2174112 Ontario Inc. c.o.b. Ever Young Asset Management v. New Dynasty Bakery Inc., Rong Zan Wu, and Sui Tak Choi

COURT FILE NO.: CV-17-573637 DATE: 20181214 ONTARIO SUPERIOR COURT OF JUSTICE

B E T W E E N:

2174112 ONTARIO INC. c.o.b. EVER YOUNG ASSET MANAGEMENT Plaintiff

• and -

NEW DYNASTY BAKERY INC., RONG ZAN WU, and SUI TAK CHOI Defendants

COUNSEL: Derek Ketelaars, for the Plaintiff Roger A. Gosbee, for Mr Choi

JUDGMENT

D.L. Corbett J.:

[1] The plaintiff is a commercial landlord. It moves for summary judgment on an indemnity provided by the defendant Sui Tak Choi. The indemnity is in respect to a lease for a small bakery.

[2] New Dynasty, the commercial tenant, did not file a statement of defence and has been noted in default. The plaintiff believes New Dynasty is without assets and has not yet pursued default judgment against the company, seeking instead to pursue the individual defendants.

[3] This motion was originally brought against both individual defendants. The plaintiff settled as against Mr Wu for $30,000 before this motion for summary judgment was argued.

[4] Thus what remains for this court are issues concerning the liability of the remaining defendant, Mr Choi.

The Commercial Lease Arrangements

[5] The leased property, owned by the plaintiff, is Unit 6, 4002 Sheppard Avenue East, Toronto (the “Property”).

[6] Mr Wu leased the Property, in his own name, in June 2010, for a term expiring December 31, 2016 (the “2010 Lease”).

[7] In 2012, Mr Wu sold his business to Mr Choi’s company, New Dynasty. The 2010 Lease was assigned to New Dynasty with the consent of the plaintiff, and on April 30, 2012, the plaintiff, New Dynasty and Mr Wu executed an assignment agreement to this effect. Further, at the time of the assignment, New Dynasty entered an additional lease (the “2012 Lease”), for a term of six months, commencing on January 1, 2017 (the day after expiry of the 2010 Lease).

[8] Mr Choi executed the 2012 Lease on behalf of New Dynasty and also executed it on his own behalf as indemnifier of New Dynasty’s obligations under the 2012 Lease. Mr Choi also executed a separate indemnity agreement in favour of the plaintiff.

[9] As a result of these transactions, as of 2012:

(a) Mr Wu was still liable under the 2010 Lease, which he had assigned to New Dynasty;

(b) New Dynasty was liable, as assignee, under the 2010 Lease, and was also liable under the 2012 Lease;

(c) Mr Choi was liable as indemnifier of the 2012 Lease, and as the indemnifier under the general indemnity he signed at the time of the 2012 Lease.

Change of Control of New Dynasty

[10] As of the end of June 2013, Mr Choi apparently sold his business by transferring his shares in New Dynasty and resigning as an officer and director of New Dynasty. [1] Mr Choi attended at the offices of the plaintiff in June 2013 to arrange a transfer of the 2010 Lease and the 2012 Lease to the new owners. Mr Choi’s evidence is that he was told by the plaintiff that there would be a charge of $7,000 in connection with agreements to transfer the lease, but that when he and the purchasers met with the plaintiff’s representative, they were told the charge would be $30,000. Mr Choi and the purchasers considered this demand unreasonable and did not pay it; they went ahead with the sale of the New Dynasty shares without the plaintiff’s consent.

New Dynasty Defaults

[11] New Dynasty abandoned the Property on July 15, 2016 and has paid the landlord nothing since July 2016. The plaintiff claims unpaid charges under the lease of $106,028.89 (for “rent” and “additional rent”), plus $15,854.69 for water charges respecting the Property, plus $1,800 to replace fixtures removed from the Property.

Issues

[12] Distilling the parties’ arguments, the following issues require decision:

(a) Is this a proper case for summary judgment?

(b) Did the conduct of the plaintiff in demanding $30,000 to consent to the change in control of New Dynasty release Mr Choi from his indemnity obligations?

(c) Is Mr Choi liable to indemnify the plaintiff respecting New Dynasty’s obligations under the 2010 Lease?

(d) Is Mr Choi liable to indemnify the plaintiff for New Dynasty’s obligations under the 2012 Lease?

(e) What are the plaintiff’s damages?

(f) What account should be taken of the settlement between the plaintiff and Mr Wu?

