she thinks fit, have access to and inspect and copy any of them.
Section 39 states:
39 On the dissolution of a partnership every partner is entitled, as against the other partners in the firm and all persons claiming through them in respect of their interest as partners, to have the property of the partnership applied in payment of the debts and liabilities of the firm and to have the surplus assets after such payment applied in payment of what may be due to the partners respectively after deducting what may be due from them as partners to the firm, and for that purpose any partner or the partner’s representative may, on the termination of the partnership, apply to the court to wind up the business and affairs of the firm.
Lastly, section 44 states:
44 In settling accounts between the partners after a dissolution of partnership, the following rules shall, subject to any agreement, be observed:
Losses, including losses and deficiencies of capital, are to be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits, but a partner is not required to pay any loss arising from a liability for which the partner is not liable under subsection 10(2).
The assets of the firm, including the sums, if any, contributed by the partners to make up losses or deficiencies of capital, are to be applied in the following manner and order,
(a) in paying the debts and liabilities of the firm to persons who are not partners therein;
(b) in paying to each partner rateably what is due from the firm to him or her for advances as distinguished from capital;
(c) in paying to each partner rateably what is due from the firm to him or her in respect of capital.
- After making the payments required by paragraph 2, the ultimate residue, if any, is to be paid among the partners in the proportion in which profits are divisible.
(b) Applicable Partnership Agreement Terms
[11] While the parties did not have a formal partnership agreement, they did sign two documents setting out their intentions. The first was dated 4 February 2012 and evidenced their intention to be equal partners. The second was dated 26 February 2012 and was signed in conjunction with Melanie and Ian obtaining a new mortgage with Meridian Credit Union. In it the parties agreed as follows:
The new Meridian Credit Union mortgage would be used to pay out the existing Equitable Trust mortgage.
Remaining funds available would be used for renovations to enhance the value of the Property and as a reserve fund for future repairs/maintenance.
Debt load to be split equally among the three partners (Ian, Rawle and Melanie).
All future gains and losses will be shared equally among the three partners.
Each partner has an equal vote in the decision making of funds obtained for the Property. Any disputes are to be settled by an arbitrator per the Shareholders Agreement.
Second floor, two bedroom apartment to be modernized and rented out for suggested rent of $1400 + utilities. Rent revenue to be applied monthly against the mortgage and reserve fund (repairs, maintenance and lump sum pay down on mortgage).
Apartment vacated for renovations’ start date of June 1, 2012 with apartment available for rental September 1, 2012.
Rawle’s ownership shares (33.333%) of building will continue to be held in trust by Ian and Melanie after the mortgage is signed off with Meridian Credit Union. Each individual (Ian, Rawle and Melanie) own 33.333% of building.
A complete shareholders agreement between above parties and individual wills must be completed and signed off by June 1, 2012. (I note that the parties never did prepare or sign a shareholders’ agreement.)
[12] These arrangements are consistent with what had been discussed by the partners at their meetings held in November 2011, January 2012 and May 2012.
[13] As reflected in the minutes of those meetings, it was agreed that renovating the apartment to a higher standard would bring in a better tenant which should reduce issues with rent payment. The water pressure for the apartment had to be addressed and new plumbing installed. There were problems with the heating and air conditioning that also had to be addressed. The knob and tube wiring had to be replaced. It was agreed that new kitchen cabinetry, countertop and appliances would be purchased and installed along with new bathroom fixtures and a washer/dryer. It was also agreed that the renovations and repairs had to be done by a contractor to ensure the quality of work met commercial standards. In addition the roof required repair and the windows were to be replaced. By May 2012 all contractors had been booked to start their work in June.
Issue 1: Occupation Rent - Rental Arrears for the Property
(a) Rent Owing by Ian to the partnership
[14] Commencing in early 2007 Ian moved into the upstairs apartment. By the agreement noted above, he was to vacate the apartment by 1 June 2012 so that the contractors who had been booked to start the renovations June 1 could begin and the renovated apartment rented out commencing 1 September 2012.
