2021 ONSC 1252

Court File and Parties

COURT FILE NO.: CV-20-00637375-00CL DATE: 20210218 SUPERIOR COURT OF JUSTICE – ONTARIO (Commercial List)

RE: PARC-IX LIMITED, Applicant AND: MANUFACTURERS LIFE INSURANCE COMPANY, Respondent

BEFORE: Koehnen J.

COUNSEL: Jonathan C. Lisus, Shaun Laubman, Andrew Winton Counsel, for the applicant Phillip L. Sanford and Lisa M. Constantine for the respondent

HEARD: January 29, 2021

Endorsement

[1] Parc-IX Limited applies to set aside the arbitral award of P. David McCutcheon dated February 3, 2020 for exceeding his jurisdiction. Manufacturers Life Insurance Company brings a cross-application to recognize and enforce the arbitral award.

[2] The arbitration arises out of a 99 year lease, the rent under which is re-set every 25 years. Parc-IX submits that the arbitrator made a jurisdictional error in that he failed to take into account legal regulations affecting the property when he was obliged to do so pursuant to a decision of McEwen J. indexed as The Manufacturer’s Life Insurance Company v. Parc-IX Limited, 2018 ONSC 3625.

[3] I dismiss the application. Although there are individual passages of the arbitrator’s decision which, when read in isolation, could be interpreted as ignoring or misapplying the decision of McEwen J., when read as a whole, the arbitrator’s decision demonstrates that he took the regulations at issue into account but found that they did not apply on the facts of the case. The arbitrator was entitled to make that factual determination. The parties had precluded appeals from the arbitrator’s award. As a result, whether the arbitrator was right or wrong in the factual determination he made is beyond the scope of this review. The sole question is whether the arbitrator acted within his jurisdiction. I find that he did.

I. Background to the Arbitration

[4] The dispute before me arises out of a ground lease dated August 15, 1964 for a property municipally known as 9 Deer Park Crescent in Toronto. Pursuant to that lease, Parc-IX rented a parcel of land from Standard Life Insurance Co. for a term of 99 years. The rent is calculated at:

“6.75% of the fair market value of the property as if it were unimproved”.

[5] The lease provides that the rent is to be re-set every 25 years by agreeing afresh on the fair market value of the property. If the parties could agree on value, that determination would be submitted to final and binding arbitration.

[6] The ground lease was entered into with the intention that Parc-IX would construct a 17 story, 95 unit rental apartment building, which it did shortly after entering into the lease.

[7] The first rental arbitration occurred in 1990. Then, as now, the highest and best use of the property was re-development as a condominium project. At the time, however, there were a series of restrictions in place that prohibited the demolition of rental properties and strictly controlled rent rates on those properties. In the 1990 arbitration, Standard Life argued that valuing the property “as if it were unimproved,” as the ground lease provided, meant that the property should be appraised as vacant land which was capable of being re-developed as condominium. Parc-IX argued that the valuation had to take into account demolition and rent control restrictions (or encumbrances as the parties and subsequent decisions have referred to them).

[8] The 1990 arbitral panel agreed with Parc-IX and valued the land based on the assumption that it could be used only as a rental apartment building.

[9] Standard Life sought judicial review. Even though the reviewing court found that it would have adopted the approach that Standard Life had advocated, it nevertheless dismissed the application because the approach taken by the arbitral panel had nevertheless been reasonable. [1]

[10] After the 1990 arbitration, Standard Life assigned the lease to the current respondent, the Manufacturer’s Life Insurance Company (“Manulife”).