A. Is This A Proper Case For Summary Judgment?

[13] This is an ideal case for summary judgment. The central issues can be decided on agreed or uncontroverted facts, and on the basis of written agreements. There are no material issues of credibility. Aside from some minor questions concerning calculation of damages – which do not merit the expense and delay of a trial – the court has all it needs to dispose of the case fairly on the basis of the written record filed by the parties. Given the total amount at stake – roughly $125,000 – summary judgment is the proportionate and appropriate way in which to proceed. [2]

B. Was the Plaintiff’s Demand for $30,000 Unreasonable and Did it Release Mr Choi From His Indemnity Obligations

[14] For the reasons that follow, I find, on the record before me, that the demand for $30,000 by the plaintiff was unreasonable. However, this unreasonableness did not terminate the parties’ contractual obligations to each other and in particular did not terminate Mr Choi’s indemnity obligations.

(i) The Plaintiff’s Demand for $30,000 Was Unreasonable

[15] The 2010 and 2012 Leases provided that they could be assigned with the plaintiff’s consent, such consent not to be withheld unreasonably. There are similar provisions respecting changes in control of the corporate tenant. These provisions allow the plaintiff to maintain some control over who is using its Property, while at the same time permitting the tenant flexibility sufficient to sell the business or otherwise terminate its involvement in the property on a commercially reasonable basis.

[16] Mr Choi’s uncontested evidence is that an initial demand was made for $7,000, which was then increased to $30,000, as the price for the landlord’s consent to the proposed sale in 2013. No explanation was provided by the plaintiff to justify these demands. Given the rents under the lease, its duration, and the absence of any justification for the demand for $30,000, I conclude that the demand was not a reasonable condition for the plaintiff’s consent to change in control of New Dynasty.

[17] I want to be clear, here, that this conclusion is on the record before me, in the circumstances of this case. The plaintiff has not contested this issue because, in its estimation (correct, as I explain below), the plaintiff’s failure to consent to the change in control is not relevant to Mr Choi’s liability under the indemnity and the plaintiff did not want an issue raised that could require a trial to resolve. The plaintiff must bear the consequences of this tactical decision – of course – but I wish it clear that my findings on this issue are on the basis of a limited record, and, for tactical reasons, no contest from the landlord on the point. Thus my conclusion should not be taken as some broad statement of principle about what is and is not reasonable conduct by a landlord responding to a request to assign or to change of control of a commercial tenant.

(ii) The Plaintiff’s Unreasonable Conduct Does Not Release Mr Choi From His Indemnity Obligations

[18] There is nothing in the indemnity signed by Mr Choi requiring the plaintiff to release him from that indemnity upon a change of control of New Dynasty. Likewise, there is nothing in the indemnity agreement requiring the plaintiff to agree to release Mr Choi from his indemnity upon assignment of the lease to a new tenant.

[19] As a matter of commercial leasing practice (and, indeed, commercial lending), indemnities often survive transfers of interest involving the borrower or tenant. The indemnity is a form of security – why would a creditor voluntarily give up some part of its security? Of course, sometimes lenders and landlords do agree to release indemnities – notably when replacement security is available that satisfies the lender or landlord. The point is that the questions are severable: whether the underlying rights and obligations may be assigned (in this case, the lease), and whether the security for those obligations may be transferred or released (in this case the indemnity obligations).

[20] Mr Choi did not have a right, under either lease or under his indemnity obligations, to require the plaintiff to release him from his indemnity obligations.

[21] This point is illustrated by the facts of this very case. The 2010 Lease was assigned by Mr Wu to New Dynasty. Mr Wu’s indemnity obligations, however, continued after the assignment, and he was sued on those obligations in this very case – a claim he settled by paying $30,000.

[22] Finally, although I have found that the plaintiff’s demand for $30,000 for its consent to the change in control of New Destiny was unreasonable, this unreasonable conduct was not a basis on which Mr Choi is released from his indemnity obligations. Mr Wu was not entitled to proceed with the sale of his shares without the plaintiff’s consent. His remedy, in the face of unreasonable conduct by the plaintiff, was to seek a court order permitting the transfer on the basis that the plaintiff was withholding its consent unreasonably. That would have been the prudent and proper way in which to proceed.

[23] I am aware of the practicalities here: this is a small lease, and the cost of hiring lawyers to address the point would be impractical, given that the value of the dispute, at that point, was $30,000. Mr Choi did not retain counsel to sort the issue out in court – instead he went ahead with the sale of shares without the plaintiff’s consent – on its face a breach of the two leases. I do not have to decide whether this conduct by Mr Choi – a form of self-help in the face of his landlord’s unreasonable conduct – would have been a basis on which the plaintiff could have terminated New Dynasty’s lease – but that was the risk that Mr Choi and the purchasers of his business faced when they went ahead with their transaction without the plaintiff’s consent.

