Court File and Parties

COURT FILE NO.: CV-18-00604535 DATE: 20200122 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: SUBWAY FRANCHISE RESTAURANTS OF CANADA LTD., Applicant – AND – BMO LIFE ASSURANCE CO., Respondent

BEFORE: E.M. Morgan J.

COUNSEL: C. Cosgriffe and M. Dzurman, for the Applicant M. Koczerginski and M. Deamorin (student-at-law), for the Respondent

HEARD: January 10, 2020

REASONS FOR JUDGMENT

[1] Who is responsible for a commercial tenant’s mis-diarizing of a lease renewal date?

[2] The Applicant is the tenant and the Respondent the landlord of a commercial premises located at 60 Yonge Street, Unit 65, Toronto (the “Premises”). The Applicant missed the time frame in which it could have given notice to renew its tenancy, and now seeks relief from forfeiture.

I. The Lease renewal date

[3] On April 25, 2008, the Applicant entered a lease for the Premises with AIG Assurance of Canada (which, some 5½ months later, amalgamated with AIG Life Insurance Company of Canada and was acquired by the Bank of Montreal to form the Respondent) (the “Lease”). The Lease was for an initial 10-year term with two five-year renewal options. The term of the Applicant’s tenancy was to begin on a date to occur following a fixturing period. The term and the fixturing period are defined in the Lease as follows:

(b) Term (Section 1.1) The period commencing on the date (the ‘Commencement Date’) which is the day immediately following the expiration of the Fixturing Period (as hereinafter defined) and expiring ten (10) years after the Commencement Date.

(c) Fixturing Period (Section 2.2) The Fixturing Period is the period commencing on the day after the Landlord notified the Tenant in writing that the Leased Premises are ready for occupancy by the Tenant for the Tenant to commence the installation of the Tenant’s Work as provided in this Lease and expiring at 11:59 p.m. on the sixtieth (60th) day thereafter. The Fixturing Period shall be provided to the Tenant on a gross rent-free basis. Notwithstanding the foregoing, neither the Tenant nor its sublessee shall be given possession of the Leased Premises until this Lease has been finally negotiated, signed and delivered to Subway World Headquarters.

[4] Although the description is unambiguous, the commencement date for the term of the Lease is not self-defining. One cannot know the commencement date by simply reading the Lease. The commencement date turns on when the fixturing was complete and a Notice to that effect was delivered to the Applicant.

[5] Both parties concede that they do not have a copy of any notice from the Respondent’s predecessor that the Premises were ready for occupancy. Ultimately, the Premises were in fact occupied by a Subway franchise restaurant that is the sub-tenant of the Applicant. It is obvious, therefore, that at some point the term of the Lease began, but there appears to be no contemporaneous document in existence that indicates on what date that occurred.

[6] The documentation accompanying the October 2008 amalgamation and acquisition by the Bank of Montreal included an Estoppel Certificate. That document was executed by the Applicant on March 31, 2009. It states that the Lease expires on August 23, 2018, with two further five-year renewal options. The Estoppel Certificate is the one and only document that contains the termination date for the ten-year Lease.

[7] The Applicant’s option to extend or renew the term of its tenancy for two further periods is contained in Section 1, Schedule “G” of the Lease:

