COURT FILE NO.: CV-18-593728 DATE: 20181213 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
McRae Cold Storage Inc. Applicant – and – Nova Cold Logistics ULC Respondent
Counsel: Monica Peters, for the Applicant Emily Sherkey, for the Respondent
HEARD: August 14, 2018
REASONS FOR JUDGMENT
NISHIKAWA J.
Overview and Procedural Background
1The Applicant, McRae Cold Storage Inc. (“McRae”), leases space in a cold storage warehouse from the Respondent, Nova Cold Logistics ULC (“Nova”) pursuant to a lease agreement entered into in March 2013 (the “Lease”). The Lease was for a term of five years, ending on March 31, 2018.
2Beginning in July 2016, Nova informed McRae that pursuant to a term of the Lease, it would require McRae to pay a portion of increased energy costs. McRae disputed Nova’s interpretation of the relevant clause, and did not pay the increased energy costs.
3Nova sent McRae a notice of default on March 28, 2017. In addition, Nova took the position that because McRae was in default of the Lease, it was not entitled to exercise the renewal option under the Lease. McRae nonetheless delivered a notice exercising the renewal option on September 29, 2017. Nova maintained its position that McRae was in default and rejected McRae’s exercise of the renewal option.
4On March 9, 2018, McRae commenced this Application seeking a declaration that it is not in default of its obligations under the Lease and that it properly exercised its option to renew the Lease. McRae also brought a motion for an interlocutory injunction, seeking to preclude Nova from exercising its right to terminate the Lease.
5On March 29, 2018, Favreau J. granted an order requiring Nova to refrain from exercising its right to terminate the Lease until further order of the court. As agreed by the parties, Favreau J. ordered that McRae continue to pay Nova $169,714.84 per month in rent pending the final disposition of the Application. The parties further agreed that in the event that the court finds that McRae is in default of the Lease, the judge hearing the Application would have jurisdiction to determine the amount of holdover rent owing by McRae.
Issues
6The issues to be determined in this Application are as follows:
(a) What is the proper interpretation of the provision in the Lease pertaining to increased energy costs?
(b) Is McRae in default of the Lease?
(c) Is McRae entitled to exercise its option to renew the Lease?
(d) In the event that McRae is in default of the Lease:
(i) Is relief from forfeiture appropriate?
(ii) How much holdover rent does McRae owe Nova?
Factual Background
A. The Parties
7The Applicant, McRae, is a corporation incorporated in Ontario which provides cold storage for fresh and frozen food products. McRae operates from two cold storage facilities, including the leased premises.
8The Respondent, Nova, is an unlimited liability corporation incorporated in Nova Scotia. Nova owns and provides temperature-controlled space to customers for perishable food products. It has facilities in Brampton, Calgary, and Halifax. At the Brampton facility, Nova uses 288,343 of the 471,000 square foot area for its own operations. The remaining space is leased to three tenants, including McRae. The Brampton facility is currently full with no additional capacity.
B. The Lease Agreement
9On March 25, 2013, Millard Refrigerated Services – Canada, ULC (“Millard”) as lessor and McRae as lessee entered into the Lease for 77,657 square feet at 745 Intermodal Drive, Brampton, Ontario (the “Leased Premises”). The Leased Premises consist of freezer, dock, and office space.
10Brookfield Asset Management (“Brookfield”) later acquired Millard and changed Millard’s name to Nova Cold Logistics. The lessor will be referred to as Nova throughout.
Rent
11Section 4 of the Lease sets out McRae’s obligation to pay rent during the first year. Generally speaking, McRae was required to pay a “base rent” of $135,899.75 per month on the first day of each month during the first year.
12The Lease is a “gross” lease, meaning that the rental amount includes utilities. The provision pertaining to utilities states that the “Lessor shall pay all fees and charges for water, gas, electricity and sewer use at the Demised Premises in connection with the Lessee’s use of the Demised Premises.”
13The parties’ dispute relates to Section 5(c) of the Lease (the “Energy Provision”). Section 5(a) and (b) deal with the calculation and payment of an annual rent adjustment for inflation. The relevant portions of Section 5 are set out below:
- Annual Adjustment in Rental.
(a) The aforementioned annual basic rental shall be fixed through March 31, 2014, but shall be adjusted annually thereafter for the remainder of the Lease term. Said adjustment for the second lease year shall be effective beginning on April 1, 2014, with an adjustment for each succeeding year of the Lease term being made on each following April 1. The Adjustments shall reflect and compensate Lessor annually for decreases in the purchasing power of money, if any, as measured by the current Consumer Price Index as more specifically described below. In no event will the rental be less than that of the preceding year. A detailed formula of the annual adjustment of rent as aforesaid is specifically set out hereinafter:
(i) “RENTAL” for the following leased square footage shall be the annual square foot rental of $21.00.