[15] Ian did not move out as agreed. As a result, the renovations did not proceed as scheduled. He first advised Melanie and Rawle that he hoped to vacate by September, but he did not leave then either. Melanie and Rawle believed that Ian vacated in April 2013 but then allowed his nephews to move into the apartment. At the hearing, Ian testified that he in fact remained in the apartment on and off until March 2014.
[16] Unfortunately, not only did Ian not move out as agreed, he did not pay rent during this “extension” at the agreed rate of $1,400 per month, so there was a $540 monthly rental income shortfall. Ultimately this had four important consequences: first, Melanie had to personally fund the ongoing expenses of the Property; second, Melanie and Rawle had to bring an action against Ian for rental arrears, which was successful and resulted in Ian’s wages being garnished; third, Melanie and Rawle had to bring eviction proceedings against the nephews in early 2014 which finally resulted in their (and Ian’s) removal from the apartment in March 2014; and, fourth, the renovations that were agreed to in 2012 did not start until May 2014, once the apartment was vacant.
[17] The rent owing by Ian was paid for the period August 2013 to March 2014 on the basis of the lower $960.00 rent rather than the agreed upon rent of $1,400 per month. Ian has agreed that he owes the partnership the sum of $3,520 to account for this rental shortfall for this period. Rawle takes the position that the rental arrears owed by Ian run through to 2017 and total $16,000. There is no evidentiary support for this position. Ian did not sign a lease to 2017. Further, he was evicted in March 2014 and there is no basis to claim rent against him after that period absent a specific lease agreement to that effect.
[18] I find that Ian owes the partnership the sum of $3,520 for his rental shortfall from August 2013 to March 2014.
(b) Rent Owing by Rawle to the partnership
[19] It is Melanie and Ian’s position that Rawle owes rent and insurance for the main floor restaurant space for the 23 month period from 1 December 2014 to 31 October 2016 in the amount of $37,723.42.
[20] Rawle signed a ten year lease for the main floor space for the period 1 November 2006 to 31 October 2016. It was a term of the lease that he would pay $18,000 per annum along with insurance premiums, among other things. The restaurant opened in November 2007 once the necessary renovations were done and it operated until 30 November 2014 when Rawle became ill. Efforts were made to find a subtenant but a suitable candidate was not located. The lease remained in effect until 31 October 2016.
[21] In early April 2015 Rawle reiterated his commitment to the main floor restaurant space and also to the addition of the second floor apartment space. Melanie insisted on a rental agreement to evidence Rawle’s ongoing obligation as he would now be occupying the entire Property. On 25 April 2015 she and Rawle signed a rental agreement whereby Rawle confirmed that he agreed to resume the commercial lease payments for the Property in June 2015 and would pay until October 2016, then end of the lease term. In this rental agreement, Rawle also agreed to rent the second floor apartment for $1,400 per month plus hydro.
[22] In the fall of 2015 Rawle decided to reopen the restaurant and some additional improvements were made to the space that November. He also obtained the necessary additional insurance for the restaurant starting that month through to June 2016. However, Rawle never did reopen the restaurant before the lease expired.
[23] After signing the rental agreement in April 2015, Rawle occupied the apartment from June 2015 to April 2017 when the Property was sold. Rent and hydro for the apartment for that period totaled $33,648.83. In 2016 Rawle paid $7,800 in rent, whether allocated to the restaurant or the apartment.
[24] As such, the rent claimed for the combined space is $63,572.25. While Rawle does not take issue with the calculation, he denies that he owes any rent for either space.
