COURT FILE NO.: CV-17-00571262-0000

DATE: 20190621

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

OLD NAVY (CANADA) INC.

Applicant

– and –

THE EGLINTON TOWN CENTRE INC.

Respondent

Jonathan Lancaster and Daniel Richer, for the Applicant

Catherine Francis, for the Respondent

HEARD: January 14-18, 2019, at Toronto

REASONS FOR DECISION

Michael G. Quigley J.

Overview......................................................................................................................................... 2

Background.................................................................................................................................... 2

(a) The Parties........................................................................................................................................................ 2

(b) The Drafting of the Letters of Intent and Lease....................................................................................... 3

(c) Key Lease Provisions...................................................................................................................................... 5

(d) The Danier bankruptcy and its aftermath................................................................................................. 9

Legal Principles............................................................................................................................ 14

(a) Principles of Contractual Interpretation................................................................................................... 14

(b) The Lease Co-Tenancy Requirements..................................................................................................... 16

The Positions of the Parties......................................................................................................... 22

Issues............................................................................................................................................. 24

Analysis......................................................................................................................................... 24

(a) Interpretation of the Lease and the Co-Tenancy Requirements......................................................... 24

(b) The parties’ intentions in 2000: The LOI amendments and choice of Key Stores........................... 26

(c) The parties’ intentions and the contra proferentum rule....................................................................... 31

(d) The Intent of the Parties as Reflected in Their Conduct....................................................................... 37

(i) Danier’s Assignment into Bankruptcy.................................................................................................. 37

(ii) GAP/Old Navy’s Conduct Regarding the Key Stores Requirements............................................. 39

(e) Is the Alternative Rent Remedy an Unenforceable Penalty Clause?................................................. 42

(f) Should rectification be granted?................................................................................................................. 44

Conclusion and Disposition......................................................................................................... 46

Overview

[1] This proceeding involves the interpretation of a lease (the “Lease”) between Old Navy (Canada) Inc. as tenant (“Old Navy”) and The Eglinton Town Centre (the “Centre”) as landlord (the “Landlord”).

[2] Old Navy commenced this matter as an application for declaratory relief, but on May 28, 2018, Gans J. ordered that it be converted to an action to be heard at a two-day trial, with the application affidavits to serve as the pleadings. Firestone J. extended it to a five-day trial. In this action, the Landlord now also seeks equitable relief.

[3] In addition to declaratory relief, Old Navy seeks a refund of rents that it claims to have overpaid to the Landlord. At its core, the issues in this case involve the interpretation of certain provisions of the parties’ Lease that went into effect on May 1, 2000. Old Navy asks the Court to give effect to a rent reduction provision contained in co-tenancy operating requirements in the Lease, (the “Co-Tenancy Requirements”), which applies in certain circumstances where one or more of a small number of stipulated “Key Stores” at the Centre leave or if there is a significant failure of the Centre as a whole.

[4] This decision focuses on whether the provisions of the Lease are clear, straightforward, and reflect the contract that the parties thought they had signed. It requires an interpretation of the Lease as well as an analysis of the parties’ contractual intent, their respective understanding of the Lease, and whether their dealings with each other were in good faith. With hindsight, in a contractual context, this dispute can be analogized to two ships passing in the night because neither the Landlord nor Old Navy ever had the same understanding of the Lease, and in particular, the Co-Tenancy Requirements.

Background

(a) The Parties

[5] Old Navy is a prominent retailer of clothing. It operates stores throughout Canada, the United States, and worldwide. Old Navy is a subsidiary of GAP Inc. (“GAP”), which is headquartered in San Francisco, California. Old Navy’s operations and stores are owned and directed by GAP. Because GAP is the directing mind for Old Navy, the applicant and their store at the Centre are frequently referred to in these reasons collectively as “GAP/Old Navy.”

[6] GAP is the largest specialty retailer in the United States. It has approximately 3,700 stores worldwide, including 240 stores in enclosed malls, so-called lifestyle centres and strip/power centres across Canada, operating under the GAP, Banana Republic, and Old Navy brands. Of the three, Banana Republic is considered to be at the top end of the GAP family of brands, while Old Navy is the low level, inexpensive or budget brand.

[7] Mr. Ryan O’Connor testified for GAP/Old Navy at this trial. Mr. O’Connor is a member of the GAP Real Estate Department and is responsible for the retailer’s worldwide leases. Although Mr. O’Connor is not licensed to practice law, he is legally trained and has had extensive experience in GAP lease negotiations since he joined GAP in 2005. Importantly, that was five years after the Lease in this matter was negotiated and concluded. As explained in greater detail below, there were no witnesses at this trial who testified for GAP about these earlier lease negotiations.

[8] The Landlord is owned and operated by Lebovic Enterprises, a well-known Toronto and Canadian property developer. Amongst others, it owns and operates the Centre. The Centre is a so-called “Power Centre”, located at Eglinton Avenue East and Lebovic Avenue in Scarborough, Ontario.

[9] Old Navy was an original or at least early tenant at the Centre, before it was fully constructed, and it has remained a tenant under a Lease since May 2000. Old Navy’s Lease with the Landlord has been extended from time to time through several renewal options.

[10] The Centre has in place a varied mix of retail stores, restaurants, and service providers offering complementary goods and services to the same general demographic as Old Navy shoppers. As is typical in any Centre, there is a frequent change of tenants.

(b) The Drafting of the Letters of Intent and Lease

[11] The foundation for the Lease between the Landlord and Old Navy was three letters of intent (“LOIs”). The first and third LOIs between the parties were dated March 31 and April 4, 2000, with the second being of an unknown intermediate date.

[12] The Lease was negotiated between GAP and the Landlord. None of the individuals at GAP involved in this Lease negotiation still work for GAP, so there was no contemporaneous memory of the negotiations from their perspective. One individual who was involved still works in San Francisco for a private law firm, but was either not approached or unwilling to speak to her role in these matters.

[13] The Landlord’s Executive Vice-President, Lloyd Cherniak, signed the LOIs on behalf of the Landlord but he was not their principal negotiator. However, as an experienced and qualified veteran in real estate and commercial leases, who has now been part of Lebovic Enterprises Limited for more than 37 years[^1], Mr. Cherniak did formally represent the Landlord.

[14] In addition, the Landlord also had the assistance of Paracom Realty Corporation (“Paracom”), as represented by Seymour Schwartz. Paracom was the agent for the Landlord in the negotiation of the LOIs and the Lease. Discussions started in November, 1999, between GAP/Old Navy and Paracom regarding the possibility of a lease at the Centre. It was most likely that Paracom brought the parties together. Both sides were legally represented and there is no realistic suggestion of unequal bargaining power between them.

[15] The template used for Old Navy’s lease was the GAP standard form of lease as it read at that time. As is becoming increasingly common in commercial leases for space in shopping centres and malls like this one, as the Lease was being negotiated, GAP wanted there to be a co-tenancy requirement included.

[16] The original typed version of the LOI described what the content of the Lease and that provision was to include. Two prospective tenants of the Centre were stipulated as the Key Stores: Canadian Tire and Cineplex. These are the kinds of large, heavy draw businesses that are so-called “anchor tenants”. They are called anchor tenants because their premises occupy a significant amount of space, and more importantly because they are businesses that tend to draw a lot of traffic to the Centre. This is traffic that GAP wanted to ensure was present at the Centre in order to enhance the retail success and profitability of its Old Navy store.

[17] Canadian Tire is located in very close proximity to the Centre. At the time the LOI was drafted, Canadian Tire was situated on land that comprised part of the Centre. However, it later bought out the underlying freehold from the Landlord. While the store still has a significant presence in the area, it is now independently owned and no longer forms part of the Centre. As a result, there needed to be one or more other Key Stores to take its place.

[18] As the LOI negotiations progressed, after it was realized that Canadian Tire could not be a Key Store, Mr. Schwartz suggested the change to the Co-Tenancy Requirements to: (i) delete Canadian Tire and add Roots, Danier, and Globo Shoes as Key Stores; and (ii) change from a 80% to 70% store occupancy and opened requirement as of the date that Old Navy opened its retail space. As explained below, these provisions were included in the final terms of the Lease and form the heart of the subject matter of the dispute between the parties.

[19] There was no contemporaneous evidence of how the reference to Canadian Tire was struck out in the LOIs and “Roots, Globo and Danier Leather” were handwritten in its place. None of them were anchor tenants at the Centre. They were, however, all retail stores located in the only fully completed section of the Centre at that time. Roots sells men’s, women’s and children’s clothing, active wear, shoes and small home furnishings. Globo Shoes sells “affordable shoes for the family”, and Danier Leather, at that time[^2], sold upscale leather clothing from outlet type retail stores.

[20] There remains one very important difference between the LOIs as amended over the negotiation period and the final Lease terms as it relates to the operation of the Co-Tenancy Requirements: the LOI was amended in handwriting, evidently by the Landlord or its agent, providing that in the event Old Navy exercised its Co-Tenancy rights, then either the Landlord or the Tenant would be entitled to terminate the Lease not earlier than six months following the commencement of the payment of Alternate Rent.

[21] Notably, this provision was not incorporated into the final Lease terms. There was no evidence at trial of any negotiated agreement to remove that provision’s reciprocal application to both Old Navy and the Landlord in the event of an election by Old Navy to enforce its Co-Tenancy rights.

[22] No one was able to cast light on that claimed oversight. None of the GAP/Old Navy personnel actually involved in the Lease negotiation provided evidence. As mentioned, Mr. O’Connor was not employed at GAP until 2005 and so had no reliable knowledge or history of these negotiations. The only evidence on point was that of Mr. Cherniak. I will refer to the evidence on this point later in these reasons.

(c) Key Lease Provisions

[23] Article 13 of the Lease contains the Co-Tenancy Requirements as reflected in the final Lease terms that were intended to be consistent with the terms of agreement in the LOIs. Section 13.3 of the Lease provides as follows:

13.3 Operating Requirements

(A) Notwithstanding anything to the contrary in this Lease, Tenant shall not be required to open the Premises for business at all nor operate during Designated Times (or, in the absence thereof, Minimum Times) unless the Key Stores plus retail stores (other than the Premises and the Key Stores) having an aggregate of eighty percent (80%) or more of the total built GLA, as at the expiry of the Construction Period, of the Shopping Centre (other than the Premises and the Key Stores) are also open for business during the Designated Times (or, in the absence thereof, Minimum Times) (the “Operating Requirements”);

(B) The Key Stores are the following retailers occupying the floor area indicated:

Trade Name

Floor Area

Cineplex

68,000 sf

Roots

6,545 sf

Globo Shoes

12,084 sf

Danier Leather

6,548 sf

(C) A store shall not be considered open for business if such store is open and operating

(1) less than the Designated Times (or, in the absence thereof, Minimum Times), or

(2) in less than substantially all of its space. Any of the foregoing events shall be deemed a failure of the Operating Requirements and may sometimes be referred to as a “Co-Tenancy Failure.” Landlord shall immediately notify Tenant of any Co-Tenancy Failure. If the Operating Requirements are not being met because a store is closed by reason of casualty, expropriation or the making of repairs or alterations (collectively, an “Excused Closure”), such Excused Closure shall not give rise to Tenant’s right to pursue Operating Requirement Remedies unless such Excused Closure continues for more than a period of sixty (60) days. Any waiting period before which Tenant may exercise the Operating Requirement Remedies shall be deemed to run concurrently with such 60-day grace period for an Excused Closure.

[24] As can be seen, s. 13.3(A) of the Lease appears to contain two operating requirements: the presence of Key Stores and a percentage of GLA based operating requirement. Section 13.3(B) of the Lease then identifies the Key Stores and their respective areas in square feet. This is to enable the calculations to be performed that determine when the provision applies. Finally, section 13.3(C) of the Lease identifies when a co-tenancy failure has occurred and sets out a Landlord notice requirement to the Tenant. Collectively, these are the three elements of the Co-Tenancy Requirements.

[25] Section 13.3(D) contemplated that the Landlord would deliver annually to Old Navy, at Old Navy’s request, a notice certifying the then current trade name and GLA of each tenant. Additionally it also permitted Old Navy to conduct an audit and inspect the Landlord’s records on 30 days’ notice at its expense. However, Old Navy never required annual listings of tenants or their GLA at the Centre and it never conducted any audits in relation to the tenancies and leasable GLA. Old Navy did request tenant listings from time to time, but that only occurred on several occasions over the years connected with and in anticipation of exercising lease renewal options for additional terms.

[26] Section 13.4(A) of the Lease goes on to describe the Tenant’s recourse in the event that the Landlord does not achieve the operating requirements, either for the purposes of whether the Tenant is required to open for business at all, or continue to operate. This is the provision Old Navy relies upon in its ongoing payment of reduced rent. Section 13.4(A)(2) of the Lease (the “Alternate Rent Section”) provides as follows:

13.4 Operating Requirement Remedies

(A) If the Operating Requirements are not met within 30 days’ written notice, then, effective immediately, Tenant shall have the following rights:

(1) Right to Close Remedy. Tenant may close the Premises for business and, during such period of closure, Tenant shall pay Minimum Rent in lieu of all other Rent and perform all of such other obligations as are applicable to a vacant premises. This remedy is referred to herein as the “Right to Close Remedy.” If at any time during the Term the Premises have been closed for business for a continuous period of six (6) months pursuant to the Right to Close Remedy, Landlord shall have the right to terminate this Lease upon written notice to Tenant effective on a date stipulated in such notice, which date shall be not less than sixty (60) days and not more than one hundred and twenty (120) days following the date on which such notice is given to Tenant. Tenant shall be entitled, within thirty (30) days after receipt of Landlord’s notice of termination, to give Landlord written notice undertaking to re-open the Premises for business within ninety (90) days after the termination date set out in Landlord’s notice of termination, and provided Tenant does re-open the Premises for business by such time, Landlord’s notice of termination shall be automatically revoked and of no effect.

(2) Alternate Rent Remedy. Tenant may remain open for business and pay monthly, as “Alternate Rent” during the period that the Operating Requirements are not being met, in lieu of Minimum Rent and Other Charges, an amount equal to: (a) for the first three (3) months of the Co-Tenancy Failure, fifty percent (50%) of the amount of Minimum Rent then applicable; and (b) thereafter, until the Operating Requirements are once again met, twenty-five percent (25%) of the amount of Minimum Rent then applicable. Each such payment of the Alternate Rent shall be made on the same days as monthly instalments of Minimum Rent are payable hereunder. This remedy is referred to herein as the “Alternate Rent Remedy.”

