COURT FILE NO.: CV-19-1434 DATE: 2019 05 28

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: ZENEX ENTERPRISES LIMITED v. PROMENADE LIMITED PARTNERSHIP

BEFORE: Doi J.

COUNSEL: B. Franklin Shostack and Nicholas Reinkeluers, for the Applicant Arnie Herschorn, for the Respondent

HEARD: April 17, 2019

ENDORSEMENT

Overview

[1] The Applicant, Zenex Enterprises Limited (“Zenex”) seeks a declaration that its leases with its landlord, Promenade Limited Partnership (“Promenade”), are valid and in good standing. In the alternative, Zenex seeks an order granting relief against forfeiture under ss. 20(1) of the Commercial Tenancies Act, R.S.O. 1990, c.L.7, as am. (“Act”), from the notice of default and the notices of termination that Promenade delivered under the terms of the leases.

[2] For the reasons that follow, I find that Promenade’s notice of default improperly claims breaches of lease terms and is invalid. I also find that Promenade’s notices of termination validly invoke the termination provisions under its respective leases with Zenex, and that this is not a case for granting relief under ss. 20(1) of the Act.

Background

[3] Zenex is a high-volume discount retailer. On February 14, 2019, it entered into a short term lease with Promenade, the landlord of a shopping mall, to occupy approximately 50,000 square feet of retail premises on the upper level of the mall (“Upper Level Lease”). On February 15, 2019, the parties entered into a second short term lease for about 43,000 square feet of adjacent retail premises on the lower level of the mall (“Lower Level Lease”). The parties manage significant businesses and are sophisticated commercial entities.

[4] During lease negotiations, the parties discussed the retail premises which had broken escalators and a broken freight elevator. On January 24, 2019, Zenex obtained a maintenance summary and a repair quote for the escalators and elevator and it disclosed to Promenade. On January 26, 2019, Zenex entered into a service agreement with a provider to repair and maintain the escalators and elevator, with service to begin on March 1, 2019. Zenex provided a copy of the service documents to Promenade. On February 1, 2019, Zenex took possession of the retail premises on an “as-is” basis, with a shared understanding with Promenade that repairs to the escalators and elevator would be performed in due course. On February 27, 2019, Zenex advised the landlord’s representative of the timeline for servicing the escalators and elevators, and provided further updates to her on the status of the repairs on March 4, 15 and 18, 2019.

[5] Promenade claims that it entered into the Lower Level Lease based on a misrepresentation by Zenex that it was connected with the Reena Foundation, a prestigious charitable organization that assists the developmentally disabled. Promenade claims to have factored this connection in its lease negotiations on the understanding that it would support the charity and also create goodwill that would generate consumer traffic to the mall. Had it known that Zenex was unconnected to the Reena Foundation, Promenade claims that it would not have entered into the lease.

[6] Zenex claims that its family owners have a close relationship with the Reena Foundation, which has partnered with Zenex to host employment training programs for developmentally disabled persons and received various other forms of support from the Zenex family owners. It states that the retailer considered pursuing a social enterprise development project whereby the Reena Foundation would be a part of Bobby’s Outlet (i.e., the name by which Zenex operates), which the retailer claims to have disclosed to Promenade. Zenex denies having misrepresented its relationship with the Reena Foundation, and further denies that its relationship with the Foundation was critical to, or a condition of, Promenade’s decision to lease retail space to Zenex.

[7] After its proposed lease terms with Promenade were negotiated, Zenex entered into a sublease agreement on January 29, 2019 (“Space Sharing Agreement”) with a consignment business partner, Outlet Liquidators Corp. (“Outlet”), for it to occupy most of the Upper Level premises. Promenade submits that Zenex’s sub-lease with Outlet breached the Upper Level Lease, which expressly prohibits a sublet without the landlord’s consent which it claims was never sought or given. From its discussions with Nancy Rosenmann, Promenade’s leasing agent, Zenex claims to have formed the view that Promenade would support a sublease with Outlet. Promenade and Ms. Rosenmann deny consenting to the sublet or otherwise waiving strict compliance with the sublet term under the Upper Floor Lease. Zenex’s sublease terms with Outlet apparently were more profitable than those under its lease with Promenade.