(i) Rent for the Restaurant Space
[25] As it relates to the restaurant rent, his position is two-fold. First, he testified that the April 2015 rental agreement was understood by both him and Melanie to be unenforceable. He stated that he was not working at the time and that Melanie knew he did not have the funds to pay these amounts. At the time Ian had disappeared from the partnership and, without his signature and agreement, it was not possible to obtain new mortgage financing. Rawle wanted to explore obtaining unsecured financing using at least his interest and that of Melanie. He testified that he signed this rental agreement so that he and Melanie could present it to potential lenders to demonstrate a rental income stream.
[26] Melanie denied this. She testified that she wanted a written commitment from Rawle as he had not paid the commercial rent since November 2014 and now wanted to take on the upstairs apartment as well. He spoke to her about opening his restaurant in another location, about subleasing this location and about a crowd-funding idea. I note that Rawle deposed in his affidavit sworn 31 July 2017 that he was considering business partners with Neighbourhood Link, discussing investment possibilities with the Daniels Group and seeking private capital around this time. Further Rawle had arranged commercial insurance for the restaurant at a cost of roughly $500 a month, evidencing his intention to re-open and did some renovation work to the basement floor.
[27] Even if I accepted that the April 2015 rental agreement was created to show a fictitious rental income stream, it does not deal with Rawle’s original ongoing obligation under the ten year lease he signed. He did not give notice under that lease and the lease was not terminated. While the parties took steps to find a subtenant or a new tenant, there is no evidence that Rawle’s lease payments were waived.
[28] Second, Rawle takes the position that Melanie and Ian should be solely responsible for the rent owing for the restaurant space as it was because of their actions that the restaurant space was not leased to a new tenant. As against Melanie, Rawle’s position is that she unreasonably refused to refinance the Property when he requested. As a result, he was unable to access some of the capital he had built up in the Property. Had he been able to do so, it would have solved the issue with the rent owing and the restaurant could have remained open and paid rent.
[29] As against Ian, Rawle argues that his complete absence from the partnership – and from their lives – after March or April 2014 caused significant challenges. It impacted their ability to refinance the Property (had Melanie agreed to that, which she did not) and to lease the restaurant space or sell the restaurant entity including its lease. Rawle testified that the inability to obtain Ian’s signature made potential tenants and buyers wary and negatively impacted Melanie and Rawle’s negotiating position.
[30] As will be seen below, these issues are also advanced in support of Rawle’s position on the obligation to cover the ongoing Property expenses, including the mortgage payments, and the cost of renovations.
[31] There is no evidence that Ian’s absence caused any of the leasing proposals to fail. While Rawle testified that he assumed it impacted their negotiating position, the evidence was that the lease negotiations never got to that stage. The proposed tenants may have been aware that there was another person on title but there was no evidence led that the prospective tenants were told that the co-owner would not consent or would be challenging to reach, even if that were the case. Ian testified that if the lease terms had been acceptable to Melanie and Rawle, he would have agreed to the lease if asked. The evidence from both Melanie and Rawle is that the leases proposed by the potential new tenants contained terms that neither was prepared to agree to. One of those terms was a veto over the sale of the Property, which Rawle characterized as a deal breaker.
[32] With regard to his position concerning Melanie, Rawle testified that he begged Melanie to aid him to achieve his “vision” and to agree to refinance the Property to allow him to “access his capital”, as he put it. While this was clearly Rawle’s favoured approach, Melanie was not prepared to agree and was entitled to take that position. As will be noted below, she had been single handedly funding all the expenses of the Property. Neither Rawle nor Ian was contributing further capital or even rent. The mortgage was up for renewal in the coming months and she was not prepared to refinance and extend or increase her mortgage obligation. Rawle’s “vision” was becoming Melanie’s expensive nightmare.
[33] Rawle was also upset that Melanie would not agree to buy out Ian. Rawle testified that his financial situation did not “provide the option at that point” to bring an application to deal with Ian’s position so he wanted Melanie to bring the application as an owner on title and pay for it. Melanie was clear that she did not want to increase her position in the Property by buying Ian out and would have agreed to be bought out herself instead.
