Court File and Parties

Court File No.: CV-17-579044 Date: 2019-07-09 Ontario Superior Court of Justice

Between: Markham Village Shoppes Limited, Plaintiff And: Gino’s Pizza Ltd., Gino’s Pizza Inc., Baljit Gangar, Vick Darubra, Martin Bernard, Redwater Capital Realty Inc. and Haroon Amadi, Defendants

Counsel: Mitchell Wine, counsel for the Plaintiff John G. Morrissey, counsel for the Defendants

Heard: April 22, 23, 24 and 25, 2019

Before: G. Dow, J.

Reasons for Decision

[1] This matter was originally heard as a summary judgment motion on January 23, 2018 with reasons released the following day by Justice Morgan. He determined the plaintiff, Markham Village Shoppes Limited (“Markham Village”) was entitled to damages in the amount of $85,697.96. He subsequently fixed costs on March 9, 2018 in the amount of $32,000.00 inclusive of fees, HST and disbursements.

[2] The action involves the defendant, Gino’s Pizza repudiating a 10 year lease it signed with the plaintiff in March, 2017 effective June 1, 2017 until May 31, 2027. The space had remained vacant as of the appearance before Justice Morgan and damages calculated based on evidence it would take an average of 22 months to re-lease the premises along with other negotiated expenses to be incurred.

[3] Gino’s Pizza appealed the quantum of damages and sought to admit new evidence on the basis the premises had been leased effective April 1, 2018 for six years or about two months after Justice Morgan’s decision.

[4] The lease was for six years or until March 31, 2024 with an option to renew for an additional five years. The Court of Appeal admitted the evidence, allowed the appeal and referred the matter back to this court for an assessment of damages.

[5] With the benefit of hindsight, the parties reconsidered their position and evidence, retaining experts to evaluate the actual losses. Before me, the plaintiff was claiming in excess of $200,000.00 and the defendants submitted through its expert a range of between $27,874.94 to $69,162.58.

Background

[6] The premises in question is 1262 square feet of ground floor retail space on the west side of Main Street North in Markham, a few hundred meters north of Highway 7. The unit is part of a 3 or 4 story complex containing approximately 145 condominium units above ground level. The other ground floor units include other take-out food establishments along with travel, real estate and dental offices. I heard evidence the building was completed in 2014. The unit in question, Unit 5, had previously been rented to a submarine sandwich franchise.

[7] There was evidence from four witnesses. The first, Robert Kansun is the Vice-President and Project Manager employed by the plaintiff. He provided background information about the development and the parameters of the leases entered into with Gino’s Pizza and the replacement tenant, Slice of Fire (Exhibits 1 and 2). While both businesses are principally take-out pizza operations with limited seating on site, Gino’s Pizza is a franchise operation with about 90 outlets.

[8] This evidence came from Dharmrie Wilfred, the franchise and leasing manager of Gino’s Pizza for the past three years. This compares to Slice of Fire being a single outlet business known as a “mom and pop” operation that is perceived as less stable by the landlord, less financially secure and thus a less desirable tenant. Mr. Kansun explained the various financial aspects of commercial leasing with a view to identifying the categories of financial losses and mitigation which occurred.

[9] The first was a need for either take-out pizza business to purchase, install and operate with an ecologizer. This is a piece of equipment that scrubs the air odors from the ovens used in cooking before it is exhausted outside the premises. It was believed to cost about $35,000.00 plus installation expenses. A term of each lease (Clause 9.03(B)) required the tenant to buy and install this device, the nature and type to be approved by the landlord, with ownership of the device reverting to the landlord. Its lifespan was not fully addressed. It formed a basis for granting the tenant one year of free base rent.

[10] Second, the base rent that was negotiated in the Gino Pizza lease was $19.50 per square foot or $24,609.00 per year for the first five years (June 1, 2017 – May 31, 2022) with waiver of these payments for the first year and $22.00 per square foot or $27,764.00 per year for the second five years (June 1, 2022 – May 31, 2027). This compares to the Slice of Fire lease base rent at $20.00 per square foot or $25,240.00 commencing April 1, 2019. Base rent for the first year, commencing April 1, 2018 was waived. The next two years is payable at $22.00 per square foot or $27,764.00 (April 1, 2020 – March 31, 2022) and $23.00 per square foot or $29,026.00 for the final two years (April 1, 2022 – March 31, 2024). The option to renew (Section 2.05) for an additional five years (actually available for two terms, the second of which is not of concern in this trial) requires six months’ notice, to be completed at least three months before the renewal date and to be fair market value but not less than the $23.00 per square foot being paid in the last year of the lease.