[8] In February 2019, Outlet defaulted on its sublease with Zenex by not making payments required under the Space Sharing Agreement.

[9] On March 12, 2019, Zenex gave Outlet written notice that the Space Sharing Agreement had been terminated for default. Under this notice of termination, Outlet had until March 30, 2019 to remove its goods and vacate. Zenex changed the locks to the Upper Level premises to prevent Outlet from having access. Shortly thereafter, Outlet approached Promenade to lease the Upper Level premises directly from the landlord.

[10] On March 15, 2019, Promenade served Zenex with a notice of default which stated that the tenant had breached the Upper Floor Lease by subletting the premises and failing to activate the escalators and the freight elevator as required under the lease. The notice advised that the lease would end on March 26, 2019 if Zenex failed to cure both of these deficiencies. That same day, Promenade also delivered notices of termination under the Upper Floor Lease and the Lower Floor Lease, respectively, which invoked the termination provisions under each lease by giving ninety (90) days of termination notice ending on June 16, 2019. Under its leases, Promenade was not required to give reasons for terminating the leases, and it did not provide any reasons in its notices of termination to Zenex.

Analysis

a. Relief against forfeiture

[11] Zenex seeks relief against forfeiture under ss. 20(1) of the Commercial Tenancies Act, R.S.O. 1990, c. L.7, as am., which provides:

Relief against re-entry or forfeiture

20. (1) Where a lessor is proceeding by action or otherwise to enforce a right of re-entry or forfeiture, whether for non-payment of rent or for other cause, the lessee may, in the lessor’s action, if any, or if there is no such action pending, then in an action or application in the Superior Court of Justice brought by the lessee, apply to the court for relief, and the court may grant such relief as, having regard to the proceeding and conduct of the parties under section 19 and to all the other circumstances, the court thinks fit, and on such terms as to payment of rent, costs, expenses, damages, compensation, penalty, or otherwise, including the granting of an injunction to restrain any like breach in the future as the court considers just.

[12] Court recognize that forfeiture is a very serious remedy that should be avoided, where appropriate, unless the tenant’s behavior has been “persistent, substantial or reprehensible;” Jungle Lion Management Inc. v. London Life Insurance Company, 2019 ONSC 780 at para. 33. The factors to be considered by the court in determining whether to exercise its discretion to relieve a tenant from forfeiture are:

i. The conduct of the applicant [tenant]; ii. The gravity of the breaches; and iii. The disparity between the value of the property forfeited and the damage caused by the breach.

Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., [1994] 2 S.C.R. 490 at 504.

b. Notice of Default

[13] In its notice of default to Zenex dated March 15, 2019, Promenade set out two (2) grounds for noting the tenant in default under the Upper Level Lease:

(i) Section 7A – The Tenant has not activated both the escalators and freight elevator and has not provided to the Landlord proof of a maintenance contract nor proper Licensing and TSSA approvals. (ii) Section 13 – The Tenant has sublet or otherwise transferred part or all of the Premises.

[14] Sections 7A, 11(A) and 13 of the Upper Level Lease state the following, respectively:

7A. Special Condition – Escalators and Elevators

The Tenant will, at its sole cost and expense, activate the escalators and the freight elevator and provide to the Landlord proof of a maintenance contract as well as proper Licensing and TSSA approvals. All repairs and maintenance will be the responsibility of the Tenant.

11. Landlord’s Rights on Default

(a) The Landlord may terminate this Lease upon (i) five (5) days prior written notice for non-payment of Rent; (ii) three (3) days prior written notice for breach of the Standard of Merchandising requirements set out in Section 5A; (iii) ten (10) days prior written notice for breach of any other provision of this Lease which is capable of being remedied, and (iv) immediately for a breach that is not capable of remedy upon written notice specifying the particulars of the breach. The following shall be deemed, without limitation, to be events of default not capable of being remedied: (A) the Tenant becomes bankrupt or insolvent or takes the benefit of any statute for bankrupt or insolvent debtors, including the Companies’ Creditors Arrangement Act; (B) a receiver or a receiver and manager is appointed for all or a part of the property of the Tenant; (C) the Tenant abandons or attempts to abandon the Premises or removes its property from the premises other than in the Tenant’s usual course of business; or (D) the Premises are vacant or unoccupied for a period of five (5) consecutive days.

