2019 ONSC 278
COURT FILE NO.: CV-11-5112-00
DATE: 2019 01 11
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
Phyzex Technologies Inc. and Sasha Sekretov
Plaintiffs
- and -
Correct Development Corporation
Defendant
K. Randhawa, for the Plaintiffs
E. Moore, for the Defendant
HEARD: September 13, 14, 15; October 12, 13, 2017; February 11, 12, 2018; and May 16, 2018
REASONS FOR JUDGMENT
McSweeney J.
OVERVIEW
[1] This trial was held to determine who owes what to whom following the abrupt end of the parties’ nine-year commercial leasing relationship. The Plaintiffs are the former tenants. The defendant, Correct Development Corporation (“Correct”), is the landlord and owner of the leased premises.
[2] The Plaintiff, Sasha Sekretov, testified that he holds a business diploma from Humber College and is an entrepreneur. He is the owner and principal of Phyzex Technologies Inc. (“Phyzex”), a manufacturer and distributor of weight‑lifting goods and accessories.
[3] The background facts are not in dispute. In 2002, when Mr. Sekretov’s business got too big to operate from his parents’ home, he negotiated his first commercial lease with Correct and moved his business into Unit 26-B North, 18 Strathearn Avenue, Brampton. Correct gave him a discount on the rent for his first year in exchange for some weight-lifting goods.
[4] For the first five years, the terms of Phyzex’s tenancy were governed by a sequence of six “net net net” leases executed by Mr. Sekretov (in his personal capacity and on behalf of his company) and Alan Furbacher, who is the President of Correct.[^1] Although Correct preferred longer lease commitments from tenants, Mr. Sekretov preferred the business flexibility of shorter leases. Accordingly, all leases during this period were for either 6 or 12 months.
[5] On April 30, 2008, the last of these leases expired. The Plaintiff remained in the premises in an “overhold” position, which meant he owed twice the monthly rent until a new lease was negotiated. Mr. Sekretov was reluctant to enter into a new lease, in part because of his disagreements with the landlord regarding Taxes, Maintenance, Insurance (“TMI”), and other operating costs charged to tenants under the terms of its Standard Net Net Net Lease.
[6] On May 12, 2011, Correct issued a Notice of Distress to Phyzex and sought to distrain its goods for non-payment of rent. In response, Mr. Sekretov did a “midnight move” that evening, using rented trucks to move all of Phyzex’s inventory out of the unit.
[7] Correct did not hear from Phyzex after the move until it started a Small Claims Court action to recover rent and other amounts owing under the terms of the lease. In response, Phyzex and Mr. Sekretov started their own action in Superior Court. The two actions were joined in Superior Court and the trial proceeded before me, with Correct’s claim treated as a counterclaim.
POSITIONS OF THE PARTIES
a. Phyzex
[8] Phyzex claims that Correct is bound by a Short Form Lease document that Mr. Sekretov signed in 2010 with Gord Main – an employee at Correct. It further claims that Gord Main’s signature on a “letter of forgiveness” drafted by Mr. Sekretov (“Forgiveness Letter”) has the legal effect of eliminating all debts of Phyzex to the landlord – approximately $29,000 to the date of the letter. The 2010 Short Form Lease, Letter of Forgiveness, and 2011 “Lease Renewal” will be referred to collectively as the “Gord Main Documents”. The validity of these documents is disputed by Correct.
[9] Phyzex pleads that the Gord Main Documents bind Correct and comprise a “clean slate” that eliminated all past debts to Correct. Phyzex maintains that because it was in compliance with the terms of the 2010 Short Form Lease and a subsequent 2011 Lease Renewal, Correct had no legal basis to issue a Notice of Distress and is therefore liable for breach of contract for effectively evicting Phyzex. It pleads that Correct must pay $120,000 in business losses and $50,000 in punitive damages.
b. Correct
[10] Correct disputes the validity of the Gord Main Documents on the basis that Gord Main was a temporary maintenance employee who was never authorized to bind Correct in any lease or other agreements. Correct denies that Gord Main had actual or apparent authority to bind it.
[11] Correct asserts that Phyzex was significantly behind on its rent on May 12, 2011, and that it was legally entitled to issue a Notice of Distress in the manner it did. It did so in order to distrain Phyzex’s goods and bring it to the table to negotiate a new lease. In response, Phyzex chose to pull a “midnight move,” which frustrated the distraint of its goods and effectively ended the tenancy. Correct seeks an order requiring Phyzex to pay the amounts owing by Phyzex at the time it moved out on May 12, 2011.
ISSUES
[12] The central issue is the validity of the Gord Main Documents. The validity of these documents turns on whether “Gord Main” had apparent or ostensible authority to bind the defendant.[^2]
[13] The Plaintiffs’ claim rests on the assertion that the Gord Main Documents are binding on Correct. For the reasons that follow, I find that Correct is not contractually bound by those documents. Correct was therefore entitled to distrain the Plaintiffs’ goods in the manner it did. Phyzex’s “midnight move” frustrated the distraint and ended the tenancy.
[14] The Plaintiffs’ claims are dismissed. Judgment is granted on the counterclaim in favour of Correct Development.
[15] The reasons below for my judgment will address each of the following issues in turn:
Did Gord Main have authority to bind Correct in its contracts with the Plaintiffs?
If not, did Correct’s conduct after January 29, 2010, nonetheless make it bound by the Short Form Lease?
Was Correct entitled to initiate distress proceedings?
Were the distress proceedings excessive?
What damages are recoverable?
a. What damages are recoverable by Phyzex?
b. Can Correct recover beyond the Small Claims Court limit?
c. What damages are recoverable by Correct?
ANALYSIS
Issue 1: Did Gord Main have authority to bind Correct in its contracts with the Plaintiffs?
Context
[16] Mr. Sekretov testified that he had had difficulties with the landlord regarding the terms of his leases over the five-year period of 2002 to 2007. After the lease executed on August 15, 2007, ended on April 30, 2008, he wanted better terms from Correct before he would agree to enter into a new lease. He spoke to a “legal friend” for advice. Based on this advice, he was willing to sign a new lease if Correct would forgive Phyzex on all the unpaid rent and TMI amounts outstanding at that time.