(iii) Conclusion

[24] I find that the plaintiff unreasonably demanded $30,000 in order to consent to transfer of the shares of New Dynasty. However, I find that the plaintiff had no obligation to consent to transfer or release of Mr Choi’s indemnity obligations. I also find that Mr Choi’s remedy for the plaintiff’s unreasonable demand was to apply to a court to compel the plaintiff’s consent to transfer of control of New Dynasty. I conclude that Mr Choi was not released from his indemnity obligations by the plaintiff’s unreasonable demand for $30,000.

C. Is Mr Choi Liable to Indemnify New Dynasty’s Obligations Under the 2010 Lease?

[25] New Dynasty is the tenant under both leases. Section 5.03 of each lease states that all amounts payable by the tenant under that lease, as well as all amounts payable by the tenant to the landlord under any other agreement, constitute additional rent which the tenant shall pay to the landlord.

[26] Under the indemnity agreement, Mr Choi agreed to pay “as a primary obligation” all amounts due by New Dynasty, as the tenant, to the plaintiff, as landlord, under the 2012 Lease.

[27] Reading these provisions together, on their plain meaning, Mr Choi is liable to indemnify for New Dynasty’s obligations under both leases, even though his indemnity is only in respect to the 2012 Lease: amounts due under the 2010 lease are “amounts payable by [New Dynasty]” under “another agreement” within the meaning of s.5.03 of the 2012 Lease.

[28] This reading makes commercial sense: while it is true that the plaintiff retained an indemnity from Mr Wu for the 2010 lease – because he was the original indemnitor and was never released from that commitment – Mr Wu, the plaintiff, and Mr Choi himself, understood that the business now belonged to Mr Choi and Mr Choi’s business would be expected to pay the rent. Mr Wu’s continuing indemnity does not create a presumption that Mr Choi would not also provide an indemnity: there is no limit to the security a landlord may seek for a tenant’s obligations, and there is nothing commercially unreasonable about there being indemnities from both of Messrs Wu and Choi.

[29] Counsel for Mr Choi noted that the assignment agreement, as originally drafted, identified Mr Choi as an indemnitor, but this aspect of the document was crossed out. That is true. However, it was Mr Choi who asked for an additional six month lease when he took the assignment. What makes sense – and is consistent with the documents all read together – is that Mr Choi’s indemnity in the assignment agreement was deleted because it was no longer necessary, since the 2012 Lease contained an indemnity from Mr Choi that included indemnification of the 2010 Lease obligations of New Dynasty.

[30] It is trite law that contracts do not turn on the subjective understanding of one of the parties, and I agree with the plaintiff that Mr Choi’s evidence that his indemnity was limited to the six month term of the 2012 lease (a) makes no commercial sense; and (b) is inconsistent with the plain language and meaning of the 2012 Lease. I would not find it necessary to consider parole evidence to construe these documents – their meaning is plain on their face – but if was thought otherwise, I note that there is no extrinsic evidence supporting Mr Choi’s account of his subjective understanding of the extent of his indemnification obligations. [3] Mr Choi and his company were stepping into the shoes of Mr Wu, who had personal liability on the 2010 lease as the tenant. Mr Choi understood that he would be personally liable for New Dynasty’s obligations to the plaintiff – for its entire tenure in the premises, and not just for the additional final six months (the term of the 2012 Lease).

[31] I find that Mr Choi is liable to indemnify the plaintiff for New Dynasty’s obligations under the 2010 Lease.

D. Is Mr Choi Liable to Indemnify New Dynasty’s Obligations Under the 2012 Lease?

[32] Mr Choi argues that the 2012 Lease never commenced, and thus New Dynasty has no obligations under that lease for which he can be called to pay. The argument is as follows.

[33] The 2012 Lease is not an extension or renewal of the 2010 Lease. It is a fresh lease.

[34] In July 2016 New Dynasty stopped paying its rent. The plaintiff became aware that the premises appeared to have been abandoned by New Dynasty. Unknown persons were apparently looting the premises of fixtures, and the plaintiff entered and secured the premises to prevent any further damage to the Property. By re-entry, Mr Choi argues, the plaintiff terminated the 2010 Lease, and the tenancy did not recommence on January 1, 2017, when the term of the 2012 Lease was to start.

[35] I do not accept this argument. The 2010 Lease was terminated because of New Dynasty’s breach. It was New Dynasty’s obligation – under the 2010 Lease and under the 2012 Lease – to pay the outstanding rents under the 2010 Lease. It was New Dynasty’s obligation to remain in possession of the premises and it was only through its own breach that it ceased doing so. The only change, as of January 1, 2017, was that Mr Wu no longer had liability under the 2012 Lease.