13. Transfers

The Tenant shall not assign or transfer this Lease, (which includes a mortgage, charge or debenture (floating or otherwise) or other encumbrance of this Lease or the premises or any part of them), or sublet any part of the Premises nor part with or share possession of the Premises with a third party or undergo a change in effective voting control without the Landlord’s consent, which consent may be unreasonably or arbitrarily withheld notwithstanding any statutory provision to the contrary. [Emphasis added]

[15] Notably, the language of ss. 11(a)(iii) makes it clear that the tenant may remedy a breach under any other provision of the lease that otherwise triggers an event of default upon which the landlord may terminate the lease.

[16] On February 1, 2019, Zenex took possession of the Upper Level premises on an as-is basis, without working escalators or a working freight elevator. Both Zenex and Promenade were well aware that the escalators and elevator were not operational and could not be repaired or activated immediately. On January 26, 2019, Zenex emailed Promenade’s representative to disclose a copy of its agreement with a service contractor for elevator and escalator maintenance to be provided. On February 24, 2019 and March 4, 15 and 18, 2019, Zenex emailed status updates to Promenade’s representative regarding the repairs to the escalators and freight elevator. As of March 15, 2019 when Promenade delivered its notice of default to Zenex, one escalator had been repaired and certified by the Technical Standards and Safety Authority (“TSSA”), the second escalator had been repaired but required a new handrail for which the repair contractor was awaiting a quote, and the freight elevator had been inspected recently by the contractor and awaited necessary repairs.

[17] In my view, Zenex took appropriate steps and exercised reasonable diligence to arrange for necessary repairs to the escalators and freight elevator in order to activate them at the earliest reasonable opportunity. The Upper Level Lease does not stipulate a date by which Zenex is to activate the escalators and elevator and give the landlord proof of a maintenance contract and regulatory inspection approvals. In the circumstances, I find that Zenex is to exercise reasonable diligence to activate the escalators and elevator within a reasonable period. From the record on this motion, I readily find that Zenex has acted with reasonable diligence to arrange for repairs to the escalators and elevator and necessary maintenance and inspections as required under the lease. Accordingly, I find that Zenex was not in breach of its obligations under section 7A of the lease and was not in default when Promenade served its notice on March 15, 2019.

[18] Zenex sublet about 60,000 square feet of the Upper Level premises to Outlet pursuant to a Space Sharing Agreement dated January 29, 2019. Howard Starr, President of Zenex, claims to have formed the belief from discussions with Promenade’s agent, Ms. Rosenmann, that Promenade would allow a sublet to Outlet under the terms of Zenex’s leases with the landlord. Mr. Starr further claims to have advised Ms. Rosenmann that the Reena Foundation would need to sublease space from Zenex, which she did not object to. From this, Mr. Starr claims to have formed the view that Promenade was willing to waive the subletting restriction under the lease to allow Zenex to sublet to Outlet. However, Mr. Starr has offered no details as to what he discussed with Ms. Rosenmann or what she said that caused him to understand that a sublet to Outlet was permissible.

[19] Ms. Rosenmann expressly denies saying anything to Mr. Starr that would have led him to believe reasonably that Promenade would waive strict compliance with the sublease prohibition under section 13 of the Upper Level Lease. She further states that Mr. Starr did not seek or obtain Promenade’s consent for the sublease, and claims that Mr. Starr misrepresented that Yousef Bakhshali, the principal of Outlet, was an employee of Zenex. While Mr. Starr flatly denies her allegations, Ms. Rosenmann states that Promenade only learned of the sublet after a dispute arose that led Zenex to change the locks to the Upper Level premises (i.e., to deny Outlet access to the sublet space) which led Mr. Bakhshali to call police on March 12, 2019. This caused a public incident, which is said to have embarrassed Promenade. Mr. Starr claims that Outlet then approached Promenade with an offer to lease the Upper Level premises directly from the landlord. After Zenex, Promenade and Outlet failed to negotiate a resolution, Promenade served Zenex with its notice of default and notices of termination on March 15, 2019.