(ii) “BASE INDEX” shall mean the January, 2013 level of the “Consumer Price Index (All Items) for the Province of Ontario, 2002 = 100” published by Statistics Canada, or its successor…
(iii) “CURRENT INDEX” shall mean the level of the same index published for the month of January of each year prior to the commencement of each applicable annual adjustment term.
(iv) “ADJUSTED RENTAL” shall be the adjusted annual square foot rental produced by multiplying the RENTAL by the ratio of the CURRENT INDEX to the BASE INDEX, i.e.
ADJUSTED RENTAL = RENTAL x CURRENT INDEX BASE INDEX
(b) ….
(c) Notwithstanding anything to the contrary set forth herein, the parties expressly agree that in the event any energy supplier increases Lessor’s cost of energy at the Warehouse Premises in excess of three percent (3%) of the current electric rates during the Term, then Lessor reserves the right to pass through said increase on a pro rata basis to Lessee, based on the proportionate amount of square footage of the Demised Premises to the square footage of the entire Warehouse Premises.
Default
14Pursuant to Section 18 of the Lease, Nova is entitled to enter and take possession of the Premises, expel McRae, and terminate the Lease if, among other things, McRae: (i) “fail[s] to pay when due any instalment of any rental of other sums of money payable to Lessor (time being of the essence and no notice of default being required)”; or (ii) “breach[es] or fail[s] to comply with any other provision… and such default shall continue without correction for a period of ten (10) days after written notice thereof is given to Lessee by Lessor (time being of the essence).”
15Section 19 of the Lease provides that if the lessee continues to hold or occupy the Premises after the expiration of the term, without the express consent of the lessor, the holdover rent will be 125 percent of the monthly amount last payable under the terms of the Lease.
Renewal
16The Lease was for a term of five years, ending on March 31, 2018. Section 2(b) provided McRae with an option to extend the Lease for two additional terms of five years (the “Renewal Provision”):
(b) Option to Extend Term of Lease . The parties expressly agree as follows:
(i) If this Lease shall then be in force and effect and Lessee on such date is not in default under any terms of this Lease, and strictly subject to the parties’ agreement on the rental for such option term as provided in subsection (iii) below, Lessee shall have separate options to extend the term of this Lease for two (2) additional consecutive terms of five (5) years each. Each option, if exercised, shall be exercised in consecutive order and in accordance with this paragraph or be automatically forfeited.
(ii) To exercise each option, Lessee shall provide Lessor with written notice of such exercise on or before the day that is 180 days prior to the expiration of the then current or extended term thereafter.
(iii) If either option is exercised or both options are exercised, the basic rental rate for each year of such extended term shall be calculated in accordance with the provisions of Section 5 of this Lease. All other terms, conditions and provisions of this Lease shall remain in full force and effect during the term of each option.
C. Energy Costs
17Both parties rely upon documents and information from the Ontario Energy Board and the Independent Electricity System Operator (“IESO”) for the manner in which energy costs are calculated. The parties’ dispute relates to the interpretation of the terms used in the Energy Provision. While it is unnecessary to go into all the intricacies of how electricity costs are calculated and passed on to consumers, some background is necessary to interpret the Energy Provision.
18Generators, the largest being Ontario Power Generation (“OPG”), produce electricity. Once generated, electricity travels across transmission lines owned by transmitters such as Hydro One. Distributors then deliver electricity to consumers over low voltage lines. IESO is responsible for directing the flow of electricity from the generators and for balancing supply and demand. The Ontario Energy Board (“OEB”) licenses transmitters and distributors of electricity, and sets the transmission and delivery rates charged to consumers.
19The total commodity cost of electricity includes the Hourly Ontario Energy Price (“HOEP”) and the Global Adjustment (“GA”). HOEP is the average market clearing price for each hour based on Ontario’s supply of and demand for electricity. HOEP is thus the wholesale price and fluctuates on an hourly basis depending on supply and demand. The GA covers the cost of building new electricity infrastructure and of conservation programs in the province. GA is made up of the difference between the HOEP and the guaranteed prices paid to regulated and contracted generators. For a larger business like Nova, GA appears separately on their electricity bill. For consumers and small businesses, GA does not appear separately. HOEP and GA are inversely related. In other words, when HOEP is lower, GA rises. GA has risen substantially in recent years: N-R Power and Energy Corp. v. Ontario Electricity Financial Corp. , 2015 ONSC 1641 , at para. 50 .