1. Option to Extend If the Tenant has duly and regularly paid the Rent, has performed all its other obligations under this Lease and is not currently in default hereunder, the Tenant may, at its option, extend this Lease for two further periods of five (5) years each (the “First Extension Term” and the “Second Extension Term” respectively) commencing on the expiration of the Term and the expiration of the First Extension Term respectively. To be effective, the option must be exercised at least nine (9) months and not more than twelve (12) months prior to the expiration of the Term or the First Extension Term, as the case may be, by written notice to the Landlord. The First Extension Term and/or the Second Extension Term shall be on the same Terms and conditions as set out in this Lease, save and except for Rent, storage area charges, inducement or fixturing period, and further option to extend and all provisions dealing with the Landlord’s Work, Tenant improvement allowances or any other Tenant inducement. The Rent during any such extension period shall be mutually agreed upon between the parties at least four (4) months prior to the expiry of the Term. In the event that a new rent is not agreed upon at least four (4) months prior to the expiry of the Term, the rent for an extension period shall be settled by a single arbitrator pursuant to the Arbitration Act, S.O. 1991 c. 17 as amended or replaced, and shall be equal to the then current market rent for the Premises, taking into account that there are no tenant inducements and having regard for improved premises similar to the Premises in an unimproved condition which are comparable in size, location, type and condition and leased for a similar period of time. The expense of arbitration shall be borne equally by Landlord and Tenant, except that each party shall be responsible for its respective solicitor’s fees and witnesses.

[8] As with the commencement of the tenancy, it is not possible to determine from reading Schedule “G” of the Lease when the Applicant must deliver the option to renew to the Respondent. The option must be delivered at least nine months and not more than twelve months prior to the expiration of the term of the Lease. No part of the Lease or its Schedules, however, indicates when the Term commenced or when it expires. Only the Estoppel Certificate indicates the termination date of August 23, 2018.

[9] Over the years the Applicant made a number of inquiries of the Respondent asking, among other things, when the Lease term expires. It is unclear why the Applicant needed this information since it had signed the Estoppel Certificate confirming the termination date, except that the inquiries appear to be a standard form of letter sent by the Applicant to all of its landlords. They were generated automatically on an annual basis in order to confirm the records at the Applicant’s head office. Letters of this sort were sent first to the Respondent’s predecessor and then to the Respondent in June 2013, May 2015, and Jan 2016. These periodic letters, coming to the Respondent without any immediate context, went unanswered.

[10] The Applicant states that it was not until a meeting between representatives of the two parties on December 21, 2017 that the Respondent advised the Applicant that the Lease ends on August 23, 2018. A simple calculation using the time frame set out in Section 1, Schedule “G”, and counting back in time from this expiry date, establishes that the Applicant’s option to renew was to be delivered between August 24, 2017 and November 23, 2017. Accordingly, by the time of the December 21, 2017 meeting the window for the Applicant to exercise its option had already closed.

[11] For reasons that are unexplained, in the Applicant’s central database the Lease was recorded as expiring on May 31, 2018 rather than August 23, 2018. Applicant’s counsel poses this as a conflict of two documentary records – i.e. the database expiry date vs. the Estoppel Certificate expiry date. He submits that this confusion could have, and should have, been clarified by the Respondent, but that the Respondent instead let the matter go until it was too late.

[12] The Applicant places particular reliance on a letter it sent to the Respondent on February 1, 2017 in which it expressly referenced its own understanding of the term of the Lease. The letter also indicated that the Applicant was contemplating the exercise of its option to renew. The Applicant’s letter states:

According to our records, the current lease term for the above-referenced location shall expire on May 31, 2018. Pursuant thereto, renewal notice is due on or before May 31, 2017. In the event that any of these dates differ from your records, please contact us in writing immediately as your silence will be an acknowledgement and authorization of their accuracy and our reliance.

[13] This letter also went unanswered by the Respondent. Ed Waite, the Respondent’s affiant, conceded in cross-examination that he had received the February 1, 2017 letter. He explained that at the time he had not seen the Estoppel Certificate and so did not know the expiry date of the Lease. He therefore was not in a position to answer. The Applicant apparently took this silence as a confirmation of the expiry date it had found in its erroneous records. It ignored or was inexplicably unaware that it had signed an Estoppel Certificate advising the Respondent of the correct date.

[14] On April 5, 2017, Mary Gallagher, a representative of the Applicant, met with Mr. Waite at the Premises. Ms. Gallagher states that she advised Mr. Waite that the Applicant intends to renew the Lease for another 5 years, and that the Applicant would be providing the Respondent with a formal notice to that effect pursuant to the Lease.