(ii) Rent for the Apartment Space
[34] Rawle argued that he should not be responsible for paying rent for the apartment because it did not comply with the Building Code. He and Melanie halted the renovations after issues with the contractor and the contractor did not install the staircase banister, the railing and finish some of the drywall. Even if the banister and railing were missing, the evidence was that they could have been installed in short order had Rawle requested or retained another contractor to do the installation. At its highest, the consequence of such a failure might have been an order that the handrail and banister be installed but would not have been a waiver of rent for a period of 23 months.
(iii) Conclusion on rental owing by Rawle to the partnership
[35] I find that Rawle owes rent to the partnership for both the main floor space and the apartment space in the total amount of $63,572.25. He occupied the apartment either personally or with his belongings. He knew based on the earlier partnership notes and confirmed in the April 2015 rental agreement he signed that the rent was $1,400 per month + utilities.
[36] On the restaurant space, the rent was owing under the commercial ten year lease signed in November 2006 and the confirmation lease signed in April 2015. The landlords considered potential new tenants (either as main tenants or as subtenants) and worked with Rawle on lease terms but did waive their entitlement to rent.
(c) Rent owing by Melanie and Rawle to the partnership
[37] The parties expected that the renovations to the apartment would take three months. They ended up taking 14 months. Ian argues that it may have been reasonable for the renovations to take six months but any period longer than that was as a result of mismanagement by Melanie and Ian. He argues that the apartment should have been rented no later than 1 October 2014, which would have been six months after the eviction of the nephews (and perhaps himself). It was not rented until 1 June 2015 when Rawle signed the lease agreement. Ian claims that the rental shortfall of $1,400 per month for those intervening eight months should be the responsibility of Melanie and Rawle jointly and severally.
[38] I reject this position for a number of reasons. First, while the partners anticipated that the renovations would take three months, it was clear from everyone’s testimony – including Ian’s - that this was only a guess. It was not based on any advice or input from any contractor or someone knowledgeable in the field. It was based on, if anything, their collective experience renovating the restaurant space in 2006. If the estimate was faulty, it was as much Ian’s fault as Melanie’s or Rawle’s.
[39] Second, while it is true that the Property would have had a modest profit without the renovation expense (assuming all tenants paid their rent), that was not the agreement the partners had. They had agreed to carry out the renovations set out above. Whether the estimate ran over time or not, I find that the renovations were agreed to and were undertaken for the benefit of the partnership. It is only with the benefit of hindsight that the renovations are being criticized.
[40] Third, Ian was the reason for the delay in the commencement of the renovations. Had he moved out when agreed, the contractors were lined up and ready to start in June 2012. Due to his actions, the space was not vacant for almost two more years after the tenants were evicted in March 2014. There was now a different market in Toronto and a cost and time estimate that was reasonable in 2012 may not have been reasonable in 2014.
[41] Fourth, Ian was told in May 2014 that the apartment had been stripped to the bare walls and that renovations were underway and he did not object.
[42] Lastly, Ian claims an interest in the improved Property. To be consistent, had he not wanted to share the renovation expense and the price at which the renovated Property sold, he could have tendered evidence valuing his interest as at May 2014 when he ceased his contact with his two partners. I find it is unreasonable for Ian to want to receive the benefit of the renovations had they gone smoothly but reserve his right to complain when problems developed. He argued that the renovations did not increase the value of the Property but there was no evidence led to support that position.
[43] Ian complains that he was not consulted as the renovations continued. However, he had agreed in 2012 to the scope of the renovations. That scope did not change. He testified that he knew the apartment would be completely gutted. Everyone was aware that there was knob and tube wiring and the apartment would be taken back to the studs. The cost of the renovations exceeded what the three partners together had guessed but it was not due to any addition made by Melanie or Rawle to the 2012 agreement. This was not a “change in the nature of the partnership business” as contemplated by section 24.8 of the Partnership Act such that the consent of all the partners was needed to continue what had been earlier agreed.