20A consumer’s electricity bill generally includes four components: electricity, delivery, regulatory, and debt retirement charges. For a business like Nova, the monthly bill is broken down into the following line items that correspond to charges for the electricity, distribution, transmission, and various service charges: Monthly Service Charge, Energy Charge, Non-Competitive Electricity Charges, Debt Retirement Charge, Global Adjustment, Distribution Charge, Transmission Network, Transmission Connection, and Transformer Allowance.
D. The Dispute Over Energy Charges
21From 2013 to 2016, Nova did not avail itself of the Energy Provision of the Lease and did not pass through any increases in energy costs to McRae.
22In July 2016, due to constant and significant increases in its electricity bills, Nova began to pass the increase in energy costs through to McRae.
23In a telephone conversation in September 2016 Nova’s President, Ken McLean, advised Ken McRae of McRae how much McRae owed in increased energy charges. Mr. McRae responded that since the lease was a gross lease, no additional amounts were owing.
24Mr. McLean followed up by sending monthly email messages attaching invoices for what it labelled “hydro surcharges” and calculations of the amounts owing for increased energy costs.
25The parties had a without prejudice exchange of emails in early 2017, but continued to have differing views on the Energy Provision’s interpretation.
26On March 20, 2017, Nova provided McRae with its calculations of the amounts owing for the increase in energy costs, along with a copy of the underlying electricity bills. Mr. McLean advised that, in accordance with the terms of the Lease, Nova would begin charging interest on April 1, 2017.
E. Nova Gives Notice of Default
27On March 28, 2017, Nova advised McRae in writing that it owed $74,457.75 in increased energy costs from July 2016 forward, and that Nova considered McRae’s failure to pay the amount a default under the Lease terms.
28In April 2017, McRae proposed retaining a third party to interpret the Energy Provision. By that time, both parties had retained counsel. Nova rejected this proposal and advised McRae that it considered the money to be due and owing under the Lease, and that if McRae failed to pay it would not be permitted to exercise the renewal option.
29On September 28, 2017, the parties, along with their counsel, participated in a conference call to discuss the dispute. The following day, Nova’s counsel sent McRae a letter confirming its position that since McRae was in default of the Lease, it would not be permitted to exercise the renewal option. McRae responded that since the parties could not agree, it might need to commence an application seeking an interpretation of the Lease.
30On the same day, McRae sent a letter to Nova advising that it was exercising the renewal option. Nova responded on October 2, 2017 reiterating that since McRae was in default, the option to renew was unavailable.
31McRae took no further action until March 5, 2018, when it sent Nova a cheque for a further month’s rent, despite the end of the Lease term on March 31, 2018. On March 9, 2018, McRae commenced this Application.
32According to Nova’s calculations, the total amount McRae owes for increased energy costs from July 2016 to June 18, 2018 is $149,778.78 including interest and taxes.
33In brief, Nova calculated the increase in energy costs billed to McRae as follows. 1 In order to determine whether the cost of energy had increased over three percent, Nova applied a baseline of the rate for March 2013, when the Lease was executed. As will be discussed further below, the parties disagree on the applicable baseline. Nova calculated the average rate by dividing the total electricity charges (before tax) for March 2013 by total usage. Then, for each month after July 2016 when Nova sought to collect the increase in energy costs, it calculated the average rate in a similar manner. If the average rate for that month exceeded the average rate for March 2013 by more than three percent, then that increase in rate was multiplied by Nova’s usage for that month. That amount was then multiplied by the proportion of warehouse space occupied by McRae, which Nova has calculated at 17.14 percent (77,757 square feet / 453,666 square feet). The calculations are summarized below:
March 2013 Rate Total Electricity Charges / Usage = Rate $137,980 / 1,349,912 kwh = $0.1022/kwh
- 3% = $0.1053/kwh
July 2016 Rate Total Electricity Charges/Usage = Rate $222,089 / 1,757,770 kwh = $0.1263/kwh
Rate Increase between March 2013 and July 2016 July 2016 Rate - (March 2013 + 3%) = Rate Increase $0.1263/kwh - $0.1053/kwh = $0.0210/kwh
July 2016 Increase Paid by Nova July 2016 Usage x Rate Increase = Increase Paid 1,757,770 kwh x 0.0210 = $36,913.17
McRae’s Proportionate Share of Increase Paid Increase Paid x Percentage McRae Space = McRae’s Proportionate Share $36,913.17 x 17.14% = $6,326.91
