COURT FILE NO.: CV-00000903-0000
DATE: 2020-09-24
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
HUNT’S TRANSPORT LIMITED
Applicant
– and –
EAGLE STREET INDUSTRIAL GP INC.,
Respondent
Cynthia Davis, for the Applicant
Rohit R. Kumar, for the Respondent
HEARD: August 18, 2020
juSTICE d.a. bROAD
REASONS FOR JUDGMENT
Background
(a) Parties
[1] The Applicant (“Hunt’s” or the “Tenant”) carries on business providing commercial transport and logistic services to customers across Canada. Its head office is in the Province of Newfoundland and Labrador. It leases premises (the “Premises”) from the Respondent (“Eagle Street” or the “Landlord”) at 1574 Eagle Street North in Cambridge, Ontario pursuant to a lease dated January 1, 2018 (the “Lease”). The Tenant says that the building portion of the Premises consists of 102,375 square feet of commercial space, whereas the Landlord says that it comprises 105,941 square feet. The outdoor yard space included in the Premises is two acres in size. The Tenant uses the Premises as a warehouse and distribution centre. There are ten commercial tenants (including the Tenant) on the property (the “Property”) of which the Premises comprise a part.
[2] Eagle Street acquired the Property in December 2018 from NKG Holdings Inc. (“NKG”). Hunt’s held a 50% ownership share in NKG through a holding company from August 2014 to December 2018.
(b) Pertinent Lease Terms
[3] The Lease was drawn using a template form of lease previously used by NKG as landlord. It is for a five (5) year term back-dated to commence on January 1, 2018. The Tenant is afforded a right to renew the Lease for two additional terms of five (5) years each. The Tenant also has the right to assign the Lease or sublet the Premises with the prior consent of the Landlord, which is not to be unreasonably withheld.
[4] The Lease provides for base rent payable by the Tenant for the initial five (5) year term at set annual rates per square foot, commencing at $4.76 per sq. ft. in 2018 and increasing through annual adjustments to $5.07 per sq. ft. in 2022.
[5] The Lease also provides for the Tenant to pay as Additional Rent (referred to by the parties as “TMI”) its proportionate share of common expenses relating to the Property as defined in the Lease, subject to certain specified exclusions.
[6] The Lease provides that at the commencement of each calendar year, or as soon as practicable thereafter, the Landlord is obliged to advise the Tenant of its estimated proportionate share of common expenses (TMI) for the ensuing yearly period. This estimated amount is payable by the Tenant monthly on the 1st day of each month. The Lease does not expressly require the Landlord to provide documentation or other support for its estimate.
[7] At the end of each calendar year, or as soon as practicable thereafter, the Landlord is required by the Lease to provide the Tenant with a reconciliation of its proportionate share of the actual common expenses incurred for the preceding year. The Lease does not expressly require the Landlord to produce invoices or other documentation to substantiate its reconciliation. Any over-payment or under-payment of common expenses, based upon the estimate provided by the Landlord at the commencement of the year, is applied to the next month's rent as a credit or debit, as the case may be.
[8] “Rent” is defined in the Lease as “the aggregate of (a) Base Rent, (b) Additional Rent, and (c) all additional sums which may become payable by Tenant to Landlord or third parties from time to time” under the provisions of the Lease.
[9] The Lease specifically provides that the “estimated” Additional Rent is $1.95 per sq. ft.
[10] Para. 4.1 of the Lease (the “No Deduction” clause) provides that the Tenant shall pay all Rent (as defined) and all other amounts collectible by the Landlord as Rent “without any deduction, set-off or abatement.”
(c) Arbitration of Disputes
[11] The Lease provides that any dispute between the parties is to be submitted to arbitration. A set of rules governing the arbitration of disputes is set forth at Schedule D to the Lease (the “Arbitration Rules”).
[12] The Arbitration Rules provide, inter alia, for the parties to request that the arbitrator or arbitrators report in writing to them within thirty (30) days following the date of the appointment of the arbitrator or arbitrators and that the determination of any issue by the arbitrator or arbitrators, as the case may be, shall be final and binding on the parties.
[13] The Arbitration Rules also provide that “nothing herein shall affect, modify, diminish, defer, or vary any of Landlord's rights and remedies in the event that Tenant is in default hereunder.”