[27] As is apparent from section 13.4(A)(2), it provides for a rent adjustment during the period of a co-tenancy failure. The Co-Tenancy Requirements found in Article 13 of the Lease are not entitled “Default”. The Co-Tenancy provisions are not events of default contained in Article 22 of the Lease, but instead purport merely to regulate the amount of rent payable (as, for example, a percentage rent[^3] provision may also do, albeit in other ways).

[28] Finally, section 13.5, which deals with the substitution of tenants, is of relevance to this dispute. It provides as follows:

13.5 Substitution

(A) If Landlord desires to substitute a retailer for one of the Key Stores for purposes of satisfying the Operating Requirements, Landlord shall submit the name of such substitute retailer to Tenant for its prior written approval. The approval of Tenant shall not be unreasonably withheld if: (1) the use to be conducted by such substitute retailer is substantially the same as that conducted by the Key Store it is intended to replace; (2) the merchandise sold by such substitute retailer is of equal or better quality, and is offered at similar price points as the Key Store that it is intended to replace; and (3) such substitute retailer will operate a retail business from substantially all of the premises being vacated by the Key Store it is intended to replace.

(B) The aforementioned right of approval of Tenant is solely for the purpose of determining whether such proposed replacement retailer qualifies as a Key Store for purposes of determining Tenants rights under this Lease and is not intended to impair or restrict the freedom of Landlord to enter into leases or operating agreements with any party with whom Landlord desires in the exercise of its sole and absolute discretion.

[29] Old Navy, through the GAP head office and as represented by Mr. O’Connor, and the Landlord, as represented by Mr. Cherniak, differ in their interpretation of this provision.

[30] As noted above, the LOIs expressly provided that in the event Old Navy exercised its co-tenancy rights, either the Landlord or the Tenant would be entitled to terminate the Lease after six months. While this provision was not included in the final Lease terms, I note there was no agreement to remove that reciprocal entitlement, and indeed, that is the provision for which the Landlord seeks rectification.

[31] Section 27.12 of the Lease is entitled “Landlord and Tenant and their Respective Representatives to Act Reasonably and in Good Faith” and it expressly provides as follows:

27.12 Landlord and Tenant and their Respective Representatives to Act Reasonably and in Good Faith

Landlord, and each person acting for Landlord, in making any determination (including, without limitation, any determination as to whether or not to grant any consent or approval required of it), designation, calculation, estimate, conversion, or allocation under this Lease, will act reasonably and in good faith and each accountant, architect, engineer, surveyor and other professional person employed or retained by Landlord will act in accordance with the applicable principles and standards of such person’s profession.

Tenant, and each person acting for Tenant, in making any determination (including, without limitation, any determination as to whether or not to grant any consent or approval required of it), designation, calculation, estimate, conversion, or allocation under this Lease, will act reasonably and in good faith and each accountant, architect, engineer, surveyor and other professional person employed or retained by Tenant will act in accordance with the applicable principles and standards of such person’s profession.

[32] The Lease was dated as of May 1, 2000 but because of the custom building work required to outfit its store consistent with its branding, Old Navy did not take possession under the Lease until December 8, 2000 and it opened for business on April 4, 2001. Old Navy did receive a significant leasehold allowance from the Landlord of $16.00 per square foot, that is, $360,000, as a contribution towards the construction and outfitting of the store to meet GAP’s spatial and branding requirements.

[33] The original term of the Lease was from May 1, 2000 to April 30, 2006. It was renewed and amended, without material change on three occasions: (i) by a simple renewal letter dated September 6, 2005, for the period from April 30, 2006 to April 30, 2011; (ii) by a renewal letter dated July 30, 2010 and agreement dated April 5, 2012, for the period from May 1, 2011 to April 30, 2016; and (iii) by a renewal and amendment dated January 16, 2014, for the period from May 1, 2016 to April 30, 2021, with a further 5-year optional renewal period stipulated in the last renewal. There is no evidence the parties had any material discussions about the other Lease terms during the three successive Lease renewals.

(d) The Danier bankruptcy and its aftermath

[34] Danier was a prominent Canadian retailer of leather goods. The Landlord entered into a lease with Danier for an initial 10-year term from June 10, 1999 to June 9, 2009. Danier’s lease was renewed in 2009 and Danier remained a tenant of the Centre until 2016. Danier’s premises were comprised of 6,548 square feet of space out of a total of 285,425.37 square feet of GLA in the Centre. In other words, Danier’s retail outlet accounted for only 2.3% of the current GLA.

[35] Danier was a public company. Its shares were listed on the Toronto Stock Exchange. However, public filings showed that Danier had been struggling financially since its 2014 fiscal year, with declining revenues and annual losses. This decline is believed to have been attributable to a change in tastes of the purchasing public away from leather products and apparel. On February 4, 2016, Danier filed a Notice of Intention to File a Proposal under the Bankruptcy and Insolvency Act, R.S.C., 1985 c. B-3 (the “NOI”).

[36] Certainly, Danier’s bankruptcy filing was a significant event in the retail industry and it was publicly reported in the national media. At the time of the NOI filing, Danier operated 84 stores across Canada. All of the stores were leased. In the end, however, Danier decided not to file a bankruptcy proposal and instead made an assignment in bankruptcy. A receiver was appointed over Danier to liquidate the stores. Danier continued operating until July 2016.[^4]

[37] Certainly all of the tenants at the Centre, including the local management of the Old Navy store, would have known that Danier was conducting a “store closing” sale, as authorized by the court orders in Danier’s insolvency filing. However, no one appears to have advised the GAP/Old Navy Head Office that Danier had closed until late summer of 2016.

[38] Importantly, throughout the period of the closing of the Danier outlet, the other retail businesses at the Centre were thriving. The Centre’s construction had long been completed and was well over 90% leased at the time of Danier’s bankruptcy and the subsequent store closure. Cineplex was drawing movie audiences every day and the remaining three pods of stores including the building in which the Old Navy store was situated, across the parking lot from the Danier outlet, were all operating. There was no evidence they were not operating profitably.

[39] The Landlord insists that the closure of Danier had no material impact whatsoever on foot traffic at the Centre or on Old Navy’s sales. Given its interpretation of the Co-Tenancy Requirements, the evidence showed that the Landlord did not consider that a co-tenancy failure had occurred, and accordingly that it had any obligation at that time under section 13.3 (C) of the Lease. Consequently, the Landlord did not provide any notice to GAP/Old Navy of Danier’s closure.

[40] By September 15, 2016, GAP/Old Navy claimed they had finally learned about Danier’s failure. As such, Old Navy issued a Notice of Co-Tenancy Failure to the Landlord (the “Co-Tenancy Failure Notice”) and took the position that: (i) Danier Leather’s bankruptcy constituted a “co-tenancy failure” under the Lease; (ii) that the Landlord had breached the Lease by failing to advise Old Navy of Danier’s bankruptcy; and (iii) that Old Navy was therefore exercising its “right” under the Lease to pay Alternate Rent to the Landlord, retroactive to May 1, 2016.

[41] Unfortunately GAP/Old Navy sent the Co-Tenancy Failure Notice to a former address for the Landlord, so that notice did not come to Mr. Cherniak’s attention until the end of September, 2016. That was after Ms. Erin Rowe from GAP Head Office left Mr. Cherniak a voicemail message on or about September 28, 2016, and then sent a follow-up email. She took the position that the Centre was “currently in co-tenancy failure due to the closure of Danier Leather” and advised that Old Navy would be pursuing the Alternate Rent remedy under the Lease.

[42] The Landlord disputed that the Centre was “currently in co-tenancy failure due to the closure of Danier” and advised that if the current rent was not paid, the Landlord would consider Old Navy to be in default under the terms of the Lease. At the same time, the Landlord retained counsel, Mr. Jason Cherniak, to provide a formal legal response to Old Navy’s September 15, 2016 letter. Mr. Jason Cherniak is Mr. Cherniak’s son, who practices law on his own entirely separate from the Landlord’s business. As counsel for the Landlord and on its instructions, Mr. Jason Cherniak responded to this letter on October 24, 2016. In that response, Mr. Jason Cherniak proposed to substitute Party City, an existing tenant at the Centre, as an alternative Key Store under the Lease.

[43] After approximately six weeks, GAP/Old Navy provided a formal response to the Landlord. The Landlord’s proposal for Party City appeared to go through at least two departments at GAP Head Office before the Landlord received a substantive response on December 6, 2016.

[44] First, on October 26, 2016, Magdalena Silva-Baneulos took the position that Mr. Cherniak’s alternative Key Store proposal would have to be submitted by way of written request to the proper GAP legal address as set out in the Lease. Eight days later, on November 3, 2016, Ms. Silva-Banuelos advised that GAP’s legal department was reviewing the claim. In the meantime, she requested that the Landlord provide to GAP a Tenant Listing and/or Site Plan by November 16, 2016. Finally, Mr. Ryan O’Connor wrote a formal letter to the Landlord on December 6, 2016 advising that GAP would not accept Party City as a substitute Key Store under the Lease.

[45] It was GAP’s position that Party City could not meet the criteria for substitution under section 13.5 of the Lease for four reasons. First, it was insufficient to GAP that both Danier and Party City were retail stores. Second and third, in its view, Party City’s business sold different merchandise than had been sold by Danier Leather and it was not of equal or better quality and not at similar price point to Danier merchandise. Finally, GAP rejected the proposal because it was GAP’s position that a substitute retailer would only be acceptable if it took over and commenced to operate out of the same retail space formerly occupied by Danier. Another location in the Centre would not be acceptable.

[46] As a result, Old Navy ceased paying rent under the Lease. It took the position that it was entitled to offset its retroactive rent decrease under its claimed Alternative Rent rights against its current rent payments.

[47] The Landlord responded a week later on December 13, 2016, when Mr. Jason Cherniak wrote to GAP/Old Navy formally putting them on notice that the Landlord considered them to be in default of the Lease due to the Tenant’s election under the Alternate Rent section. The December 13 Notice letter contains the usual draconian boilerplate language typical of a Landlord’s assertion of default on the part of a tenant, but it also specifically required as follows:

You are hereby required to forthwith remedy the aforesaid default by delivering to the Landlord, by not later than December 24, 2016, a certified cheque in the amount of One-Hundred Two Thousand, Five Hundred Fifty-Seven Dollars and Seventy-Five Cents ($102,557.75) (comprising all arrears to December 14, 2016 as set out on the enclosed statement of account plus legal fees). If a certified cheque in the aforesaid amount is not received by that time, the Landlord will thereupon and thereafter have the right, without further notice, to exercise such remedies under the Lease or at law as it may be advised including, without limitation, the right to terminate the Lease and take possession of the Premises. Any such termination will be without prejudice to all of the Landlord’s other rights under the Lease and at law in respect of any defaults, including without limitation, the right to collect any amounts owing and the right to hold you responsible for all future losses over what would have been the unexpired term of your tenancy but for such termination.

[48] GAP/Old Navy paid the disputed amount with two certified cheques, one issued on December 21, 2016 for $15,057.86, and a second for between $125,000 and $135,000, subject to verification, to be sent to the Landlord on Friday, January 6, 2017.

[49] Mr. Daniel Byma, Old Navy’s external Canadian counsel in Vancouver, sent a letter advising the Landlord that any further and future rent payments in excess of the Alternative Rent amounts were being paid under protest. The letter also advised that Old Navy was reserving its right to commence legal proceedings against the Landlord. Old Navy has continued to pay rent under protest since that time. The amount paid under protest now exceeds $1.5 million.

[50] In a subsequent letter sent on December 23, GAP/Old Navy reiterated its position that there was a Co-Tenancy Failure under s. 13.3 of the Lease, that it was entitled to the Alternate Rent Remedy pursuant s. 13.4, and that it was not obligated to pay the $97,557.75 as demanded.

[51] Mr. Byma also sent an email stating that he did not have instructions from GAP to accept service of the Notice and instructed Mr. Cherniak to serve it at GAP’s San Francisco office. Mr. Cherniak sent the Notice to Old Navy by UPS courier on December 23, 2016.

[52] By this time, the Landlord was in advanced negotiations with Ren’s to lease Danier’s space at the Centre. Ren’s is a growing Canadian retail chain selling principally pet supplies. The Landlord was of the view that Ren’s sold high quality merchandise within the same price range as Danier, and that the presence of a Ren’s would actually be complementary to the retail mix at the Centre and increase traffic draw.

[53] On December 23, 2016, Jason Cherniak wrote to Mr. Byma advising Old Navy that the Landlord had entered into a lease with Ren’s. While the letter formally proposed Ren’s as the substitute Key Store for Danier, the Landlord would be proceeding with a lease with Ren’s regardless of the position taken by GAP/Old Navy. Mr. Cherniak also enclosed a corporate profile on Ren’s and an exterior photo of one of its stores.

[54] Neither Mr. Byma nor any official from GAP/Old Navy provided an answer to the Landlord’s request to substitute Ren’s as a Key Store in the Danier retail space. They simply never responded. Mr. O’Connor testified, frankly, that they saw no point in responding because by that time GAP/Old Navy appears to have decided that they would take the matter to litigation and seek a determination from the courts on their position.

[55] In its written materials, Old Navy submitted that it saw no point in responding to the Landlord’s suggestion to bring in Ren’s because, at least in its view, Ren’s was clearly not qualified to be a substitute Key Store as it was not a retailer of “upscale apparel”, but rather was a pet food and supplies retailer.

[56] At its core, GAP maintains that the merchandise sold by Ren’s was not of equal or better quality than that offered by Danier, and that no evidence had been provided by the Landlord to show that Ren’s and Danier’s merchandise were at similar price points. In its view, the use of the premises by Ren’s, a supplier of pet products, would clearly have been different than that of Danier, a retailer of upscale leather apparel and accessories. In other words, as far as GAP/Old Navy was concerned, Ren’s was not a qualifying substitute retailer within the meaning of section 13.5(A) of the Lease.

[57] In support of this position, GAP/Old Navy relied on the terms of Danier’s 1999 lease with the Landlord in arguing that the only retailer that could qualify as a Key Store would need to meet the following, very constrained attributes: “a retail business featuring principally the retail sale of men’s, ladies’ and children’s leather, fur, suede and sheepskin garments and as ancillary to such principal use, the sale at retail of belts, leather handbags and purses, leather hats and other items from time to time being sold in the majority of the Tenant’s other retail stores located in Canada.”

[58] Although GAP/Old Navy considered the information provided by the Landlord about substituting Ren’s to be sparse and inadequate, GAP/Old Navy’s counsel asserts that GAP was nevertheless able to determine from the information provided that Ren’s did not meet the criteria in sections 13.5(A)(1) and (2) of the Lease.