[15] In cross-examination Mr. Waite explained that he had told Ms. Gallagher that the Respondent intended to sell or redevelop the property, and that although he did not want the Premises vacant immediately it was his preference that the Lease not be renewed according to its terms. In his affidavit, Mr. Waite deposed that he also indicated to Ms. Gallagher at this meeting that the Lease expired on August 23, 2018. Ms. Gallagher does not recall being so advised.

[16] Following this meeting, on May 1, 2017, the Applicant sent another letter to the Respondent with respect to the Lease and its termination date. Applicant’s counsel states in his factum that the reason for this letter being sent was that “there were conflicting dates seen on the Estoppel Certificate and within the FWH (i.e. the Applicant’s) database.”

[17] Mr. Waite has conceded that he received this letter and that, again, he never answered it. Applicant’s counsel submits that Mr. Waite, having seen the date that the Applicants were working with, “was completely silent and took no steps to correct [the Applicant’s] clear confusion.”

[18] During the ensuing weeks, the parties had a number of communications regarding the Respondent’s plans to redevelop the property in which the Premises were situated. The Respondent offered various forms of assistance and compensation to the Applicant for having to relocate its business in the event that the Premises could no longer be used. The Applicant indicated that there were no suitable alternative premises available and explained that the Respondent’s plans for the property would cause significant financial hardship to the Applicant’s business.

II. The renewal notice

[19] On May 19, 2017, the Applicant sent a letter to the Respondent formally exercising its option to renew the Lease. The notice letter provides:

This letter is to advise you that the Tenant hereby exercises its option to renew its lease for the above referenced location. As outlined in this lease agreement, the extended term shall run from June 01, 2018 through May 31, 2023. Should you have any questions or comments please do not hesitate to contact Jane Bonnanzio at extension 1663.

[20] Given the dates set out in this notice, it is evident that the Applicant still was not cognizant of the Estoppel Certificate that it had signed. Rather, the dates set out in the letter reflect the erroneous entry in the Applicant’s internal database. The notice therefore was timed to comply with the mistaken belief that it had to be delivered to the Respondent on or before May 31, 2017. In fact, it was too early to be within the Section 1, Schedule “G” window, which, as indicated above, required the notice to be delivered after August 24, 2017 and before November 23, 2017.

[21] In another odd turn of events, the Applicant’s renewal notice was sent to a generic mailbox at the Respondent’s head office where rent cheques were sent each month. It was not addressed to Mr. Waite or anyone else who dealt with the Lease or the Applicant’s tenancy. Thus, while the envelope was apparently received in the Respondent’s mail room – the Respondent’s records show that it was signed for by a person named Tony – it was never received by Mr. Waite or brought to his attention or that of any other individual within the Respondent organization in a position to deal with the matter.

[22] Ms. Gallagher contacted Mr. Waite in late 2017 to schedule a meeting, and Mr. Waite responded by proposing that they meet on December 21, 2017. While Ms. Gallagher was under the impression that they would be discussing the Applicant’s renewal of the Lease, Mr. Waite was under the impression that they would be discussing accommodations for the sale of the property. As indicated above, the meeting date fell outside of the notice window in Section 1, Schedule “G”. Given the state of communications between the parties and the Applicant’s mistaken entry in its database, it is evident to me that the meeting date was not engineered by the Respondent to throw the Applicant off course. The Applicant was off course already.

[23] On October 20, 2017, the 60 Yonge Street property was sold by the Respondent to Yonge Melinda Realty Inc. (“Yonge Melinda”). Parallel with that sale, the Respondent entered into a lease agreement with Yonge Melinda pursuant to which the Respondent became tenant and the existing tenants, including the Applicant, became subtenants. The term of the lease between the Respondent and Yonge Melinda is from October 20, 2017 to October 31, 2027, with Yonge Melinda having the ability to unilaterally terminate it upon giving 18 months’ notice any time after October 31, 2022.