[14] In addition, para. 11 of the Arbitration Rules, entitled “Continued Performance,” provides as follows:
At all times, notwithstanding the existence of any dispute, the parties shall continue to perform their respective obligations in accordance with the provisions of this Agreement without prejudice to their right to contest, dispute and challenge the relevant matter in accordance with the provisions of this Agreement, provided that this Schedule shall not apply to a party where the other party has repudiated, terminated or abandoned performance of this Agreement or where the first party asserts claims in fraud or misappropriation. Nothing herein shall be deemed to restrict or vary any of Landlord's rights and remedies in the event of default by Tenant.
(d) Dispute
[15] In January 2019 the Landlord provided the Tenant with its estimate of Additional Rent for the 2019 lease year in an amount comprising $2.50 per sq. ft. The Tenant says that it paid this amount reluctantly with the expectation that at the end of the year the Landlord’s reconciliation of Additional Rent would disclose that it had over-estimated the amount of Additional Rent.
[16] On March 3, 2020 the Landlord delivered a statement to the Tenant setting forth its reconciliation of Additional Rent for 2019, which totalled $3.15 per sq. ft. This represented an increase to the Tenant of $189,193.07 in respect of Additional Rent for 2019 over the “estimate” in the Lease of $1.95 per sq. ft. Moreover, the Landlord advised the Tenant that its estimate of Additional Rent for the 2020 lease year had increased to $3.24 per sq. ft., representing an increase of 3% over the TMI costs it says it incurred in 2019. The Landlord demanded payment of this amount from the Tenant in monthly instalments.
[17] The Tenant disputed both the Landlord’s reconciliation of 2019 Additional Rent and its estimate of Additional Rent for 2020, and withheld payment of the 2019 reconciliation amount claimed by the Landlord as well as the amount of the estimated 2020 Additional Rent in excess of $2.50 per sq. ft. The Tenant requested that the Landlord provide invoices and other documentation to support its 2019 reconciliation. The Landlord provided certain invoices on March 25, 2020 and on May 25, 2020 produced additional invoices.
[18] The Tenant took the position that not all of the invoices supporting the Landlord’s claim for Additional Rent were produced and, of the invoices produced, many were for expenses that were expressly excluded by the Lease. Further documentation was produced by the Landlord on June 25, 2020. The Landlord says that it has explained 100% of its calculation of the 2019 reconciliation and has produced invoices for all but $14,000 in expenses, which represents 1% of the overall value of the reconciliation. It says that this amount is immaterial when prorated for the square footage of the Premises.
[19] On June 22, 2020 the Landlord delivered a Notice of Default under the Lease to counsel for the Tenant demanding payment of $173,415.24. The Notice of Default stated that the Tenant had 20 calendar days to cure the default by paying the said amount, failing which the Landlord will proceed without further notice with all remedies available to it under the lease or at law. In addition to the Landlord’s claims in respect of the 2019 Additional Rent reconciliation and its estimate of 2020 Additional Rent, the Notice of Default raised issues in respect of arrears of utility charges and allegations of damage to the Property by the Tenant.
[20] The Landlord issued a revised arrears statement to the Tenant on August 5, 2020 in the amount of $162,684.64, following application of a utilities deposit in the amount of $13,761.50 due to be credited to the Tenant on January 1, 2020.
[21] The Tenant has listed the Premises for sublease with a broker. The date of the listing agreement is not disclosed in the material, however the Landlord discovered the listing on or about June 25, 2020. By correspondence, counsel for the Landlord advised counsel for the Tenant that the Landlord did not consent to the listing of the Premises for sublease on the basis that the Tenant is in default under the Lease.
(e) The Tenant’s Application
[22] By Notice of Application issued July 9, 2020 the tenant seeks various relief against the Landlord including the following:
(a) an interim order for relief from forfeiture pursuant to section 20 of the Commercial Tenancies Act, R.S.O., 1990, c. L. 7;
(b) an order for relief from forfeiture pending determination of an arbitration between the parties pertaining to the determination of the square footage of the premises, the calculation of any over or under payment of 2019 actual Additional Rent, the determination of the 2020 estimated additional rent rate pursuant to the Lease, the determination of any arrears owing by the Tenant for utility charges, and the determination of any set-off for overpayments of base rent and/or Additional Rent made by the tenant;
(c) an order that the Court appoint an arbitrator to determine the arbitration issues;
(d) in the alternative, an order that the Tenant deposit certain monies in dispute into a solicitor’s trust account or into court pending the determination of an arbitration;
(e) an order declaring that the Tenant is entitled to market the premises for the purpose of assigning or subleasing the premises under the Lease; and
(f) an order that the Landlord is prohibited from withholding consent to a sublease of the premises on the basis of the matters related to the arbitration issues.