Analysis
A. What is the Proper Interpretation of the Energy Provision of the Lease?
Principles of Contractual Interpretation
34The Supreme Court of Canada has observed that the courts’ approach to contract interpretation “has evolved towards a practical, common-sense approach not dominated by technical rules of construction”: Sattva Capital Corp. v. Creston Moly Corp. , 2014 SCC 53 , [2014] 2 S.C.R. 633, at para. 47 . The primary object of contract interpretation is to give effect to the intention of the parties at the time of contract formation: Bhasin v. Hrynew , 2014 SCC 71 , [2014] 3 S.C.R. 494, at para. 45 . The “intent of the parties and the scope of their understanding” is determined by reading a contract “as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract”: Sattva Capital , at para. 47. The Supreme Court has noted, quoting Lord Reid in L. Schuler A.G. v. Wickman Machine Tool Sales Ltd. , [1974] A.C. 235 (U.K.H.L.), at p. 251, that “[t]he more unreasonable the result, the more unlikely it is that the parties can have intended it”: Bhasin , at para. 45 .
35Similarly, in The Plan Group v. Bell Canada , 2009 ONCA 548 , 96 O.R. (3d) 81 , at para. 37 , the Court of Appeal held that a commercial contract should be interpreted: (i) as a whole, by giving meaning to all the terms of a contract to avoid an interpretation that would render any term ineffective; (ii) by determining the intention of the parties with reference to the words used in the contract; (iii) with regard to objective evidence of the factual matrix underlying the negotiation of the contract, but without reference to subjective intention; and (iv) to the extent that there is any ambiguity in the contract, in a fashion that accords with sound commercial principles and good business sense and that avoids a commercial absurdity.
36The Court of Appeal has confirmed that courts should “strive [not] to set aside a commercial bargain that was intended to have legal effect where a clause in an agreement – even if not perfectly expressed – has an ascertainable meaning”: Mapleview-Veterans Drive Investments Inc. v. Papa Kerollus VI Inc. , 2016 ONCA 93 , 344 O.A.C. 363, at para. 29 . In that case, the Court found that the clause referred to the prevailing market rate, which could be objectively determined.
37Contrary to McRae’s submission, the principle of contra proferentem does not apply. That principle applies when the other rules of construction fail to ascertain the meaning of the contract and when the party seeking to rely on the principle had no opportunity to modify the wording of the contract: 1299746 Ontario Inc. v. 784481 Ontario Inc. (2011), 14 R.P.R. (5th) 249 (Ont. S.C.), at paras. 45-46 . As discussed further below, the Energy Provision has an ascertainable meaning. In addition, the Lease was negotiated between two commercial parties. On cross-examination, Mr. McRae confirmed that McRae was represented by a real estate broker with experience negotiating leases. He further admitted on cross examination that there was insufficient time to negotiate the Lease because “time was of the essence” and that “for the most part the lease was fine.”
The Purpose and Intent of the Energy Provision
38The interpretation of the Energy Provision, and whether or not McRae is in default of that provision, is central to the parties’ dispute. The Energy Provision stipulates that “in the event that an energy supplier increases Lessor’s cost of energy at the Warehouse Premises in excess of three percent (3%) of the current electric rates during the Term, then Lessor reserves the right to pass through said increase on a pro rata basis to Lessee…” The terms “energy supplier”, “cost of energy”, and “electric rates” are not defined in the Lease.
39The principles of contract interpretation dictate that I give meaning to all the terms of a contract and avoid an interpretation that would render a term ineffective. As will be further explained below, the Energy Provision is flawed but is not so ambiguous as to be devoid of meaning.
40Based on the words used in the Energy Provision, I find that the purpose of the provision was to transfer the risk of a significant rise in energy costs to the lessee, in proportion to the area of its leased space. The factual matrix further supports such an interpretation. At the time of the negotiation of the Lease, it was clear that the lessee would be using the Premises for cold storage, which would involve significant electricity consumption. In addition, the Lease was negotiated at a time of rising electricity costs. In this context, the parties intended that the lessor could pass on a portion of the rising energy costs to the lessee if the costs rose beyond a de minimis amount of three percent.
41The Energy Provision is not inconsistent with the fact that the Lease is a gross lease. Nova remains responsible to pay for the utilities, including the bulk of the electricity costs. In May 2018, for example, the three percent threshold was not met and Nova paid the entire electricity bill. While the lessor agreed to pay for the utilities, the parties specifically agreed that the risk of a significant rise in electricity costs could be passed on to the lessee. Nova’s electricity bill for July 2016 was $222,089.14. The increase in energy costs billed to McRae was $6,326. From July 2016, when Nova first sought to recover the increased energy costs, to May 2018 Nova has paid almost $4 million in energy costs. The amount Nova seeks to pass through to McRae for the same period is approximately $138,000.