[59] While GAP claims to assess each mall/centre on a case-by-case basis, the evidence before me suggests that GAP plainly prefers other apparel stores and sometimes cinemas as Key Stores, but definitely not pet stores or novelty stores. Indeed, while GAP did not ever provide a copy of its current Standard Form Lease, I understood from Mr. O’Connor’s evidence that it now contains an outright ban on pet stores being located in shopping centres where GAP rents premises. As a result, GAP felt no need to respond to the request concerning Ren’s.

[60] In the end, the Landlord rented the former Danier premises to Ren’s and on March 20, 2017, GAP/Old Navy issued the Notice of Application that gave rise to this action. Notably, nothing in the Application Record made any reference at all to the Landlord’s request that Old Navy approve of Ren’s as a substitute Key Store, or the fact that the former Danier premises had been rented to Ren’s.

[61] The Landlord asserts that by failing to respond to its efforts to find replacement tenants, GAP/Old Navy did not act in good faith. In response, GAP/Old Navy claims that the Landlord’s threat to terminate the Lease in the December 13 notice letter is germane to their position that the Landlord did not act in good faith. In their position, the Landlord’s conduct during that time clearly demonstrates an underlying absence of good faith on the Landlord’s part.

Legal Principles

(a) Principles of Contractual Interpretation

[62] The “interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract.”[^5] The interpretive exercise is objective rather than subjective: “[t]he goal in interpreting an agreement is to discover, objectively, the parties’ intention at the time the contract was made.”[^6] Equally and fundamentally, commercial contracts must be interpreted with sound commercial principles and good business sense.[^7]

[63] At para. 2.5.2, in his seminal text on Canadian Contractual Interpretation Law[^8], Geoff Hall writes as follows:

Courts seek a commercially sensible interpretation of the contract to give effect to the intentions of the contracting parties. Since those who enter into commercial contracts generally have sensible goals, a commercially sensible interpretation is more likely to be consistent with their intentions and is one that does not make commercial sense. This point was made by the Manitoba Court of Appeal in the following way:

In determining the meaning of the language of a commercial contract, and unilateral contractual notices, the law therefore generally favours a commercially sensible construction. The reason for this approach is that a commercial construction is more likely to give effect to the intention of the parties.[^9] [Emphasis added]

The House of Lords, in a passage which has been applied in Canada, put the point the following way: “the more unreasonable the result the more unlikely it is that the parties can have intended it, and if they do intend that the more necessary it is that they shall make that intention abundantly clear”.[^10]

[64] Since contractual interpretation is an objective exercise, commercial reasonableness cannot be judged solely from the perspective of one of the contracting parties, but rather must be assessed objectively:

[T]he document should be construed in accordance with sound commercial principles and good business sense. Care must be taken, however, to do so objectively rather than from the perspective of one contracting party or the other, since what might make good business sense to one party would not necessarily do so for the other.[^11]

[65] The corollary of the commercial efficacy principle is the precept that commercially absurd interpretations are to be avoided[^12], and it is the duty of the Court in interpreting commercial documents, to avoid an interpretation that would result in a commercial absurdity.[^13]

[66] In a recent decision, Park Royal Centre Holdings Ltd. v. GAP (Canada) Inc.[^14], DeWitt-Van Oosten J. analysed a co-tenancy provision that was at issue in that lease, and which had similarities to this co-tenancy provision. However, she commenced her analysis by emphasizing the fundamental rule that:

[t]he contractual intent of parties to a written contract is objectively determined by construing the plain and ordinary meaning of the words of the contract in the context of the contract as a whole and the surrounding circumstances (or factual matrix) that existed at the time the contract was made, unless to do so would result in an absurdity.[^15]

[67] As such, the courts have long adhered to the principle enunciated by Jessel M.R. in Wallis v. Smith[^16] as “…the well-known doctrine that in the construction of written instruments you may depart from the literal meaning of the words, if reading the words literally leads to an absurdity”.[^17] Put another way: “[contracts] should be interpreted in a reasonable way to give “business” efficacy and in such a way to avoid all absurd results”.[^18]

[68] The wording of relevant provisions may be ambiguous or capable of more than one meaning looked at in the context of the contract as a whole and the negotiations that took place between the parties to produce the contract. While it may not always be possible to discern the parties’ intent, the Court should strive to do so.

[69] In circumstances where the contract is found to contain ambiguity, the contra proferentem rule can be applied to resolve the ambiguity. Under the contra proferentem rule, the ambiguous clause or portion of the contract will be interpreted against the interests of the drafter.[^19] In this case, since the GAP/Old Navy standard form lease was used as the template for the Lease, and since Old Navy had control of ensuring all terms in the LOIs were included in the Lease, if found to apply here, this rule would require that any ambiguity be resolved in the Landlord’s favour and against Old Navy.

[70] Another principle central to the positions of the parties in this case is the requirement that they demonstrate good faith in their conduct under the contract. In Bhasin v. Hrynew[^20], the Supreme Court of Canada recognized an organizing principle of good faith in contractual performance. In carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner. This requires, in certain respects, honest, candid, forthright, and reasonable contractual performance.

[71] In Mohamed v. Information Systems Architects Inc.[^21], the defendant terminated the plaintiff’s consulting contract in circumstances where the contract expressly provided for termination rights. Perell J. held that the defendant improperly terminated the contract and acted in bad faith and awarded the plaintiff damages. The Court of Appeal found that Perell J. had made extricable errors of law in his interpretation of the contract. However, his decision was upheld on the basis that the defendant had exercised its contractual termination rights in bad faith.

[72] Recently the duty of good faith was re-examined by the Supreme Court of Canada in Churchill Falls (Labrador) Corp. v. Hydro-Quebec.[^22] There, the Court determined that good faith confers a broad, flexible power to create law and serves as a basis for a court to intervene and to impose on contracting parties, obligations that are based on a notion of contractual fairness.

(b) The Lease Co-Tenancy Requirements

[73] Co-tenancy provisions are well-known features of shopping centre leases. GAP/Old Navy is by no means the only retailer that has a policy of including operating requirements and co-tenancy provisions when it leases commercial retail space. Mr. Cherniak acknowledged that the Landlord also employs co-tenancy provisions in its standard form of lease, so certainly such clauses are not new to either of these parties now, nor were they at the time they negotiated the Lease. However, as the evidence and disagreement on the meaning of the nuanced wording showed, the purposes each appears to have had in mind were different.

[74] Regardless, co-tenancy provisions are a matter of bargain between a landlord and a tenant, and the case law appears to accept that they are intended conceptually to reflect a balancing of landlords’ and tenants’ interests. This will be particularly true in cases (unlike this one) where there has been no financial contribution by the Landlord to outfitting the tenant’s space, but less true in circumstances, like in this case, where a substantial contribution has been made by the Landlord to the Tenant’s initial capital costs.[^23]

[75] Retail tenants in shopping centres rely not only on their own brand to attract customers but also on spin-off traffic generated by other occupants of the shopping centre, particularly so-called anchor tenants. Tenants may seek remedies against landlords if the traffic is too low for any number of reasons, including shopping centre vacancy rates being too high, or where part of the shopping centre is incapable of being rented because the landlord has undertaken renovations or failed to complete construction on a timely basis. However, in the absence of language specifically addressing such tenant concerns, courts have dismissed claims for such remedies and instead have suggested that the tenant should have required a specific clause in the lease to deal with those specific issues.[^24]

[76] In 9202-9131 Québec Inc. c. 6943870 Canada Inc., for example, the Court refers to 9142-9134 Québec Inc. c. 9180-9293 Québec Inc., where Mayer J. dismissed the tenant’s claim that the high vacancy rate constituted an unacceptable change by the landlord in the permissible use of the property. He stated:

[155] To begin, when synergies are an important aspect of a tenant’s success, it is wise to negotiate a co-tenancy provision in a lease, which gives a tenant the right to terminate his lease or reduce his rent if a prescribed percentage of neighbouring tenants become vacant or anchor tenants leave the shopping centre. This type of clause will help ensure that a tenant will obtain a certain relief in the event that there is not sufficient customer traffic that enables his business to remain viable. [Emphasis Added]

[77] That need for such specific situation focused remedies appears to be the driver behind increased use of co-tenancy provisions in shopping centre leases, not only in Quebec, but across Canada and elsewhere.

[78] In his seminal and authoritative text, Shopping Centre Leases[^25], H.M. Haber, Q.C. et al. comments on the underlying purposes of co-tenancy provisions, and provides insight into what the parties’ likely intent was or would have been in agreeing to include co-tenancy provisions in the Lease. Those purposes are borne out by the evidence that I accept in this case. I refer specifically to the commentary at pp. 352-353, which reads in part as follows:

A retail tenant enters into a shopping centre lease in expectation of neighbouring tenants who will create synergy that will enhance the retailer's business. No retailer wants to be the only tenant in the shopping centre. A co-tenancy clause (sometimes called a co-occupancy clause) is included in a shopping centre lease to protect the retailer if a certain threshold level of other retail tenants leave the shopping centre and are not promptly replaced by other viable retailers.

Co-tenancy clauses vary to a great degree and are susceptible to prolonged negotiation but there are several common elements to be found in a typical co-tenancy clause:

• if a certain level of occupancy (expressed as a percentage of the total number of leasable stores in the shopping centre or a percentage of leasable area in the shopping centre) is not continuously present, the tenant will be entitled to rent reduction (often expressed as a gross rent calculated as a percentage of gross sales) pending the occupancy condition being restored;

• if the critical level of occupancy is not restored within a set period (often, a year), the tenant will be entitled to terminate the lease without bonus or penalty; and

• if the tenant does not in fact terminate the lease within a set period (often, 30 days), the termination right lapses and co­ tenancy “remedy” of reduced rent no longer applies, i.e., the tenant will be required to revert to paying full rent.

Sometimes a co-tenancy clause stipulates that in order for the tenant to be entitled to the contemplated rent reduction, it must first demonstrate that gross sales for the subject period have decreased (or decreased by a material percentage) when compared to gross sales for the same period in the preceding year.

As to the scope of the conditions included in a co-tenancy clause, this depends entirely on the shopping centre. Some shopping centres are more dependent on the presence of ‘anchor tenants’ than others. Depending on the layout, co-tenancy conditions may be defined in relation to neighbouring tenants or certain specialty stores/tenants (e.g., restaurant tenants may tie their obligations to the presence of the cinema tenant, whereas electronics or fashion retailers may tie their obligations to the presence of department stores and/or other electronics or fashion retailers).

[79] While co-tenancy provisions are becoming increasingly common features of shopping centre leases, only seldom have they been the subject of litigation, at least in Canada. One instructive case is the recent British Columbia decision in Park Royal Shopping Centre Holdings Ltd. v. GAP (Canada) Inc. [^26] There are also cases from the United States and more recently in Canada, involving the interpretation of co-tenancy provisions that have arisen out of Target Canada’s insolvency, as well as the insolvency and restructuring of Eaton’s of Canada about 20 years ago. Beyond that, there are no reported decisions that counsel were aware of or that I was able to discover.

[80] Park Royal is relevant not only because GAP was one of the parties to that lease and litigation, as they are here, but because the co-tenancy provision at issue in that decision had similarities to the provisions present here. As well, the Court recognized the authoritative commentary in Shopping Centre Leases[^27], reproduced above, and in part, in DeWitt-Van Oosten J.’s reasons.

[81] In Park Royal, GAP had leased retail premises in the Park Royal Shopping Centre in North Vancouver, on its own under the GAP brand and under its Banana Republic brand. The leases provided there, as they do here, for reduced rent in defined circumstances, including if there was a failure in relation to operating requirements of the centre. The landlord undertook extensive renovations that included demolishing parts of the shopping centre and rebuilding them from the ground up. Both GAP and Banana Republic stopped paying their regular rent under their lease agreements and instead paid no rent or alternative rent as stipulated in the lease. They claimed this remedy on the basis that the demolished areas in the shopping centre had to still be counted as areas “designated for leasing to tenants” for the purposes of determining whether the landlord was in compliance with the percentage of GLA operating requirements.

[82] The landlord issued notices to GAP that they and Banana Republic were in default and subsequently brought an action against the two stores for rent owing. GAP and Banana Republic claimed they were entitled to pay alternative rent because they claimed that the landlord had failed to meet the ongoing operating requirements. While the operating requirements were somewhat different from those in this case, there were similarities regarding the GLA provisions.

[83] In Park Royal, the landlord argued that GAP could only pay alternative rent when one of two thresholds were met: if either (i) stores representing 85% of the “Gross Leasable Area” of the interior North Mall that is capable of being leased are not open for business; or (ii) 65% of the stores in the interior North Mall that are capable of being leased are not open for business. For Banana Republic, the applicable percentage was 80% of the “Gross Leasable Area” of the North Mall.

[84] For purposes of these calculations, however, the landlord, Park Royal, took the position that the relevant GLA area had to be reduced during demolition and reconstruction because once demolition had occurred, there was no longer a leasable area, store or premise in place. However, DeWitt-Van Oosten J. disagreed and found that “[h]ad it been intended that demolished stores within the North Mall would be carved out of the triggering thresholds, the signatories would have made this express.” This would have been expressed because the demolition certainly could have caused adverse impacts to the tenants’ businesses, including the risk or potential for decreased traffic-flow to the centre as a whole for a prolonged period and its resulting revenue deprivation to the tenants from what their expectations would otherwise have been.

[85] Notably, in that case, unlike in this case, GAP and Banana Republic produced financial evidence of the negative impact the construction had caused to their profitability.

[86] There have also been some limited legal developments in the United States and in Canada that cast some light on the efficacy of co-tenancy provisions that permit the payment of alternative rent in prescribed circumstances. Those cases have focused on the issue raised by the Landlord here, relative to the enforceability of co-tenancy provisions. The first of those cases is relied upon here by the Landlord for the proposition that GAP/Old Navy’s claim of Alternative Rent under this Lease owing to the insolvency of Danier is unenforceable because it is a penalty clause.

[87] There are no Canadian cases directly on point dealing with the enforceability of co-tenancy provisions and whether they represent penalty clauses.[^28] However, this issue has been litigated in the United States, including in GAP’s home state of California.

[88] In Grand Prospect Partners, L.P. v. Ross Dress for Less, Inc.[^29], Ross was given an opening co-tenancy clause, which did not require Ross to commence business and pay rent until both Target and Mervyns, a department store, were open for business. The clause also said that if the co-tenancy requirement was not met within 12 months of Ross taking possession of the premises (but not opening), Ross could terminate the lease. Ross took possession, but before it opened, Mervyns went bankrupt and closed its store in the shopping centre. As a result, the co-tenancy requirement was not satisfied and Ross elected to not open and more importantly, to not pay rent. After the 12-month period expired, Ross terminated its lease.