[20] The parties have conflicting accounts as to what, if anything, Zenex advised Promenade as to its sublease with Outlet. Regardless, Zenex changed the locks to the Upper Level premises on March 12, 2019 (i.e., to prevent Outlet from accessing the sublet premises) and gave Outlet written notice that its Space Sharing Agreement had been terminated. By March 15, 2019 when Promenade gave Zenex its Notice of Default, it is clear that Zenex had terminated its sublease with Outlet. In the circumstances, and without formally deciding whether Zenex had breached s.13 of the Upper Level Lease by subletting to Outlet, I have no hesitation in finding that Zenex had remedied any such breach (i.e., as contemplated by ss. 11(a)(iii) of the Upper Level Lease) by terminating its sublease with Outlet several days before Promenade delivered its Notice of Default. It follows that Zenex was not in default of the lease on March 15, 2019, and Promenade could not proceed that day to invoke the sublet as a basis for terminating the lease for default under ss. 11(a) of the Upper Level Lease. In making this finding, I note that a lessee does not lose its rights under a lease for a past default that was corrected; 1290079 Ontario Inc. v. Beltsos, 2011 ONCA 334 at para. 22, citing Fingold v. Hunter, [1944] 3 D.L.R. 43 (C.A.) at 47-48.

[21] During oral submissions, the parties devoted a significant amount of time addressing the implications of Zenex’s relationship, or its lack of one, with the Reena Foundation. As this point did not directly impact Promenade’s claim that Zenex was in default, and in view of my findings above, I need not address this matter further.

c. Notice of Termination

[22] I now turn to whether relief ought to be granted from Promenade’s notices of termination to Zenex which were delivered pursuant to the mutual termination provisions found at section 12 to both leases (i.e., the Upper Level Lease and the Lower Level Lease), which contains the same language that provides:

12. Mutual Termination Right

Notwithstanding the foregoing, the Landlord or the Tenant shall have the right, at any time and for any reason whatsoever, to terminate this lease upon at least ninety (90) days prior written notice to the other party (“Termination Notice”). In the event of such termination, Tenant shall deliver vacant possession of the Premises on the termination date specified in Termination Notice and Landlord shall refund, on a prorated basis, all pre-paid Rent. [Emphasis added]

[23] Relief from forfeiture is not available if a lease is terminated as a result of a right of the landlord to do so; Maverick Professional Services Inc. v. 592423 Ontario Inc. at paras. 4-9; 1230455 Ontario Ltd. v. 150 Katimavik Inc., 2019 ONSC 2481 at para. 27. Since the act of a landlord in exercising a termination provision under a lease does not rely upon or otherwise address a breach, there is no basis for the court to grant relief from forfeiture under ss. 20(1) of the Commercial Tenancies Act for any such action. As the Court of Appeal in Maverick noted (at para. 9), a party’s exercise of an option to terminate a lease is broadly construed and unconstrained:

Unless the lease contains conditions restricting the circumstances in which the option may be exercised, the motive of the party exercising it is irrelevant. The fact that exercise of the option causes hardship is no reason for restraining its exercise.

[24] It follows that Promenade is entitled to exercise its contractual right to terminate the leases on notice pursuant to the mutual termination provisions.

[25] Mr. Starr claims that Zenex negotiated the mutual 90 day termination provision based on representations made by Promenade that a developer was looking to build a condominium or hotel at the premises, that approvals for such a development would take at least 18 months, and that Promenade would only exercise the termination provision if that potential land development were to arise. Relying on this, Zenex invites the court to draw an inference to limit Promenade’s ability to exercise the mutual termination provision under the leases. However, evidence of subjective intention or negotiations generally is not admissible to interpret a contract by creating an ambiguity in a written agreement which is otherwise clear, or would lead to making a new agreement; G.R. Hall, Canadian Contractual Interpretation Law (3d) (LexisNexis 2016) at 85-86 and 99-100. O’Bonsawin J. in Katimavik helpfully canvassed the jurisprudence dealing with negotiations to interpret a commercial contract and noted (at para. 29) the importance of upholding contracts by determining the intention of the parties based on the language used in their agreement:

In Goodlife Fitness Centres Inc. v. Rock Developments Inc., 2019 ONCA 58, the Court of Appeal for Ontario stated:

This court has repeatedly cautioned against looking to negotiations to interpret a contract. The basic principles of commercial contract interpretation were summarized in Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673, 268 O.A.C. 279. At para. 16, Winkler C.J.O. stated:

When interpreting a contract, the court aims to determine the intentions of the parties in accordance with the language used in the written document and presumes that the parties have intended what they have said. The court construes the contract as a whole, in a manner that gives meaning to all of its terms, and avoids an interpretation that would render one or more of its terms ineffective. In interpreting the contract, the court must have regard to the objective evidence of the “factual matrix” or context underlying the negotiation of the contract, but not the subjective evidence of the intention of the parties. [Emphasis added]

[26] Likewise, in The Canada Trust Company v. Browne, 2012 ONCA 862, 115 O.R. (3d) 287, Feldman J.A. said at para. 71:

While the scope of the factual matrix is broad, it excludes evidence of negotiations, except perhaps in the most general terms … Ultimately, the words of the agreement are paramount. [Emphasis added]

[27] Brown J.A. cited this in his decision in Weyerhaeuser Company Limited v. Ontario (Attorney General), 2017 ONCA 1007, 77 B.L.R. (5th) 175, at para. 112:

Canadian common law generally treats evidence of the parties’ specific negotiations as inadmissible for purposes of interpreting a contract: Primo Poloniato Grandchildren’s Trust (Trustee of) v. Browne, 2012 ONCA 862, 115 O.R. (3d) 287, at para. 71. In light of that principle (and until that principle of contract interpretation is changed as a matter of policy), evidence of the factual matrix cannot operate as a kind of alternate means by which an adjudicator constructs a narrative about what the parties must have discussed or intended in their negotiations. In other words, evidence of the factual matrix cannot be used to do indirectly that which the principles of contract interpretation do not permit doing directly.

[28] Zenex argues that Promenade acted in bad faith by invoking the termination provision under the leases, and in doing so breached its duty to act in good faith and honestly as required under Bhasin v. Hrynew, 2014 SCC 71 at para. 33. Zenex further submits that a landlord cannot arbitrarily terminate a lease without a legitimate business reason for doing so; Tannous v. Ontario (Food Terminal Board), 2003 CarswellOnt 2489 (S.C.J.) at para. 10. In response, Promenade argues that Zenex’s tandem submissions improperly expand the duty of honest performance. For the reasons that follow, I agree with Promenade’s submission.

[29] The Supreme Court of Canada in Bhasin recognized that good faith performance of a contract is a general common law concept of contract law, which underpins and informs common law rules that recognize obligations of good faith contractual performance in certain situations and relationships including landlord-lessee contracts; Bhasin at paras. 33 and 44. Importantly, this organizing principle of good faith grounds a common law duty of honest performance “which requires the parties to be honest with each other in relation to the performance of their contractual obligations;” Bhasin at para. 93. In CM Callow Inc. v. Zollinger, 2018 ONCA 896, the Court of Appeal explained (at para. 11) that the Supreme Court in Bhasin had been careful to emphasize that the common law good faith concept is not to be applied in a such way that would undermine established contract law principles, which would lead to commercial uncertainty, and noted in Bhasin Cromwell J.’s explanation (at para. 70):

The principle of good faith must be applied in a manner that is consistent with the fundamental commitments of the common law of contract which generally places great weight on the freedom of contracting parties to pursue their individual self-interest. In commerce, a party may sometimes cause loss to another — even intentionally — in the legitimate pursuit of economic self-interest: A.I. Enterprises Ltd. v. Bram Enterprises Ltd., 2014 SCC 12, [2014] 1 S.C.R. 177, at para. 31. Doing so is not necessarily contrary to good faith and in some cases has actually been encouraged by the courts on the basis of economic efficiency: Bank of America Canada v. Mutual Trust Co., 2002 SCC 43, [2002] 2 S.C.R. 601, at para. 31. The development of the principle of good faith must be clear not to veer into a form of ad hoc judicial moralism or “palm tree” justice. In particular, the organizing principle of good faith should not be used as a pretext for scrutinizing the motives of contracting parties. [Emphasis added]

[30] The Court of Appeal in Callow further explained (at paras. 12-13) the extent of the new duty of honesty in contractual performance:

[12] The same is true of the new duty the [Supreme] Court recognized as flowing from the good faith organizing principle, the duty of honesty in contractual performance. As Cromwell J. explained at para. 73:

[The duty] means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance.