Applying the Energy Provision
42While the purpose of the Energy Provision can be readily ascertained, its application is more challenging. In essence, where “any energy supplier” increases “the Lessor’s cost of energy” more than three percent over “current electric rates”, the lessor can pass the increase on to the lessee, in proportion to its leased space. The parties disagree on the meaning of the terms used in the Energy Provision, as their definitions determine whether there was an increase that could be passed on to the lessee and, consequently, whether McRae is in default.
43McRae maintains that because the terms “energy supplier,” “cost of energy,” and “current electric rates” are undefined, the Energy Provision is so ambiguous that it cannot be enforced. In the alternative, McRae submits that the electric rates to be referenced in applying the provision are the HOEP, or wholesale, rates.
44Nova’s position is that the Energy Provision does have an ascertainable meaning, and that the entire electricity costs must be considered in determining whether there is an increase over the threshold. Nova further argues that McRae has failed to pay the increase in energy costs under any reasonable interpretation of the provision.
“Cost of energy”
45The term “cost of energy” is not so ambiguous as to render the Energy Provision unenforceable. Its meaning can be ascertained from the other terms used in the Energy Provision. Contrary to McRae’s position, the terms of the Energy Provision do not support an interpretation that HOEP is the only rate to be considered in determining the energy cost increase.
46In practical terms, HOEP would be an artificial number for the purposes of determining the “cost of energy.” As noted above, HOEP fluctuates on an hourly basis, based on supply and demand. Nova is not billed based solely on HOEP. The “energy charge” item on Nova’s electricity bill reflects HOEP as charged to Nova for the month. HOEP reflects only a fraction of the entire electricity bill. Taking July 2016 as an example, the “energy charge” for HOEP was $29,408.87. In comparison, GA was $87,652.84. The amount that Nova pays for electricity includes both HOEP and GA, along with other charges. The “total electricity charges,” as identified on the bill for July 2016 were $161,556.73. As noted above, HOEP and GA are inversely related. It would be inconsistent with the purpose of the provision, which is to pass on the risk of rising electricity costs to the lessee, if only HOEP were considered.
47In addition, the use of the broader term “energy supplier”, further expanded by the term “any”, supports an interpretation that the “cost of energy” includes the entire amount paid, including generation, transmission, distribution, and regulatory charges, regardless of which entity, whether the generator, transmitter, or distributor, caused it. The use of the term “any energy supplier” as opposed to “energy generator” suggests that the provision does not refer only to HOEP.
48McRae submits that “cost of energy” refers to HOEP because this interpretation would be most advantageous to it. HOEP has decreased while electricity rates have increased dramatically. However, HOEP does not account for the entire commodity cost of electricity, since it excludes GA. It is worth noting that the Energy Provision refers to “ the Lessor’s cost of energy” (emphasis added). HOEP would have little relevance to the lessor and lessee, since it bears no relation to the actual cost of electricity to the lessor. If they intended to refer only to HOEP, the parties could have used the term “HOEP” or “wholesale price” in the Lease. The Lease does not refer to a specific cost or a specific portion of the costs of electricity, supporting an interpretation that it was intended to include all the charges that are encompassed in the “cost of energy.”
49Based on the terms employed in the Energy Provision, there is no basis for excluding any particular cost associated with the delivery of electricity to Nova. As a result, I find that the “cost of energy” includes the total electricity charges as billed to Nova.
“Current electric rates”
50The parties disagree on the meaning of the word “current” in “current electric rates.” Nova’s position is that “current electric rates” refers to the rate in March 2013 when the parties entered into the Lease. On this view, since electricity is billed monthly, each month that energy costs increase by more than three percent over the March 2013 rate, the lessor can pass the increase on to the lessee. McRae’s position is that “current” cannot refer to a fixed rate but must be variable, and based on a “present” value, either by month or by year.
51While the term “current electric rates” in the Energy Provision is lacking in precision and difficult to apply, it does not render the meaning of the clause unascertainable.
52In my view, “current” in “current electric rates” should be interpreted as referring to a fixed rate. This interpretation is more consistent with the Energy Provision’s purpose, which is to pass an increase in energy costs, beyond a de minimis level of three percent, through to the lessee.
53The use of the term “electric rates” in the plural is not inconsistent with a fixed baseline, since the monthly electricity bill includes various charges for generation, distribution, transmission, and other charges. The use of “rates” can be interpreted as referring to all of these charges and does not necessarily mean variable rates over time.
54One of the problems with interpreting “current electric rates” as a variable baseline is that the language of the provision provides no guidance as to whether the baseline is determined monthly or annually. This weighs against a variable baseline.
