Court File and Parties

COURT FILE NO.: CV-19-624021 DATE: 2020-05-21

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

547131 Ontario Limited Applicant – and – MPI Torgan Properties Inc. Respondent

COUNSEL: Shaun Laubman, Vlad A. Calina, for the Applicant A. Kauffman, D. Chochla, for the Respondent

HEARD: February 19, 2020

Carole J. Brown J.

Reasons for Decision

Background of the Arbitration

[1] The applicant, 547131 Ontario Limited (“547”), brings this application for leave to appeal from the arbitral award of Larry Banack dated June 21, 2019. The application arises in the context of a long-term 90 year commercial lease (“Ground Lease”) of property municipally known as 800 Steeles Ave. W., Vaughan, Ontario, which is leased by the respondent, MPI Torgan Properties Inc. (“MPI”), and used as an office and retail complex. The Ground Lease was executed on April 15, 1987, and is broken into three 30-year periods with the rent payable by the lessee, to be reset at the beginning of each period.

[2] As at April 2017, the parties were unable to agree on the meaning of “Appraised Value” for the purpose of determining the “minimum annual rent” payable for the “first subsequent period”, namely for the next 30 years of the Ground Lease. The applicant took the position that the use of the lands as contemplated in the definition of “Appraised Value” should be as a mixed-use residential/commercial development. The respondent’s position was that the use contemplated in the definition should be a mixed-use office/commercial shopping centre, which use complied with the zoning bylaw and the actual use of the lands, both on the effective date and as at the date of the arbitration.

[3] The provision in question in the Ground Lease is as follows:

“Appraised Value” means the appraised value of the lands as though unencumbered by this or any other lease, and on the basis of its use for the maximum permissible uses permitted by bylaws or any other government regulations for the kind of uses for which the lands are being used at the time for which the appraisal is being made and without taking into account the value of the buildings.

[4] Arbitration provisions are included in the Ground Lease at Article XXIV, under the heading “Arbitration” with respect to disputes where arbitration is permitted or required under the Lease. These arbitration provisions set forth the rules governing arbitration, the means for selection of an arbitrator or arbitrators, the compensation of the arbitrator, which is to be shared equally, and the Award of the arbitrator which is to be rendered in writing.

[5] For the purposes of this application for leave to appeal, the following two provisions are relevant: Articles 4.01(a) and Article 24(d).

[6] Article 4.01(a) of the Lease provides as follows:

Any dispute between the Lessor and the Lessee as to the calculation or determination of Minimum Annual Rent or any of the ingredients thereof, including, without limitation, Appraisal Value or Interest Factor shall be determined by arbitration.

[7] Article 24(d) of the Lease, which deals with the arbitration process, provides as follows:

The decision and reasons therefor of the single arbitrator, or the decision and reasons therefor of the arbitrators, or a majority of them, shall be drawn up in writing and signed by the single arbitrator or by the arbitrators, or a majority of them, and shall be final and binding upon the parties hereto as to any question or questions so submitted to the arbitration and the parties shall be bound by such decision and perform the terms and conditions thereof.

[8] The agreement of the parties to arbitrate emanates from the Ground Lease. By letter of April 10, 2017 from Mr. Kaufman, counsel for the respondent, to counsel for the applicant, counsel for the respondent set forth its interpretation of the meaning of “Appraised Value” and indicated that if this was not the interpretation of the applicants, the parties should proceed to arbitration pursuant to Article 4.01 of the Lease. He further set forth the issues which the respondent lessee wished to have arbitrated and suggested the arbitration be bifurcated such that the first two of the three questions proposed would be determined first. He also proposed one, rather than three arbitrators and suggested that they mutually select an arbitrator. Mr. Choi, former counsel for the applicant agreed that the parties would proceed to arbitration, agreed upon selection of the arbitrator, the scope of the arbitration and bifurcation of the issues. Ultimately, a letter was forwarded by Mr. Kaufman to Mr. Banack, after having been reviewed and approved by Mr. Choi, counsel for the lessor applicant, which set forth the dispute, made reference to the arbitration procedure in the Lease and forwarded to Mr. Banack the Lease for his reference. The correspondence set forth the questions to be submitted to arbitration and indicated that both parties had agreed to bifurcate the arbitration. The correspondence indicated that they wished to have him act as arbitrator if he had no conflicts.