[89] The landlord sued Ross arguing that the co-tenancy clause was unconscionable and constituted an unlawful penalty. The California Court of Appeal agreed with respect to the rent abatement component based on the general principle that a contractual provision will be an unlawful penalty if the value of the money or property given up under it is not reasonably related to the harm that is anticipated to be caused. The evidence in that case, accepted by the trial judge and similar to the evidence or absence of evidence in this case, showed that Ross did not think the closure of the Mervyn’s department store would actually have any measurable impact on their store’s viability, that is, they did not anticipate any lost sales.

[90] The Court of Appeal of California accepted that “a contractual provision that provides a party with a true alternative method of performance – that is, an alternative that provides a rational choice between two reasonable possibilities – does not involve an unenforceable penalty.”[^30] It described the test for unenforceability at p. 1361 as follows:

Generally, a contractual provision is an unenforceable penalty if the value of the money or property forfeited or transferred to the party protected by the provision bears no reasonable relationship to the range of harm anticipated to be caused to that party by the failure of the provision’s requirements.

[91] Consequently, while emphasizing that the determination of the enforceability of a co-tenancy provision will always depend heavily on the particular facts of each case, the Court found that Ross had breached the lease and required it to pay several hundred thousand dollars in damages in respect of the rent payments that it did not make prior to terminating the lease.

[92] Importantly, and surprisingly in that case, there was no stipulated time limit on the rent abatement. It could continue indefinitely, or at least until the 12-month period passed when Ross could then break the lease. Yet in this case, there is exactly the same absence of a stipulated time limit to GAP/Old Navy’s claim to pay the Alternative Rent remedy, and at least up until the commencement of this trial, Old Navy appeared to take the position that it could continue to pay Alternative Rent indefinitely merely because of Danier’s insolvency. That issue is addressed below.

[93] I note that the Court’s analysis and conclusion in Ross relative to the rent abatement clause constituting an unlawful penalty is similar to the results that have been reached by some Canadian courts. Under Canadian law, penalty clauses are generally not enforceable. Generally, a provision that specifies the payment of an amount upon a breach, regardless of the damages actually sustained, will be regarded as a penalty clause. To avoid being characterized as unenforceable, the amount to be paid needs to be reasonable and a genuine pre-estimate of damages. If both of those elements are not present, the Court may not find the clause to be enforceable.

[94] Alternatively, as the Ontario Court of Appeal has concluded in several cases, referenced further below[^31], so-called penalty clauses may simply breach principles of unconscionability. The argument is that within the context of good-faith performance under the contract, it would be unconscionable to permit such a clause to be enforced, particularly where no time limit is specified for the period during which it may operate, and no alternative remedies given to either party to bring the lease to an end, say six months after such an event has occurred.

[95] Regrettably, given their reliance on it, counsel for the Landlord did not provide me with any update to the California decision, but it now appears from more recent developments that it may be limited to its own specific circumstances. I learned from my own noting up of the decision in Grand Prospect Partners, L.P. v. Ross Dress for Less, Inc., that the opposite result was reached in a 2017 Pennsylvania decision upholding the award of a panel of Arbitrators, and that also involved Ross Dress for Less, Inc., as defendant.

[96] In that case, Ross had a lease for retail space in the Lycoming Crossing Centre in Eastern Pennsylvania, owned by a company named VIWY. That lease contained a co-tenancy provision. It permitted Ross to pay reduced alternative rent in the event of the business failure of any one of the three anchor tenants stipulated for that shopping centre. One of the three, a company named Circuit City, went out of business in 2009. It was one of the named anchor tenants expected to draw traffic to that mall. The landlord could have satisfied the anchor tenant provision of the lease by finding another similar store but it did not, yet it continued to demand that Ross pay full rent.

[97] Ross demanded a refund, the landlord refused and terminated Ross’ lease. Ross then alleged breach of lease in U.S. District Court. The case was ultimately decided at arbitration, but in contrast to the California case, the arbitrators awarded Ross $1.9 million in damages including legal fees.

[98] Ross then moved for confirmation of the arbitration panel’s June 26, 2017 decision on its breach of contract claim against the defendant, and the defendant brought a motion to vacate the arbitration award, arguing that the arbitration panel failed to properly apply the Statute of Limitations to Ross’ claim. In the result, the award was confirmed by Sanchez J. of the United States District Court for the Eastern District of Pennsylvania in September 2017.[^32]

[99] As a result, in contrast to the California decision, in this latest U.S. instalment on co-tenancy provisions, the tenant’s right to claim alternate rent under the co-tenancy provisions of that lease was upheld by the approval of the arbitrators’ award, but the case as reported does not permit great insight into the arbitrator’s reasoning. It instead focuses on a limitation period issue that is of no import in this context.

[100] Finally, in T. Eaton Co., Re[^33], as in the more recent failure of Target Canada, tenants who sought to enforce co-tenancy rights following the business failure of an anchor tenant, like Eatons of Canada or Target Canada, have seen their alternate rent and closure remedies curtailed to permit insolvency restructuring. Recent developments have also occurred in Canada relative to the enforcement of co-tenancy rights in the wake of the insolvency of Target Canada.

The Positions of the Parties

[101] Old Navy relies on section 13.3 (A) of the Lease. It takes the position that the clause is crystal clear. According to Old Navy’s interpretation, if any one of the Key Stores ceases to operate at any time during the term of the Lease or extensions, this is a “Co-Tenancy Failure”, entitling Old Navy to reduce its rent to 50% of minimum rent for three months and 25% of minimum rent thereafter and indefinitely. In other words, GAP/Old Navy regards the test as containing two distinct elements. One is related to the identity and continuing operation of the Key Stores. The other relates to the overall occupancy and operations of the GLA of the Centre. In GAP’s view, both elements, which it regards as distinct, apply at all times,

[102] Further, in GAP/Old Navy’s interpretation, both of the Co-Tenancy Requirements: (i) presence of the named Key Stores; and (ii) the occupied and operative GLA requirement, subsisted on an ongoing basis, and were not simply operative as a two-prong test to be met at the initial opening point of the Old Navy Store, that is, not just at the commencement of the Lease during the construction and immediate post-construction period, as claimed by the Landlord.

[103] There is a further important interpretive component to GAP’s position. The evidence shows that it was GAP/Old Navy’s view that if a Key Store closed, it would be entitled to commence and to continue to pay Alternate Rent for its premises unless and until: (i) the Landlord replaced the failed Key Store with another retailer; (ii) such other retailer was also engaged, not simply in retail, but in the sale of “upscale high quality apparel” consistent with Old Navy’s view of its products; and (iii) the new Key Store actually took over the exact same premises as had been occupied by the failed store. Nevertheless, GAP also took the position that the Landlord could lease space to anyone it wished, without complying with these three criteria, but if it did, then the Co-Tenancy remedies would be operative, with no apparent end date.

[104] GAP’s position changed somewhat at trial, and Old Navy ultimately conceded that other provisions of the Lease would limit and prevent the payment of Alternative Rent from continuing indefinitely. That seems likely to have been a change of position encouraged by counsel, but there is nothing in the original application materials that suggests that GAP/Old Navy were not adhering to their original expansive view when these matters first became a source of conflict between the parties.

[105] In contrast, the Landlord was adamant that it was not its intention, nor did Mr. Cherniak ever understand that it was Old Navy’s intention and belief that the future loss of any Key Store would trigger Old Navy’s co-tenancy rights under the Lease, provided the GLA operating requirements continued to be met.

[106] As his evidence showed, instead, Mr. Cherniak’s understanding of these provisions was quite different. He believed that the requirement for the listed Key Stores being in place referred only to the initial lease-up period/opening requirements, and that thereafter only the 80% percentage occupancy test was applicable. The Landlord understood and believed that the purpose of the Co-Tenancy Requirements was to protect Old Navy from a catastrophic loss of tenants at the Centre, which would or could have resulted in the loss of the foot traffic that the Landlord understood GAP required in order to protect the economic viability of its Old Navy store. Mr. Cherniak also made clear that he relied on Old Navy and GAP to act reasonably and in good faith, and in accordance with the usual and understood reasonable expectations between a landlord and a tenant in a long-term shopping centre lease.

Issues

[107] This case raises four questions. First and foremost is the question of contractual interpretation:

(i) Is the Lease clear, as GAP/Old Navy argues, with Old Navy entitled to pay Alternative Rent following the insolvency of Danier, and with the Landlord having failed in its notice obligations, and to put in place a satisfactory replacement Key Store?

or

(ii) Is the Lease unclear and poorly drafted, as the Landlord argues, suffering from latent ambiguity, not reflective of the parties’ intent and leading to absurd and inefficacious business results?

[108] The case law shows that the answer to this question must necessarily be informed by a number of factors: (i) the commercial purpose of the Co-Tenancy provisions; (ii) the evidence relative to the importance and identity of Key Stores in this particular Lease; (iii) the understanding and intent of the parties at the time the Lease was negotiated; and (iv) the understanding and intent of the parties as reflected in their subsequent conduct.

[109] The second question is whether either of the parties adhered to their obligations to act reasonably and in good faith in their performance of the entirety of the contract.

[110] Third and fourth, but subsidiary in importance to the first two questions, are the validity of the two further claims made by the Landlord. The first is that the Co-Tenancy Requirements amount to an unenforceable penalty clause. The second is that the failure to include a key term in the final Lease terms, a term which the LOIs show was intended to be included, requires that the Court exercise its equitable jurisdiction to rectify the Lease.

[111] I consider each of these questions in the paragraphs that follow.

Analysis

(a) Interpretation of the Lease and the Co-Tenancy Requirements

[112] GAP/Old Navy claims the provisions of the Lease are straightforward and should be given effect despite the Landlord’s arguments of perceived unfairness. The Landlord raises numerous grounds to support its position that the language the parties have used is not only unclear, but is also unreasonable, not what was ever intended, and absurd. It says that GAP/Old Navy’s interpretation of the Lease and the co-tenancy-related provisions is untenable.

[113] I find that the provisions of the Lease relating to co-tenancy are not straightforward nor unambiguous as claimed by GAP/Old Navy. I find that the language used in section 13.3(A) is unclear and capable of two different interpretations. The parties’ beliefs greatly differ on the operation of the provision. These were not after-the-fact positions – both appeared to have different understandings of what the contract said from the moment it was signed. The 15 plus years of co-operative and largely uninvolved dealings further demonstrates that each party did have different understandings of what the contract said from the moment it was signed, because the issue never came up before until Danier’s insolvency.

[114] Further, the language used in the Lease differs from the description of the Co-Tenancy Requirements that the parties agreed to as set out in the LOIs. Yet no explanation for that variance can be found in the evidence. GAP/Old Navy produced no evidence outside of the Lease to support its position, and yet its claim makes no sense in the context of how events actually unfolded.

[115] Stated summarily, I find that there is no clarity on what the final common intention of the parties was meant to be, assuming they had a common intention, which, frankly, is arguably belied by the evidence of their conduct.

[116] GAP/Old Navy offered no evidence from anyone who was actually involved or participated in the negotiation of this Lease. Mr. O’Connor testified based solely on his own experiences in other leases and conceded that he cannot testify reliably about what was in the minds of the parties from GAP’s perspective at the relevant time because he simply was not there.

[117] Neither did Mr. O’Connor have any discussions with anybody from GAP who was involved at the time of the negotiation of the Lease. No other GAP personnel participants came forward to provide evidence. Ms. Carol Hee had been in-house counsel for GAP/Old Navy at the time, and she was clearly involved, because she wrote some of the correspondence that went back and forth between GAP and the Landlord at the time. Blair Hodgson, the Director of Real Estate at GAP and GAP’s Canadian real estate representative at the time was also certainly involved. As GAP’s signatory during the Lease negotiation phase, it is Mr. Hodgson’s initials which can be seen on the LOIs and the handwritten amendments to those LOIs.

[118] However, Mr. Hodgson no longer works for GAP and there was no evidence of any effort made to find him. Further, by the time this litigation was underway, Ms. Hee had left GAP and was working for a San Francisco law firm. However, Mr. O’Connor never spoke to her and it was his understanding that “she had no recollection at all” of this Lease transaction. Unfortunately this information did not come from Ms. Hee, but from some other unnamed partner at that firm.

[119] In contrast, Mr. Cherniak, who testified for the Landlord, was directly involved in the negotiations of and drafting of the Lease. As I explain in greater detail below, in my view, his evidence speaks volumes about what the Landlord understood, which I find seems contextually and objectively reasonable having regard to the language used. This is plainly at odds with what GAP/Old Navy now advances as the meaning of the clause. It was his direct and blunt testimony that the interpretation now put forward by GAP was neither ever understood, nor would it have ever been agreed to by the Landlord.

[120] While I find both parties at fault in their conduct relative to the drafting of the Lease, overall I accept Mr. Cherniak’s evidence and prefer it to that of Mr. O’Connor, as his evidence relates to the relevant time period including what happened, what the parties agreed to, and what they would have understood at the time, not sixteen years later. I examine these issues separately in the subsections that follow.

[121] Regardless, the ambiguity I have found in the language used in ss. 13.3 and 13.4, combined with the absence of a reciprocal provision that was intended but not included in the Lease, requires me to consider the intent of the parties in 2000 when the Lease was concluded and to use their conduct thereafter to assist in understanding their intent and determining the appropriate disposition in this matter.

(b) The parties’ intentions in 2000: The LOI amendments and choice of Key Stores

[122] In considering the interpretation of the Lease and what the reasonable understanding of the parties would have been, I find it important to make several observations.

[123] First, this started out in a new and unusual situation. This was one of the first Old Navy stores opened in Canada, and that appears to have affected the negotiations that led to the conclusion of this Lease.

[124] Second, a unique aspect of the Lease was the unusual and last minute circumstances and impromptu process that led to the determination of the Key Stores. That is important since none of the Roots, Globo Shoes, or Danier Leather Outlet stores would normally have been considered to be anchor tenants and they were not designated as Key Stores in any other GAP or Old Navy leases.

[125] Finally, there is the obvious discrepancy between the LOIs and the Lease relative to what was certainly intended to be a reciprocal termination right.

[126] I find I am unable to accept Mr. O’Connor’s contention that Danier and the other Key Stores at the Centre, apart from Cineplex, were intentionally chosen because of their particular retail specialties. That contention is not borne out on the evidence.

[127] First, the evidence shows that Mr. O’Connor had no real knowledge of who any of Danier, Roots, or Globo Shoes were as Canadian retailers before the time Danier failed in 2016, and there is no evidential reason to believe GAP/Old Navy would have had any specific knowledge of these retailers before then.[^34] In fact, this is the only shopping centre where GAP had any outlets, for any of its brands, that also had a Danier as a named Key Store tenant.