(f) Notice of Arbitration
[23] By Notice of Arbitration dated and delivered July 10, 2020 the Tenant gave notice of submission of the following issues to arbitration pursuant to the Lease:
the determination of the square footage of the Premises;
the determination of the amounts owing by or to be credited to the Tenant with respect to 2019 actual Additional Rent pursuant to the Lease;
the determination of the amounts owing by or to be credited to the Tenant with respect to estimated 2020 Additional Rent pursuant to the Lease;
the determination of what, if any, amounts are outstanding, due and payable by the Tenant or the Landlord in respect of utility charges under the Lease between January 1, 2019 and the date of the Notice;
the determination of any set-offs to be applied to any amounts found payable by the Tenant to the Landlord; and
a determination of whether the Respondent has acted in good faith with respect to:
(a) the execution of the Lease as part of the sale transaction for the property which expressly included a negotiated rate of Additional Rent for all five years of the Lease at $1.95 per square foot for Additional Rent;
(b) increasing the estimated Additional Rent from $1.95 to $2.50 within two months of purchasing the property and negotiating the Lease;
(c) the preparation of the 2019 Reconciliation;
(d) the expenditures related to additional rent charges;
(e) the estimation of 2020 Additional Rent;
(f) the service of a Notice of Default for Non-Payment of Rent dated June 22, 2020;
(g) attempts to thwart the Tenant from subleasing the Premises;
(h) its premature notice of an intention to refuse to consent to the sublease of the Premises; and
(i) any other actions to be particularized prior to the arbitration hearing.
Issues
[24] The issues for determination may be stated as follows:
(a) is the Tenant in breach of the Lease for nonpayment of the amount claimed by the Landlord for 2019 Additional Rent, the full estimated 2020 Additional Rent and/or arrears of utility payments?
(b) if so, should the Tenant be granted relief from forfeiture pending the outcome of the arbitration?
[25] The Landlord has brought no Application of its own seeking relief in the proceeding. The question of whether the Tenant should be ordered to pay the arrears to the Landlord pending the outcome of the arbitration, put forward as an issue by the Landlord in its Factum, is therefore not something the court is called upon to determine in the pleadings.
[26] Both parties, in their respective Factums, proposed issues relating to the Tenant’s listing of the Premises for sub-lease.
[27] The Tenant has expressed the issues as follows:
“Is the Applicant entitled to market its Premises for subleasing purposes?
Can the Landlord withhold consent to sublease the Premises on account of the non-payment of $173,415.24?”
[28] The Landlord has identified the issue as:
“if the Tenant is in default of the Lease for non-payment of the Arrears, should the Tenant be entitled to market the Premises for sub-lease pending the outcome of the Arbitration?”
[29] It is axiomatic that the issues are to be framed by the pleadings.
[30] The Tenant, as indicated above, has sought the following relief in reference to its listing of the Premises for sub-lease at para.1 of the Notice of Application:
(e) an order declaring that the tenant is entitled to market the premises for the purpose of assigning or subleasing the premises under the lease; and
(f) an order that the landlord is prohibited from withholding consent to a sublease of the premises on the basis of the matters related to the arbitration issues.
[31] In my view, these heads of relief are duplicative of the relief claimed by the Tenant in the Notice of Arbitration at para. 6 (g) and (h).
[32] Para. 1 (e) of the Notice of Application seeks declaratory relief. Lang, J. (as she then was) conducted a very useful review of the law respecting declaratory orders and judgments in the case of Harrison v. Antonopoulos, 2002 28725 (ON SC), [2002] O.J. No. 4890 (S.C.J.) at paras. 21 to 28. At para. 28 Lang, J. observed the following:
Declaratory relief, being only a declaration of parties' rights, is mainly sought in commercial matters to help parties define their rights, and as a means to settle matters amicably where reasonable people would otherwise disagree on their mutual obligations and wish to resolve the matter in order to avoid future disputes. In other words, a cause of action need not be extant at the time a party requests declaratory relief. Because declaratory relief is in essence a request for an advance ruling, courts have discretion to refuse such relief. This is the type of relief contemplated by s. 108(2) of the CJA — a declaration of parties' rights with no coercive effect or remedial entitlement.