[9] Mr. Banack responded that he would be able to arbitrate the issue and attached a copy of his standard proposed arbitration terms for their review. Said terms were subsequently populated with the issues to be determined and signed by the parties.

[10] Prior to commencement of the arbitration, Mr. Choi advised Mr. Kaufman that he intended to submit expert evidence at the hearing dealing with the interpretation of Appraised Value. Counsel agreed that, if MPI intended to object to the admissibility of such expert reports, it would be efficient to determine admissibility by way of an interlocutory or a procedural motion rather than at the arbitration. In this way, Mr. Kaufman’s clients would save the cost of preparing responding reports, which may be unnecessary if the initial reports were found inadmissible. As a result, Mr. Banack made a Procedural Order on consent with respect to the hearing on the admissibility of the expert reports. The hearing was held December 17, 2018 and the ruling, termed by him as an Award, was rendered December 20, 2018. The proposed expert reports were found to be inadmissible in respect of the first phase of the arbitration dealing with the meaning of “Appraised Value” as set out in the Lease.

The Arbitration Award

[11] In the arbitration Award, rendered June 21, 2019, the arbitrator carefully reviewed and analysed the provision in question, the provisions of the Lease, the factual matrix surrounding the Lease and the caselaw relied upon by both parties and concluded that in determining the appraised value of the lands in question, the maximum permissible uses are only those permitted by the in-force bylaw number I-88, the zoning bylaw in effect as at June 1, 2017, and for the kinds of commercial uses for which the lands are being used as at June 1, 2017. The zoning bylaw does not permit residential use although the City of Vaughan’s Official Plan as “mid rise mixed use would permit a range of retail, commercial, institutional and residential uses in a mixed-use context with a maximum permitted building height of 12 stories and a maximum density of 3.5 FSI. The arbitrator held that the maximum permissible use of the lands under the definition was as a commercial development and not as a residential/commercial condominium development, as urged by the applicant.

[12] It is the position of the applicant, as it was before the arbitrator, that the Appraisal Value provision of the Lease and particularly the phrase, “as though unencumbered by this lease or any other lease” and “without taking into account the value of the buildings” indicates that Appraised Value is to be interpreted using the “highest and best use” analysis, such that the land is valued having regard to the potential economic productivity of the various use options without consideration of how the land is currently being used. In this case, it is the position of the applicant that the Appraised Value of the property should be as if it is being used as a mixed-use residential/commercial condominium development.

[13] It is further the position of the applicant that the arbitrator made several extricable errors of law and that said errors can be appealed pursuant to the Arbitration Act, 1991, section 45(1). It is the position of the applicant that the provisions of the Lease regarding arbitration are not effective, as the parties entered into a new arbitration agreement with the arbitrator, which is the governing document.

[14] It is the position of the respondent that the arbitrator made no errors in his Award. The respondent submits that the subject provision, namely the definition of “Appraised Value” is a customized, bespoke provision and not a standard provision, which has expressed limitations on a simple “highest and best use” approach. The two expressed limitations or “qualifiers” on the “maximum permissible uses” included (i) that the use must be permitted by “bylaws or any other governmental regulations” at the time for which the appraisal is being made; and “(ii) the use must be for “the kind of uses for which the lands are being used at the time for which the appraisal is being made”. In this case, it is the position of the respondent that the evaluation must be based on the present usage, namely as a shopping centre. As bylaw I-88 does not permit residential use, fixing the appraised value at a mixed residential/commercial usage does not make commercial sense.

[15] It is further the position of the respondent that the arbitration emanated from the provisions of the Ground Lease and that it is the Lease which is the governing document. The Lease provides that an arbitration award would be “final and binding”, which would preclude an appeal on any issue. In the alternative, only an error of law may be the subject of an appeal pursuant to section 45(1) of the Arbitration Act, and only with leave of the court. It is the position of the respondent that the extricable errors identified by the applicant are, at best, errors of mixed fact and law, and would not be subject to appeal pursuant to the Act.