III. Relief from forfeiture

[24] It is the Respondent’s position that it is not obliged to provide the Applicant with advice as to dates that are within the Applicant’s own knowledge and responsibility. Respondent’s counsel argues that the sale to Yonge Melinda had nothing to do with the Applicant’s exercise of the option to renew, and that had the Applicant done proper due diligence it was capable on its own of meeting the time frame for the notice as set out in Section 1, Schedule “G” of the Lease.

[25] It is the Applicant’s position that the Respondent acted intentionally in failing to advise it of the date of termination of its tenancy and, accordingly, of the time frame for providing the Respondent with notice of its exercise of its renewal option. Applicant’s counsel argues that with the sale to Yonge Melinda in the works, it was in the Respondent’s interest not to assist the Applicant in exercising its option to renew the Lease.

[26] With all due respect, the Applicant casts blame where it is not deserved. The Applicant signed an Estoppel Certificate representing to the Respondent when the term of the Lease ends; the very point of the Certificate is that the signing party is estopped from asserting anything to the contrary. The Lease itself puts the obligation of notice on the Applicant, not on the Respondent. And the very point of signing an Estoppel Certificate is to signal that the Respondent is relying on the Applicant to get this date right, and not the other way around.

[27] In Ross v T. Eaton Co. (1992), 11 OR (3d) 115, the Court of Appeal stated definitively that the onus is on a tenant seeking relief from forfeiture to, at the very least, make a diligent effort to comply with the Lease’s terms. At para 27, Morden ACJO reasoned that, “It appears to be clear that at least one condition necessary for the jurisdiction to be exercised in favour of a tenant who seeks to be relieved from the consequences of failure to comply with the requirements of the lease respecting the exercise of the option of renewal is that the tenant has made diligent efforts to comply with the terms of the lease which are unavailing through no default of his or her own.”

[28] There is now a recognized, general duty to perform contractual terms in good faith: Bhasin v Hyrnew, 2014 SCC 71, [2014] 3 SCR 494. Counsel for the Applicant contends that the Respondent has failed to live up to this duty. The Supreme Court of Canada has described the content of the duty of good faith in terms of honesty in the parties’ mutual dealings: “parties must not lie or otherwise mislead each other…about one’s contractual performance”: Ibid., para 73.

[29] At the same time, a unanimous Court of Appeal has limited the context in which this duty operates. In CM Callow Inc v Zollinger, 2018 ONCA 896, para 18, the Court stated that, “The duty of honest performance in this case required that the parties be honest with each other concerning matters ‘directly linked to the performance of the contract’”. The Court, at para 17, spelled out precisely what that limitation means in a case like the one at bar:

It is clear from Bhasin that there is no unilateral duty to disclose information relevant to termination. Unlike Bhasin, this was not a case in which the contract would renew automatically, nor were the parties required to maintain an ongoing relationship. The appellants were free to terminate the winter contract with the respondent provided only that they informed him of their intention to do so and gave the required notice. That is all that the respondent bargained for, and all that he was entitled to. [citations omitted]

[30] The duty of good faith is designed to ensure that the contract terms are performed in accordance with the spirit and substance of each party’s rights and obligations: Mohamed v Information Systems Architects Inc., 2018 ONCA 428, para 18. It is not, however, designed to transform or modify those rights and obligations: CM Callow, para 19.

[31] The point of Section 1, Schedule “G” of the Lease is to provide clarity to the Applicant’s right of extension or renewal. That provision puts the onus on the Applicant to give notice, and spells out precisely when that notice is to be given. As it was put in Delphi Management Corp. v Dawson Properties, 2014 ONSC 354, quoting Dora v. 66 Degrees Inc. (2002), 30 RPR (3d) 287, para 8:

In a lease where there is a requirement for written exercise of an option on or before the stipulated date prior to the end of the lease term, there is little if any doubt that the business rationale for those requirements is to provide both landlord and tenant with certainty as to their future rights and obligations vis-à-vis each other. It gives the landlord certainty that if the option is not exercised in time, he is free to re-market the premises to another prospective tenant or indeed to the existing one. It gives the tenant the certainty that if he exercises the option in conformity with the lease, the landlord is bound to him, and if he does not so exercise, that he is at liberty to negotiate a new lease with the landlord without obligation if those negotiations do not lead to a concluded agreement.