[33] The relief sought at sub-para. 6(f) of the Notice of Application is coercive, as being injunctive in nature. However, it is dependent upon the making of the declaration sought at sub-para. 6(e).
[34] The dispute between the parties on whether the Tenant may market the Premises for sub-lease under the circumstances and whether the Landlord may refuse consent to a sub-lease, pending the arbitration of the dispute respecting Additional Rent, is squarely within the jurisdiction of the arbitrator by reason of the Notice of Arbitration delivered by the Tenant.
[35] In accordance with Harrison, in the exercise of my discretion, I therefore refuse to grant the declaratory relief sought by the Tenant at para. 6(e) of the Notice of Application and the associated injunctive relief at para. 6(f).
[36] The relief sought at sub-para. 1 (c) of the Notice of Application requesting the court to appoint an arbitrator was not pursued in submissions. I understand that the arbitrator has been selected by the parties.
Issue One – Is the Tenant in Breach of the Lease?
[37] The Tenant takes the position that the Landlord has not produced a properly completed reconciliation of the 2019 Additional Rent supported by invoices or other records. It maintains that there are numerous issues with the amount claimed by the Landlord, including the failure to render support for the expenses, inclusion of duplicated charges, inclusion of invoices that are related to the purchase of the Property, expenses expressly excluded from the Lease and expenses that require additional information before they can be confirmed to be included in the calculation of Additional Rent. It says that disputes between the parties are to proceed to arbitration and it cannot be in default under the Lease for the non-payment of monies not yet determined by the arbitrator to be owing.
[38] I accept the Tenant’s submission that the duty of good faith imposed on the Landlord by virtue of the case of Bhasin v. Hrynew, 2014 SCC 71 renders it commercially reasonable to imply a term into the Lease requiring the Landlord to provide copies of all the documents which support the amounts claimed from the Tenant in the year-end reconciliation of Additional Rent for 2019 (see 1877352 Ontario Inc. v. 699147 Ontario Inc. 2016 ONSC 445 (S.C.J.) at para. 30) .
[39] However, 1877352 Ontario Inc. v. 699147 Ontario Inc. does not support the Tenant’s proposition that, pending determination of the Tenant’s dispute of the completeness, sufficiency or accuracy of the Landlord’s supporting documentation by arbitration, the Tenant is justified in withholding payment of the adjusted amount claimed by the Landlord.
[40] 1877352 Ontario Inc. v. 699147 Ontario Inc. concerned an application by a commercial tenant for a declaration of the correct amounts which were properly payable by it in respect of additional rent under a lease over several years and a declaration that it had overpaid rent. There was no suggestion that the tenant had withheld payment of additional rent based upon an alleged failure of the landlord to provide adequate support for its calculations or was seeking to do so.
[41] As indicated above, the “No Deduction” provision in the Lease obligates the Tenant to pay all Rent, defined to include Additional Rent and all other amounts collectible by the Landlord as Rent, “without any deduction, set-off or abatement.”
[42] Moreover, the “Continuing Performance” provision in the Arbitration Rules at para. 11 specifies that, notwithstanding the existence of any dispute, the parties shall continue to perform their respective obligations in accordance with the provisions of the agreement without prejudice to their right to contest, dispute and challenge the relevant matter by arbitration, and there is nothing in the Lease which shall be deemed to restrict or vary any of the Landlord's rights and remedies in the event of default by the Tenant.
[43] In its Factum, the Tenant cites the case of The Garage Grill Inc. v. 2517532 Ontario Inc., 2018 ONSC 1105 at para. 16 for the proposition that it is not improper for a tenant to withhold payment of amounts claimed by landlord on account of additional rent if the landlord fails to substantiate such amounts with documentation and the tenant is not responsible to pay for the landlord’s claims until it does.
[44] In my view, Garage Grill does not stand for this general proposition. Dow, J., at para. 16 of his Reasons observed
It was clear in submissions that the tenant's refusal to pay until the eve of the hearing was met with the landlord not providing the information which could support the landlord's right to be paid the first two items. Counsel for the landlord sensibly acknowledged such expenses were part of the landlord's larger operation and the tenant is not responsible to pay for these claims until appropriate documentation was provided. I agree and if necessary, same is ordered.
[45] There was no indication that the lease in Garage Grill provided for arbitration of disputes or contained provisions similar to those in the present Lease requiring the tenant to pay all rent without any deduction, set-off or abatement, for the parties to continue to perform their respective obligations pending arbitration of disputes and for the landlord’s rights and remedies to continue to apply pending arbitration. Dow J. simply noted that counsel for the landlord had acknowledged that certain expenses were not properly chargeable and that the tenant was not responsible to pay for them until the landlord provided proper documentation.