55Moreover, if “current” were interpreted as referring to a variable monthly baseline, the electric rates each month would presumably be compared to the rates the previous month to determine whether the threshold is met. This would not capture long-term increases in the cost of electricity. Given that the rates can fluctuate significantly on a monthly basis, comparing each month to the previous month would be somewhat meaningless. A monthly comparison would reflect only immediate fluctuations without capturing any long-term trend. IESO data indicates that the commodity cost of electricity has increased by almost 40 percent between 2013 and 2017.
56The arbitrariness of the Energy Provision reflecting only monthly increases in electricity costs would be alleviated somewhat if “current electric rates” is interpreted as variable on an annual basis. However, it is unclear how the increase in electric rates would be calculated if a variable, annual baseline applies. Unlike the adjustment for inflation in Section 5(a) of the Lease, the Energy Provision provides no formula or guidance to calculate the increase in energy costs. If the baseline is annual, changes in electric rates would have to be calculated retrospectively. In other words, it would be necessary to compare the annual electric rates of the current lease year to those of the preceding lease year to determine whether the three percent threshold is exceeded. If so, referring back to the average over the previous year would not be consistent with the ordinary meaning of the term “current.” Moreover, since no formula is provided, interpreting “current” to refer to a variable, annual baseline would require reading in further steps that go far beyond the contractual language.
57A contextual interpretation of Section 5 does not suggest an intention that current electric rates would be recalculated annually. While the Energy Provision (Section 5(c)) falls under the heading “Annual Rental Adjustment” it bears no relation to the annual rental adjustment in Section 5(a), which adjusts and provides a formula for decreases in the purchasing power of money. The formula for the annual rental adjustment does not incorporate an annual adjustment for energy costs. In Section 5(a), “Base Index” is defined as the January 2013 level of the “Consumer Price Index (All Items) for the Province of Ontario, 2002 = 100” published by Statistics Canada….” “Current Index” is defined as “the level of the same index published for the month of January of each year prior to the commencement of each applicable annual adjustment term.” The fact that Section 5(a) defines “Base Index” and “Current Index”, as well as a specific formula to calculate an annual adjustment for inflation, supports an interpretation that the parties did not intend that an annual adjustment for energy costs should be calculated in the same manner. Similarly, “current” in “current electric rates” need not be interpreted in the same manner as “Current Index,” which provides a specific definition in relation to the Consumer Price Index.
58In addition, Section 31 of the Lease states that “paragraph titles” are for reference and convenience only and do not affect the meaning or construction of the language in the body of the paragraphs to which they refer. It would be illogical and inconsistent with the words used in the Energy Provision to interpret it as an annual adjustment, and I place no significance on the heading under which it appears.
59I recognize that, depending on the context, the word “current” could be used to refer to a variable, present value. The use of the words “during the Term” after “current electric rates” could also imply that the rates to be referenced fluctuate and are not a single reference point. However, if the parties intended to refer to the electric rates from the previous month, they could have used the term “then current” to refer to a point in time. Indeed, the parties used “then current” in the Renewal Provision, to require that the option to extend be exercised “on or before 180 days prior to the expiration of the then current or extended term thereafter.” While the parties could have referred to the electric rates as of March 2013 more simply, their failure to do so does not render the Energy Provision so uncertain or ambiguous as to be unenforceable.
60In any event, the finding that the cost of energy is not to be limited to HOEP is sufficient to find that McRae is in default of the Energy Provision. Even if a variable baseline is applied, the cost of energy has at times increased over three percent from the previous month. For example, between July 2016 and August 2016 the average rate per kilowatt hour increased by almost 15 percent. This is also true comparing annual averages.
61In summary, interpreting the Energy Provision as permitting Nova to pass increased energy costs through to McRae where the increase is more than three percent over the March 2013 rate is not only the most reflective of the contractual language and the parties’ intent in agreeing to the provision, but is also the most commercially sensible approach. Based on this interpretation, I find that Nova’s manner of calculating the amount owed by McRae is the correct approach.
B. Is McRae in Default of the Lease?
62Since McRae did not pay any of the increase in energy costs that Nova passed through and billed to McRae, as required by the Energy Provision, McRae is in default of the Lease.
63McRae cannot rely upon the fact that Nova’s calculations may have been mistaken, or that it did not know the exact amount of the default. Nova specifically advised McRae of the amount owing based on its interpretation of the Energy Provision. While McRae may have disagreed with Nova’s interpretation, it was not open to McRae to fail to pay. It should have paid the amount demanded by Nova, while reserving its rights to bring an application for an interpretation of the provision.
64Moreover, under any reasonable interpretation of the Energy Provision, McRae is in default. McRae would not be in default only if the Energy Provision were interpreted as referring to HOEP only. Since HOEP is only a fraction of the cost of energy to Nova, this interpretation was not reasonable. In any event, McRae only put forward that interpretation during the course of this Application.