[32] What the Applicant seeks to do is, essentially, to reverse the onus accompanying the notice of exercise of option under the Lease. Having executed an Estoppel Certificate representing to the Respondent the termination date of the Lease, it was not a difficult task for the Applicant to know and be responsible for the window of time in which notice to exercise its option to renew could be given. The Applicant has a right to extend or renew the Lease upon delivering a proper notice to the Respondent; in turn, the Respondent has a corresponding obligation to extend or renew the Lease upon receiving the proper notice. Without such proper notice, the Lease is at an end for both parties.

[33] This court has previously held that a party with rights under a lease has the responsibility to properly exercise those rights. Here, as in Kassiouris v Kalantzis, 2017 ONSC 1985, para 40, “ [The Applicant] did not make diligent efforts to comply with the terms of the lease. [It] could simply have renewed the lease. It was [its] responsibility to be aware of its terms”.

[34] The court’s jurisdiction to grant equitable relief in respect of a commercial tenant’s failure to deliver a notice of renewal is rather narrow: Ibid., para 34. It exists in order to ensure that the terms of a contract or lease are implemented where default cannot be attributed to the substandard or ineffectual conduct of the defaulting party. Non-compliance that could have been remedied by the defaulting party does not trigger this equitable remedy: Mapleview Veterans Drive Investments Inc. v Papa Kerollus VI Inc., 2016 ONCA 93, para 57.

[35] On the record before me, it is apparent that the Applicant could have and should have known and complied with the relevant dates for giving notice of its exercise of the option. It was not for the Respondent to keep track of the relevant dates and to ensure that the Applicant was on target for exercising its option.

[36] There was a genuine confusion for some time on the part of both parties as to the termination date and the time frame for the notice of renewal. The question under those circumstances is: which party is responsible to keep the time frame in mind and to serve the notice of renewal in a timely fashion? The obvious answer given the structure of the renewal option in the Lease is that the Applicant is the responsible party.

[37] For the Respondent’s part, it did not intentionally obscure anything from the Applicant. The Respondent was not, as Applicant’s counsel contends, motivated to do so in order to cover up its pending sale to Yonge Melinda. In fact, the Respondent was up front and entirely transparent with the Applicant about that sale and had started negotiating some compensation or alternative premises for the Applicant.

[38] It was the Applicant that mis-diarized the termination date and so miscalculated the notice date for renewal of the Lease. Its attempt to cast blame on the other side does not change that. The duty of good faith in contracting required the Respondent to honour the Applicant’s right of renewal once exercised; it did not require the Respondent to make sure that the Applicant fulfilled its own obligations correctly.

[39] Due to its own failings, the Applicant missed the date for providing notice of exercise of its option under the Lease. There are no grounds for relief from forfeiture.

IV. Disposition

[40] The Application is dismissed.

[41] The Respondent is entitled to its costs. Its counsel has submitted a Bill of Costs indicating that it incurred $51,204.08 in fees, disbursements, and HST. Respondent’s counsel concedes, however, that its costs rose because of a rescheduling of the Application that was not anyone’s fault, and that it would reduce its request to match that of the Applicant.

[42] Applicant’s counsel has submitted a Bill of Costs seeking $41,295.62, all inclusive. This is a reasonable amount in a case of this size and complexity. Ordering the Respondent to pay costs in roughly this amount will not take the Applicant by surprise: see Rule 57.01(1)(a)(0.1) of the Rules of Civil Procedure.

[43] The Applicant shall pay the Respondent costs in the all-inclusive amount of $40,000.

Morgan J. Date: January 22, 2020