[46] The Tenant, in its Factum, cites the case of L’ouvrier Inc. v. Leung, 2016 ONSC 6993 at paras. 75 and 88 for the proposition that the Landlord cannot rely upon the Tenant’s refusal to pay unsubstantiated amounts as a breach of the Lease.
[47] In my view, reliance on L’ouvrier for this proposition is misplaced.
[48] On the specific facts of L’ouvrier, the landlord failed to make annual adjustments of additional rent as provided for in the lease and did not raise the issue of adjustments until the time of renewal of the term, at which time it purported to deny the tenant’s right to renew on the basis that it was in breach for failure to pay additional rent. Lederer, J. at para. 75 stated:
There is nothing that would allow the landlord to hold back, claim no adjustment each year and at the time of renewal expect full payment of what it says is owing (including interest) and claim the failure to pay what it demands as a breach of the Agreement to Lease. In such a circumstance, the landlord could not deny the exercise of an option to lease on the basis that the tenant has failed to pay Additional Rent and is, on that account, in breach.
[49] At para, 88 Lederer, J. observed
I find that the defendants are in breach of the Agreement to Lease and the settlement. They claimed Additional Rent in a fashion that was contrary to the Agreement to Lease. They did not provide the plaintiff with an "adjustment" to account for Additional Rent at the end of each year. They made one claim during the course of the five-year term (in 2013) and then waited until the option to renew had been exercised. At that point, they sought to obtain the payment they claimed in return for discussing a renewal they were obliged to provide.
[50] I find that the principles enunciated by Harris, J. in the case of Old Colony Properties Inc. v. Ontario (Management Board of Cabinet), 2002 CarswellOnt 2372 at paras. 213-215 are applicable to the circumstances of the case at bar, as follows:
I have reviewed the cases provided by counsel and the law is fairly settled in the matter of suspending or withholding rental payments under commercial leases. The textbook Tenants Rights and Remedies in a Commercial Lease, by Harvey M. Haber, 1998 is a useful source in that regard as I feel it effectively decants the common law jurisprudence I have reviewed on this particular case. At page 27:
Covenants in a commercial lease are not interdependent. Just as the independence of covenants ensures that the Tenant will rarely have the right to terminate a lease, the Tenant is equally not entitled to suspend rent. Only where there is an applicable clause in the lease, or where the breach of a covenant is sufficient to amount to a legal eviction, is the Tenant entitled to withhold rent. It should be noted that there is no right to withhold rent as compensation for the cost of doing repairs which the Landlord has failed to do... A Tenant must seek alternate remedies in such situations. This is in direct contrast to the situation pertaining to residential tenancies.
The lease contains no provision whereby the Tenant is entitled to withhold rent.
The appropriate remedy of an aggrieved Tenant is to choose its remedy under the contract and pursue it in the civil process. The self-help notion of withholding rent while still maintaining sovereignty over the premises was misguided and counter to settled and legitimate commercial conduct.
[51] In the case of Michele’s Italian Ristorante Inc. v. 1272259 Ontario Ltd., 2016 ONSC 4888, Perell, J. confirmed that, in the face of a “No Deduction” provision in a lease, a tenant is not entitled to withhold base and additional rent even if the landlord is in breach of the lease, stating the following at para. 40:
Even if there was some breach of the lease by the Landlord, which I find there was not, Ristorante was obliged to pay Basic and Additional Rent without deduction, abatement or set-off.
[52] In my view, the Landlord and the Tenant in the case at bar have, by the terms of the Lease, established a system for the orderly and expeditious resolution of disputes under the Lease, including disputes respecting the calculation of Additional Rent, in a way that does not interfere with the parties’ continued performance under the Lease, or with maintenance of the revenue stream to the Landlord required by it to maintain the Property for the benefit of all tenants and to satisfy the requirements of its financiers.
[53] Should the Tenant seek to dispute the reconciliation of Additional Rent carried out by the Landlord at year end, or its estimate of Additional Rent at the commencement of the lease year, its remedy under the Lease is to submit the dispute to arbitration - as the Tenant has done. There is nothing in the Lease which permits the Tenant to withhold payment of Rent, as defined in the Lease, pending determination of the dispute by arbitration. There is similarly nothing in the jurisprudence, in my view, which supports such a right in the Tenant.