[36] I find that Mr Choi is liable to indemnify the plaintiff for New Dynasty’s obligations under the 2017 Lease.

E. What Are the Plaintiff’s Damages?

[37] The plaintiff has provided a detailed statement of account for its claim. [4] As is disclosed in this statement, rent was paid up to the end of June 2016.

[38] The following issues arise in respect to the plaintiff’s claimed damages:

(a) Should the plaintiff be entitled to claim for additional rent for matters arising before July 2016 that were not claimed or billed for prior to July 2016? I answer “no” to this question and reduce the claim by $10,128.11 as a result.

(b) Should the plaintiff be entitled to collect for expenses for grease pick-up and pest control after the premises were vacated? I answer “no” to this question, and reduce the claim by $2,503.20 (12 x $208.60) as a result.

(c) Should the plaintiff be entitled to collect 21% interest on the outstanding balance, as claimed? I answer “yes” to this question.

(d) Should the plaintiff be permitted to charge administration charges (a) on a monthly basis, (b) for NSF cheques, and (c) for employee time spent with lawyers to advance the claims in this litigation? I answer “yes” to this question in all respects.

(e) Should the plaintiff be permitted to charge $2,644.20 for its staffing costs to attend at and secure the Property on an emergency basis after New Dynasty abandoned the Property and unknown persons unlawfully entered and started taking fixtures. I answer “yes” to this question.

(f) Should the plaintiff be entitled to recover water charges of $15,854.69 for the period December 2011 to August 2016 as part of its claim? I answer “no” to this question. [5]

(g) Should the plaintiff be entitled to $1,800 to replace fixtures stolen from the Property after New Dynasty abandoned the premises. I answer “yes” to this question, and add this amount to the claim as a result.

[39] The plaintiff’s statement of account claims $106,028.89 as of August 30, 2018. On the basis set out above, from this shall be subtracted $12,631.31 (items (a) and (b), leaving a balance of $93,397.58. To this shall be added $1,800 (item (g)), leaving a balance of $95,197.58. Interest is calculated on the running balance in the statement of account, and will have to be recalculated on the basis of this judgment; this will result in a further reduction of the claim. To the total that results there will be further interest to be added from August 30, 2018 to the date of judgment (December 14, 2018), to be calculated at 21% as provided in the two leases. If counsel cannot agree on the resulting calculation then they shall arrange a 9 am appointment to see me.

(a) Pre-default Claims (to July 2016)

[40] The plaintiff has over-reached in its claim. It has also proceeded by way of summary judgment. The over-reaching involves multiple small items. I could direct a reference to sort these issues out, but in the spirit of Hryniak v. Mauldin, 2014 SCC 7 I am satisfied that justice can best be done by taking a broad approach to these issues: the cost of further process would far outweigh the financial significance of the items in question.

[41] The first item claimed is a legal fee for the assignment that took place in 2012. The claim is $3260. The statement shows that $2000 was paid back in 2012. There is no evidence that the additional $1260 was claimed prior to these proceedings. It may well be that the plaintiff incurred legal fees of $3260 in 2012 in connection with the assignment at that time. However, I find that it charged the tenant $2000 for this transaction, which the tenant paid. It is not open to the plaintiff to come back, some five years later, and seek to collect the balance that it did not claim at the time of the transaction. The claim is unfair and unreasonable, in all the circumstances. It is also inconsistent with the “additional rent” provisions in the leases: as is common in commercial leases, the landlord estimated annual costs to be paid by the tenant, and collected them monthly as “additional rent. Annually the landlord reconciled the estimates with actual expenses and refunded or credited the difference. It was the landlord’s obligation to do this, and claims asserted years after the fact for costs never claimed from the tenant are now asserted in breach of the landlord’s obligations to account annually.

[42] I take the same approach to all of the items claimed in 2013 and 2014. The landlord’s claims that predate the tenant’s breach are premised on the landlord’s failure to claim additional rent when it fell due or in its annual reconciliation of expenses. It cannot claim for these forgotten items, years after the fact.

(b) Grease Pick-Up and Pest Control

[43] I disallow this claim for two reasons. Historic claims that were not asserted previously cannot be claimed now for the same reason that other historic expenses are disallowed. Subsequent claims are not allowed since the premises should not have required these services once the bakery stopped operating and the landlord re-entered in July 2016.

(c) Interest @ 21%

[44] The lease provides for interest on overdue rent at 21%. The parties agreed to this rate and no reason has been offered why it should not apply to the arrears in this case.