[17] Mr. Sekretov’s evidence at trial was that the following documents were the result of his meetings with Gord Main:
a) Forgiveness Letter, dated February 1, 2010: This document was prepared by Mr. Sekretov. Where the name “Alan Furbacher” is indicated as the author of the letter, his name is scratched out and “Gord Main” is written in. The letter is signed by Gord Main. The letter from Correct but not printed on letterhead, is addressed to Phyzex, and states that “any and all debts” are “set to zero” upon the signing of “the new lease”. The specified forgiven debts include “default rent amounts of $29,857.08, and Additional Rent outstanding TMI charges of $4,024.93”. The letter further states that “once the new lease is signed any prior monies owed prior to February 1st, 2010 can no longer exist and are no longer valid”. Mr. Sekretov testified that although dated February 1, 2010, the Forgiveness Letter was signed by Gord Main in the Correct offices on January 29, 2010.
b) Short Form Lease, dated January 29, 2010: This document is signed by Mr. Sekretov for Phyzex. His initials and signatures are witnessed by Gord Main. Gord Main did not sign this document – the signature line for the Landlord to sign indicating acceptance of the Short Form Lease is left blank; there is no signature on behalf of the landlord. Significant redactions to the Short Form Lease’s pre-printed language are initialled by Mr. Sekretov and Gord Main. These include the deletion of Mr. Sekretov in his personal capacity as the “Guarantor/Indemnifier” and the removal of clauses entitling the Landlord to charge additional TMI once the year’s full operating costs are known.
c) Confidentiality and Non-Disclosure Agreement, dated January 29, 2010: This document was signed by Mr. Sekretov for Phyzex and witnessed by Gord Main.
d) Renewal of Lease, dated June 28, 2011: This document was signed by Gord Main on behalf of Correct.
[18] Mr. Sekretov testified that he would not have signed the Short Form Lease unless Correct forgave the Plaintiffs’ debts to that date. As mentioned above, after speaking with a “legal friend”, Mr. Sekretov prepared the Forgiveness Letter addressed to himself from Correct’s Vice President, Mr. Furbacher. He required Correct to sign it before he would agree to enter into a new lease. Mr. Sekretov argues that Gord Main’s signature bound Correct, resulting in a “clean slate” with “zero balance” owing as of January 29, 2010.
[19] I note that the Short Form Lease was not signed by Gord Main. It does not have a signature of anyone purporting to represent Correct. The legal issue regarding this document is therefore whether Correct’s subsequent conduct in processing the lease amounted to an agreement to be bound by its terms. This issue will be addressed later.
Legal Framework
[20] Correct is bound in law by documents signed on its behalf by people with actual or apparent (also known as ostensible) authority. The issue is, therefore, whether the Plaintiffs have established on a civil standard that Gord Main had apparent (or ostensible) authority to enter into the Forgiveness Letter on behalf of Correct.
[21] The parties agree on the applicable test for apparent authority. This test was originally set out in Freeman v. Buckhurst Park Properties (Mangal) Ltd., [1964] 2 Q.B. 480, [1964] 1 All E.R. 630, at p. 816-817. It has been applied by the Supreme Court of Canada in various cases, such as Rockland Industries Inc. v. Amerada Minerals Corp. of Canada Ltd., 1980 CanLII 188 (SCC), [1980] 2 S.C.R. 2. The test requires the following four factors to be established:
a) A representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor;
b) Such representation was made by a person or persons who had actual authority to manage the business of the company, either generally or in respect of those matters to which the contract relates;
c) The contractor was induced by such representation to enter into the contract (i.e., that he in fact relied upon it); and
d) Under its memorandum or articles of association, the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent.
[22] In this case, in order for the 2010 Short Form Lease and Forgiveness Letter to be binding on Correct, the Plaintiffs must prove that prior to signing those documents:
a) A representation by word or action was made to Mr. Sekretov that Gord Main had authority on behalf of Correct to enter into the 2010 Short Form Lease and Forgiveness Letter;
b) The representation regarding Gord Main’s authority was made by the person with actual authority to manage the business, Alan Furbacher;
c) Mr. Sekretov relied on the representation prior to signing any documents with Gord Main; and
d) Nothing in Correct’s corporate constituting documents deprived Correct of the capacity to enter into this kind of agreement or prevented Mr. Furbacher from delegating authority to Gord Main.
[23] The first two questions can be combined, in this case, into one: did Mr. Furbacher, by word or deed, represent to Mr. Sekretov that Gord Main could bind Correct by signing lease documents?
Evidence
[24] I have reviewed the evidence carefully. Nowhere does Mr. Sekretov allege that Correct’s Vice President, Mr. Furbacher, indicated to him that he had given Gord Main authority to execute the Forgiveness Letter or any other documents on behalf of Correct.
[25] Mr. Sekretov testified that Gord Main signed the Forgiveness Letter in the Correct boardroom on January 29, 2010, and that Mr. Main “left the room” to speak with Mr. Furbacher before doing so.
[26] Mr. Sekretov conceded that he did not know whether Gord Main and Mr. Furbacher actually spoke. He did not see them speak. When cross-examined on this point, Mr. Sekretov conceded that he did not himself have any conversation with Mr. Furbacher about the lease renewal or the Forgiveness Letter, nor was he not told by Mr. Furbacher that Gord Main had authority to sign the documents.
[27] He also conceded that he knew that it was Mr. Furbacher who signed Correct’s final lease documents and was the individual at Correct who made the decisions.
[28] Mr. Furbacher testified on this issue. As Vice President of Correct, he had the authority to sign lease documentation for the company. He signed most leases, but had also delegated that authority to two people: his daughter, Krista Furbacher, and his in-house counsel, Stephanie Campanero. No one else had authority to sign binding lease documentation for Correct.
[29] Mr. Furbacher denied categorically authorizing Gord Main at any time to sign any agreements for Correct. He testified that Gord Main was a tenant who ran a gym out of Correct’s property in Orangeville, Ontario. Gord Main was in financial difficulties and could not make his rent. Mr. Furbacher therefore hired him for $20/hr to help him pay down his debt. Mr. Main performed maintenance tasks at the 18 Strathearn Avenue property, in particular, due to his strength and skills as an overhead door installer.