[128] Nevertheless, at questions 178-182 of his examination for discovery, Mr. O’Connor stated that the choice of these Key Stores by GAP was specific and intentional. He was asked if he had any knowledge of the demographic of shoppers who would shop at Danier or know why they were named. He responded that “[i]t would be consistent with the demographic of an Old Navy, that’s why we named them as a key store”, but had to acknowledge that he had no personal knowledge as to why they were named, had not asked anyone else why they were named, and could find nothing in GAP’s files indicating why any of Danier, Roots or Globo Shoes were named as a Key Store.

[129] While Mr. O’Connor may have claimed that the choice of these Key Stores by GAP was specific and intentional, that construction is not supported on the evidence. There is no evidence that GAP/Old Navy itself “selected” or “named” these tenants as Key Stores. Indeed, Mr. O’Connor later admitted this.[^35] More importantly, seemingly undermining his own claim, Mr. O’Connor gave evidence that these stores would not generally have qualified as Key Stores according to GAP’s internal policies or under the provisions of its standard form Lease, to the very limited extent GAP was willing to reveal them in the course of these proceedings.

[130] Mr. O’Connor explained that GAP generally identified key stores based on size guidelines. GAP generally preferred so-called “big box stores”, meaning a retail store comprising somewhere between 50,000 to 100,000 square feet, depending on the size of the Centre. He acknowledged that GAP’s preferred key stores could typically be regarded as anchor tenants, but GAP does not use the “anchor tenant” phraseology in its standard form Lease, preferring the use of the term Key Store in this Lease.

[131] Regardless of which term may be used, however, the point here was that none of the identified Key Stores at this Centre, except Cineplex, came even close to fitting that profile. I found these answers to be telling relative to the selection process, given that the square footage of Danier was only about 6,500 sq. ft. That store was about the same size as Roots, but only about half the size of Globo Shoes, and just over one-tenth the size of Cineplex.

[132] Most importantly, when asked in reference to “big box tenants” whether he was referring to anchor tenants, Mr. O’Connor confirmed that the selection of key stores was all about identifying the so-called “drivers of traffic.” He confirmed in his evidence that the purpose of picking key stores was to pick the traffic generators, the drivers of traffic to the Centre, the businesses which would most strongly attract customers and shoppers. These would typically be the big box stores, that is, retail outlets or service providers comprising 50,000 to 100,000 square feet, like Canadian Tire and Cineplex. [Emphasis added]

[133] Rather than having been specifically selected by GAP, however, it is evident that the Key Stores here were proposed by Seymour Schwartz of Paracom, the Landlord’s Agent, acting in effect for both parties, and it is plain on the evidence before me that they came to be chosen, almost as an afterthought.

[134] Initially, the LOI shows that GAP/Old Navy preferred Canadian Tire and Cineplex as Key Stores for the Co-Tenancy Requirements. These choices would have been consistent with their corporate policy respecting key stores. It is unknown whether the GAP representatives knew anything about Canadian Tire in 2000 when the Key Stores were chosen, other than that it was a so-called “big box” store.

[135] However, Mr. O’Connor knew nothing when examined in 2018 about the pervasive retail presence of Canadian Tire across Canada or the range of products it sells. It would probably surprise many Canadian shoppers given the ubiquitous presence of Canadian Tire as a pan Canadian retailer, but Mr. O’Connor was not familiar with the store or aware that it sold a wide variety of products, from car parts and tires to tools, appliances, hardware, furniture and sporting goods, clothing, and pet supplies. He betrayed this lack of knowledge when asked on discovery whether he knew what kind of merchandise it sold. His answer is telling:

249. Q. Do you know what kind of merchandise it sells?

A. I imagine tires. I…

250. Q. You truly are not familiar with it then?

A. Right.

[136] Mr. O’Connor was also not aware if there were any other shopping centres in Canada where GAP had a presence where any of Canadian Tire or the other three alternative choice stores were key stores. Although at the time the LOI was drafted, GAP representatives wanted Canadian Tire as a Key Store, that was not possible as it was learned that the Canadian Tire store freehold was independently owned and therefore not technically part of the Centre.[^36]

[137] The evidence shows that during the construction of the Centre, a CIBC bank branch, a Tim Horton’s, another chain restaurant outlet, and the retail stores in Pod B (where all of Globo Shoes, Danier Leather and Roots were located, along with Party City) were the only retail outlets that were actually up and running at the time this Lease was being negotiated. Several of the current building pods that now exist at the Centre had not yet been constructed and had no tenants committed to those spaces at the time Old Navy entered into the Lease, or were under construction but some time away from opening. Consequently, these were amongst the only stores that were available to be chosen as Key Stores, and that could have been chosen, regardless of their retail specialties or size.

[138] When asked if he had ever been told that GAP/Old Navy particularly wanted to have Roots, Globo Shoes, and Danier in the Centre as Key Stores, Mr. Cherniak responded:

No. As I said yesterday, we were at the agent’s office. I raised the issue that Canadian Tire had been sold and I had no control over it. And he said okay, we’ll put in these three tenants to replace Canadian Tire. My assumption was simply - it was the only other building, really, where there were retailers. So, Old Navy chose at the agent’s advice. I assumed he was acting for both parties, quite frankly, that this was sort of a standard way of dealing with it. [Emphasis added]

[139] An examination of the December 15, 1999 LOI, as updated to April 4, 2000, confirms how the thinking of the parties progressed. That LOI originated from Blair Hodgson and was addressed, not to the Landlord, but rather to Paracom Realty Corporation, the Landlord’s agent, to the attention of Seymour Schwartz. This LOI went back and forth between the parties and contains handwritten amendments and initials reflecting the progress of the negotiations, as well as the changes made to the intended and agreed terms of the Lease as those negotiations moved forward.

[140] The ongoing Co-Tenancy Requirements were set out at p. 3 of the December LOI, as follows:

Ongoing Co-Tenancy Requirements: Tenant shall not be required to open the Premises for business at all nor operate during the designated times for the Centre unless (a) Canadian Tire and Cineplex are open during the designated times for the Centre and (b) stores occupying at least 80% of the gross leasable area of the Centre are open in the Centre* in which event tenant shall immediately have the following remedies:

• Operate its business and pay, in lieu of Rent (including minimum rent, any additional rents, CAM and taxes) 50% of tenants’ monthly Minimum Rent for the first three months and 25% of tenants’ monthly Minimum Rent thereafter until such conditions are met

• If such condition is not satisfied for six months, tenant may terminate the lease at any time before such condition is satisfied upon 30 days’ notice to Landlord.

[141] As mentioned, handwritten changes were made to the language of the above provisions. First, the Co-Tenancy Requirement was changed to substitute “Roots, Globo Shoes and Danier Leather” in lieu of “Canadian Tire”. Further, the words “as of the date Old Navy opens” were inserted by the Landlord’s agent at point * in the text (above), but then that addition was struck through and replaced by the words “given the shopping centre size at the time Old Navy opens.”

[142] There was also an important change made to the second remedy. Rather than being solely in favour of the Tenant, the second remedy was amended to read:

If such condition is not satisfied for six months, the Landlord or the Tenant may terminate the lease at any time before such condition is satisfied upon 30 days’ notice to Landlord.

[143] The evidence established that all of the changes were handwritten by Seymour Schwartz, at Paracom, acting effectively as agent for both parties.

[144] The date on which Blair Hodgson signed the final LOI is unclear, but Lloyd Cherniak appears to have signed his name to that amended LOI on March 31, 2000. The dates of initialization of the handwritten interlineations and changes, is also uncertain. Be that as it may, the final terms of the Occupancy Requirements as set out in the Lease are as described above.

[145] I find that the Lease documents contain material differences from the concepts that appeared to have been agreed in the terms of the LOIs. The three important differences are:

(i) There was no apparent intent in the LOIs that each of the Key Stores be open at all times that Old Navy was open;

(ii) There is uncertainty about the ongoing test relative to the GLA of the Centre and whether a co-tenancy default could occur merely because one Key Store accounting for less than 2% of the GLA might fail, when the Centre was otherwise fully operational; and

(iii) There was no provision included in the Lease for the Landlord to have a reciprocal right as GAP/Old Navy did, to terminate the Lease six months after a default in the Co-Tenancy operating requirements, and as had clearly been written in by hand.

[146] The last point is particularly important because that omission left the Landlord in a materially disadvantaged position under the Lease. Under this interpretation Old Navy could claim it was entitled to continue to pay alternative rent for the duration of a lease term following an alleged Co-Tenancy Failure, when the Centre was otherwise busy and fully operational with a lot of shopping traffic. The failure to include that provision in the Lease, even though it was obviously intended to be included, meant there was no reciprocal escape provision available to the Landlord.

[147] In his evidence, Mr. Cherniak testified that he had a different understanding of the Co-Tenancy Provisions at the time they were negotiated. He said he never understood that a failure at any time after opening of any one of the three of the smaller Key Stores would be enough to trigger Old Navy’s Alternative Rent remedy. Instead, it was the Landlord’s understanding that to activate Old Navy’s Alternative Rent remedy, not only would all three of the Key Stores have to fail, but in addition, that the Landlord would also have had to fail the operational square footage requirement. Mr. Cherniak testified that:

I had assumed that we had an agreement in terms of the key tenants. They were there. And that Old Navy was satisfied with the key tenants. And that the clause that remained was simply that there was a square footage requirement. So, that if there were major catastrophe in the mall, a failure of Cineplex, or the three tenants that were replacing Canadian Tire, that they would be in some financial problem, and that there would be kicking in some reductions in rent, and that we could terminate the lease, or we replace defaulting covenant. I always assumed there would be a conversation with Old Navy on any kind of issue like that. [Emphasis added]

[148] Later, he was asked what his understanding was of the application of the Co-Tenancy Requirements in the summer of 2016 after Danier had failed. Mr. Cherniak responded:

Well, as I said, I mean, I didn't think they applied. The lease specified there was a percentage of the Centre had to be achieved. I felt that the clause gave me permission to basically provide the tenant mix that best suited the plaza, subject to any reasonable provisions. And we were nowhere near in a position where there was any sort of default in co-tenancy. I mean, in my mind that provision only applied if there were catastrophic failure in the mall. If Cineplex left and suddenly the Centre started to depopulate, then there would be the situation were a tenant might either leave or ask for a reduced rent. [Emphasis added]

[149] I find on the basis of all of this evidence that much clearer wording would have been needed if the actual contractual intention had been that the loss of any one of these tenants, on its own, at any time during the term of the Lease, and any renewals, whether by failure to renew, relocation, closure, bankruptcy, or for any other cause, could reasonably have been expected or understood to trigger such onerous co-tenancy rights as GAP/Old Navy is now asserting in this case.

[150] In particular, I find that much clearer wording would have to have been used if such a relatively inconsequential event, such as the failure of one small retailer, was intended to relieve GAP/Old Navy of its primary obligation under the Lease to pay rent for the use of its leased retail premises. Yet, that is the effect of GAP/Old Navy’s claimed interpretation, because under the Alternative Rent remedy, GAP/Old Navy effectively pays only part of the Common Administration costs for the Centre, and no rent at all. I reject this construction of the Lease.

(c) The parties’ intentions and the contra proferentum rule

[151] While the Lease was based on GAP/Old Navy’s standard form of lease, it has provided no evidential explanation for the variance between the LOIs and the final Lease terms.

[152] GAP/Old Navy’s counsel contends that there is no room for the contra proferentum rule to operate in circumstances where both parties are sophisticated commercial parties, like these two were. He relies upon Holden J.’s admonition in McKee v. Montemarano[^37], at paras. 27-28:

27. Mr. Monaghan submits that the context of this Agreement is that each party had a sales representative acting for him, Mr. Ingram for McKee and Mr. Whetung for Montemarano. They are both associated with the one agent-broker, Re/Max, which had the duty to share all information (subject to the exceptions in the Confirmation of Co-operation and Representation signed by the parties). The Agreement must be read as a whole and within its factual matrix, not through a literal parsing of individual words, which could defeat the objective of the parties in signing the agreement. Dumbrell v. Regional Group of Cos. (2007), 2007 ONCA 59, 85 O.R. (3d) 616 (Ont. C.A.); J.D. McCamus, The Law of Contracts, Toronto, Irwin Law, 2005, at p.717-719.

28. Mr. Monaghan further submitted that the contra proferentem doctrine should play no part in the exercise because in Estey J.’s words:

A contra proferentem approach, a device often used by courts to avoid injustice, does not seem appropriate where the contracting parties are sophisticated, of equal bargaining power and where Antorisa contracted with the benefit of competent legal advice after considering the scope of the limitations on liability, including the indemnities, and after being provided with the opportunity to amend them.

Antorisa Investments Ltd. v. 172965 Canada Ltd., [2007] O.J. No. 195 (Ont. S.C.J.), at para. 6. I agree. There is no inequality in bargaining power and access to legal advice in this case.

[153] I find that it is the very next paragraph that more accurately, by contrast, frames the problem of interpretation here, and the problems raised by the absence of explanatory evidence. In McKee, Holden J. found as follows at para. 29:

29. Where I cannot accept Mr. Monaghan’s submission on this branch of his argument is the proposition that a harmonious contractual approach requires that express provisions in the contract should be ignored in order to achieve a reading more in line with one party’s present requirements. The parties agreed to a general notice provision in paragraph 6 of the Agreement, there is no doubt of that. But, contrary to Mr. Monaghan’s suggestion that part of the factual matrix of this Agreement was a complete lack of contemplation or concern by the parties over possible delay in providing notice or waiver, this Agreement includes a “time of the essence” clause and, added as part of the contract, a term in Schedule “A” specifically directed at the due diligence condition and a change to the deadline at Mr. McKee’s request to move it forward. That clause and that change were specifically initialled by both parties.

[154] I find the decision in McKee to be different from the case before me here. In McKee the Court found that it was able to give unambiguous meaning to the words of the clause through a harmonious contractual approach and rejected counsel’s submissions that “express provisions in the contract should be ignored in order to achieve a reading more in line with one party’s present requirements.”

[155] In contrast, in this case, I find that I am unable to give unambiguous meaning to the words of the co-tenancy clauses through a harmonious contractual approach, because the provisions appear, on their face, to be ambiguous, unclear, and capable of alternative meanings.