The Law and Analysis

The Document Governing the Arbitration

[16] It is the position of the applicant that the governing document is not the Lease itself but rather the arbitration agreement, which was entered into by the parties at the request of the arbitrator. This is disputed by the respondent. As indicated above, following agreement of the parties as regards the arbitration, the issues to be arbitrated, the selection of the arbitrator and the issues to be bifurcated pursuant to the Ground Lease, and following the correspondence from Mr. Kaufman to the arbitrator, which referenced the arbitration provisions of the Lease and forwarded a copy of the Lease to the arbitrator, the arbitrator requested that the parties enter into his standard arbitration terms. The terms were signed on May 31, 2018, after the parties had added the issues to be determined.

[17] The arbitration terms are the standard terms of the arbitrator. They cover conflicts, terms of the contract as regards the arbitrator, his compensation, the services of an arbitral secretary, cancellation policy, confidentiality, immunity of the arbitrator and administration issues. There is no “entire agreement” clause. I am satisfied that the governing document as regards arbitration of the Lease provisions is the Lease itself and not the standard terms of the arbitrator’s agreement, which is intended to protect the arbitrator’s interests.

[18] I disagree with the submissions of the applicant as regards the applicability of Denison Mines Limited v. Ontario Hydro, 58 O.R. (3d) 26 to this arbitration agreement. In that case, the parties themselves negotiated a new arbitration agreement and executed it prior to selection of the arbitrators. That is very different from the situation here.

Leave to Appeal an Arbitration Award

[19] Pursuant to the Arbitration Act, 1991, section 45, regarding appeals:

45(1) If the arbitration agreement does not deal with appeals on questions of law, a party may appeal an award to the court on a question of law with leave, which the court shall grant only if it is satisfied that (a) the importance to the parties of the matters at stake in the arbitration justifies an appeal; and (b) determination of the question of law at issue will significantly affect the rights of the parties. (2) If the arbitration agreement so provides, a party may appeal an award to the court on a question of law. (3) If the arbitration agreement so provides, a party may appeal an award to the court on a question of fact or on a question of mixed fact and law.

[20] Under section 45(1) of the Act, the only available appeal is on a question of law which requires leave of the court. Section 3 of the Act allows parties to contract out of the appeal right in section 45(1):

3. The parties to an arbitration agreement may agree, expressly or by implication, to vary or exclude any provision of this Act except the following. [None of the exceptions are applicable in this case.]

[21] Thus, section 45(3) makes it clear that appeals on issues of mixed fact and law must be provided for in the arbitration agreement.

[22] In this case, the Lease is silent as regards appeals, although it provides that all awards are “final and binding”.

[23] However, the applicant takes the position that it is the arbitration terms signed by the parties at the request of the arbitrator, which is the governing document. These arbitration terms also are silent as regards appeals. The applicant submits that it is the Arbitration Act, section 45(1) which is applicable and which provides a right of appeal on a question of law, with leave, if the court is satisfied that the importance to the parties of the matters at stake in the arbitration justifies an appeal; and determination of the question of law at issue will significantly affect the right of the parties.

Grounds for Appeal as Framed by the Applicant

[24] The applicant has framed the grounds for appeal from the arbitration award as “extricable errors of law” and indicates the following three errors:

1. That the arbitrator failed to consider binding legal authority;
2. That the arbitrator failed to apply principles of contractual interpretation;
3. That the arbitrator made an error in law by excluding the expert reports.

[25] It is the position of the respondent that while the applicant has attempted to frame its grounds of appeal as “extricable errors of law” the issues in question, which involve contractual interpretation, are issues of mixed fact and law.

[26] Both parties rely on the Supreme Court of Canada decision in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53. In Sattva, at para 50, the Supreme Court of Canada held that contractual interpretation generally involves issues of mixed fact and law:

Contractual interpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to the words of a written contract, considered in light of the factual matrix.

