Court File and Parties

COURT FILE NO.: CV-20-641129 DATE: 2020-09-02

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

THE SECOND CUP LTD. and 2734524 ONTARIO INC. Plaintiffs

– and –

2410077 ONTARIO LTD., WILLIAM MANDELBAUM, THE BASEMENT ON DAVENPORT INC., ALEX NIKTASH and 1435501 ONTARIO INC. Defendants

COUNSEL: Ian N. Roher and Dylan Baker, for the Plaintiffs (collectively, "Second Cup") Jonathan Piccin, for the Defendants 2410077 Ontario Ltd. and William Mandelbaum (the "landlord defendants") No one appearing for the Defendants, The Basement on Davenport Inc., Alex Niktash and 1435501 Ontario Inc.

HEARD: June 5, 2020 (supplemented by written cost submissions dated July 7 and July 21, 2020)

COSTS ENDORSEMENT

Kimmel J.

[1] After being locked out of their leased premises located at unit 100, 65 Front Street East in Toronto (the "leased premises") on May 2, 2020, the plaintiffs brought an urgent motion for a declaration that their Lease[^1] had been unlawfully terminated, or alternatively, for relief from forfeiture, and for an order for possession of the leased premises and other ancillary relief.

[2] In reasons for decision released on June 11, 2020, I found that the tenant was not in default under the Lease for non-payment of rent when the landlord locked the tenant out and purported to terminate the Lease. I found that the Lease had not been lawfully terminated, and I granted various ancillary relief, including the return of possession of the leased premises, to the tenant.

[3] The parties were unable to reach an agreement on costs. Upon consideration of their written costs submissions, which I allowed for in my June 11, 2020 decision, I am awarding the plaintiffs their substantial indemnity costs of this motion fixed in the all-inclusive amount of $150,000.00, payable by the landlord 2410077 Ontario Ltd. within thirty (30) days of this costs endorsement.

[4] Notwithstanding any provision of the Lease to the contrary, I am ordering that the tenant may, in addition to any other remedies for non-payment of these costs as the plaintiffs may have, set-off these costs, plus interest accrued and compounded at the rate of 3% per annum, against any amounts owing by the tenant under the Lease if the landlord fails to pay the costs as ordered herein in a timely manner.

The Positions of the Parties on Costs

(i) The Plaintiffs' Position

[5] As the successful parties on this motion, the plaintiffs ask to be awarded their full indemnity costs in the amount of $256,734.70 (or substantial indemnity costs of $206,287.54) under Rule 57 and s. 131 of the Courts of Justice Act, R.S.O. 1990, c. 42 ("CJA").

[6] They base their request on the egregious, dishonourable and bad faith conduct of the landlord both preceding and following the landlord's purported termination of the lease. They point to various findings in my June 11, 2020 reasons as support for this scale of full-indemnity costs. This, the plaintiffs argue, is conduct warranting the court's censure through costs that will make them whole.

[7] The plaintiffs also argue that the costs they are awarded should also be ordered payable personally by Mr. Mandelbaum, a named defendant and the principal of the landlord who directed the conduct of the landlord, made all the more reprehensible in the circumstances of the COVID-19 pandemic that was the reason for the tenant's partial non-payment of April's rent that the landlord (improperly) sought to rely upon as a default.

[8] No costs are sought against the other defendants who elected not to participate in this motion.

(ii) The Defendants' Position

[9] The landlord defendants challenge the amount of time and corresponding fees claimed by the lawyers for the plaintiffs in their cost outline, arguing that the amounts exceed those of the lawyers for the landlord defendants by more than five times.

[10] They question the veracity of the amounts claimed on a number of grounds, starting with the fact that the plaintiffs' original cost outline dated June 5, 2020 (and served on June 8, 2020 shortly after the motion was argued) claimed a significantly lower amount of costs, on all scales, than the amounts sought in the cost outline appended to the plaintiffs' cost submissions on July 7, 2020. The plaintiffs' original cost outline dated June 5, 2020 claimed partial indemnity costs of $114,764.88 and substantial indemnity costs of $151,593.84 (compared to the later cost outline indicated actual costs of $256,734.70 and corresponding substantial indemnity costs of $206,287.54).

[11] The defendants also argue that there are amounts claimed for pre-hearing judicial mediations and settlement efforts that are not recoverable as part of the costs of this motion. Although they acknowledge that the matter had to proceed to a hearing on an urgent basis, they say that counsel co-operated, that matters were streamlined and that this was a straightforward commercial tenancy dispute. They also challenge the disbursement claimed for a private investigator, at least to the extent he was investigating the other defendants (the new tenants), against whom costs are not claimed.