[156] The Supreme Court’s seminal decision in Consolidated Bathurst Export Ltd. v. Mutual Boiler & Machine Insurance Co.[^38] also assists in understanding contra proferentum. That decision involved the interpretation of an insurance contract, where the rule for centuries had been that “where an ambiguity is found to exist in the terminology employed in the contract, such terminology shall be construed against the insurance carrier as being the author, or at least the party in control of the contents of the contract.”[^39] Even there, however, Estey J. accepts the earlier admonition of Cartwright J., as he then was, that resort is to be had to the contra proferentum rule “only when all other rules of construction fail to enable the Court of construction to ascertain the meaning of a document.”[^40]

[157] Estey J. completes the thought at para. 26 as follows:

26. Even apart from the doctrine of contra proferentem as it may be applied in the construction of contracts, the normal rules of construction lead a court to search for an interpretation which, from the whole of the contract, would appear to promote or advance the true intent of the parties at the time of entry into the contract. Consequently, literal meaning should not be applied where to do so would bring about an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted. Where words may bear two constructions, the more reasonable one, that which produces a fair result, must certainly be taken as the interpretation which would promote the intention of the parties. Similarly, an interpretation which defeats the intentions of the parties and their objective in entering into the commercial transaction in the first place should be discarded in favour of an interpretation of the policy which promotes a sensible commercial result. It is trite to observe that an interpretation of an ambiguous contractual provision, which would render the endeavour on the part of the insured to obtain insurance protection nugatory, should be avoided. Said another way, the courts should be loath to support a construction which would either enable the insurer to pocket the premium without risk or the insured to achieve a recovery which could neither be sensibly sought nor anticipated at the time of the contract.

[158] Based on this background, I do not accept the contention that contra proferentum cannot apply here, not because of the rule per se, but for two other reasons. First, GAP/Old Navy was in control of the drafting, but it took no steps to adduce contemporaneous evidence that would support its interpretation of what the words were intended to mean. GAP had no evidence to offer from anyone who was actually involved or participated in the negotiation of this Lease. Mr. O’Connor’s evidence cannot fill that lacuna because he simply was not there and does not know what happened.

[159] Second, while GAP admits that the reciprocal termination right was in the final version of the LOIs, it also acknowledges that it did not include that term in the Lease. The final production of the Lease was within GAP’s control – it sent the Lease to the Landlord with the ambiguous provisions regarding the Key Stores and the absence of a reciprocal right in the Landlord to bring the Lease to an end after six months of Alternative Rent being paid. This was despite the fact that a handwritten amendment had been specifically inserted in the LOI.

[160] When questioned on the handwritten insertion of a reciprocal termination right in favour of the Landlord as well as the Tenant, Mr. O’Connor acknowledged the handwritten words, “The landlord or the tenant”, were inserted after the phrase: “...If such a condition is not satisfied for six months...”, but he did not know whose handwriting it was. More importantly, he acknowledged that provision disappeared and was not contained in the final version of the Lease, that he was not aware of any discussion between the Landlord and the Tenant leading to the removal of that provision, knew of no-one from whom he could obtain such information and did not know whether the Landlord was ever sent the clause that appeared to have been intentionally deleted.

[161] However, while the Landlord acknowledged the Co-Tenancy Requirements, he believed they would only be triggered if a catastrophic event occurred that affected major tenants and caused the traffic in the Centre to decline as a result of a failure of the percentage GLA tests. The Landlord did not believe that a relatively insignificant tenant that went into insolvency after 15 years constituted such an event. I find this interpretation to be more consistent with the evidence as a whole, the case law, and legal commentary on the purposes of co-tenancy clauses.

[162] I reject GAP/Old Navy’s contention that as a consequence of this omission, the Landlord is now bound to accept rent that barely covered common area expenses. It is not a commercially reasonable position and offends the business efficacy rule of interpretation.

[163] GAP’s claims make no sense in the context of how events actually unfolded, and I am unable to find that the parties actually shared a common intention consistent with GAP’s interpretation, because, frankly, the existence of such a common intention is belied by the evidence of their conduct. Amongst the ambiguities that I find in s. 13.3 of the Lease, apart from seemingly poor and ambiguous drafting, characterized by the presence and confusing use of punctuation and parenthetical phrases, are the following:

(i) The clause does not state that each of the Key Stores must be open for business at all times during the term of the Lease and renewals thereof;

(ii) Consistent with Mr. Cherniak’s understanding, the clause addresses the conditions for the opening and initial operations of Old Navy and refers specifically to GLA at the expiry of the construction period (in 2000);

(iii) Instead, it appears that for ongoing operations, the clause requires that 80% of the Key Stores and other retail stores in the Centre be open for business.

[164] Having considered the evidence as a whole, I find that it was reasonable for the Landlord to have understood that the Lease required the Key Stores to be open for business at the commencement of the Lease, but that thereafter that requirement reduced to 80% of the Key Stores and other retail stores being open for business. That is a reasonable construction because it appears to be what the LOIs contemplated. Moreover, that construction would have avoided the business absurdity of the failure of a business occupying less than 2.5% of the GLA of the Centre to have the same consequence as if Cineplex or Canadian Tire had failed, assuming it had continued to be a named Key Store. That is simply not a rational result.

[165] Even then, I consider the Landlord’s understanding that the provisions were intended to apply only to a catastrophic situation, not to an inconsequential technical default, to be a reasonable interpretation, consistent with the business efficacy rule.

[166] Moreover, no catastrophe occurred here. The Centre was well over 90% leased, occupied and operational at the time of Danier’s insolvency and the subsequent closure of the Danier Leather Outlet at the Centre. GAP/Old Navy adduced no evidence that there was any diminished shopper traffic as a result of Danier closing at the Centre – I add that they had the high-tech surveillance cameras to substantiate such a claim, if they had wanted to or such a claim was merited.[^41]

[167] GAP/Old Navy did not produce a shred of financial evidence to suggest that Danier’s business failure had any impact on the financial success or operations of its Old Navy outlet. To the contrary, the evidence was that the Centre has been and continues to be a very successful commercial operation. Mr. Cherniak’s evidence about the turnover of stores and restaurants shows that there is nothing unusual about changes of tenancy over time, and so long as the percentage GLA occupancy requirements are being met, there is no diminution in traffic, and no factual foundation for the highly-technical Key Store replacement system interpretation adopted by Old Navy.

[168] A technical interpretation of language that leads to commercially absurd results is to be avoided. If the language used in s. 13.3 of the Lease literally means what GAP/Old Navy says it means, then this leads to a commercially absurd situation where Old Navy would be entitled to continue to enjoy the use of the leased premises for the duration of the Lease and all extensions, while paying considerably less than its share of the operating costs, let alone paying any rent to the Landlord. Plainly, such an interpretation fails to take into consideration the legitimate expectations of the Landlord. It fails the business efficacy test.

[169] In 1525292 Ontario Ltd. v. Canadian Tire Real Estate Ltd.[^42], this Court addressed a similar situation, where a literal interpretation of the lease would result in Canadian Tire effectively being excused from payment of rent for an indefinite period of time. The Court found that this would result in a commercial absurdity. O’Connor J. writes:

To excuse CTREL from rent payments for an indefinite period (possibly up to 25 years) while it enjoyed the use of the premises for its business ends would result in a commercial absurdity. The courts have long adhered to a principle enunciated by Jessel M.R. in Wallis v. Smith[^43] as “…the well-known doctrine that in the construction of written instruments you may depart from the literal meaning of the words, if reading the words literally leads to an absurdity”.

In Holt v. Thunder Bay (City)[^44], Rosenberg J.A. writing for the Court of Appeal, instructed that:

[T]he contract should be construed as a whole, giving effect to all of its terms, so long as it does not result in an absurdity. In the case at bar, I interpret the words at issue to mean the term of the renewal starts when CTREL opens for business, that is, the first ten years of the renewal. While usually the obligation for the payment of rent also commences with the term, the clause does not specifically say that. An interpretation that rent commences with the term, in the circumstances of this agreement, leads to the absurdity of the tenant occupying premises rent free for as long as it wishes, possibly up to 25 years, if it forgoes opening the gas bar for business. The true intent of the parties cannot have been to require the owner/landlord to bear the costs of a valuable piece of property while precluded from occupying it or enjoying any of the commercial benefits of it, i.e. rents.

Another way of putting the courts’ function of interpreting contracts to prevent absurdities is to say contracts should be interpreted to give ‘business efficacy’ to the terms of the agreement. In TDL Group Ltd. v. P.J.P. Developments Ltd[^45], Farley J. of the Ontario Court of Justice (General Division) said at 6, “…they (contracts) should be interpreted in a reasonable way to give “business” efficacy and in such a way to avoid all absurd results”. In The Law of Contracts, Fourth Edition, S.M. Waddams, in discussing the circumstances in which the courts will imply terms in contracts, says at para. 497, “Even under the most restrictive approach terms are regularly implied to give business efficacy to agreements…”

In this case, not only does CTREL’s interpretation of clause 18(e)(i) result in an absurdity but it also subverts the court’s obligation to give business efficacy to its interpretation of it. Furthermore, CTREL’s paying rent for seven months without a valid explanation leads the court to the conclusion that CTREL also initially interpreted the clause as does this Court.

[170] I find this analysis to be directly applicable here. It was not commercially reasonable for GAP/Old Navy to expect to be able to occupy the premises for the balance of its existing Lease term without paying rent, and presumably during the further extension, at least as it did initially, merely because of an event which had no evident impact on its business operations.

[171] Old Navy’s minimum monthly rent was $39,390.75 plus HST and its share of the common area maintenance costs and taxes (“CAM”) was $16,800.00 per month plus HST, for a gross monthly rent of $56,190.75 plus HST.

[172] Under the Alternative Rent provision, Old Navy claims the right to reduce its rent to only $9,578.84 per month plus HST. Under its interpretation of the Lease, the total “rent” payable by Old Navy covers only 57% of its share of CAM, and results in the Landlord receiving no rent for the actual use of the premises at all, indefinitely.

[173] I find this was a commercially unreasonable position. It is an interpretation that leads to an absurd result and that violates the foundational principles of business efficacy. Moreover, it results in a circumstance where the Landlord had no way of avoiding the problem continuing indefinitely because Old Navy failed to include the reciprocal termination right that had been agreed would be included in the formal Lease document. This is a further reason why I reject Old Navy’s claim that any co-tenancy failure took place in the circumstances of this case. The ambiguity of the co-tenancy language cannot support Old Navy’s highly technical, but in my view, inaccurate interpretation of that provision.

(d) The Intent of the Parties as Reflected in Their Conduct

(i) Danier’s Assignment into Bankruptcy

[174] In determining whether the language of the Lease is clear, and reflects a meeting of minds and common contractual intent, the case law shows that subsequent conduct of the parties is one of the best ways of determining what the parties intended, and whether their agreement was ambiguous or uncertain. In Montreal Trust Co. of Canada v. Birmingham Lodge Ltd.[^46], Laskin J.A. instructs as follows at paras. 23-24:

23 …Subsequent conduct may be used to interpret a written agreement because “it may be helpful in showing what meaning the parties attached to the document after its execution, and this in turn may suggest that they took the same view at the earlier date.” S.M. Waddams, The Law of Contracts, 3d edition (Aurora, Ont.: Canada Law Book, 1993), at 323. Often, as Thomson J. wrote in Bank of Montreal v. University of Saskatchewan (1953), 1953 CanLII 166 (SK KB), 9 W.W.R. (N.S.) 193, at p. 199 (Sask. Q.B.), “there is no better way of determining what the parties intended than to look to what they did under it.”

24 Lambert J.A. discussed the relevance of subsequent conduct in Canadian National Railway v. Canadian Pacific Ltd., 1978 CanLII 1975 (BC CA), [1979] 1 W.W.R. 358, at p. 372 (B.C. C.A.), affirmed (1979), 1979 CanLII 4516 (ON SCDC), 105 D.L.R. (3d) 170 (S.C.C.):

In Canada the rule with respect to subsequent conduct is that, if, after considering the agreement itself, including the particular words used in their immediate context and in the context of the agreement as a whole, there remain two reasonable alternative interpretations, then certain additional evidence may be both admitted and taken to have legal relevance if that additional evidence will help to determine which of the two reasonable alternative interpretations is the correct one.[^47]

[175] The conduct of the parties associated with the failure of Danier shows just how accurate these observations are in the particular circumstances of this case.

[176] It was GAP/Old Navy’s evidence that it received no information from its local store manager notwithstanding that any of the tenants operating at the Centre would unquestionably have known that Danier had failed nationally, that it was in receivership, and that its inventory was being liquidated.

[177] However, it was not until August 29, 2016 when a GAP employee named Steven Fastenau contacted P. Ghandi at the Landlord’s office that GAP appears to have become aware of Danier’s liquidation. Despite the alleged importance of Danier as a Key Store at the Centre, Mr. O’Connor acknowledged that before this problem arose, he had never heard of Danier or any of the other named Key Stores, apart from Cineplex, that had been identified and named in this Lease. Even though GAP had been willing initially to have Canadian Tire be one of the Key Stores, apart from Mr. O’Connor’s unfamiliarity with Canadian Tire as one of the largest and most successful retail chains in Canada, he also did not know that it also sold certain products, in particular pet food and pet-related products, which GAP claimed was counter to its policies on acceptable shopping centre co-tenant retailers.

[178] As a result, GAP/Old Navy accused the Landlord of failing to comply with its obligations to notify GAP of the failure of a Key Store.

[179] However, the Landlord saw no need to provide notice to GAP/Old Navy because, based on its understanding of the provision, the event of Danier’s bankruptcy had not triggered the operation of the co-tenancy remedies in the Lease. It was only by mid to late September that the Landlord became aware that GAP was regarding Danier’s assignment in bankruptcy as a Co-Tenancy Failure. Mr. Cherniak stated he was shocked to learn of GAP/Old Navy’s position and consequently retained his son to prepare a legal response. Equally, the evidence showed that the Landlord was astonished when GAP sent notice that it was going to start to pay Alternative Rent.

[180] By the end of September, the Landlord started discussions with Ren’s to take over Danier’s space, as Ren’s had done in several other shopping plazas in Ontario where there had been a Danier outlet.

[181] Mr. Cherniak made clear in his evidence that turnover of tenants is normal and expected in a Centre. Old Navy’s Lease was for an initial five-year term with three options to renew for successive five-year terms. In his testimony, there could never have been a reasonable expectation on GAP’s part that each of Roots, Globo Shoes, and Danier would remain tenants of the Centre for the entire duration of Old Navy’s tenancy, absent which, if not replaced by a specific tenant approved by GAP, Old Navy could pay Alternative Rent indefinitely.

[182] Indeed, Danier’s initial lease was only for an initial 10-year term, although Danier ended up remaining as a tenant for over 16 years. Roots and Globo are still tenants. I accept Mr. Cherniak’s evidence that it was never within the reasonable contemplation of the parties that there would be no turnover of these three retail tenants at any time during the term of Old Navy’s Lease. This finding is important, because it emphasizes the absurdity of the technical position advanced by GAP.

(ii) GAP/Old Navy’s Conduct Regarding the Key Stores Requirements

[183] GAP/Old Navy was not content that a replacement Key Store be simply a retail store, but instead wanted a store that was very similar in character to Danier. As Mr. O’Connor explained, that required that the replacement store be a retailer of upscale clothing.