[27] At paras. 53-54, the Supreme Court indicates, as regards extricable questions of law:

Nevertheless, it may be possible to identify an extricable question of law from within what was initially characterized as a question of mixed fact and law (Housen, at paras 31 and 34-35). Legal errors made in the course of contractual interpretation include “the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor” (King at para. 21). Moreover, there is no question that many other issues in contract law do engage substantive rules of law: the requirements for the formation of the contract, the capacity of the parties, the requirement that certain contracts be evidenced in writing, and so on.

However, courts should be cautious in identifying extricable questions of law in disputes over contractual interpretation. Given the statutory requirement to identify a question of law in a leave application pursuant to section 31(2) of the AA, the applicant for leave and its counsel will seek to frame any alleged errors as errors of law. The legislature has sought to restrict such appeals, however, and courts must be careful to ensure that the proposed ground of appeal has been properly characterized. The warning expressed in Housen to exercise caution in attempting to extricate a question of law is relevant here:

Appellate courts must be cautious, however, in finding that a trial judge erred in law in his or her determination of negligence, as it is often difficult to extricate the legal questions from the factual. It is for this reason that these matters are referred to as questions of “mixed law and fact”. Where the legal principle is not readily extricable, then the matter is one of “mixed law and fact”….[para. 36]

[28] At paragraph 55, the Supreme Court further stated:

As mentioned above, the goal of contractual interpretation, to ascertain the objective intentions of the parties, is inherently fact specific. The close relationship between the selection and application of principles of contractual interpretation and the construction ultimately given to the instrument means that the circumstances in which a question of law can be extricated from the interpretation process will be rare. In the absence of a legal error of the type described above, no appeal lies under the AA from an arbitrator’s interpretation of a contract.

[29] The Supreme Court of Canada has, more recently, stated:

Courts should, however, exercise caution in identifying extricable questions of law because mixed questions, by definition, involve aspects of law. The motivations for counsel to strategically frame a mixed question as a legal question – for example, to gain jurisdiction in appeals from arbitration awards or a favourable standard of review in appeals from civil litigation judgments – are transparent (Sattva, para 54; Southam, para 36). A narrow scope for extricable questions of law is consistent with finality in commercial arbitration and, more broadly, with deference to factual findings. Courts must be vigilant in distinguishing between a party alleging that a legal test may have been altered in the course of its application (an extricable question of law; Sattva, at para 53) and a party alleging that a legal test which was unaltered, should have, when applied, resulted in a different outcome (a mixed question).

Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32 at para 45

[30] I have reviewed the voluminous materials provided by both parties, in concluding their documents briefs, compendium of documents, facta and briefs of authorities. I have considered the arbitrator’s well-reasoned decision. I am not satisfied that the “extricable errors of law” highlighted by the applicant have merit or provide sufficient reason to grant leave to appeal. I will elaborate further below. However, first I am of the view that the exercise of the contractual interpretation in this case is a question of mixed fact and law and must be approached in that way. I am further of the view that in approaching the task of contractual interpretation, the factual matrix is important, as is reference to the Lease generally. However, I am of the view that additional documents and reports are not necessary in the circumstances of this case and having reviewed fully the provision in question, set forth at para. 4 above, which I will repeat below.

“Appraised Value” means the appraised value of the lands as though unencumbered by this or any other lease, and on the basis of its use for the maximum permissible uses permitted by bylaws or any other government regulations for the kind of uses for which the lands are being used at the time for which the appraisal is being made and without taking into account the value of the buildings.

[31] It is the position of the applicant that the arbitrator made three extricable errors of law in interpreting the definition of Appraised Value in the lease. Firstly, the arbitrator failed to consider binding legal authority, namely that an official plan which conflicts with the municipal zoning bylaw takes precedence. The applicant argues that the official plan of the City of Vaughn conflicts with the applicable zoning bylaw I-88 such that the official plan would take precedence. As the official plan permits mixed-use commercial/residential construction in the area of the subject land, the appraised value should be based on such mixed-use commercial/residential use, rather than the more restrictive commercial use permitted by the bylaw.