[30] Mr. Furbacher testified that Gord Main had told him that he and Mr. Sekretov had become friends due to their common business interests in weight lifting. Mr. Furbacher denied that Main, as a maintenance staff, had access to the Correct boardroom for signing documents as described by Mr. Sekretov.
[31] Mr. Furbacher confirmed that he and Mr. Sekretov did not speak to each other about the Forgiveness Letter or its terms or about the 2010 Short Form Lease. He described the terms of that Short Form Lease as “commercially unreasonable in every way”. In particular, Mr. Furbacher testified that he would not have agreed to release Mr. Sekretov as a named tenant and personal guarantor knowing that he was significantly in arrears of rent already, nor would he have agreed to lower Phyzex’s rent at a time when Correct’s business was going well and the property had a 90% occupancy rate.
Analysis
[32] I accept the evidence of Mr. Furbacher that the only people to whom he had delegated his authority to sign lease documents for Correct were his daughter, Krista, and his in-house counsel. This evidence was not significantly challenged by the Plaintiffs. It is supported by the fact that all the Offers to Lease, Short Form Leases, and Net Net Net Lease documents signed by the parties prior to the Gord Main Documents were signed by Alan Furbacher or in-house counsel, Stephanie Campanero.
[33] I further find on the basis of the above evidence that Mr. Furbacher did not indicate to Mr. Sekretov by word or action that Gord Main was authorized to sign lease documents for Correct. Nor was Gord Main employed in a capacity that involved signing of documents such that his authority could have been reasonably inferred by Mr. Sekretov on the basis of Correct’s past practices. In making my findings, I place no weight on Mr. Furbacher’s testimony that Gord Main told him he was friends with Mr. Sekretov, as this evidence was hearsay and was denied by Mr. Sekretov.
[34] Phyzex argues that other employees had met with Mr. Sekretov in the past to discuss or witness Short Form Lease documentation. This is accurate. However, the only corporate representatives who accepted the lease terms on behalf of Correct by signing such documentation were, as mentioned, Mr. Furbacher or his counsel. The fact that Gord Main met with Mr. Sekretov and apparently discussed lease terms was therefore not a basis, on the whole of the evidence, upon which authority to bind Correct can be inferred.
[35] I find that the Forgiveness Letter prepared by Mr. Sekretov was an unusual and significant document and that express authorization from Mr. Furbacher was required in order to bind Correct to forgiveness of almost $30,000 of tenant debt.
[36] I accept Mr. Furbacher’s evidence that he was unaware of the proposed Forgiveness Letter, would not have approved it, and did not authorize Gord Main to sign it on behalf of Correct. Mr. Furbacher testified that he did not know of the “Forgiveness Letter” until after Correct initiated distress proceedings in May 2011. That evidence was not challenged by the Plaintiffs, and I accept it.
[37] The Plaintiffs have therefore failed to establish that Gord Main had ostensible or apparent authority to sign the Forgiveness Letter on behalf of Correct. The fact that Mr. Sekretov, who drafted the Forgiveness Letter, knew that Mr. Furbacher was the person with signing authority is further supported by the fact that he typed “Alan Furbacher” at the bottom of the letter as the person to sign for Correct. I cannot find on the evidence that Gord Main’s apparent signature over the scratched-out name of Mr. Furbacher was an authorized signature in lieu of the Vice President, Mr. Furbacher.
[38] Having found that Gord Main was without ostensible or apparent authority to bind Correct, it is not necessary to consider the third step of the test, as I have found that there was no representation made to Mr. Sekretov upon which he could have relied prior to signing the Short Form Lease. Nor is the fourth step, regarding Correct’s constituting documents, relevant to the analysis, as Correct did not oppose the validity of the Gord Main Documents on this basis.
[39] I further find on the evidence that Mr. Sekretov was familiar with the lease negotiation and renewal process with Correct and knew that Mr. Furbacher had final approving authority for leases. It was not reasonable for him to assume, without evidence from Mr. Furbacher himself, that Gord Main had Correct’s authority to forgive over $30,000 of tenant debt. By his own admission, Mr. Sekretov took no steps to contact Mr. Furbacher to satisfy himself that Gord Main was authorized to sign such a significant document for Correct. Gord Main’s apparent willingness to sign the Forgiveness Letter does not make it binding on Correct.
[40] The Forgiveness Letter is therefore not binding on Correct, as it was signed by someone without ostensible or apparent authority to bind the defendant.
[41] It is perhaps here that I should comment on the absence of testimony from Gord Main. Counsel advised that Mr. Main could not be located. Each party asked me to find that the other should have called him as a witness and that their failure to do so should lead to negative inferences against the other.
[42] The onus is on the Plaintiffs to establish on a balance of probabilities that Correct’s maintenance staff, Gord Main, had apparent authority to bind Correct and forgive Phyzex’s significant tenant debt. Phyzex asserted that Gord Main had apparent authority to bind Correct. The fact that Correct did not call Gord Main as a witness does not assist the Plaintiffs in meeting their evidentiary burden. Mr. Sekretov could have called Gord Main if he wished to support his evidence.
[43] Phyzex has not met its onus to establish that Gord Main had apparent authority to bind Correct. In these circumstances, the burden does not shift to Correct to negative the assertion of apparent authority. The fact that Correct did not call Gord Main does not therefore assist the Plaintiffs in meeting their evidentiary onus.
Issue 2: Did Correct’s conduct after January 29, 2010, nonetheless make it bound by the Short Form Lease?
Evidence
[44] Having found that Gord Main did not have authority to bind Correct, I turn to the disputed Short Form Lease, which was signed by Mr. Sekretov on January 29, 2010. As noted earlier, this document was not signed by anyone on behalf of the landlord, Correct. That field was left blank. It is therefore not a valid agreement on that basis alone.
[45] I note further that the unsigned Short Form Lease, per its terms, was to have led to a signed Standard Net Net Net lease within seven days of signing. This did not happen. The Plaintiffs seek to rely on a Short Form Lease which only they have signed. Nor was it turned into a Standard Net Net Net Lease as required by its terms.