65Similarly, I reject McRae’s position that the reconciliation was to occur at the end of the Lease term. There is nothing in the language of the Energy Provision that suggests that McRae would not be required to pay the increase in energy costs until the end of a five-year lease. If the parties intended to provide for an adjustment at the end of the Lease term, this would have been specifically stated. As noted above, Section 5(a) deals with annual adjustments in rent for inflation, and specifically provides that the adjustments are to be made at the commencement of each Lease year. The Energy Provision cannot reasonably be interpreted as leaving the calculation of adjustments to the end of the Lease term. In the absence of any term regarding a delayed reconciliation or payment, the most reasonable interpretation is that the increased energy costs would be billed and paid monthly, since the rent is also paid monthly under the Lease.
C. Is McRae Entitled to Exercise its Option to Renew the Lease?
66The Renewal Provision provides McRae with an option to extend the Lease for two additional terms of five years if it is “not in default under any terms of this Lease.” The Renewal Provision specifically stated that it was to be exercised in accordance with its terms, or “be automatically forfeited.”
67In Mapleview , the Court of Appeal held that a tenant must take a covenant to renew as the tenant finds it and must comply with any conditions precedent that apply to its exercise: at para. 36. A tenant is not entitled to renew a lease if it is in default: 1383421 Ontario Inc. v. Ole Miss Place Inc . (2003) , 67 O.R. (3d) 161 (C.A.), at para. 71 . The default precludes the tenant from exercising the option to renew because it has not met the necessary precondition of being in compliance.
68In Ole Miss , the Court of Appeal held that the operative date for the purposes of determining whether a tenant is in default is a matter of interpreting the renewal clause: at para. 62. In that case, the operative date was determined to be the date by which the renewal had to be exercised, or as the case here, 180 days before the termination of the lease: Ole Miss , at para. 65. In Mapleview , the tenant had to be in compliance with the lease at that time that the tenant exercised the renewal option: at para. 51.
69The onus is on the tenant to show that it is not in default of the lease: Mapleview , at paras. 38 and 50. It is not sufficient for the tenant to demonstrate diligent efforts. It must demonstrate that it is in compliance with the lease terms in order to preserve the option to renew: Mapleview , at para. 57. The preferred course would be for the tenant to pay the arrears while preserving their right to dispute the additional charges. In this manner, the tenant could validly exercise the renewal option.
70The landlord is not required to give notice of default, unless the lease requires it: Ole Miss , at paras. 48-49. Moreover, the landlord is not required to give notice to the tenant with the correct amount of the default: Mapleview , at para. 47.
71I have determined that McRae failed to pay the increased energy costs demanded by Nova and was therefore in default of the Lease. Nova gave notice to McRae of its default in March 2017, and demanded that McRae pay the increase in energy costs. McRae did not pay this amount, or any portion of it. When McRae attempted to exercise the renewal option in September 2017 it was in default of the Lease. McRae was not entitled to know the exact amount owing under the Energy Provision and could not simply refuse to pay until it did: Mapleview , at paras. 47-51. McRae remained in default on October 2, 2017: the date by which it had to exercise the option to renew under the Renewal Provision. It was only after the commencement of this Application that McRae provided a cheque for the disputed amount to its lawyer. By that time, the period for exercising the option under the Renewal Provision had long since expired.
72McRae was aware of Nova’s interpretation of the Energy Provision since July 2016. Since that date, Nova billed McRae monthly for the increased energy costs. In March 2017, Nova gave McRae notice of default and that it owed $74,457.75 in energy charges, even though it was not required to do so under the terms of the Lease. By April 2017, McRae knew there was a live dispute between the parties and that Nova would not agree to submit the dispute to a third party for resolution. When McRae purported to exercise the option to renew on September 29, 2017 it already knew based on a conference call the previous day that Nova disputed its right to renew, as it considered McRae to be in default. Nonetheless, McRae did not commence litigation until March 2018 when the Lease term was almost expired.
73McRae argues that the Renewal Provision should be interpreted as whether or not the lessee was in default at the expiry of the Lease term. It further argues that by March 31, 2018 when the Lease expired, it was in substantial compliance with the Lease because it had paid the monies claimed by Nova into its lawyer’s trust account. This interpretation of the Renewal Provision is inconsistent with the language of the Renewal Provision and the Court of Appeal’s decision in Ole Miss , which found, at para. 65, that the operative date is the date on which the renewal is to be exercised. Interpreting the relevant date as the expiry of the Lease would simply be unworkable and commercially absurd, since the parties would not know whether the Lease could be extended until the last day of the lease term. The case law is clear that the tenant must not be in default when the option to renew is exercised.