(d) Administrative Charges and Management Time

[45] The leases are net and entirely carefree to the landlord, and specifically provide for administrative charges, including management time, spent collecting unpaid rent. I have examined the specific claims set out in the statement of accounting and they are reasonable in all the circumstances and fairly reflect the efforts required of landlord’s personnel to pursue collection of the unpaid rent.

(e) Staffing Costs to Secure the Property

[46] The landlord claims $65 per hour for its employees to attend at and secure the property once it learned the premises had been abandoned and fixtures were being removed by unknown persons. The time is charged at an overtime rate because staff were required to stay overnight. The total claim is $2,644.20. I accept that the landlord incurred this cost and I find that it likely would have cost at least this much for the landlord to retain the services of a security firm to do this work on an urgent basis. The cost to the landlord arises because of the tenant’s abandonment of the premises, leaving it unsecure: it is collectible as an expense for which the tenant is liable as additional rent.

(f) Historic Water Charges

[47] The landlord claims water charges of $15,854.69 for water charges from December 2011 to August 2016. I reject this claim for the same reason I reject the other historic claims. The landlord failed to calculate and collect this amount properly for the years in question. It did collect water charges during the period – but it miscalculated the charges and under-collected the tenant’s share – according to the landlord. There is no evidence that the tenant knew the water charges were understated, and the annual expense reconciliations reflected the amounts claimed by the landlord and paid by the tenant. For the same reason that other historic expense claims cannot be asserted so long after the fact, I find that the landlord cannot pursue these claims so long after the fact, in breach of the landlord’s obligation to account annually.

(g) Cost of Replacement Fixtures

[48] I accept the landlord’s claim for $1,800 for fixtures stolen from the property after the premises were abandoned by New Dynasty. In simple terms, the fixtures were at the risk of the tenant until the landlord re-entered the premises. I accept that more than $1,800 worth of fixtures were taken before the landlord re-entered, and New Dynasty is liable for this loss.

F. Should the Plaintiff’s Damages Be Reduced by the Amount Received from Mr Wu

[49] The claim against Mr Wu was on account of obligations of New Dynasty under the 2010 Lease. I have fixed the amount of those obligations in this judgment. To the extent that those obligations have been paid by Mr Wu, that payment has discharged New Dynasty’s obligations. Thus the short answer to this question is yes: to the extent that the claim has been paid by Mr Wu, the plaintiff’s recoverable claim against Mr Choi has been reduced.

[50] That said, the $30,000 settlement may include some amount for legal costs for pursuing Mr Wu that are not reflected in the claim asserted against Mr Choi and there is no evidence before me that the $30,000 has been paid. If counsel cannot agree on the amount by which the plaintiff’s judgment ought to be reduced to account for payments made by Mr Wu, then they may arrange an appointment to speak with me.

G. Costs

[51] The Lease provides for payment of the plaintiff’s actually incurred legal costs. Of course such costs must be reasonable as well. If counsel cannot agree on the quantum of costs, given these principles, then they may arrange an appointment to speak with me.

H. Judgment

[52] For these reasons there shall be judgment for the plaintiff on the following terms:

(a) Payment of $95,197.58, less the interest adjustment to August 30, 2018, plus the interest adjustment from August 30, 2018 to December 14, 2018, less the $30,000 paid by Mr Wu, as adjusted by counsel or by this court as described above;

(b) Costs to be agreed or fixed by this court;

(c) Post-judgment interest at 21% from December 14, 2018.

D.L. Corbett J.

Released: December 14, 2018

Footnotes

[1] The shares were sold to Zu Jie Wu (no relation to the defendant Wu, I am told) and Chin Cheung Fok. There is no evidence to suggest this transaction was anything other than arm’s length.

[2] Hryniak v. Mauldin, 2014 SCC 7, Sweda Farms v. Egg Farmers of Ontario, 2014 ONSC 1200, aff’d. 2014 ONCA 878; leave to appeal denied . In fairness, the concerns about summary judgment raised by the defence in its factum centred around the more limited powers available to a Master on a motion for summary judgment – an argument which prompted the plaintiff to return the motion before a judge instead of a Master. See R. 20.02(2.1) of the Rules of Civil Procedure, which sets out special powers available to a judge, but not a Master, on a motion for summary judgment.

[3] I do not consider the Assignment Agreement to be extrinsic evidence within the “parole evidence” line of authority respecting contract interpretation. The Assignment Agreement is a contract, executed at the same time as the other contracts executed to give effect to the sale of the business to Mr Choi.

[4] A copy was helpfully included as Schedule “B” to the plaintiff’s factum.

[5] This does not result in a deduction from the claim because this aspect of the claim was not included in the statement of account.