[46] I further note that the removal of Mr. Sekretov as the guarantor on this document was a significant change to the risk assumed by Correct on the lease. As referenced elsewhere in these reasons, Mr. Sekretov admitted that Phyzex had been having slow periods in its business and he had been unable to afford to pay his full monthly rent in 2009. Correct was aware of this and had written to Mr. Sekretov, noting his failure to pay the monthly rent in full.
Analysis
[47] On the evidence, I cannot conclude that the absence of the landlord’s signature on the Short Form Lease was an insignificant omission. At its highest, the Short Form Lease signed by Mr. Sekretov amounts to an offer by Phyzex to enter into a new lease on the terms set out in that document. This offer was not accepted by Correct, as the document was not signed and a long-form Standard Net Net Net Lease was not subsequently executed. Given the removal of the personal guarantor, the Short Form Lease cannot be viewed as akin to an extension or continuation of earlier lease terms. By Mr. Sekretov’s own admission, it was a new lease deal in which he sought to implement, to the benefit of Phyzex, terms that he had negotiated after receiving advice from an unnamed “legal friend”.
[48] As concluded above, the Plaintiffs have not established that Gord Main had authority to bind Correct or that Phyzex relied on that apparent authority prior to signing the Short Form Lease. The Plaintiffs’ case, taken at its highest, does not allege any steps taken by Correct to cloak Gord Main in apparent authority before Mr. Sekretov signed the Short Form Lease.
[49] The Plaintiffs essentially contend that Correct’s actions after the signing of the Short Form Lease and Forgiveness Letter amount to acceptance of those documents such that Correct is bound by their terms.
[50] Phyzex argues that I can find the unsigned Short Form Lease and the Forgiveness Letter to be enforceable against Correct for two reasons:
a) because of administrative actions taken by Correct’s office staff with those documents after they were signed; and
b) because Gord Main signed a “Renewal of Lease” as the “landlord” on June 28, 2011.
[51] I will consider each of these arguments in turn.
a. Administrative Actions Taken by Correct’s Office Staff
[52] With respect to the steps taken by the staff, I find on the evidence that Correct’s office staff received the Forgiveness Letter, Short Form Lease, and Confidentiality agreement at some time after January 29, 2010. They then took various steps, including:
a) uploading those documents into their tenant database;
b) accepting rent payments from Mr. Sekretov which fell short of the amounts owing under the overhold provisions of the prior lease and which were in accordance with the payments due under the Short Form Lease of January 29, 2010; and
c) sending routine tenant letters to Phyzex, including one regarding an HST update, which referenced the rent amount in the January 29, 2010, Short Form Lease.
[53] Such actions are not relevant to the apparent authority analysis for two reasons. First, they were not actions or words taken by Mr. Furbacher; they were made by his staff. Second, even if they were actions typically taken as part of staff’s duties in processing leases and lease adjustments and therefore part of their general duties authorized by Mr. Furbacher, they were not taken before the signing of the disputed Documents. As such, they cannot constitute “representations” upon which Mr. Sekretov may have relied before signing the Gord Main Documents.
[54] Much emphasis was placed by Plaintiffs’ counsel on Mr. Sekretov’s evidence that he was very relieved after Gord Main signed the Letter of Forgiveness and on his belief that the Gord Main Documents were valid. Mr. Sekretov’s relief, however, and his subsequent conduct on the basis of the terms in the Short Form Lease is an argument that after-the-fact reliance on the documents can cure the initial absence of apparent authority in Gord Main. The Plaintiffs were not able to provide authority in support of this proposition.
[55] Similarly, Mr. Sekretov stated that acceptance of his post-dated cheques, which he provided to Gord Main at the time he signed the 2010 Short Form Lease, constitutes Correct’s agreement with the terms of the new lease. For this fact to assist in the apparent authority test, I would have to find the acceptance of the cheques to be an action or statement from Mr. Furbacher per the first and second prongs of the test. It is not such an action, as any acceptance by Correct of cheques took place after the signing of the 2010 Short Form Lease.
[56] Phyzex’s alternative argument is effectively that Correct’s actions in processing the unsigned Short Form Lease and accepting his cheques signaled its intention to be bound by that document. The Plaintiffs argue that there was disorganization in Correct’s offices. The Plaintiffs point to evidence of a changeover in the computer systems and databases used for lease processing, the departure of in-house counsel, and the sudden death of one of Correct’s property management employees, Mr. Bell-Smith, with whom he dealt.
[57] Correct’s evidence, provided by Mr. Furbacher and, in more detail, by Krystian Zimoch (a member of the Property Management Department), confirmed that Correct’s office underwent a systems change. Tenant records were moved from an old QuickBooks software program to an updated program for managing the tenants at Strathearn Avenue. Zimoch testified to a certain amount of disarray in the office during this period.
[58] In addition, confusion arose on the sudden passing of an employee called Angus Bell-Smith in 2010. The evidence confirmed that Mr. Bell-Smith had been Mr. Sekretov’s main contact on Correct’s staff for discussions regarding lease renewals and tenant issues. However, it is important to note that Mr. Bell‑Smith never had final signing authority. He always met with Mr. Furbacher, and final short form leases were signed by Mr. Furbacher. This authority was not delegated to Mr. Bell-Smith.
[59] I agree with Plaintiffs that the evidence establishes that there was some confusion as to who was doing what in Correct’s offices over a period that included January 2010. It was therefore not unreasonable for Mr. Sekretov to have some conversations with Gord Main about his tenancy.
[60] However, there is no indication that during this time, anyone other than Mr. Furbacher was in charge or had authority to give final approval on leases.
[61] It is also relevant to note that the parties agree that Mr. Sekretov had been under-paying (“short-paying” was the phrase used by Mr. Furbacher) his rent for many months, even before the date the 2010 Short Form Lease was signed by Mr. Sekretov. Correct had accepted these monthly payments even though Mr. Sekretov continued to owe the balance of his monthly rent as well as overhold charges.
[62] I find on the evidence that even when Mr. Sekretov did not pay the monthly amount due under his lease, Correct accepted whatever amount Mr. Sekretov did pay and carried the unpaid amount forward as an accruing debt.