[44] I find that no rent is owed by Melanie or Rawle for the period October 2014 to June 2015.
(d) Rent owing by Melanie and Ian to the partnership
[45] Rawle contends that Melanie and Ian should be responsible for rent that he says should have been obtained for the commercial space through to 2020, the term of the leases that were submitted by the two potential tenants in May and June 2015.
[46] As noted above, there is no evidence that the commercial leasing negotiations failed because of any action or inaction on the party of Melanie or Ian. For these same reasons, I reject the position of Rawle on this issue and I find that no rent is owed by Melanie or Ian for the period June 2015 through to 2020, other than the rent owing by Rawle as set out above, to 31 October 2016.
Issue 2: Advances made by Melanie to pay Property Expenses
[47] Starting in June 2012 the partnership was receiving only sporadic rent from the apartment space and, then, in an amount less than the agreed upon rate of $1,400. While the amount owing by Ian was eventually recovered through garnishment proceedings, by April 2014 there was again no rent being paid for the apartment. By December 2014 the partnership was not receiving any rent from the restaurant space either.
[48] Between May 2014 and April 2017, Melanie paid $145,650.47 from her personal funds and a personal line of credit. Melanie paid $75,211 for property related expenses including mortgage payments, hydro, gas, water, property tax, insurance and bank fees. No party quarrels with the calculation. In addition, Melanie paid $54,678.27 to cover the renovation costs. The balance of the $145,650.47 is comprised of interest on her line of credit, a legal bill she paid and some minor miscellaneous items which all agreed should be reimbursed.
[49] Ian agrees that Melanie should be repaid the $145,650.47 that she has paid less $40,549.02 that he says was the cost overrun of the renovations, less interest claimed on that $40,549.02 overrun and less the legal bill of $2,825 that she paid. Rawle agrees that Melanie should be repaid the $75,211 in property-related expenses but not repaid the renovation costs.
(a) The treatment of the renovation cost overrun
[50] Ian argues that when he was an active partner and had agreed to the renovations, the partners had estimated that the renovations would cost no more than $58,941.32, which was the Meridian Credit Union mortgage surplus after payment of the Equitable Trust mortgage. Rather than that amount, the renovations went over budget by $40,549.02 and cost $99,490.34. Ian argues that he was not consulted about the cost overruns, would not have agreed to them and would have insisted the renovations be scaled back. As such, they were done without him taking part in the management of that aspect of the partnership business, as required by section 24.5 of the Partnership Act. He also argues that there was no commensurate benefit to the partnership and that it was illogical to spend almost $100,000 in renovations to achieve a rent increase of $540 a month. The railing, banister and drywall in the apartment could simply have been fixed for roughly $10,000 and the apartment rented out for that same increased amount of $1,400. He also argues that the renovations did not benefit the partnership as there is no evidence that they impacted the purchase price. As the funds were not spent in the proper conduct of the business of the partnership and were not done for the preservation of the Property, as required by section 24.2 of the Partnership Act, they are not recoverable from the partnership. Lastly, Ian argues that as the expenditures did not “enhance the value of the Property”, they are not an amount that is to be “shared equally” under the parties’ partnership agreement.
[51] Again, this is a Monday morning quarterback approach to the partnership expense. The scope of the renovation did not change from what Ian agreed. While he was not advised that the renovations were taking longer and were more costly than expected, he knew the apartment had been stripped to the bare walls in May 2014 and that the renovations were ongoing and did not reach out to either Melanie or Rawle to obtain an update or object.
[52] This is not the case where Melanie and Rawle received an estimate of $99,000 rather than the $58,941 they had agreed upon and decided to proceed anyway. Costs were incurred incrementally. Ian has not pointed to a time when the parties should have ceased the work, which, incidentally would have left them with an unfinished apartment that may have been difficult to lease. Under Partnership Act, all debts of the partnership are to be shared jointly. This renovation expense is a debt of the partnership and is to be shared equally by the partners before any division of the partnership assets.