[184] Given that the principal purpose of co-tenancy provisions is the creation of traffic, it is difficult in my view to square that purpose with GAP’s read of the provisions. The reason is because any number of types of retailing could have achieved the increased traffic objective, and indeed the Landlord was focused on that objective.

[185] I do acknowledge that the stipulated Key Stores requirements are clear in their language, even though I have found that it is not clear that the individual Key Stores requirement had to be met at all times as GAP insisted. It follows, in part for that reason, that I have found that no co-tenancy failure occurred. Since no co-tenancy failure occurred based on what I have found to be the most objectively reasonable interpretation of the relevant provisions of the Lease, while there was a need to replace Danier, no alternative rent entitlement arose.

[186] One troubling aspect of that process was the stipulation that a retailer be of exactly the same nature as GAP viewed itself and that such replacement retailer would occupy exactly the same space as Danier had occupied. As such, even if a substitute retailer of upscale clothing (only) had been identified as a potential Key Store, a chain perhaps like Club Monaco or Ralph Lauren, they could still have been refused by GAP unless they agreed to take exactly the same space Danier had occupied.

[187] GAP acknowledges that it has no ability to tell the Landlord who it can rent space to, but it says that until at least June of 2017, when it claims it first learned of the precise terms of the Ren’s lease, it would continue to be entitled to pay virtually nothing for its space because of non-compliance. That was its amended position, but originally, when this litigation commenced, it claimed that could continue for the duration of the Lease, potentially a period of years.

[188] Initially, the Landlord proposed Party City as a replacement for Danier, but not to put it into Danier’s space. Mr. Cherniak explained that Party City had bought Party Packagers, the Canadian operation, and they wanted a bigger store, 12,000 square feet in the Centre but double the size of the Danier store. I was advised that Party City is a huge company operating in over a hundred countries, with 40,000 stores around the world and with billions of dollars in sales.

[189] The Landlord believed having Party City as a Key Store would be very complementary to Old Navy, given the overlap of marketing to children. The Landlord considered it to be a reasonable request to substitute Party City for Danier, but GAP first provided no reaction and then rejected Party City as non-compliant with the Key Store parameters.

[190] During that same period, the Landlord was in ongoing discussions with Ren’s. They were anxious to take over Danier’s space, which was empty by this time. However, Ren’s was not interested in other space at the Centre – it wanted to lease the former Danier space, and only that space. The Landlord offered another suitable location for Ren’s in one of the other vacancies in the plaza, but they refused to accept it.

[191] Finally, an email was sent from Jason Cherniak to Mr. Byma on January 4, 2017. At the end of the message it indicates that “[w]ithout prejudice, before beginning any court action my client proposes a meeting in Toronto the week of January 16 to discuss the situation and try to come to an agreement. Please advise when your client would be available.”

[192] GAP/Old Navy never responded, either to that proposal, or to the Landlord’s request that GAP approve Ren’s as the replacement Key Store for Danier. Further, the evidence showed that the Landlord never knew and was confounded by learning that Old Navy had a policy against pet stores being in the same plazas as any of its brand stores. There was no such policy in the Lease. Even more surprising to the Landlord was GAP’s acceptance of Canadian Tire, evidently without knowing that most if not all Canadian Tire stores do sell pet food and pet-related products.

[193] Despite GAP’s stated position regarding Ren’s or other pet or pet food and supply stores, being unsuitable co-tenants at shopping centres where it maintains retail outlets, the evidence showed that, contrary to that position, there is another power centre in the west end of Toronto where the opposite is true. That centre was the Stock Yards Village, where the anchor tenant was Target until it failed several years ago. What is important in this context, however, is that there is an Old Navy store operating in the same complex along with a PetSmart retail outlet, seemingly contradicting GAP’s position on suitable co-tenants. The two outlets are in different buildings of the same power centre at the Stock Yards Village, just as they are located in different buildings at the Centre.

[194] Regardless whether Old Navy had the right to insist on the payment of Alternative Rent unless a substitute Key Store meeting the requirements of the relevant provisions was chosen, that right would only have arisen where there was a Co-Tenancy Failure. I have found that there was no Co-Tenancy Failure triggered by the insolvency of Danier, because I have rejected GAP/Old Navy’s interpretation of how the Co-Tenancy Requirement operates.

[195] However, even if a technical Co-Tenancy Failure had arisen, issues arise whether the conduct of the parties was reasonable and in good faith. In interpreting a contract, the entire contract must be considered. Both parties in this case make allegations of unreasonable and bad faith conduct on the part of the other. Both claim that the other has ignored the good faith requirement imposed under s. 27.12 of the Lease.

[196] I have found that no Co-Tenancy Failure occurred in this case so the question may be moot, but I feel it is important to comment on the conduct of both parties. I do not criticize the parties for an absence of good faith, and from their subjective perspectives, there were reasonable grounds for each to believe that its interpretation of the relevant provisions was the correct one. Nevertheless, I have found that both acted somewhat unreasonably in the circumstances and cannot help but feel this entire situation and dispute could have been avoided with a bit more reasonable conduct from both of them.

[197] In my view, there are several examples of unreasonable conduct by GAP/Old Navy:

(i) Old Navy’s retroactive claim of reduced rent to the very low level contemplated in the Alternative Rent remedy was based on what was, at best, a very technical position, because Danier’s failure had no impact on Old Navy’s operations or sales, its ongoing viability as a retail store, or its profitability. As such, in my view it was not reasonable to demand the reduced Alternative Rent remedy in those circumstances;

(ii) It was unreasonable for GAP/Old Navy to retroactively reduce rent when there is no provision of the Lease that contemplates a retroactive rent reduction. Old Navy had no right to unilaterally cease paying rent and never provided a proper notice under the Lease;

(iii) I find that Old Navy acted unreasonably in stalling in response to the Landlord’s proposal of an alternative Key Store; and

(iv) Lastly, Old Navy’s position regarding Ren’s unsuitability is based on an unreasonable and unarticulated policy against pets, but is contradicted by other evidence such as the finding that Old Navy and PetSmart are located within the same complex at the Stock Yards Village.

[198] Nevertheless, I also find that Gap/Old Navy had what they considered to be a reasonable belief that their conduct was correct and in accordance with the terms of the Lease, even if those provisions made no business sense under the circumstances, or were objectively unreasonable. However, Old Navy took no steps to actually communicate with the Landlord about the situation, as one would reasonably have expected, given the language of s. 27.12 of the Lease, and therein lies the unreasonable conduct.

[199] However, I regard the Landlord’s aggressive approach with the almost immediate issuance of legal threats of default to be equally unreasonable. Its conduct may be only slightly less reprehensible once the alleged failure was claimed, but it hardly acted in the rational or reasonable manner that Mr. Cherniak said was his custom.

[200] The evidence shows that the Landlord’s response to GAP in these circumstances was to make an immediate demand for GAP to cease claiming the Alternative Rent remedy and comply with its rent obligations, absent which the Landlord would declare GAP/Old Navy to be in default and pursue proceedings to have them removed as a tenant. Neither of these supposedly sophisticated parties is blame-free in this sorry story.

(e) Is the Alternative Rent Remedy an Unenforceable Penalty Clause?

[201] The Landlord argues that the Co-Tenancy Requirements should be struck down as an unenforceable penalty clause if interpreted in the manner proposed by Old Navy. It relies upon the Grand Prospect decision, and the American case law discussed there, in support of this claim, on the basis that there is no resemblance between the amount of remedy, which Old Navy seeks under the Alternative Rent remedy, and any actual loss or damages that have been suffered by Old Navy. Indeed, no evidence has been provided of any loss having been suffered, including no evidence of either: (i) a reduction in Old Navy’s sales or profitability; or (ii) reduced foot traffic at the Centre.

[202] On this basis, the Grand Prospect decision might provide a basis for the Alternative Rent remedy to be construed to be an unenforceable penalty clause. However, in my view there is no need in this case to decide that question. I reach that conclusion for several reasons.

[203] First, while counsel did not provide additional case law on unenforceable penalty clauses beyond the Grand Prospect decision, it appears to me that the subsequent legal developments raise a question on whether Grand Prospect is authoritative, or should be confined to its own circumstances. More importantly, in a Canadian context, courts have cautioned against striking down damages clauses as being unenforceable penalty clauses.

[204] Rather, as the Ontario Court for Appeal has concluded in several cases, referenced further below[^48], so-called penalty clauses may simply breach principles of unconscionability, that is equitable rather than common law principles. The argument is that within the context of good-faith performance under the contract, it would be unconscionable to permit such a clause to be enforced, particularly when there is no time limit specified for the period during which it may operate, and no alternative remedies given to either party to bring the Lease to an end, say six months after such an event has occurred as would have been the case had the reciprocal termination right been included in the Lease as I have found was intended.

[205] I would adopt the discussion on this subject by in Redstone Enterprises Ltd. v. Simple Technology Inc.[^49], at paras. 15, 18, and, in part, at paras. 21-32. In essence, the questions to be asked in considering relief against penalties and forfeitures are: (i) whether the forfeited deposit was out of all proportion to the damages suffered; and (ii) whether it would be unconscionable for the seller to retain the deposit.[^50]

[206] In Redstone Enterprises Ltd., Lauwers J.A. found that a consideration of the relevant factors showed there was no unconscionability in that case. Instead, he found it to be a straightforward commercial real estate transaction undertaken in the expectation of profit by both sides, who were previously strangers. There was no inequality of bargaining power between them. There was no fiduciary relationship, and both parties were sophisticated.

[207] 869163 Ontario Ltd. v. Torrey Springs II Associates Ltd. Partnership[^51] is also instructive. The case explored the distinction between penalties and forfeitures. Sharpe J.A. notes, at paras. 31-32:

[C]ourts should, if at all possible, avoid classifying contractual clauses as penalties and, when faced with a choice between considering stipulated remedies as penalties or forfeitures, favour the latter.

[C]ourts should, whenever possible, favour analysis on the basis of equitable principles and unconscionability over the strict common law rule pertaining to penalty clauses.

[208] Accordingly, Sharpe J.A. pointed out that in the interests of furthering the policy of upholding freedom of contract, “the strict rule of the common law refusing to enforce penalty clauses should not be extended.” At para. 25 he expressed his agreement that “the finding of unconscionability must be an exceptional one, strongly compelled on the facts of the case.” Nevertheless, he went on to add that:

30 The list of the indicia of unconscionability is never closed, especially since they are context-specific. But the cases suggest several useful factors such as inequality of bargaining power, a substantially unfair bargain, the relative sophistication of the parties, the existence of bona fide negotiations, the nature of the relationship between the parties, the gravity of the breach, and the conduct of the parties.

[209] In this case, looked at from the front end of the Lease, as I am required to do, I cannot conclude that the possibility of the Alternative Rent remedy being activated causes it to be unenforceable, because the question of enforceability depends on the size and context of the penalty. Certainly, in a meltdown situation, if the percentage GLA tests were not being met and/ or there had been a failure of a number of the Key Stores, not just one occupying only 2% of the GLA of the Centre, then the reduction of traffic that would obviously and necessarily result would seem to entitle Gap/Old Navy to the agreed penalty. On the other hand, the quantum of rent that Old Navy claims to be entitled to pay here is out of proportion to any damage sustained by Old Navy, indeed there is no evidence of damage.

[210] Accordingly, I would not characterize the Alternative Rent remedy as an unenforceable penalty clause per se. While I accept that arguments can be made to permit Old Navy to pay only Alternative Rent in the particular circumstances of this case, for the duration of time it claims would be unconscionable, despite the sophistication of the parties. There is no need to reach a conclusion on that point. The finding that the failure of Danier Leather did not trigger a Co-Tenancy failure eliminates the need to answer the question.

(f) Should rectification be granted?

[211] It is plain from a comparison of the words between the Lease and the LOIs that there was a failure on the part of the parties, to include a key term of the LOIs: the ability of the Landlord to terminate the Lease after six months, in the event the Tenant invoked its Co-Tenancy “rights”.

[212] As Old Navy did not suffer any losses from Danier’s closure, it seems unlikely that it would have invoked its purported Co-Tenancy rights, if taking that action would have caused it to face the termination of the Lease. There is nothing in GAP/Old Navy’s submissions that takes issue with the characterization of the exclusion of the reciprocal termination right as anything other than a mutual mistake.

[213] In the decision of Alguire v. The Manufacturers Life Insurance Company (Manulife Financial)[^52], Hourigan J.A. set out the tests that must be met in order for an order of rectification to be made. The Landlord relies upon this language as supportive of its claim for rectification of the Lease in the circumstances of this case:

12. Rectification is an equitable doctrine that is available when it is clear that the parties’ written agreement does not accord with their actual agreement. In such circumstances, a court may rectify the agreement so that it gives effect to the parties’ true intentions: Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56, [2016] 2 S.C.R. 720 (S.C.C.), at para. 12.

13. In the present case, Manulife argued that rectification was necessary to correct a common mistake. Such a mistake arises where the parties, “subscribe to an instrument under a common mistake that it accurately records the terms of their antecedent agreement”: Fairmont, at para. 14. To obtain an order for rectification in these circumstances, Manulife was required to show, “that the parties had reached a prior agreement whose terms are definite and ascertainable; that the agreement was still effective when the instrument was executed; that the instrument fails to record accurately that prior agreement; and that, if rectified as proposed, the instrument would carry out the agreement”: Fairmont, at para. 14.

[214] In Alguire, the plaintiff argued that there was an insufficient evidentiary basis at trial to permit the trial judge to conclude that the parties had entered into an antecedent agreement. In other words, he claimed that it was not open to the trial judge on the evidentiary record to find that the agreement was definite and ascertainable, and as such, claimed that the remedy of rectification was not available. Interestingly, as part of his argument in that case, Mr. Alguire took the position that the trial judge had erred “in finding that Mr. Elias acted as his agent in securing the Policy.” Hourigan J.A. rejected that contention, concluding at para. 15 that:

15. I am unable to give effect to this submission. In my view, there was ample evidence to ground the trial judge’s conclusion that there was an antecedent agreement based on the Quote, which was for the issuance of a $5,000,000 key man insurance policy with no special provision for inflation protection.

[215] I see no material difference between the circumstances in Alguire that caused the Court to support the request for an order of rectification in that case, and the facts and circumstances that underlie the Landlord’s request for rectification here. In my view, the evidence shows that the parties here had reached a prior agreement to include the reciprocal Lease termination right, for both Old Navy and the Landlord. The interlineations in the final LOI with handwritten changes make that clear. The language reads:

If such condition is not satisfied for six months, the Landlord or the Tenant may terminate the lease at any time before such condition is satisfied upon 30 days’ notice to Landlord.