[32] It is of note that the arbitrator found that there was no conflict between the official plan and the zoning bylaw. While the lands are located in an area in which the official plan promotes intensification through an appropriate mix of compatible land uses, it does not necessarily mean that all lands within the area must be mixed-use residential-commercial developments. The official plan provides for a mix of residential, retail, community and institutional uses. The official plan does not prohibit commercial developments in the area. The arbitrator held that the arguments put forth by the applicant in this case assume that the in-force zoning bylaw is inconsistent with the official plan, which the arbitrator held it was not. He stated that while the 2010 official plan permitted a range of retail, commercial, institutional and residential uses in a mixed-use context, it did not prohibit the current use of the property, namely retail and office uses.

[33] Counsel for the respondent advised at the arbitration and on this application that the new zoning bylaws being proposed for the City of Vaughan would not change the uses for the subject area; i.e. the proposed new bylaw will also not permit residential use of the land.

[34] The arbitrator rejected the applicant’s submissions that the appraised value should be calculated on the basis of the official plan and a prospective use that was not currently permitted by the bylaw on the ground that it did not accord with sound commercial principal and good business sense.

[35] The cases relied on by the applicant deal with zoning applications and OMB appeals where there was an inconsistency between the bylaw and the official plan, in which case the official plan takes precedence. These all dealt with cases of development and not interpretation of a term employed in a lease or contract, such as “Appraised Value” used in the Ground Lease in this case. In this case the issue is not which prevails over the other, but how one interprets the clause. Thus, in this case it is a question of the interpretation of the term in the Lease, not which regulation prevails as regards zoning applications and OMB appeals in the development context.

[36] In this case there was no conflict between the bylaw and official plan, the latter of which is permissive. The bylaw permits one of the permitted uses in the area of the subject lands.

[37] As indicated above, I do not find there to be an extricable error of law as regards application of legal principle and, find that the contractual interpretation being undertaken was a question of mixed fact and law, and not an extricable error of law. I find this ground of appeal fails.

[38] The second ground of appeal is that the arbitrator failed to properly apply the principles of contractual interpretation when interpreting the lease and committed errors of law in restricting the analysis to only existing commercial uses.

[39] The applicant submits that when interpreting a rent reset clause in the lease the interpreter should not have regard to restricted use clauses in the lease but should consider the land as if it were unencumbered by that provision.

[40] However, the definition of Appraised Value as defined in the Lease requires that the arbitrator consider the fact that the lands were being used as a commercial development and not a residential development as at the effective date, which the arbitrator did, i.e. “for the kinds of uses for which the lands are being used at the time for which the appraisal is being made”. While the applicant takes issue with the fact that the arbitrator should not have referred to the Lease as a whole when interpreting the meaning of Appraised Value, I am of the view that contractual interpretation requires the arbitrator to look at the agreement as a whole: Sattva, supra.

[41] Further, the express wording of the definition of appraised value requires the arbitrator to consider the use of the subject lands as of the effective date, namely “at the time for which the appraisal is being made”, which the arbitrator did. In doing so, it was appropriate for him to consider other provisions of the Lease that dealt with the use of lands.

[42] In the end, I am satisfied that the submissions of the applicant as regards “extricable errors of law” engage the issue of how the arbitrator applied the principles of contractual interpretation (a question of mixed fact and law) and not whether the arbitrator applied the proper principles (“a question of law”). (See Diorite Securities v. Trevali, 2019 ONSC 4225, paras. 46-49). As a result, I do not find this ground of appeal to have merit. I find that this ground of appeal fails.

[43] The third ground of appeal is that the arbitrator made an extricable error of law in ruling that the expert reports were not admissible. As indicated above, prior to commencement of the arbitration hearing, it was agreed between the parties that if the applicant wished to provide expert reports, this would be done in an interlocutory pre-hearing motion such that if MPI Torgan wished to object to the admissibility of the expert reports it would be more efficient to determine the admissibility by way of an interlocutory procedural motion rather than at the arbitration hearing. In this way, if the reports were found to be inadmissible, the respondent would not have to expend the money to retain responding expert reports. After this was agreed upon, the arbitrator made a Procedural Order on consent on May 28, 2018 setting out the procedural steps and timeline for the arbitration and the scheduling of the preliminary motion to determine admissibility of the applicant’s expert reports.