[12] The defendants further argue that the amounts claimed by the plaintiffs are not reasonable, and could not have been within the reasonable contemplation of the defendants given the significantly lower amounts reflected in the cost outline of the defendants for the same motion.

[13] They argue that partial indemnity is the appropriate scale of costs. Having regard to their own cost outline indicating no disbursements and partial indemnity costs of $21,868.11, substantial indemnity costs of $30,026.92 and full indemnity costs of $33,363.25, they suggest that it would be appropriate for the court to award the successful plaintiffs their partial indemnity costs fixed in the all-inclusive amount of $40,000.00.

Guiding Principles

[14] Costs are within the discretion of the court to award under s. 131 of the CJA. The factors to consider in the exercise of that discretion are set out in Rule 57.01:

a. The principle of indemnity under 57.01(0.a), including the experience of the lawyer for the party entitled to costs as well as the rates charged and the hours spent by that lawyer;

b. Under Rule 57.01(0.b), the amount of costs that the unsuccessful party could reasonably expect to pay in relation to the step in the proceeding for which costs are being fixed;

c. The amount at issue in the proceeding (Rule 57.01(a));

d. The complexity of the proceeding (Rule 57.01(c));

e. The importance of the issues (Rule 57.01(d));

f. The conduct of a party that unduly lengthened or complicated a proceeding (Rule 57.01(e), (f) and (g);

g. Any other matter relevant to the question of costs (Rule 57.01(i)).

[15] Partial indemnity costs are typically awarded in favour of a successful party on a motion such as this. The Court of Appeal has conveniently summarized the applicable principles to consider in determining whether an enhanced scale of costs is appropriate, in the case of Mars Canada Inc. v. Bemco Cash & Carry Inc., 2018 ONCA 239, 140 OR (3d) 81, at para. 43, as follows:

b. costs on a substantial indemnity basis should only be awarded "where there has been reprehensible, scandalous or outrageous conduct on the part of one of the parties": Young v. Young, [1993] 4 S.C.R. 3, at p. 134; and

c. the kind of conduct that will justify an elevated level of costs is not limited to conduct in the proceedings and can include the circumstances that gave rise to the litigation: Mortimer v. Cameron (1994), 17 O.R. (3d) 1 (C.A.), at p. 23; Clarington (Municipality) v. Blue Circle Canada Inc., 2009 ONCA 722, 100 O.R. (3d) 66, at para. 30.

[16] The court also has a residual discretion under Rule 49.13 to consider offers to settle made prior to the hearing, even if they were not made in a form that attracts the prescribed consequences of an offer to settle made pursuant to Rules 49.03 and 49.10, particularly where there has been reprehensible conduct on the part of the party against which the cost award is being made.

Scale of Costs

[17] The plaintiffs argue that this is an appropriate case for full indemnity costs because of the conduct of the landlord defendants in terminating the lease, during the COVID-19 pandemic, in a high-handed manner. They point to a number of factors, including the landlord having negotiated for and accepted an exclusivity payment from Second Cup in the context of a lease negotiation not long before the purported termination of the Lease, the undisclosed ongoing negotiations with other prospective tenants and the unilateral communications with the licensing authorities regarding Second Cup's pending RSA application, all over what was, in the grand scheme of things, a small portion of one month's rent that was not paid early on during the pandemic.

[18] My reasons for decision included various negative findings about the conduct of the landlord, such as:

a. It was unfair for the landlord to demand payment of all of April's rent that was due on April 1 after offering to allow it to be paid in two installments, especially in the extenuating circumstances of a state of emergency having just been declared in Ontario.

b. The non-payment of May's rent on or before May 1, 2020 could not constitute an Act of Default giving rise to any right of forfeiture or termination on the part of the landlord under the Lease. The landlord cannot get a head start on the ten-day notice period under s. 49 of the Lease by sending a notice of non-payment of rent before the rent was due.

c. The equities favour the plaintiffs in this case. The plaintiffs' lack of immediate responses to the landlord's notices and demands can be explained by the unprecedented circumstances in which they were operating, with drastically reduced head office staff handling the many demands of franchisees, landlords and employees that had to be managed all at once. It was not unreasonable for them to ask for, and expect, an indulgence from the landlord defendants. Not only was such not forthcoming (beyond the two-week extension for the second half of April's rent), the landlord appears to have been trying to take advantage of the situation to keep the recently paid non-refundable exclusivity payment received from Second Cup and capitalize on an opportunity to terminate the Lease so it could enter into a new lease (the 143 Lease) in the Building Envelope for another cannabis retail store.