[63] In the circumstances of this tenancy, I cannot find that Correct’s administrative actions, including its acceptance of rent cheques from Mr. Sekretov, amounted to acceptance of the terms of the Short Form Lease.
b. The Disputed Lease Renewal Signed by Gord Main
[64] The Plaintiffs alleged that the 2010 Short Form Lease was renewed on June 28, 2010, when Mr. Sekretov executed a renewal of lease (the “Disputed Lease Renewal”) on behalf of the Plaintiffs and this document was then signed by Gord Main on behalf of Correct.
[65] I find that the Disputed Lease Renewal is not valid or binding for two reasons. First, it purports to renew the Short Form Lease, which I have found not to be valid and enforceable. The Disputed Renewal cannot extend a contract that was not valid in the first instance. Second, as established previously in these reasons, Gord Main had no authority to enter into any lease document on behalf of Correct.
Issue 3: Was Correct entitled to initiate distress proceedings?
[66] I have found that Mr. Sekretov did not have a valid lease at the time the landlord issued the Notice of Distress on May 12, 2011. At that time, Phyzex was significantly in arrears of its rental obligations.
[67] I have found that the 2010 Short Form Lease, Forgiveness Letter, and Disputed Lease Renewal were not binding on Correct. The Standard Net Net Net Lease executed by the parties on August 15, 2007, was for a term commencing November 1, 2007, and ending April 30, 2008. Phyzex continued to occupy the premises after that date without a new lease. Phyzex was therefore in an “overholding” position as of May 1, 2008.
[68] In final argument, Phyzex conceded that if the Gord Main Documents do not bind Correct, Phyzex was (per the terms of the last valid lease) in an “overhold” position and owed double rent, which it had not paid. Phyzex is therefore liable for twice the monthly rent for each month it continued to occupy the premises without a lease, up to and including May 2011, the month in which it moved out of the premises.
[69] I further find that, by his own admission, Mr. Sekretov had been “short‑paying” his monthly rent beginning in April 2009 by more than $300 per month. Correct’s staff wrote to Phyzex on July 3, 2009, advising “you cannot arbitrarily decide what rental amount you wish to pay”. Although he asserted at trial that an unspecified Correct staff member agreed to this “short-paying” of rent, Mr. Sekretov’s evidence in this regard was contradicted by a letter he wrote to Correct, dated November 9, 2009, stating “due to necessity and survival have had to reduce my rent myself”. He admitted on cross-examination that during this time, “business was exceptionally slow”.
[70] On the basis that Phyzex had not paid neither the full base monthly rent nor the overhold double amount and was significantly in arrears to Correct in May 2011, Correct was entitled to commence distress proceedings per the terms of the lease. The covenant of “quiet enjoyment” in the parties’ lease did not, per its express terms, prevent Correct from initiating a distress or taking such steps as required to distrain the goods of Phyzex.
Issue 4: Were the distress proceedings excessive?
Phyzex’s Position
[71] Phyzex pleads that even if Correct was entitled to initiate distress proceedings, the manner in which it did so was excessive and Correct is therefore liable to Phyzex for damages flowing from the distress.
Legal Framework
[72] Section 55 of the Commercial Tenancies Act, R.S.O. 1990, c. L.7, states that a landlord who takes an excessive distress or takes distress wrongfully is liable in damages to the owner of the goods distrained.
[73] Subsection 55(2) specifically makes a landlord liable for damages where it distrains a tenant’s goods when no rent is owing.
[74] Having found that Phyzex owed significant back rent at the time of the distress, s. 55(2) does not apply. The question is whether, as alleged by Phyzex, Correct’s actions were excessive such that Phyzex is entitled to damages.
[75] Specifically, Phyzex alleges that Correct’s actions amounted to an eviction rather than a distraint on its goods. As such, Phyzex claims it was entitled to 30 days’ notice as a month-to-month tenant, and that because it did not receive said notice, losses flowing from its sudden move are properly borne by Correct.
Evidence
[76] Mr. Sekretov testified that on May 12, 2011, he received a call at home from his employee that she had been given a Notice of Distress. He understood the locks were being changed or would be changed on his unit.
[77] Mr. Sekretov went immediately to the premises, accompanied by several family members. He received the Notice of Distress from his employee. The Notice advised Phyzex that:
a) Phyzex owed over $17,000 in arrears to Correct;
b) Its goods were being distrained and could be sold if outstanding arrears were not paid in five days;
c) Phyzex is prohibited at law from removing any inventory from its unit without Correct’s approval;
d) The lease has not been terminated by Correct;
e) If Correct changes the locks, “it is for the sole purpose of controlling and securing the safety of the goods and chattels distrained against”; and
f) If the locks are changed, Phyzex will still have access to the premises “under the supervision of the landlord or its agent”.
[78] With his father-in-law and brother-in-law, Mr. Sekretov went to Correct’s office and had what both parties agree was a heated exchange with Mr. Furbacher. During this exchange, Mr. Sekretov asserted that Correct had no right to distraint as Phyzex had a lease. Mr. Furbacher said that Phyzex owed considerable money to Correct and had no lease. He testified that Mr. Sekretov was yelling and aggressive and was then asked to leave the office.
[79] Mr. Sekretov testified that he left the office and returned to his unit. He understood from the exchange in Correct’s office that he was being asked to vacate the unit. He was encouraged by his family members to call a lawyer. He testified that he did in fact call and speak to a lawyer that afternoon. The lawyer explained to him that his goods were being distrained. According to Mr. Sekretov’s testimony, the lawyer advised him to rent trucks and “get your stuff and go”. Mr. Sekretov testified that he worried he would not have access to his goods.
[80] He testified that he then called several friends to help and rented trucks. Starting at around 9 PM, he and his friends moved all the Phyzex inventory out of the unit.
[81] Mr. Furbacher testified that he had a feeling Mr. Sekretov would attempt “a midnight move”, despite the terms of the Notice of Distress prohibiting him from doing same. He drove by the premises in the late evening and confirmed his suspicion. He called the police. At approximately 1 AM, the police arrived and told Mr. Sekretov to leave. Sekretov was given permission to take some photos of what was left in the unit and did so. He then left with the rental trucks and all the Phyzex inventory.
[82] Photos at trial confirm the testimony of Mr. Sekretov and Mr. Furbacher that all of Phyzex’s inventory was removed from the unit. Left behind were some office items, storage racking and lighting, and related items. Mr. Sekretov confirmed that he did not contact Correct after the midnight move to seek the return of any items remaining in the unit.