[54] If the Tenant succeeds in reducing or eliminating Additional Rent claims of the Landlord following arbitration, it enjoys security for recovery of any overpayment by means of a credit against future Rent as expressly provided by the Lease. Conversely, if the Tenant were permitted to unilaterally withhold payment of Additional Rent pending arbitration of its disputes, the Landlord, if wholly or partly successful in the arbitration, would have no such security for recovery of the withheld Rent found to be owing by the Tenant. The scheme of the Lease for resolution of disputes, by the inclusion of the “No Deduction” and “Continued Performance” clauses, has the effect of avoiding this imbalance.
[55] I find that the Tenant, by withholding the 2019 Additional Rent claimed by the Landlord following its reconciliation, is in breach of the Lease.
[56] As indicated above, the Tenant paid Additional Rent at the rate of $2.50 per sq. ft. during 2019, has disputed the Landlord’s Additional Rent estimate for the 2020 lease year at the rate of $3.20 per sq. ft. and has refused to render payment of the amount claimed by the Landlord in excess of $2.50 per sq. ft.
[57] The Tenant submits that the Landlord’s estimate of Additional Rent for the 2020 lease year represents a breach of its obligation of good faith in its contractual dealings with it. The Tenant argues that, until the Landlord produces a proper estimate for 2020 Additional Rent and the proper amount is determined by arbitration, it is not in breach of the Lease for refusing to make payment of the full amount of Landlord’s claim, which it says is 60% higher than the “estimate” of $1.95 per sq. ft. provided in the Lease.
[58] In light of the arbitration clause in the Lease, by which the parties expressly agreed to submit disputes to binding arbitration, it is not the role of the court to determine the propriety of the Landlord’s estimate. The parties agreed to leave that determination to the arbitration process. The parties also agreed that the Landlord’s estimate of 2020 Additional Rent is required to be paid without set-off, deduction or abatement pending completion of arbitration of the dispute. The Tenant is therefore in breach of its obligation under the Lease to pay Rent by withholding the portion of the estimate in excess of $2.50 per sq. ft.
[59] The same disposition applies in respect to the amount claimed by the Landlord for arrears of utility charges.
[60] As observed by Harris, J. in Old Colony Properties as set forth above, the Tenant’s use of self-help by withholding the Rent arrears pending resolution of the disputes by arbitration while still maintaining sovereignty over the Premises, is “misguided and counter to settled and legitimate commercial conduct.”
Issue Two: Is the Tenant Entitled to Relief from Forfeiture?
(a) Guiding Principles re Relief from Forfeiture
[61] S. 20(1) of the Commercial Tenancies Act, provides as follows:
20 (1) Where a lessor is proceeding by action or otherwise to enforce a right of re-entry or forfeiture, whether for non-payment of rent or for other cause, the lessee may, in the lessor’s action, if any, or if there is no such action pending, then in an action or application in the Superior Court of Justice brought by the lessee, apply to the court for relief, and the court may grant such relief as, having regard to the proceeding and conduct of the parties under section 19 and to all the other circumstances, the court thinks fit, and on such terms as to payment of rent, costs, expenses, damages, compensation, penalty, or otherwise, including the granting of an injunction to restrain any like breach in the future as the court considers just.
[62] The remedy of relief against forfeiture has been described by the Supreme Court of Canada as equitable in nature and purely discretionary (see Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., 1994 100 (SCC), [1994] 2 SCR 490 at p. 504).
[63] The Court of Appeal in Ontario (Attorney General) v. McDougall, 2011 ONCA 363 at paras. 86-87 confirmed that the power to grant relief from forfeiture is discretionary and fact specific and is based on the existence of circumstances in which enforcing a contractual right of forfeiture, although consistent with the terms of the contract, visits an inequitable consequence on the party in breach. Relief from forfeiture is granted sparingly and the party seeking the relief bears the onus of making the case for it.
[64] The Supreme Court of Canada in Saskatchewan River Bungalows at para. 32 identified three factors to be considered by the court in determining whether to exercise its discretion to grant relief from forfeiture: (1) the conduct of the applicant; (2) the gravity of the breaches; and (3) the disparity between the value of the property forfeited and the damage caused by the breach.
[65] The Court of Appeal in 147777 Ontario Inc. v. Leon’s Furniture Ltd., (2003) 2003 50106 (ON CA), 67 O.R. (3d) 206 (C.A.) noted, at para. 72, that in considering the tenant’s conduct, the court should have regard to whether it was "wilful."