[53] Rawle does not take issue with the cost of the renovation. He was the person on the front line of the project. In his affidavit sworn 31 July 2017, he took the position that “each partner is responsible for 1/3 of the monthly expense of apartment from March 2014 to present”, including the renovation costs. At the reference he argued that he should not bear any of the cost of the renovation because of the delays caused by Ian to the project and the decision by Melanie to use her line of credit rather than agree to refinance and allow him access to his capital. I note that Rawle was the party who continued to oversee the renovations and continued to forward the bills from the various contractors to Melanie for payment – when he knew she was using her line of credit to pay those bills.
[54] I also note that Rawle deposed in his affidavit sworn 31 July 2017, “… Melanie had obtain [sic] a personal loc. I was informed after she received the loc. I will honor this loc, because the money was used for a positive reason within the partnership focus for growth.”
[55] In any event, on the proposed distribution chart he submitted at the conclusion of the hearing, he agreed that Melanie should be reimbursed the renovation cost and related HST. I agree with this position.
[56] I find that the funds paid by Melanie for the renovations Melanie were expended for the benefit of the partnership and are to be treated as an expense of the partnership.
(b) Payment of ongoing expenses
[57] Ian agrees that Melanie should be repaid the amount she spent to pay the ongoing bills of the Property.
[58] Rawle argues that Melanie should not be repaid the $75,211 she spent to cover the mortgage, utilities, etc. or the interest charges she incurred on the line of credit that she used to pay those bills. He argues that both of the rental units in the Property would or should have been rented and there would have been no need for Melanie to pay those amounts. Again, the parties could not come to an agreement on a lease or sublease for the restaurant through no fault of Melanie. The apartment space was rented out to Rawle, who then did not pay rent.
[59] Had Melanie not paid these expenses, the mortgagee could have foreclosed on the Property or the utilities could have cut off supply.
[60] I find that the funds paid by Melanie to maintain the Property were expended for the benefit of the partnership and are to be treated as an expense of the partnership.
(c) Payment of legal fees incurred
[61] The legal fees challenged by Ian were spent on the services of a lawyer who reviewed a draft lease for the restaurant space and drafted documents in connection with the proposed sale of Rawle’s business to a new tenant, an arrangement that included a new lease. Ian argues that the work was for Rawle’s benefit and that Rawle should have been responsible for paying the account. In the alternative, he takes the position that 50% of the fee should be paid by Rawle as at least the agreements relating to the sale of his business were for his benefit alone.
[62] Melanie takes the position that the legal work was for the benefit of the partnership as it was done with a view to obtaining a paying commercial tenant.
[63] I find that the work done was for the benefit of the partnership, even if it may have also benefited Rawle. It was in the interest of the partnership to have a stable paying tenant in the space and to approve any lease or sublease required for that purpose. Further, the proposed tenant was negotiating the lease and the purchase of the Rawle’s restaurant business as a package, so the review of the draft purchase agreement was part of the work required if an agreement with a new paying tenant was to be reached.
[64] I find that the funds paid by Melanie for legal services to review the draft lease and sale agreements were expended for the benefit of the partnership and are to be treated as an expense of the partnership.
Issue 3: Responsibility for the cost of removing and storing the kitchen equipment belonging to Rawle
[65] It was a term of the agreement of purchase and sale approved by the court on 31 March 2017 that the vendors provide the purchasers with vacant possession of the space. The purchasers did not want Rawle’s kitchen equipment and it had to be removed as a result.
[66] As part of the court order, Rawle was ordered to arrange to remove or sell all of the kitchen equipment by 7 April 2017 failing which Melanie and Ian were required to arrange to have the equipment removed and stored. Hepp Contractors gave a quote, was retained to and did remove the equipment and was paid $3,774.20 from the sale proceeds. By order directing this reference, responsibility for that sum is to be taken into account as part of this determination.