[13] This, he emphasized at para. 73, was a “modest, incremental step” in the development of the law of contract.

[31] Zenex claims that Promenade acted in bad faith by invoking the termination clause under the leases surreptitiously to end its contractual relationships with Zenex in order to lease retail space directly to Outlet under more favourable terms and at a greater profit. Taking Zenex’s allegation against Promenade at its highest, I appreciate that it may go to show a form of dishonorable action but not to an extent that breaches the duty of honest performance. Bhasin recognizes (at para. 73) a general duty to perform contracts honestly such that parties must not lie or knowingly mislead each other about matters directly linked to the performance of the contract. As Callow explains, this does not impose a duty of loyalty, or a unilateral duty to disclose information relevant to exercising a termination of the contract, or require a party to forego contractual advantages. Rather, the good faith obligation is a requirement to act honestly by not lying or misleading the other party in the performance of the contract; Bhasin at para. 73.

[32] Under the lease agreements, Promenade was entitled to exercise its right of termination provided only that requisite prior written notice under s. 12 of the leases was provided. This is what the parties bargained for, and all that Zenex was entitled to; Callow at paras. 16-18. The duty of honest performance required the parties to be honest and “to not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract;” Bhasin at para. 73. In my view, Promenade complied with this duty, which did not limit its freedom to terminate the leases and enter into a future lease agreement with a third party. While earlier discussions may have led Zenex to form an understanding as to when and/or how Promenade might exercise its termination provision under the leases, these discussions did not prevent Promenade from exercising its rights under the agreements to terminate the leases. To find otherwise would, in my view, result in the court substantially modifying the termination provisions to the parties’ lease agreements, which are key terms of these agreements, and go well beyond the required or permissible scope of the duty of honest performance; Callow at para. 19.

[33] In its submissions, the Applicant placed strong emphasis on the Tannous decision as supporting the proposition argued by Zenex that a landlord requires a legitimate business reason to terminate a commercial lease. I disagree, and find that Tannous is distinguishable.

[34] The tenant in Tannous had leased a vending stall in the food terminal for several decades under an “evergreen lease” that automatically renewed the lease on one year terms. The food terminal landlord then insisted upon introducing a new lease term that permitted it to terminate the lease at any time for any reason whatsoever upon thirty days written notice, and permitted the lessee to terminate on thirty days’ notice at the end of a term. The dispute in Tannous arose after the lessee shared his stall with another vendor. As the sharing of stalls was not allowed, the landlord claimed a breach of the lease and sought to terminate despite the stall sharing having occurred for several years with the landlord’s apparent approval. The lessee in Tannous commenced legal proceedings to challenge the notice to terminate, and the Board gave notice that it would not renew the lease for the following year.

[35] Given its particular facts and lease terms, the court in Tannous stated (at para. 10) that the landlord had conceded that it could not arbitrarily terminate the lease without a legitimate business reason to do so. As Low J. observed in Downtown Pallets Ltd. v. Ontario Food Terminal Board, 2013 ONSC 502 at para. 25, the landlord’s concession in Tannous made it unnecessary for the court in Tannous to rule on the issue. I share the observation by Low J. in Downtown Pallets, and do not regard Tannous as a decision by which the court held as a matter of general application that a commercial landlord must have a legitimate business reason to exercise a termination provision under a lease to which it is party. I also have no evidence before me to infer such a term in the leases between Zenex and Promenade. Instead, the termination provisions under the leases in this case are unambiguous and, in my view, clearly require no condition precedent for either party to exercise their termination rights.

[36] I conclude by reiterating that the parties to this Application are sophisticated commercial actors with substantial business activities who were more than capable of safeguarding their commercial interests during lease negotiations.

Conclusion

[37] For all of these reasons, the Application is dismissed.

Costs

[38] The Respondent was mainly successful and is entitled to costs which are fixed in the amount of $5,000.00, inclusive of taxes and disbursements, and payable by the Applicant within 30 days.

Doi J. DATE: May 28, 2019