[83] Mr. Furbacher denied that the Notice of Distress was issued to evict Phyzex. He explained the purpose of the distress proceedings as follows: “Principally … to protect our interests and get the tenant to come to the table … we haven’t formally locked the tenant out. The tenant can continue his operations, however this is an attempt to make sure that the tenant doesn’t defeat our rights.” Mr. Furbacher testified that if Mr. Sekretov wished to continue the tenancy, he wanted Phyzex to sign a lease.
[84] Mr. Furbacher testified that after Phyzex moved its inventory out, he did not hear from Mr. Sekretov again. Mr. Sekretov did not ask to collect the remaining items in the unit, nor to access it for any other purpose. The items Phyzex left in the unit were of no value to Correct and were disposed of when the unit was cleaned and restored for re-leasing.
Analysis
[85] The Plaintiffs argue that Correct’s actions of changing the locks and of failing to appraise and inventory its goods during the distress render the distress unlawful. I will address these arguments in turn.
[86] It is common ground that a landlord’s action of changing locks and preventing a tenant from accessing the leased premises may support a characterization of its actions as an eviction which ends the tenancy, rather than a distraint on goods which continues the tenancy on terms.
[87] There is contradictory evidence as to whether the locks on the premises were changed, and if they were, when they were changed. In any event, the Plaintiffs admitted that at no time were they denied access to the premises. They completed the removal of substantially all of their goods and made no effort to try to regain access to the premises.
[88] By Mr. Sekretov’s own admission, he was not locked out of the unit and was not at any time denied access to his goods. Indeed, after deciding to take his goods out of the unit without Correct’s consent, he was able to do so and in fact did so.
[89] Even if the locks were changed, this action in and of itself does not necessarily render the distress unlawful. In Queen Street Holdings Inc. v. Z-Teca Inc., 2017 ONSC 5890, the court considered the issue of whether a distress was unlawful because the landlord changed the locks immediately upon issuing the notice of distress. The court confirmed that distress and forfeiture are mutually exclusive remedies available to a landlord and that changing locks may give rise to an inference that forfeiture is being invoked. However, the court also recognized that depending on the circumstances, the changing of locks in the course of a distress may not necessarily result in forfeiture, and consequently, an unlawful distress.
[90] Applying the analysis of Di Luca J. in Queen, I find that the facts of this case support a conclusion that Correct’s actions in changing or commencing to change the locks as part of its distress proceedings did not amount to the forfeiture of Phyzex’s goods.
[91] Specifically, I find on the evidence that:
a. Correct’s Notice of Distress stated clearly that the tenancy was not being terminated;
b. The Notice of Distress confirmed that locks may have to be changed to protect the tenant’s goods and that the tenant would continue to have access to the premises;
c. Phyzex never sought a copy of the key to any new locks; and
d. Phyzex removed its inventory from the premises, which indicated that it had no intention of continuing business at the premises.
[92] I note further that Correct’s actions of seeking to change the locks on the unit were prudent in the circumstances of its distraint of this tenant. This conclusion is supported by the fact that Phyzex took self-help steps within hours of receiving the Notice of Distress and removed its goods from the unit in express contravention of its terms.
[93] Phyzex has also alleged that the distress was executed unlawfully because Correct did not comply with specific distress obligations imposed on landlords under the Commercial Tenancies Act. Specifically, Correct did not conduct an appraisal of the goods, nor did it inventory and account for the sale or dispersal of the items left behind in the unit by Phyzex.
[94] It is common ground that distraint proceedings are taken where a landlord has elected to secure and sell a tenant’s property to satisfy arrears, but nevertheless to continue the lease. In this case, Correct commenced distraint proceedings on May 12, 2011, but did not have the opportunity to complete the distress by securing, itemizing, or appraising the goods in the unit because Phyzex removed them without approval that night.
[95] After Phyzex removed its goods from the unit, there was no inventory against which Correct could distrain. Where a distress cannot be completed due to the removal of the goods by a tenant, a landlord has no ability and, accordingly, no obligation to satisfy statutory distress obligations. Put another way, Correct was not required to appraise or secure goods which were removed from its premises by Phyzex.
[96] Phyzex argues that it left behind racking and other non-inventory items in the unit which had value. I accept that such items may have had value to Phyzex for the storage of its items and the carrying on of its business. However, the evidence of Mr. Furbacher for Correct was that these abandoned items had no commercial value to the landlord and it was not worth taking steps to value or sell them. I accept this evidence, and note further that it is consistent with the fact that Mr. Sekretov himself did not seek the return of the items after he moved his inventory out.
[97] An unusual aspect of the history of these parties is worth noting here. The evidence of both parties confirmed that on an early occasion in its tenancy, Phyzex had changed the locks on the unit without notifying the landlord. Mr. Sekretov admitted at trial that this was in contravention of the lease.
[98] I note further that Mr. Sekretov admitted he obtained legal advice prior to removing his inventory from the unit. He admitted that he did not take steps to go to court to seek relief from the distress or from what he viewed as a forfeiture. Instead, he removed Phyzex’s inventory without notice to the landlord in express contravention of the terms of the Notice of Distress. He did so within hours of receiving the notice.
[99] Although additional recovery was not sought by Correct on this basis, the actions of Phyzex could be viewed as engaging ss. 48 and 50 of the Commercial Tenancies Act, under which landlords may seek double recovery of the value of goods which are removed by a tenant to frustrate a distraint.
[100] The Plaintiffs’ claim for wrongful distress is dismissed for the foregoing reasons.
Issue 5: What damages are recoverable?
a. What Damages are Recoverable by Phyzex?
[101] I have concluded that the Plaintiffs have not made out their claim for damages on the evidence. Although is not necessary for me to do so in light of this conclusion, I make the following observations regarding Phyzex’s claim that it lost significant revenues as a result of its unplanned move from Correct’s premises to a new space.
[102] The evidence presented by Mr. Sekretov would not have enabled me to reach this conclusion on a balance of probabilities. The Plaintiffs did not tender a valuation of Phyzex, corporate financial statements, or tax returns. As such, the court was not able to assess its productivity in 2011 against its performance in previous years. I note further that the Plaintiffs’ claims for “lost customers” were negated by Mr. Sekretov’s own testimony in cross-examination that Phyzex did not in fact lose customers as a result of the move.
b. Can Correct Recover Beyond the Small Claims Court Limit?