[67] In addition, once the equipment was removed, Melanie paid $381.49 for it to be stored for two months for Rawle.
[68] Melanie and Ian take the position that Rawle is responsible for both of these costs. Rawle argues that, because of the actions of Melanie and Ian in refusing to allow him to access his capital and of Ian in interfering with his ability to lease out the space to a tenant who could have purchased his kitchen equipment, they should bear these costs. Further he argues that he was shut out of the sale process and, as a result, should not be responsible for these costs.
[69] I do not agree that Rawle was shut out of the process. He met the first real estate agent and participated in setting the sale terms. While he did not meet the second real estate agent before he was retained, the listing terms were the same as he had agreed to earlier. Further, the second agent copied him on updates on the listing and asked for his input on the kitchen equipment, which Rawle chose not to provide. By letter dated 13 February 2017 counsel for Melanie wrote to Rawle as follows:
As you know, [the real estate agent] has resumed showing the Property. As before, the kitchen equipment is specifically excluded from the sales offer. However, if you are interesting in selling the kitchen equipment, please let [the agent] know and he will let the prospective buyers know to contact you directly about buying the kitchen equipment.
[70] Rawle would have preferred to sell the equipment as part of any sale. Melanie and Ian presented that option to the buyers but they were not interested. On cross examination, Rawle agreed that it would not have been reasonable to restrict potential purchasers to restaurant operators. It would have been equally unreasonable to reject the offer because the purchasers did not want the kitchen equipment.
[71] Rawle was involved with the Hepp Contractors and, at his request, he met with the contractors without Melanie present. Rawle knew what the estimated costs were to remove the equipment. He could have obtained another quote if he thought the price was not reasonable or he could have arranged to sell his kitchen equipment before the closing. He did neither.
[72] I find the costs of removing and storing Rawle’s kitchen equipment were paid solely for the benefit of Rawle. Rawle is responsible for repaying the removal expense and repaying Melanie for the storage expense.
Additional Issue Raised by Rawle
[73] During his testimony, Rawle suggests that a contact of his had carried out renovations in the main floor space that were valued at $100,000 and had not charged for the work. Rawle testified that he had “gifted” half of that amount to Melanie as part of her contribution. Melanie testified that she was unaware of that at the time and at any time prior to Rawle testifying. She disagreed she had received any such gift. In any event, Rawle did not take this into account in his proposed distribution breakdown either as a capital contribution or as a claim for a greater percentage of the division of the partnership assets.
Conclusion
[74] For the reasons set out above, and detailed in Appendix A attached to this decision, I find it appropriate that the net proceeds in the amount of $396,824.51 be divided as follows:
Melanie: $259,255.11
Ian: $136,281.05
Rawle: $ 1,288.35
$396,824.51
Costs
[75] If the parties are unable to agree on costs, they may each submit to the motions office clearly marked to my attention costs submissions no more than pages in length and a costs outline by 16 February 2018.
Master Jolley
Date: 31 January 2018
APPENDIX "A"- COURT ORDERED DISTRIBUTION OF NET SALE PROCEEDS
1
Total Net Proceeds from Sale of the Property
Net Proceeds Paid into Trust on Closing
$394,199.51
Agreed by all parties
Reimbursement of real estate commission received after closing
$2,625.00
Agreed by all parties
Sub-Total
$396,824.51
Actual amount held in trust
Hepp Contractors for removal of kitchen equipment
$3,774.20
Paid out on closing pursuant to Order of Kurke, J.
Reimbursement to Melanie for LOC
$39,822.40
Paid out on closing pursuant to Order of Kurke, J.
Advance Received by Rawle
$25,000.00
Paid out pursuant to Order of Kurke, J.
TOTAL NET SALE PROCEEDS
$465,421.11
2
Removal of Kitchen Equipment
Hepp Contractors for removal of kitchen equipment
-$3,774.20
Paid out on closing pursuant to Order of Kurke, J.