[216] The evidence established that all of the changes to the LOIs were handwritten by Seymour Schwartz, at Paracom, acting effectively as agent for both parties. The date on which Blair Hodgson signed the final LOI is unclear, but Lloyd Cherniak appears to have signed his name to that amended LOI on March 31, 2000. The dates of initialization of the handwritten interlineations and changes is uncertain, but there was no evidence presented to suggest that the final version of the LOIs reflecting this common intent of the parties was not known by both to contain this revision and intended by them to be included in the final Lease terms. Nevertheless, the provision did not find its way into the Lease.

[217] As such, I find that GAP/Old Navy and the Landlord had reached a prior agreement whose terms were definite and ascertainable, that the agreement was still effective when the Lease was executed, and that, if rectified as proposed, the Lease would carry out the agreement in that respect. Accordingly, I find that the Landlord is entitled to the rectification remedy it seeks.[^53]

Conclusion and Disposition

[218] On this application, GAP/Old Navy claimed that the provisions of the Lease, particularly the Co-Tenancy Requirements and the remedies for an operational failure, are straightforward and should be given effect. On the other hand, the Landlord raised numerous grounds to support its position that the language of the Lease as interpreted by Old Navy is not only unclear, but also unreasonable, not what was ever intended, and absurd. It says that GAP/Old Navy’s interpretation of the Lease and the Co-Tenancy Requirements is untenable.

[219] As these reasons show, I have rejected Old Navy’s interpretation and found that the provisions of the Lease relating to the Co-Tenancy Requirements are not straightforward or unambiguous. The language of s. 13.3(A) is unclear and capable of two different interpretations. The language used in the Lease differs from the description of the Co-Tenancy Provisions that the parties agreed to as set out in the LOIs. Both parties appeared to have different understandings of what the Lease said from the moment it was signed.

[220] Stated summarily, I have found that there is no clarity on what the final common intention of the parties was meant to be, assuming they had a common intention. Moreover, the evidence suggests they did not share a common understanding or intention.

[221] As a result, I have accepted the Landlord’s interpretation of the relevant provisions as being the most objectively reasonable. Unlike GAP/Old Navy’s evidence which was speculative and not supported by testimony of anyone who was involved in the negotiation of the Lease, the evidence of the Landlord was provided by one of the main individuals involved in the negotiation of the Lease at that time, and who still has day-to-day responsibility for the operation of the Centre.

[222] I have found that it was not commercially reasonable for GAP/Old Navy to expect to be able to occupy the premises for the balance of its existing Lease term, effectively without paying rent, merely because of a technical event that had no evident impact on its business operations.

[223] Old Navy’s rent and its share of the common area maintenance costs and taxes totaled $56,190.75 plus HST per month. However, by invoking the Alternative Rent remedy in response to the alleged Co-Tenancy failure that resulted from Danier’s insolvency, Old Navy was able to reduce its rent by over 60% to only $9,578.84 per month plus HST, an amount that covered only 57% of its share of common area maintenance costs, but more importantly resulted in the Landlord receiving no rent for the actual use of the premises at all, for a potentially indefinite period.

[224] I found that this was not a commercially reasonable position. It flows from an interpretation that, in my view, violates the foundational principles of business efficacy and leads to an absurd result. Moreover, while the Landlord may be faulted for not catching the omission at the time the Lease was signed, Old Navy’s failure to include the reciprocal termination right that had been agreed would be included in the formal Lease document left the Landlord with no mechanism to avoid the problem from continuing indefinitely. This is a further reason why I have rejected Old Navy’s claim that any co-tenancy failure took place in the circumstances of this case. The ambiguity of the co-tenancy language cannot support Old Navy’s highly technical, but in my view, inaccurate interpretation of that provision.

[225] Old Navy commenced this matter as an application for declaratory relief relative to the interpretation of the Lease and for a refund of rents that it claims to have overpaid to the Landlord. That application for declaratory relief and a refund of alleged overpayments of rent is dismissed. I also dismiss the Landlord’s claim that the Co-Tenancy Requirements of the Lease are unenforceable as an impermissible penalty clause. There is no need to answer that question in light of my conclusion that no co-tenancy failure took place here under this Lease, reasonably and properly interpreted.

[226] However, the Landlord’s request for equitable relief by way of rectification to amend the Lease to include the reciprocal termination right as intended by the parties as reflected in the LOIs is granted.

[227] Based on the result, it would seem likely that costs would presumptively go to the Landlord, but I have no knowledge if there were offers or counteroffers that might affect the costs result. I would be grateful to be advised of those matters by both counsel in writing within two weeks of the release of this decision.

[228] If the parties are unable to address and resolve issues of costs between themselves, they may contact me through the Trial Coordinator to schedule a date and time when the matter may be spoken to in order to establish a schedule for the preparation and exchange of costs submissions, if necessary.

Michael G. Quigley J.

Released: June 21, 2019

COURT FILE NO.: CV-17-00571262-0000

DATE: 20190621

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

OLD NAVY (CANADA) INC.

• and –

THE EGLINTON TOWN CENTRE INC.

REASONS FOR DECISION

Michael G. Quigley J.

Released: June 21, 2019

[^1]: There were others involved in the negotiations as well, including John Temesvary, a lawyer of 35 years standing who was a partner at Fogler Rubinoff in the Business Law Department at the time. Mr. Temesvary was probably involved in the negotiations of the LOIs and he executed the Lease on behalf of the Landlord, together with Joseph Lebovic, as the sole officers and directors of the Landlord at the time.

[^2]: Since its bankruptcy, Danier has re-opened under new ownership. It has deleted the word “Leather” from its branding and now simply sells apparel.

[^3]: A common provision in a commercial retail lease is a percentage (or participating) rent clause under which a tenant pays a rent based on a fraction of gross sales on gross revenues, in addition to base (or minimum) rent, and additional rent for taxes, maintenance, insurance and other charges.

[^4]: I note as an aside, that there was at least one Danier Leather Store, located in downtown Toronto in the Toronto Dominion Centre, which continued to operate after the insolvency of the other stores. It was evidently owned by one of the former principals of Danier Leather. It continues to sell leather goods to this day. In addition, as noted, under new ownership, Danier has now resurrected itself, but selling a broader range of apparel.

[^5]: Creston Moly Corp. v. Sattva Capital Corp., 2014 SCC 53, at para. 57.

[^6]: Gilchrist v. Western Star Trucks Inc., 2000 BCCA 70, [2000] B.C.J. No. 164 (B.C. C.A.) at para. 17.

[^7]: Scanlon v. Castlepoint Development Corp., [1992] O.R. No. 2692, 11 O.R. (3d) (C.A.), 744 at p. 770, leave to appeal to S.C.C. refused [1993] S.C.C.A. No. 62 (S.C.C.).

[^8]: G. Hall, Canadian Contractual Interpretation Law, 3rd ed. (Markham: Lexis Nexis, 2016) at pp. 24-26.

[^9]: Nickel Developments Ltd. v. Canada Safeway Ltd., 2001 MBCA 79 at para. 34.

[^10]: Schuler A.G. v. Wickman Machine Tools Ltd., [1974] A.C. 235 at 251 (H.L.)

[^11]: Kentucky Fried Chicken Canada v. Scotts Food Services Inc., 1998 CanLII 4427 (ON CA), [1998] O,J. No. 4368 (C.A.), at para. 27. See Hall, supra note 8 at para. 2.5.3.

[^12]: Ibid at para. 27. Buildevco Ltd. v. Monarch Construction Ltd., 1990 CanLII 6823 (ON SC), 73 O.R. (2d) 627 at 634 (H.C.)

[^13]: City of Toronto v. W.H. Hotel Ltd., [1996] S.C.R. 434 at p. 548. See Hall, supra note 8 at para. 2.5.5.

[^14]: Park Royal Centre Holdings Ltd. v. GAP (Canada) Inc., 2017 BCSC 1257.

[^15]: Athwal v. Black Top Cabs Ltd., 2012 BCCA 107.

[^16]: Wallis v. Smith, (1882), 21 Ch. D. 243 (C.A.), at 257

[^17]: 1525292 Ontario Ltd. v. Canadian Tire Real Estate Ltd., 2004 CanLII 15587 (ON SC), citing Holt v. Thunder Bay (City) 2003 CanLII 38649 (ON CA), 65 O.R. (3d) 257 (C.A)

[^18]: TDL Group Ltd. v. P.J.P. Developments Ltd, [1997] O.J. No. 5357 (C.J.)

[^19]: Consolidated-Bathurst v. Mutual Boiler, 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888, at pp. 899-900.

[^20]: Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 SCR 494.

[^21]: Mohamed v. Information Systems Architects Inc., 2018 ONCA 428.

[^22]: Churchill Falls (Labrador) Corp. v. Hydro‐Québec, 2018 SCC 46.

[^23]: See H. Haber et al., Shopping Centre Leases, below, at p. 353. The authors suggest that where the landlord has invested significant capital in the tenancy, as the Landlord did in this case, in the form of construction work or allowance/inducement funding, it will seek to tighten the co­tenancy conditions as much as possible as it does not wish to risk the loss of both the lease and its investment.

[^24]: 9202-9131 Québec Inc. c. 6943870 Canada Inc., 2015 QCCS 1209 at paras. 37-40.

[^25]: Edited by H.M. Haber, Q.C., 2nd ed. (Aurora: Canada Law Book, 2008).

[^26]: Park Royal Shopping Centre Holdings Ltd. v. GAP (Canada) Inc., 2017 BCSC 1257.

[^27]: H.M. Haber, supra note 25.

[^28]: But see Sharpe J.A., in 869163 Ontario Ltd. v. Torrey Springs II Associates Ltd. Partnership, 2005 CanLII 23216 (ON CA), 76 O.R. (3d) 362 (C.A) at paras. 19-34, discussed below, that unconscionability is the preferred analytical route in Ontario.

[^29]: Grand Prospect Partners, L.P. v. Ross Dress for Less, Inc., 232 Cal. App. 4th 1332 – Cal: Court of Appeal, 5th Appellate Dist. 2015.

[^30]: Ibid. at p. 1358.

[^31]: 869163 Ontario Ltd. v. Torrey Springs II Associates Ltd. Partnership, 2005 CanLII 23216 (ON CA), 76 O.R. (3d) 362 (C.A) per Sharpe J.A. at paras. 19-34; Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282, 137 O.R. (3d), at paras. 21-26 and 30-32.

[^32]: Ross Dress for Less, Inc. v. VIWY, L.P., et al., United States District Court, Eastern District of Pennsylvania, Civil Action No. 12-131, dated September 19, 2017.

[^33]: T. Eaton Co., Re, (1997), 1997 CanLII 12405 (ON SC), 46 CBR (3d) 293 (Ont. Gen. Div)

[^34]: Excerpts from Cross Examination of Ryan O’Connor held November 15, 2017, read in as part of the Landlord’s case: Q. 144-145, Q. 163-175.

[^35]: Q. 239-244

[^36]: Ironically, I note that in the Grand Prospect Partners, L.P. v. Ross Dress for Less, Inc. case, note 29 above, the Mervyns Department Store that failed and caused that litigation was an anchor tenant, but like Canadian Tire in this case, its store was not actually part of the shopping centre there, but was on land separately owned by Mervyn’s. Nevertheless, the Landlord chose to permit a co-tenancy provision based upon its occupancy. Thus, since that land was outside of the control of the Landlord, that severely curtailed the landlords ability to cure the default within 12 months, which would have required not only the purchase of the Mervyn’s property, but also new tenants to be located who would have been acceptable to Ross. That was an important factor in the decision reached.

[^37]: McKee v. Montemarano, 2008 CanLII 36163 (Ont. S.C.).

[^38]: Consolidated Bathurst Export Ltd. v. Mutual Boiler & Machine Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888, per Estey J. for the majority.

[^39]: Ibid at para. 25.

[^40]: Reliance Petroleum Limited v. Canadian General Insurance Company, [1956] S.C.R. at p. 951. See also Lindley L.J. in Cornish v. Accident Insurance Company (1889), 23 Q.B. 453 (C.A.), at p. 456.

[^41]: I was somewhat disturbed to learn from the evidence to learn that GAP/Old Navy actually used surveillance cameras to surreptitiously record and keep track of not only all foot traffic into and out of its Old Navy outlet, provided the potential customers stayed in the store for a de minimis period of time, but also that reach of the surveillance camera also extended to capture traffic outside of the store, recording anybody that walked or drove within a set distance of the front of the store. It maintained statistics of that traffic at head office in San Francisco, but I note there was no evidence produced that showed any decline in traffic attendant on the Danier Leather Outlet failure.

[^42]: 1525292 Ontario Ltd. v. Canadian Tire Real Estate Ltd. 2004 CanLII 15587 (Ont. S.C.).

[^43]: Supra note 16 at 257.

[^44]: Holt v. Thunder Bay (City) 2003 CanLII 38649 (ON CA), 65 O.R. (3d) 257 (C.A).

[^45]: TDL Group Ltd. v. P.J.P. Developments Ltd., [1997] O.J. No. 5357.

[^46]: Montreal Trust Co. of Canada v. Birmingham Lodge Ltd., 1995 CanLII 438 (ON CA), 125 D.L.R. (4th) 193 (Ont. C.A.).

[^47]: See also Arthur Andersen Inc. v. Toronto Dominion Bank (1994), 1994 CanLII 729 (ON CA), 17 O.R. (3d) 363, at p. 372 (C.A.).

[^48]: 869163 Ontario Ltd. v. Torrey Springs II Associates Ltd. Partnership, 2005 CanLII 23216 (ON CA), 76 O.R. (3d) 362 (C.A.) at paras. 19-34; Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282, 137 O.R. (3d), at paras. 21-26 and 30-32.

[^49]: Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282, 137 O.R. (3d) 374.

[^50]: See also Varajao v. Azish, 2015 ONCA 218 at para. 11.

[^51]: 869163 Ontario Ltd. v. Torrey Springs II Associates Ltd. Partnership 2005), 2005 CanLII 23216 (ON CA), 76 O.R. (3d) 362 (C.A.), leave to appeal refused, [2005] S.C.C.A. No. 420 (S.C.C.).

[^52]: Alguire v. The Manufacturers Life Insurance Company (Manulife Financial), 2018 ONCA 202, 140 O.R. (3d) 1, at paras. 12-13.

[^53]: I note that GAP/Old Navy appeared to resist the Landlord’s efforts to secure this remedy, in part on the basis of Limitations Act considerations. However, in Alguire, Hourigan J.A. refused to give effect to this ground of appeal. He concluded that the rectification relief sought by Manulife was not barred by the Limitations Act because it was an independent claim. In my view, the same considerations apply here. See Alguire, above, at paras 25-26.