[103] When it commenced its claim in the Small Claims Court, Correct had limited its pleaded recovery to $25,000. At the outset of trial before me in Superior Court, Correct indicated that it sought to amend its pleading to claim its full losses and tendered a draft order seeking the following amounts, plus interest:
DESCRIPTION
AMOUNT
a) Rental payments at the overhold rate, from May 1, 2008, to May 30, 2011 (net of amounts paid by Plaintiffs)
$55,870.75
b) One month additional rent for June 2011
$2,660.60
c) TMI adjustments 2002 - 2007
$4,024.93
d) TMI adjustments 2010 - 2011
$ 693.00
e) Restoration charges
$2,000.00
f) HVAC certificates
$1,800.00
[104] Correct set out its full claim in its Small Claims Court pleading. The amendment sought was to permit it to recover beyond the Small Claims Court limit of $25,000, now that the action is in Superior Court. Effectively, Correct seeks to remove from its claim the acknowledgment in para 1(g) that “the Plaintiff [Correct] acknowledges that the maximum monies awarded under this Claim can be $25,000.00”.
[105] Phyzex opposed Correct’s request to amend on the basis that it would suffer prejudice if Correct were permitted to seek to recover an amount over $25,000.
[106] I advised the parties that I would rule on this issue at the end of trial and that I would hear their final submissions before doing so. Each filed written submissions at the end of trial and attended before me to make oral submissions.
[107] Phyzex did not elaborate on the issue of prejudice in its final submissions or deny the applicability of r. 26 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. It only argued that it did not have notice of the issue.
[108] I have reviewed the pleadings. Correct’s Statement of Claim in the Small Claims Court action commenced October 5, 2011, and its defence in the Superior Court actions describe both the categories and basis of recovery claimed.
[109] Rule 26 of the Rules of Civil Procedure provides that an amendment shall be granted unless it results in prejudice that cannot be compensated for by costs or an adjournment. Per 370866 Ontario Ltd. v. Chizy (1987), 1987 CanLII 4122 (ON SC), 57 OR (2d) 587 (Ont. S.C.), at para. 4, the opposing party must demonstrate prejudice on a balance of probabilities to resist an amendment.
[110] In this case, Correct was clear at the outset of trial that it was seeking to recover the full amount of its loss on the basis of the facts pleaded in its original claim. I find that Phyzex had notice of the basis on which the claim was made in the original claim itself and that there is no evidence that it would suffer actual prejudice by Correct amending its claim. Phyzex did not seek an adjournment to address its unspecified prejudice.
[111] I note that the risk to Phyzex that Correct could recover over $25,000 is a risk that would have been wholly managed if Phyzex had defended the original claim in the Small Claims Court, rather than bring its own claim in Superior Court.
[112] Correct’s request to amend its counterclaim is granted. The counterclaim is hereby amended to include the claim amounts specified in Correct’s draft order, referenced above at para. 103.
c. What Damages are Recoverable by Correct?
a. Overholding
[113] The overholding calculations and rent paid by Phyzex were established by the evidence of Krystian Zimoch on behalf of Correct. Given my findings that the overholding provisions of the last lease executed by the parties apply, this claim is allowed. The Plaintiffs are therefore liable for unpaid rent for the period May 1, 2008, to May 30, 2011, in the amount of $55,870.75.
b. One Month’s Additional Rent
[114] Correct is entitled to seek one month in additional rent (i.e., for June 2011) at the overholding rate ($2,660.60) on the basis that Phyzex moved out on May 12, 2011, without notice. My conclusion in this regard is consistent with s. 28 of the Commercial Tenancies Act, which provides that a month is sufficient notice to terminate a month-to-month tenancy. Further, Correct’s evidence was that it required this time for restoration and re-leasing of the unit. This claim is allowed.
c. & d. TMI Adjustments
[115] Correct seeks TMI adjustment payments reaching back to 2002. The terms of the parties’ last Standard Net Net Net Lease are clear that tenants are responsible for additional TMI adjustments made by the landlord. The Plaintiffs do not dispute Correct’s contractual entitlement to levy additional TMI. I find that Correct was contractually entitled to charge TMI. I also find that the amount in issue was not paid by Phyzex. The Forgiveness Letter confirms this for some of the amount owed.
[116] There was a significant dispute between the parties about who had the obligation to inquire about TMI.
[117] Mr. Sekretov has concerns about the timing of the TMI demands by Correct. He argues there was a significant delay in the demands. Mr. Sekretov testified that he felt that Correct sought amounts that were unjustified and that there was too much delay in notifying him of the adjustment amounts.
[118] Accordingly, a review of the terms of the parties’ lease is required. Such review reveals the following:
(1) Section 6(g)(3) of the Standard Net Net Net Lease (November 2002 – October 2003) reads as follows: “[t]he amount of which the Tenant is to pay a proportion, in this paragraph (6)(g), shall be estimated by the Landlord for such period as the Landlord shall determine; the Tenant agrees to pay to the Landlord his proportion of such amount in monthly installments in advance during such period with other rental payments provided for in this lease; at the end of the period for which such estimated payments have made, the Tenant shall be advised of the actual amount required to be paid under the provision of this paragraph (5)(g) if necessary an adjustment shall thereupon be made between the parties”. [Emphasis added.]
(2) The parties’ leases commencing May 1, 2004, contained additional wording that put a positive obligation on the tenants to inquire about and pay the adjustment costs at least once per year: “[t]he Tenant(s) acknowledge that they have a positive obligation to inquire about any T.M.I. increases and corresponding adjustments, that may be owing by them, and the Tenant(s) acknowledges that they will inquire about the same, and pay any adjustment costs at least once per year. If unpaid and overdue these T.M.I. adjustment costs will be regarded as outstanding additional rent, the non-payment of which will trigger the above-noted repercussions”. [Emphasis added.]
[119] Based on the above provisions, I find that for the period ending on April 30, 2004, Correct is entitled to recover those TMI adjustment amounts which are supported on the evidence and which it requested from the Plaintiffs in a timely way following the end of each period.