Storage of kitchen equipment
-$381.49
3
Rent Arrears
Total Rent Arrears Owing by Ian
$3,520.00
Total Rent Arrears Owing by Rawle
$63,572.25
4
Personal Loans to Rawle from Melanie
Apr 28 2015 loan
$7,500.00
Agreed by all parties
2 years interest on loan (8%)
$1,248.00
January 2015 Loan
$3,500.00
TOTAL
$12,248.00
5
Property Expenses 2014-2017 Paid by Melanie
Water
$301.00
Property Tax
$381.41
Bank Fees
$28.50
Renovation
$54,678.27
HST
$56.24
Legal Fees
$2,825.00
MH Advances
$75,211.00
Interest on Melanie's Property Payments
$12,169.05
TOTAL
$145,650.47
6
Melanie's Contribution to Purchase Price
2006: Melanie's deposit
$4,166.67
Agreed by all parties
2006: Melanie's downpayment
$30,366.59
Agreed by all parties
2009: Melanie's buyout of fourth party
$10,332.50
Agreed by all parties
TOTAL
$44,865.76
7
Ian's Contribution to Purchase Price
2006: Ian's deposit
$4,166.67
Agreed by all parties
2006: Ian's downpayment
$30,366.59
Agreed by all parties
2009: Ian's buyout of Wycliffe
$9,335.00
Agreed by all parties
TOTAL
$43,868.26
8
Rawle's Contribution to Purchase Price
2009: Rawle's buyout of fourth party
$10,332.50
Agreed by all parties
TOTAL CONTRIBUTIONS TO PURCHASE PRICE
$99,066.52
9
Net Sale Proceeds Less Reimbursement for Property Expenses and Contribution to Purchase Price
Net sale proceeds
$465,421.11
Less reimbursement to Melanie for property expenses
-$145,650.47
Less Reimbursements for Contributions to Purchase Price
-$99,066.52
Net sale proceeds after reimbursements
$220,704.12
1/3 share of net sale proceeds after reimbursements
$73,568.04
10
Rawle's Share of Net Sale Proceeds
1/3 Share of Net Sale Proceeds
$73,568.04
Plus 1/3 of Rent Arrears owing from Ian
$1,173.00
Plus Reimbursement for Contribution to Purchase Price
$10,332.50
Less payment to Hepp Contractors already paid from sale proceeds
-$3,774.20
Paid out pursuant to Order of Kurke, J. on closing
Less Reimbursement of Storage Fees for Kitchen Equipment to Melanie
-$381.49
Less payment of 2/3 of Rent Arrears to Ian and Melanie
-$42,381.50
Less Repayment of Loan to Melanie
-$12,248.00
Less Advance Already Received by Rawle
-$25,000.00
Paid out pursuant to Order of Kurke, J.
AMOUNT OWING TO RAWLE
$1,288.35
11
Ian's Share of Net Sale Proceeds
1/3 Share of Net Sale Proceeds
$73,568.04
Plus reimbursement for contribution to purchase price
$43,868.26
Plus 1/3 Rent Arrears owing from Rawle
$21,190.75
Less payment of 2/3 of Rent Arrears to Rawle and Melanie
-$2,346.00
AMOUNT OWING TO IAN
$136,281.05
12
Melanie's Share of Net Sale Proceeds
1/3 Share of Net Sale Proceeds
$73,568.04
Plus Storage Fees
$381.49
Plus 1/3 Rent Arrears owing from Ian
$1,173.00
Plus 1/3 Rent Arrears owing from Rawle
$21,190.75
Plus Repayment of Loan from Rawle
$12,248.00
Plus Reimbursement for Contribution to Purchase Price
$44,865.76
Plus Reimbursement for Property Expenses
$145,650.47
Less Reimbursement received pursuant to Kurkee J Order
-$39,822.40
AMOUNT OWING TO MELANIE
$259,255.11