d. The sequence of events indicates that the landlord entered into arrangements with 143 and Basement on Davenport (BOD) that disregarded the plaintiffs' rights in respect of the leased premises, including that:

i. The landlord and the defendant 143 had conditionally entered into the 143 Lease on April 7, 2020, only 5 weeks after granting Second Cup exclusive cannabis retail rights at the Building Envelope (and accepting the $33,900.00 exclusivity payment in exchange for said rights). This conditional 143 Lease contemplated cannabis exclusivity being granted to another tenant in the Building Envelope only 4 days after the April 3 notice, when the landlord was in receipt of 75% of April's rent and days after the province-wide business shutdown due to the COVID-19 pandemic.

ii. Second Cup was not made aware of the 143 Lease until May 12, 2020.

iii. On May 4, 2020, after Second Cup had offered to bring the Lease into good standing, the landlord instead, immediately after receiving that offer, signed a lease for the premises with BOD that granted a significant rent-free period.

iv. On May 6, 2020, knowing that 273 had an RSA application pending for a cannabis store at the premises and that the plaintiffs were disputing the termination of the Lease, the landlord nonetheless wrote directly to the Alcohol and Gaming Commission of Ontario ("AGCO") to advise of its termination of the Lease. Since there cannot be two licences for the same premises, this would have paved the way for an RSA application by 143 for adjacent premises in the Building Envelope under the 143 Lease that the landlord then proceeded to finalize on May 7, 2020.

v. After notifying the AGCO of the termination of Second Cup's lease on May 6, 2020, on May 7, 2020 the landlord finalized a lease to be used for the operation of a cannabis retail store with the defendant 1435501 Ontario Inc. of other premises within the Building Envelope, with a term commencing May 15, 2020 and a two-month rent free period until July 14, 2020.

vi. the leases entered into with BOD and 143 were not fairly characterized as simply efforts to mitigate the breaches of the Lease, particularly given the rent-free periods that were granted under the BOD Lease and the 143 Lease.

[19] This is the type of reprehensible, scandalous or outrageous conduct that is deserving of an award of substantial indemnity costs. These circumstances are far more extreme than those that were considered in a recent decision relied upon by the defendants involving the conduct of a landlord (when asked for an accommodation by a tenant due to the financial strain of the COVID-19 pandemic) that was found by the court to be short-sighted and precipitous but not worthy of an award of substantial indemnity costs. See Risk Logistics Inc. v. Mantella & Sons Investments Limited, 2020 ONSC 3936, at paras. 21 and 30.

[20] However, I do not consider the circumstances of this case to go so far as to command the punitive effects of an award of full indemnity costs. The principle of indemnity under Rule 57.01(0.b) is not treated as a basis for full indemnification. It is balanced against what the losing defendants might reasonably have expected to pay.

[21] There are also settlement offers to consider. I do not agree with the submissions of the landlord defendants that it was improper for the plaintiffs to refer to without prejudice communications that took place prior to the motion about settling the motion. That these were not formal Rule 49 offers does not mean that they are irrelevant to the exercise of my discretion when it comes to determining the scale of costs. Rule 49.13 directs that they are relevant.

[22] The offers made by the plaintiffs contemplated the reinstatement of the Lease with added benefits and incentives that did not accompany the reinstatement of the Lease that resulted from my decision. The plaintiffs accurately portray these as offers that, if accepted, would have given them something less favourable than my decision (in other words, offers that they "beat" in the end result). They are not determinative of my decision to award substantial indemnity costs to the plaintiffs, but the fact of these offers having been made and not accepted supports my decision to award the higher scale of costs.

[23] On the scale of costs, it is objectively reasonable in circumstances such as existed in this case that the landlord defendants ought to have expected to have to pay substantial indemnity costs if they were unsuccessful.

[24] In the exercise of my discretion, I find that the plaintiffs are entitled to their substantial indemnity costs of this motion.

Quantum of Costs

[25] The court has a broad discretion when determining the issue of costs. Rule 57.01 sets a non-exclusive list of factors that may be considered in the exercise of that discretion. I have considered the factors applicable in this case, including: the result of the application, the principle of indemnity (taking into account the experience and rates of the lawyers involved), the amount at issue, the complexity and importance of the issues and the conduct of the parties.

[26] The issues were factually complex and important to the tenant. The amount in issue was not simply the $4,500.00 in rent arrears, as the defendants suggest, but rather Second Cup's longevity as a tenant in the leased premises and its entire RSA application. The issues were complicated by the hard line and technical positions that the landlord took. Injunctions are notoriously expensive because of the high intensity and fast pace at which the parties have to prepare for the hearing, with the heavier burden being on the moving party.