[120] Correct wrote to the Plaintiffs on August 16, 2007. The letter attached an invoice, which includes the TMI adjustments claimed for the years 2002-2004, before GST, as follows:
(1) 2002: $95.01
(2) 2003: $690.04
(3) 2004: $616.68
[121] With respect to the timing of Correct’s demands for additional TMI, I find on the evidence that it did not advise the Plaintiffs of the additional amount of TMI owing for more than a year after the end of the lease periods in 2002, 2003, or 2004. I find that this delay does not comply with Correct’s obligation in the lease to give this information to the tenant at the end of each lease period, per para. 118 above. Its failure to comply with the lease provision excerpted above disentitles it to claim additional TMI for the years 2002, 2003, and the first four months of 2004. The TMI portion of Correct’s counterclaim is therefore reduced by $95.01 (2002), $690.04 (2003), and $205.56 (four months of 2004), plus GST. This amounts to a reduction of $1,059.95. Correct is therefore entitled to $2,964.98.
[122] As of May 1, 2004, however, Correct is entitled to such TMI adjustments as are supported on the evidence, without the evidentiary requirement that it demonstrate timely notification to the Plaintiffs of the adjustment amounts. The reason for this is that the as noted above, the terms of the lease commencing on that date shifted the onus to the Plaintiff tenants to inquire about and pay the adjustments annually.
[123] With respect to the quantum of TMI payments, Mr. Sekretov testified as to his concern with the timing and quantum of TMI adjustment payments sought by Correct after the expiration of each lease period. On the basis of the evidence as a whole, I find that Correct was reasonably responsive to the queries made by the Plaintiffs regarding TMI amounts. Although Mr. Sekretov was clear that he felt Correct should have to prove each component of the TMI amounts to the tenants when asking for additional rent, this level of disclosure was not required per the terms of the lease. Disclosure made by Correct was sufficient to respond to the Plaintiff’s queries about the TMI adjustments charged.
[124] With respect to the remainder of the TMI adjustments claimed by Correct for the period after May 1, 2004, I find that these amounts are supported by the evidence. These amounts are therefore allowed.
e. & f. Restoration Charges and HVAC Certificates
[125] The Plaintiffs did not dispute the last two items – the restoration charges and the HVAC certificates.
Interest
[126] With respect to the interest rate applicable on the amounts sought by Correct, its draft order sought the claimed amounts “plus interest”. It was suggested at some points in the evidence that the parties’ last lease entitles Correct to higher interest rates on amounts owing. I am unable to reach this conclusion on the basis of the testimony or my review of the parties’ last lease. Prejudgment interest is therefore allowed per s. 128 of the Courts of Justice Act, R.S.O. 1990, c. C.43.
Plaintiffs Jointly and Severally Liable
[127] Under the terms of the parties’ last lease, Mr. Sekretov is both a tenant and the “Guarantor / Idemnifier”. As the Guarantor/Indemnifier, Mr. Sekretov is jointly liable for any amounts owing by Phyzex under the terms of the lease.
[128] The following provisions of Schedule C of the final lease signed by the parties confirm that Mr. Sekretov is jointly and severally liable for the amounts owing by Phyzex to Correct:
[T]he Guarantor does hereby unconditionally and irrevocably covenant and agree with Correct Development Corporation, (hereinafter referred to as “Landlord”) as follows:
If at any time the Tenant for any reason fails to make any payment to the Landlord when and as required under the Lease Agreement then, and in such event, and so often as the same shall occur, the Guarantor shall jointly and severally with the Tenant have the obligation to promptly make such payments to the Landlord on demand from time to time to the extent that the Landlord shall receive an amount equal to the monies to be paid due under the Lease Agreement, been paid without default by the Tenant.
Without limiting any other provisions hereof, the Guarantor shall pay to the Landlord the following, which shall be deemed to be a loss by the Landlord resulting from a default by the Tenant under the Lease Agreement;
a) all reasonable expenses incurred by the Landlord in connection with any action taken by the Landlord under this Section of this Guarantee; and
b) all reasonable expenses incurred by the Landlord including legal fees and other expenses in connection with any legal action taken by the Landlord to enforce this Guarantee.
[129] The terms of the lease confirm that Phyzex and Mr. Sekretov are therefore jointly and severally liable for the amounts awarded against them in the counterclaim.
[130] I note that Mr. Sekretov was fully aware of his personal liability under the terms of his leases with Correct. For this reason, he sought expressly to remove himself as a guarantor in the Short Form Lease he signed on January 29, 2010.
ORDER
[131] The Plaintiffs’ action is dismissed.
[132] The counterclaim is allowed. Judgment on the counterclaim is granted as follows against the Plaintiffs on a joint and several basis:
a) Rental payments
$55,870.75
b) One month additional rent for June 2011
$2,660.60
c) TMI adjustments 2002 - 2007
$2,964.98
d) TMI adjustments 2010 - 2011
$ 693.00
e) Restoration charges
$2,000.00
f) HVAC certificates
$1,800.00
[133] Pre-judgment interest is allowed pursuant to s. 128 of the Courts of Justice Act.
[134] Judgment granted accordingly. Order to issue.
COSTS
[135] Correct was successful and is presumptively entitled to its costs. If the parties are unable to agree on costs, they may file written submissions. Submissions as to costs, are to be filed on the following timeline:
(1) Submissions of Correct are due by 4 PM on January 25, 2019;
(2) Submissions of Plaintiffs are due by 4 PM on February 8, 2019; and,
(3) Any reply by Correct is due by 4 PM on February 22, 2019.
[136] Submissions are to be filed in paper and electronic copy in the Brampton SCJ administration office to my attention. Submissions are not to exceed five pages, exclusive of offers to settle, cost outlines, and authorities.
McSweeney J.
Released: January 11, 2019
[^1]: There was one exception: the 2006-2007 lease was executed by Correct’s in-house counsel at Mr. Furbacher’s direction.
[^2]: The Small Claims Court and Superior Court actions were consolidated on consent in the Superior Court of Justice by order of Bielby J. on April 5, 2012. On transfer to this court, the parties agreed that Correct’s claim would be tried as a counterclaim. This trial was conducted over 7 days in September 2017 and February 2018. Final submissions were made in May 2018.