74While McRae relies upon the Court of Appeal’s decision in Spiegel v. Modernage Furniture Ltd . , [1972] 1 O.R. 625 (C.A.), that case does not assist because the court’s interpretation turned on the language of the provision at issue, which was very different from the provision at issue here. In that case, the tenant’s failure to deliver a cheque for last month’s rent with the renewal notice was not fatal, since it was delivered before the end of the current term.
75McRae cannot exercise its option to renew the Lease because it was in default when it sent its Renewal Notice. McRae cannot satisfy its onus of demonstrating that it had complied with the preconditions required for its exercise of the renewal option. If McRae intended to preserve its right to renew the Lease, it should have paid the amounts claimed by Nova while reserving its rights under the Lease. Because it did not do so, McRae cannot avail itself of the option to renew.
D. Is Relief from Forfeiture Appropriate?
76The case law draws a distinction between relief from forfeiture of an existing right and relief from failure to perform conditions precedent to a right: Delphi Management Corp. v. Dawson Properties, 2014 ONSC 354 , at paras. 16-20 . In the case of a failure to perform conditions precedent to a right, the court’s equitable jurisdiction to grant relief is more limited: 120 Adelaide Leaseholds Inc. v. Oxford Properties Canada Ltd. , 1993 CarswellOnt 5327 (C.A.), at para. 3 . In order to be entitled to relief from forfeiture, the tenant must show that it has “made diligent effort[s] to comply with the terms of the lease which are unavailing through no default of his or her own”: Adelaide Leaseholds , at para. 3.
77In this case, by defaulting on the Lease, McRae failed to perform a condition precedent to the Renewal Provision. McRae cannot demonstrate the requisite degree of diligence to comply with the Lease’s terms. It knew well in advance Nova’s interpretation of the Energy Provision, and did not provide an alternative interpretation for Nova’s consideration. When Nova rejected the idea of a third party interpreting the clause, McRae ought to have known that litigation was the only alternative. It should have paid the amounts under protest and then sought a resolution of the dispute: Mapleview , at paras. 56-57. McRae could not both remain in default and purport to exercise the renewal option. McRae had more than ample time to remedy the default and, in failing to do so, jeopardized own its option to renew.
78There was no conduct on Nova’s part that equity would find reason to criticize: 120 Adelaide Leaseholds , at para. 3 . Once it decided to recover the increase in electricity costs, Nova made its position on the interpretation of the Energy Provision clear throughout and did nothing to mislead McRae into believing that the option could still be exercised.
E. How Much in Holdover Rent Does McRae Owe Nova?
79The parties agreed at the hearing of the motion before Favreau J. that if McRae was found to be in default of the Lease, the judge hearing the Application would have jurisdiction to determine the amount owed by McRae to Nova.
80The Lease expired on March 31, 2018. As of the date of these reasons, McRae has occupied the Premises for an additional eight and a half months. There may be an additional occupation period depending upon when McRae ultimately vacates the Premises. The amount of holdover rent owing will be determined in accordance with Section 19 of the Lease, which states that for the holdover period, the Lessee must pay 125 percent of the “monthly rent last payable pursuant to the terms of the Lease.”
81It will also be necessary to calculate the increase in energy costs under the Energy Provision from the date of the last account provided on June 19, 2018.
82Given the foregoing, I request that counsel provide me with their calculations of the amount owing including all of the above charges. Since the increased energy costs are to be based on the interpretation of the Energy Provision as detailed above, and the Lease provides the rate of interest and holdover rent, I expect that the parties will be able to agree on the outstanding amount. As a result, within 30 days of the release of this decision, I request that counsel provide:
(a) a joint submission in writing calculating the amounts owed by McRae; or
(b) in the event that the amount is disputed, each party’s submissions in writing on the amount owed, with the calculations clearly shown.
Conclusion
83For the foregoing reasons, I dismiss the Application for declaratory relief and find that McRae was in default of the Lease and therefore not entitled to exercise its option to renew. Moreover, McRae is not entitled to relief from forfeiture. The injunction is vacated and Nova is entitled to exercise its rights under the Lease.
84At the hearing of the motion, counsel for both parties exchanged costs outlines and agreed that the successful party would be entitled to $16,000 in costs on a partial indemnity basis. I therefore order that the Applicant pay the Respondent $16,000 in costs.
85I remain seized of this matter for the purposes of determining and ordering the amount owed by McRae pursuant to the Lease.
Nishikawa J.
Released: December 13, 2018
Footnotes
- Nova acknowledged in this Application that its initial calculations of the increase in energy costs were mistaken because they failed to account for usage. This resulted in a lower amount owing by McRae. Nova is not seeking the difference. The methodology provided above is as corrected to account for usage.