(b) Position of the Tenant
[66] The Tenant submits in its Factum that it has not “outright refused” to render payment of the amounts being disputed, but simply seeks to have the proper amount determined by an arbitrator before rendering what “it deems” will be a significant overpayment
[67] The Tenant also argues that, notwithstanding the “no set-off or abatement” provision of the Lease with respect to the payment of Rent, it would be unfair to allow the landlord to recover the disputed amount that it has failed to properly substantiate under the Lease as a precondition to the Tenant’s ability to have the proper amount determined, citing the case of Toronto (City) v. MFP Financial Services Ltd., 2003 19234 (ON SC), 2003 CarswellOnt 2417 (SCJ) at paras. 43 to 46.
[68] Finally, the Tenant submits that the court should take into consideration the Coronavirus pandemic currently impacting businesses across the world. It says that businesses which are ineligible for government assistance “should receive relief in the form of equitable solutions granted by the courts.” It relies upon the recent case of The Second Cup v. 2410077 Ontario Ltd., 2020 ONSC 3684 at para. 58 in support of this submission.
(c) Discussion
[69] In my view the conduct of the Tenant in the case at bar can be characterized as “wilful.” The Concise Oxford English Dictionary (11th ed.) defines “wilful” as “intentional” or “deliberate.” In addition to invoking the remedy of arbitration for resolution of its disputes specifically provided by the Lease, the Tenant deliberately chose to utilize self-help by withholding Rent pending determination of the disputes by arbitration - a remedy not contemplated in the Lease. In doing so the Tenant acted in an unreasonable manner.
[70] The second factor being the “gravity of the breach” concerns itself with the nature of the breach itself and the impact of the breach on the contractual rights of the other party. The Court of Appeal in Ontario (Attorney General) v. McDougall at para. 91 stated as follows:
The second factor identified in Saskatchewan River Bungalows, the gravity of the breach, looks both at the nature of the breach itself and the impact of that breach on the contractual rights of the other party: see Leon's Furniture at paras. 75-78. If, for example, the forfeiture provision operated as a means of securing payment of the rent required under a lease, the fact that the breaching party had paid all amounts owing could obviate the need to resort to forfeiture and support a claim for relief from forfeiture.
[71] The forfeiture provision in the Lease operates in the case at bar as a means for the Landlord to secure payment of the Rent required under the Lease. The Tenant has not paid all amounts owing but is withholding payment, which demonstrates the need for the Landlord to resort to forfeiture. The determination of the amount owing by the Tenant for Additional Rent is within the exclusive purview of the arbitrator. The fact that, as indicated above, the Landlord has no security for recovery of payment from the Tenant of the withheld rent, if it is wholly or partly successful on the arbitration, exemplifies the impact of the breach on the contractual rights of the Landlord.
[72] In my view, Toronto (City) v. MFP Financial Services Ltd. does not stand for the proposition for which it is cited by the Tenant in its Factum. It did not involve a commercial lease dispute nor a claim for relief of forfeiture, but rather involved an unsuccessful motion for summary judgment brought by the defendant seeking dismissal of the plaintiff’s claim for contractual damages for breach of fiduciary duty. Blair, R.S.J. (as he then was) commented as follows at para. 52:
… there are authorities that support the enforcement of "no setoff, defense or counterclaim" clauses in accordance with their terms, and other authorities that suggest the clauses may not necessarily be enforced - at least in the summary judgment context - where they are impacted by other circumstances surrounding the relationship of the parties. In such circumstances, a trial of the issues is appropriate.
[73] The Tenant made no specific submissions in its Factum respecting the third factor being the disparity between the value of the property forfeited and the damage caused by the breach. No evidence was led by the Tenant respecting the value of the leasehold interest in the Premises, although judicial notice can be taken that it has some commercial value given that the initial term of the Lease expires at the end of 2022, followed by two additional renewal terms of five years each. No evidence was led by the Tenant respecting the availability of comparable premises at equivalent lease rates within a reasonable radius of the Property.
[74] I accept the Landlord’s submission that, given the adverse financial condition of the Tenant as described in its affidavit material, the potential for substantial financial loss to the Landlord is considerable, should the Tenant be permitted to maintain sovereignty over the Premises while continuing to hold back the claimed arrears of 2019 Additional Rent and a the portion of the estimated Additional Rent for 2020 - given the lack of security that the Landlord has for collection of those amounts if successful on the arbitration. The Landlord would be unable to mitigate its losses by reletting the premises.