[11] Third, additional rent known as TMI or “Taxes, Maintenance and Insurance” actually covers all of the landlord’s expenses in operating and maintaining the property. In this situation property taxes represent more than 50% while insurance is less than 3% of the total. In the Gino’s Pizza lease, it was agreed that it would not exceed $12.00 per square foot or $15,144.00 for the “first Lease Year” (Section 4.01). The same wording or inducement was incorporated in the Slice of Fire lease. The actual additional rent, calculated on a calendar year basis for 2018 was $12.91 per square foot.

[12] A deposit was paid to the landlord that represented the first and last month’s base rent. That is, set out in Item 11 of the Lease Terms, Gino’s Pizza paid $7,486.80 and Slice of Fire paid $5,110.04 which the landlord acknowledged receipt of in the Lease Document. This is inclusive of HST.

[13] As part of evaluating the difference between the ten year lease signed by Gino’s Pizza and the six year lease with a five year renewal option signed by Slice of Fire, Markham Village sought, through the evidence of its expert, David Black, the cost of putting the premises back into a leasable condition or “shell condition”. If Slice of Fire departs before May 31, 2027, being the conclusion of the Gino’s Pizza lease, this is a possible expense. This claim is predicated on the belief by the landlord that removing all flooring, walls and other material before marketing the space makes it more attractive to a wider range of potential tenants. The landlord’s position is incurring this expense will result in securing a new tenant earlier than if this work and expense is not incurred and the space is immediately marketed in “as is” condition which could offer substantial savings to a new take-out pizza business. Mr. Black, with his many years of experience in the Markham area as a commercial real estate broker, as a full service property manager and as an owner of a construction company that builds commercial space, estimated the cost to be $40.00 per square foot or $50,480.00. This recognized the potential need for qualified trades to be involved with regard to plumbing and electrical as well as permits to be obtained. It compared to the evidence of the expert of Gino’s Pizza, Jay Wong, who approached the issue from his background as a real estate appraiser. He opined a foreperson and two labourers could accomplish the task in three to five days at an expense of $9,240.00 and $13,400.00. Both experts ignored clause 9.02(A) (which is buttressed by clause 16.23) that each lease provided for the tenant to return the space to the landlord having removed any alterations made “at Tenant’s sole expense”. Mr. Black testified the circumstances of a tenant’s departure usually involves it not being profitable. Thus, the work is not done by the tenant and seeking recovery of this expense where not performed by the tenant is likely unrecoverable.

[14] An issue also arose about the rate of increase of additional rent over the next eight years or until May 31, 2027. Mr. Black opined these costs are increasing at rates significantly higher the inflation for a variety of reasons. The first was with regard to the property taxes (which are based on the assessed value of the property multiplied by the mill rate. He estimated same to be in the 4.5 – 5% range. This was disputed by Mr. Wong who utilized data from outside Markham to support increases at 2% per year. In addition, Mr. Black relied on higher than inflation rates of increases for expenses such as snowplowing and landscaping given lessening competition in these fields and the suppliers incurring higher costs, particularly insurance premiums.

[15] Fortunately, this is not an issue as Slice of Fire is bound by its lease to pay the additional rent calculated in the same way as Gino’s Pizza contracted to pay until March 31, 2024.

[16] An issue also arose about whether HST, payable by the tenant to the landlord ought to be added to the damages. I raised my decision will be an award of damages. No HST on that award will be payable. HST is remitted on the basis of the difference between HST collected and HST paid. On that basis, I conclude it will not be included in the damages assessment.

[17] Plaintiff’s counsel provided a variety of spread sheets, some of which were marked as exhibits. They made calculations or assumptions of what Gino’s Pizza would have paid and what Slice of Fire has paid and is obligated to pay. The key difference was with regard to what will occur after the Slice of Fire lease concludes March 31, 2024 and until the Gino’s Pizza lease would have concluded May 31, 2027. This is a period of 38 months. In this regard, Mr. Black gave evidence about what a competitive market existed in this area and that rates for base rent could well be lower than what Gino’s Pizza agreed to pay during the future, being $22.00 per square foot needed to be offered to secure a new tenant.