[44] It is the position of the applicant that this decision is appealable as the excluded reports are relevant to the interpretation of the Appraised Value clause, and excluding it pursuant to R. v. Mohan, [1994] 2 S.C.R. 9 is an extricable error of law. It is further the position of the applicant that the ruling is not a procedural ruling but rather substantive, and is a decision, which dealt with the substance of the matter and disposed of part of the dispute between the parties in a separate, but preliminary arbitral award, which was to be appealed along with the final order.

[45] It is the position of the respondent that the ruling is a procedural order or interlocutory in nature and not an Award and, therefore, not subject to appeal: Inforica Inc. v. CGI Information Systems & Management Consultants Inc., 2009 ONCA 642 rev’g 2008 Carswell 9227; Universal Settlements International Inc. v. Duscio, 2012 ONCA 215, rev’g in part 2011 ONSC 968 at paras. 31-33. In the alternative, the respondent submits that if the interlocutory decision is an “Award” in the context of the arbitral Award, the time for appealing it is long past.

[46] In excluding the expert reports, at this juncture, the arbitrator held as follows:

Neither of the reports purported to be for the purpose of interpreting the definition of appraised value in the lease. Neither report purports to provide an industry-specific definition for any of the terms specifically utilized therein. Both reports do, however, opine on the appropriate methodology for valuing real property like the subject property and in the case of the Weston report, opine on the role of Ontario’s Planning Framework.

What I am initially tasked with is the interpretation of the commercial lease. Absent some ambiguity, this requires me to adopt the plain, ordinary, popular, natural, or literal meaning of the words of the lease, read in light of the entire agreement and its surrounding circumstances.

Neither of the reports assist me in this exercise, as they speak to practice standards and policy frameworks, but do not speak to the meaning of the words I must interpret nor the reasonable expectations of the parties at the formation of the lease.

[47] I am not of the view that the expert reports dealt with the substance of the matters in issue, nor that the ruling disposed of a part of the dispute. I note that the arbitrator also indicated that the expert reports might be relevant to the subsequent issues at play in the bifurcated proceeding, but not in the preliminary issue of the meaning of Appraised Value in the Lease.

[48] I do not find there to be any error, nor any extricable error of law, in the determination of the arbitrator. The contractual interpretation in which he was engaged was one of defining the provision in question, namely the definition of Appraised Value, based on the wording of the lease, in light of the entire agreement and surrounding factual matrix without reference to extrinsic evidence such as the expert reports.

[49] I am satisfied that the parties had initially contracted out of court proceedings as regards any disputes arising from the Lease in the terms of the Ground Lease. The original Ground Lease was made “final and binding”. The original terms of the ground lease were not changed, modified or replaced by the Arbitration Terms provided by the arbitrator and signed by the parties. The case law cautions that courts should be careful to intervene with the arbitral process when the parties have agreed to submit their disputes to arbitration rather than to the courts: Inforica, supra at para 44.

[50] I do not find that the applicant has satisfied the test for leave to appeal the arbitrator’s Award under the Act, s. 45. I have found that the grounds of appeal, raised by the applicant are not meritorious and fail. Nevertheless, as regards the test pursuant to section 45(1), I make the following comment. I am satisfied that the matters in issue in the arbitration are important to the parties, but that the issues on appeal will not significantly affect the rights of the parties, given my findings that the appeal is without merit. In this regard, I have considered the jurisprudence set forth in Aronowicz v. Aronowicz, 154 ACWS (3d) 761, 84 0.R. (3d) 428; Ledore Investments Limited v. Ellis-Don Construction Ltd., 2015 ONSC 6536 at para 15, citing Aronowicz.

[51] The application for leave to appeal is dismissed.

Released: 2020-05-21