[75] I am not satisfied that the value of the property to be forfeited is disproportionate in reference to the damage caused by the Tenant’s breach.
[76] I do not accept the Tenant’s submission that the effect of the COVID-19 pandemic is a relevant consideration in the circumstances of this case. As indicated above, it advances the policy argument in its Factum that businesses such as it which do not qualify for rental reduction through government programs should receive equitable relief from the courts.
[77] In The Second Cup, Kimmel J. at para. 58 referred to the following circumstance as one of four which favoured the exercise of the court's equitable jurisdiction and discretion to grant relief from forfeiture to the tenant:
In the midst of an unprecedented pandemic that shut down most of Second Cup's operations and the country's economy and had its senior management scrambling to negotiate with multiple landlords and franchisees over a short period of time, the landlord terminated the Lease for failure to pay 25.5% of one month's rent, totalling $4,527.55 in April 2020 and on the first business day after the May 2020 rent was due.
[78] This passage does not support the broad policy proposition advanced by the Tenant in its Factum. It is simply an example of the court considering the relevant circumstances in applying the three factors from Saskatchewan River Bungalows and, in particular, the third factor which calls for a weighing of the impact of forfeiture on the tenant against the effect of the tenant’s breach on the Landlord.
[79] The Tenant goes on to argue in its Factum that it is “merely trying to conserve financial resources so it may preserve its operations while asserting its rights to pay only those sums which it is obligated to pay under the Lease.” This submission ignores the fact that it is for the arbitrator to adjudicate on the disputes respecting the correct amount of Additional Rent and that, pending that determination, the Lease obligates the Tenant to pay the Landlord’s reconciled amount for 2019 and its estimated amount for 2020.
[80] At paras. 86 to 91 of her Affidavit filed in support of the Application, Darlene Hilliard addressed the impact of the COVID-19 pandemic, deposing that “Hunt’s has not been spared [from the economic downturn due to the pandemic] and we are facing significant issues and uncertainty.” She offers no particulars of the specific impact of the pandemic on the Tenant’s business. It is evident that, as a commercial trucking/logistics company, it was not required to cease operations at any time since the onset of the pandemic.
[81] In consideration of the foregoing, I am not satisfied that the Tenant has satisfied the onus on it to demonstrate that relief from forfeiture should be granted pending the outcome of the arbitration of the disputes between the parties.
[82] However, in the exercise of my discretion, I find that it is appropriate to order temporary relief from forfeiture of the Lease for 20 days from the release of these Reasons for Judgment to permit the Tenant to cure its default by paying all arrears of Rent, plus accrued interest thereon in accordance with the Lease to the date of payment.
Disposition
[83] In accordance with the foregoing, it is ordered as follows:
(a) The Applicant is granted temporary relief from forfeiture of the Lease for a period of 20 days from the date of this Judgment to permit it to cure its default by paying to the Respondent all arrears of Rent, plus accrued interest thereon in accordance with the Lease to the date of payment. If the parties are unable to agree on the amount of the arrears and interest, they may make an appointment through the Trial Coordinator at Kitchener to appear before me to settle the amount to be paid;
(b) The relief claimed at sub-paragraphs 1(c), (d), (e), (f), (g), (h), (i), and (j) of the Notice of Application is dismissed.
Costs
[84] The parties are strongly urged to settle the issue of costs between themselves. If the parties are unable to do so, the Respondent may make written submissions as to costs within 21 days of the release of these Reasons for Judgment. The Applicant has 14 days after receipt of the Respondent’s submissions to respond. The written submissions shall not exceed five (5) double-spaced pages exclusive of Bills of Costs or Costs Outlines, offers to settle and authorities. All such written submissions are to be forwarded to me at my chambers at 85 Frederick Street, 7th Floor, Kitchener, Ontario N2H 0A7. If no submissions are received within this timeframe, the parties will be deemed to have settled the issue of costs as between themselves.
D.A. Broad, J.
Released: September 24, 2020
COURT FILE NO.: CV-00000903-0000
DATE: 2020-09-24
ONTARIO
SUPERIOR COURT OF JUSTICE
HUNT’S TRANSPORT LIMITED
Applicant
– and –
EAGLE STREET INDUSTRIAL GP INC.,
Respondent
REASONS FOR JUDGMENT
D.A. Broad J.
Released: September 24, 2020