[18] To the contrary, Markham Village has a tenant in the space now with a lease to be paid at $23.00 per square foot in 2023 – 2024. I heard no evidence that the existing tenant was not making its rent payments. Given such evidence was in the possession of Markham Village, I find it was not a concern or a negative inference as of the time of trial. I also heard evidence from David Black that base rents for commercial space in this area had not risen in the last 10 years. There is significant competition for commercial space a short distant south on Highway 7 where there is greater traffic flow and more parking. David Black’s opinion was the space would lease at $19.50 per square foot in 2024.

[19] It would be more difficult to rent with the existing tenant still on site according to David Black. This compared to Jay Wong’s evidence on this issue that, from his appraising perspective, the space was likely to rent at $23.00 per square foot (if necessary) in 2024 due to demand and escalating prices in the market place.

Analysis

[20] The parties agreed with regard to past losses, I should calculate what Markham Village bargained for with Gino’s Pizza, was not paid, and deduct what Slice of Fire has paid with certain exceptions. That is, what was the dollar value of the Gino’s Pizza lease less the mitigation which has occurred or should have occurred on the part of the landlord. This is principally the amounts agreed upon and paid by Slice of Fire.

[21] In this regard, the first item is the value of the ecologizer which was awarded in the first trial. However, it has since been obtained and installed by Slice of Fire on the same basis and terms as agreed to by Gino’s Pizza. Thus, I conclude there is no loss suffered by Markham Village and no amount to be awarded.

[22] Similarly, the payment of additional rent by Slice of Fire commencing in April, 2018 at the same fixed amount of $12.00 per square foot for the “first Lease Year” (Section 4.01) and thereafter, whatever expense incurred results in no net loss.

[23] I also am not prepared to make any award for the cost of returning the premises to a shell condition at the end of the lease. While this is a contingent expense that may be incurred by the landlord in a practical sense, the landlord has insulated itself from this expense in the lease by the terms requiring the tenant to incur that expense. It is a term and expense that the landlord could commence an action for in this Court and recover judgment. It strikes me as inconsistent for the landlord to seek enforcement of other terms of the lease but not this one given the practicalities of the situation.

[24] In response to questions by me during closing submissions, counsel agreed I should be provided with a calculation which was tendered by the plaintiff’s counsel in a letter dated April 29, 2019. The difference between the leases with regard to base and additional rent to May 31, 2019 was calculated to be $33,309.45 and I award this amount. For ease of calculations and with my apologies for not completing these reasons by May 31, 2019, I shall consider that date to be “to the present”.

[25] The next time frame to consider is beyond the present or until the end of Gino’s Pizza lease being May 31, 2027. The parties agreed the current statement of the law was set out in Morguard Corp. v. 2063881 Ontario Inc., 2013 ONSC 7213 as the “present value of the unpaid future rent for the unexpired period of the lease less the actual rental value of the premises for that period plus reasonably foreseeable consequential losses” (at paragraph 34).

[26] In my view, this raises two distinct time frames to consider. The first is from June 1, 2019 to the potential end of the Slice of Fire lease, being March 31, 2024. The second is from April 1, 2024 until May 31, 2027. The first term is the next 58 months to March 31, 2024 and the second term is the 38 months beyond April 1, 2024.

[27] With Slice of Fire a tenant and with the lease that provides for payments at base rent greater than Gino’s Pizza was obligated to pay and the same amount for additional rent or TMI, the plaintiff is poised to receive a greater amount or a windfall which the letter from plaintiff’s counsel calculated to be $9,873.54. This amount can be discounted to a present value figure (at 6%) to be $8,631.85.

[28] This is a contingent amount. It is based on what turns out to be a credit to be given to Gino’s Pizza while Slice of Fire is meeting its monthly rent obligation. As stated, there was no evidence that Slice of Fire had not met its rent obligations since that lease was entered into over one year ago. However, the rental obligation has significantly changed as of April, 2019 following expiration of the free year of base rent. In addition, there is evidence that Slice of Fire, as a mom and pop operation, is less financially secure than a nationwide chain such as Gino’s Pizza. As a result, I find the credit should be further discounted for contingencies and Gino’s Pizza only receive 75% of the net present value, that is $6,473.81.