[27] It is commonly understood, as this court reiterated in Tesla Motors Canada ULC v. Ontario (Ministry of Transportation), 2018 ONSC 5062, 144 O.R. (3d) 701, at para. 67, that:

Overall, the court is required to consider what is "fair and reasonable" in fixing costs, and is to do so with a view to balancing compensation of the successful party with the goal of fostering access to justice: Boucher v. Public Accountants Council (Ontario), 71 O.R. (3d) 291 (Ont. C.A.), at paras. 26, 37.

[28] This engages the principle of indemnity for the successful party (57.01(1)(0.a)) and the expectations of the unsuccessful party (57.01(1)(0.b)).

[29] The cost outline of the unsuccessful parties is one data point to consider in assessing their expectations, but that is not the only consideration. Here, the cost outline of the defendants on all scales is considerably less than that of the moving plaintiffs. However, the plaintiffs had a much heavier onus and much more at stake so it is not surprising that they would devote more time and resources to this motion. The moving parties also carried a heavier load in preparing the agreed facts that was of much assistance to the court.

[30] The moving parties retained more experienced counsel whose hourly rates were higher than those of the defendants' counsel. That was their prerogative. The defendants could not reasonably expect that the plaintiffs would only hire lawyers of similar experience and with similar rates to their own lawyers.

[31] The defendants challenge the cost outline because a cost outline claiming higher amounts on all three scales was delivered with the initial cost submission after the outcome of the motion was known. Plaintiffs' counsel explains that this updated outline captured significant time spent in June leading up to the motion that was not included in the original cost outline.

[32] The defendants are also critical of the plaintiffs for including, and not breaking out, the portion of the claimed fees associated with the pre-hearing judicial mediation that the parties participated in at the encouragement of the court. The defendants argue that such fees are not recoverable as part of the costs of this motion, relying on Saltsov v. Rolnick, 2010 ONSC 6645 (Div. Ct.), at paras. 9-19.

[33] This is not an assessment and it is not the role of the court to parse through the line items of the lawyers' bills and time dockets. The exercise of discretion in fixing costs includes an overall assessment of fairness and reasonableness. In my view, taking into account the defendants' challenges and criticisms, some of which I have given effect to in a general way (such as the claim for non-recoverable costs of voluntary mediation and differential in the cost outlines between June 5 and July 7) and others that I have not (such as the criticism of the higher hourly rates and the fact that more time was spent by the lawyers for the plaintiffs) it is fair and reasonable, in an urgent proceeding of this magnitude that Second Cup be awarded its all-inclusive substantial indemnity costs fixed in the amount of $150,000.00. The landlord is ordered to pay these costs to the Second Cup within 30 days of this endorsement.

Personal Liability of Mr. Mandelbaum for Costs

[34] Costs are sought against Mr. Mandelbaum on various theories for piercing the corporate veil. He is a named defendant personally but the motion was not argued on the basis of his personal liability and no order was made against him personally. I do not consider the issue of Mr. Mandelbaum's personal liability, distinct from his conduct on behalf of the landlord corporation which has led to my awards herein, to have been sufficiently briefed and argued for me to make an order of costs against him, and I decline to do so.

Implementation

[35] Given the magnitude of the costs award, however, and the history of dealings between the parties, to the extent that either of the plaintiffs or their permitted affiliates remain as tenants they should not be required to pay rent to the landlord while there is an outstanding costs award against the landlord and I am thus declaring and ordering that, notwithstanding anything in the Lease to the contrary, amounts owing under the Lease by the tenant to the landlord may be set off against this costs award and the costs award will bear interest, accrued and compounded monthly at the post-judgment interest rate under the CJA of 3%.

[36] This is not an invitation for the landlord to delay the payment of costs beyond the 30 days that I have allowed for payment. Interest is compounded to provide some disincentive against that. This right of set-off and compounding of interest are rights in addition to, and not in substitution for or derogation of, any rights that the plaintiffs may have if the landlord fails to pay the costs awarded in a timely manner.

[37] Notwithstanding Rule 59.05, this endorsement is effective from and after the date indicated below and it is enforceable without any need for the entry and filing of a formal judgment. Any party may nonetheless submit a formal judgment for original signing, entry and filing when the Court returns to regular operations.

Kimmel J.

Released: September 2, 2020

[^1]: Capitalized terms not otherwise defined in these reasons shall have the same meaning ascribed to them in my reasons for decision released June 11, 2020 in this matter.