[29] It should also be noted that the rent free period granted to Gino’s Pizza should be repaid (1,262 square feet at $19.50 per square foot), that is $24,609.00. Markham Village also sought repayment of the three month fixturing or $6,152.25. I agree with the position of Gino’s Pizza that the three month fixturing amount is not required to be repaid. I do so as Markham Village negotiated it would not receive any base or additional rent during this initial period of time.

[30] The loss for the 38 months of exposure after March 31, 2024 is also a contingent loss. Mr. Black acknowledged that if Slice of Fire renews in 2024 at anything equal to or greater than $22.00 per square foot, any award by me would be a windfall for Markham Village. To the contrary, there is an exposure which I would calculate to be as high as $22.00 per square foot for 38 months on this 1,262 square feet which can be estimated and I calculate it to be $87,919.33. In addition, additional rent which I have taken from the chart produced by the plaintiff and marked as Exhibit 14 could be $2,418.33 per month and escalating on an annual basis over the next 38 months to be, by my calculation, $91,896.54. The total of these two figures is $179,815.87. Because the additional rent is a contingent loss, I also conclude that it is not necessary to determine whether it will rise at 4.5-5% per year or the lower 2% per year as opined by the experts for each party.

[31] Neither scenario, in my view, is credible or a just determination of this issue. I would conclude that it is more likely than not that any loss suffered would be closer to the zero figure than the $179,815.87 because:

1. the space has an existing tenant with an ongoing business and no evidence it is not making its rental payments as they fall due or that this will not continue;
2. if Slice of Fire departs before Gino’s Pizza termination date of May 31, 2027, Markham Village will have not only have motivation to re-rent the premises at what David Black referred to as net effective rent (which I understood to be the landlord’s calculation of what it is earning or expects to earn on the property over a stated time frame cognizant of all of its expenses) but also the legal duty to mitigate;
3. prior evidence of it taking an average of 22 months to re-rent the space was found to be inaccurate when this actual space in this actual scenario took just 10 months to re-rent albeit for a shorter term but at a higher eventual base rent;
4. the space appears to be relatively new and in a row of commercial premises which includes not only a fast food operations but other professional types of businesses which gives greater marketing potential to secure a new tenant sooner rather than later; and
5. any award of a future contingent loss is subject to a present value discount which was proposed at 6%.

[32] After long and careful thought, I am prepared to award 25% of $179,815.87 or $44,953.97. This takes into account all losses between March 31, 2024 and May 31, 2027.

[33] Markham Village is also entitled to recover the real estate commission paid for the Gino’s Pizza lease which was acknowledged to be $11,458.94.

[34] I total Markham Village’s damages to be ($33,309.45 - $6,473.81 + $44,953.97 + $11,458.94 =) $83,248.55. The deposit currently held by Century 21 (plus any accrued interest) shall be paid out to Markham Village. As suggested in the letter from counsel dated April 29, 2019, the full amount of $7,486.70 shall be paid to Markham Village with $6,625.49 (being the deposit net of HST) subtracted from the amount to be paid by Gino’s Pizza. Thus, the amount to be recovered by Markham Village will be ($83,248.55 - $6,625.49 =) $76,623.06.

[35] Regarding pre-judgment interest, this would only apply to past losses or the $33,309.45 plus the rent free amount to be repaid of $24,609.00 for a total of $57,918.45. The applicable rate under the Courts of Justice Act, R.S.O. 1990 c. C. 43 at Section 127 for actions commenced in the third quarter of 2017 is .8 of a percent per annum. The loss was a continuing claim and for the ease of calculation I would calculate same from June 1, 2017 to July 9, 2019 on this entire amount (which is $965.31) and reduce it by 50% to $487.77. This amount shall be reduced by any accrued interest on the deposit held by Century 21 which is being paid to Markham Village.

Costs

[36] In this regard, I note the endorsement of the Court of Appeal dated September 26, 2018 reserved the costs of the summary judgment motion to the judge hearing the damages trial. If the parties cannot agree within the next 30 days on that issue and the costs of this trial, they shall submit their position in writing to me, not longer than five double spaced pages of a readable font plus any attached Offers to Settle or draft Bills of Cost on or before August 30, 2019.

Mr. Justice G. Dow Released: July 9, 2019