[11] The second rental re-set arose in 2014. Once again, the parties could not agree on fair market value or on the basis on which it should be determined. As a result, Manulife asked the Court to determine a question of law pursuant to section 8 (2) of the Arbitration Act, 1991, S.O. 1991, c. 17. [2]

[12] The application came before McEwen J. from whom Manulife sought:

“• A Declaration that the interpretation of Land Market Value contained in s. 4 of the Ground Lease is res judicata and/or subject to issue estoppel between Manulife and Parc-IX as a result of the decision of the Ontario Divisional Court in Standard Life. • Alternatively, a Declaration that the correct interpretation of the Land Market Value in the Ground Lease should be interpreted to include the highest and best possible use of the land, as if the Property were unimproved and unencumbered, including the value of the Property as if it were available for freehold condominium development as of the valuation date.” [3]

[13] Parc-IX argued before McEwen J. that the 1990 arbitration panel had established the principles applicable to interpreting the lease which gave rise to the doctrines of res judicata and issue estoppel. Alternatively, Parc-IX argued that the value of the property under the ground lease must account for legal encumbrances that restricted Parc-IX’s ability to develop the property for freehold condominium use. McEwen J. found in favour of Parc-IX.

[14] On this application, Parc-IX argues that the arbitrator ignored the decision of McEwen J. by determining land value based on its potential for freehold condominium use and by ignoring legal encumbrances that restrict re-development.

[15] The first step in analysing that issue is to determine what McEwen J. found and why he found as he did. As noted, McEwen J. held that the valuation must take into account legal encumbrances that restricted Parc-IX’s ability to develop it for condominium use.

[16] After stating his conclusion, McEwen J. proceeded with a detailed and careful analysis of the 1990 decision, legal developments since then and the current state of the law.

[17] He held that the 1990 decision governed the parties and that Manulife was estopped from re-litigating it. [4] In paragraph 31 of his reasons McEwen J. stated:

[31] As I outline below, as a result of that evolution, it is my respectful view that the correct interpretation of the words “fair market value of the property as if it were unimproved” only allows the parties to disregard the physical improvements to the Property. Having used no language showing that the parties intended to disregard legal encumbrances, I find that the Land Market Value must account for the fact that Parc-IX is legally prohibited from developing freehold condominiums by virtue of the existence of the lease and the legislative restrictions that it attracts.

[18] The last sentence of paragraph 31 could, if taken in isolation, be interpreted as an absolute statement to the effect that condominium re-development was prohibited. That sentence must, however, be read in context. It follows an assessment of the effect of the 1990 decision at which time condominium re-development was prohibited. It precedes 18 pages of careful analysis.

[19] The gist of that analysis is that the reference to the land being unimproved in the valuation formula means that the value of the building constructed on the property should not be taken into account when determining land value. However, legal encumbrances applicable to the property should be taken into account, even if those encumbrances arise from the presence of a rental building.

[20] The thrust of Justice McEwen’s decision emerges from the following paragraphs:

[116] Simply put: fair market value (or in the case at bar, Land Market Value) must account for legal encumbrances impacting the value of the land. …

[122] In particular, the rule emerging from this line of cases is that absent language to the contrary, legal encumbrances triggered as a result of the very nature of the agreement entered into between the parties must be accounted for in the calculation of fair market value. In Musqueam, it was the land’s character as reserve land. In Victoria University, it was the condominium legislation triggered as a result of the lease. In my view, the rule therefore is: if parties to a rent re-set situation wish to disregard an aspect of market reality when valuing the property, then the contract must expressly provide for this.

[123] In this case, the parties chose to disregard improvements. With this comes a set of consequences for Parc-IX beyond the scope of this application. But the parties did not use any language showing that they intended to disregard encumbrances. In my view, this must be interpreted as meaning that the parties did not intend to ignore the impact of development restrictions that accompany the existence of the Ground Lease.

[126] It is therefore my view that the correct interpretation of s. 4 of the Ground Lease should be on the basis that the Property is unimproved but subject to the restrictions brought forth as a result of the existence of the lease. I further find that this is an interpretation in line with a plain, literal and ordinary reading of the words, as well as one that promotes the most commercially reasonable outcome.

[127] Based on the foregoing I dismiss Manulife’s application and find that the doctrine of issue estoppel applies in favour of Parc-IX and that the interpretation of the Ground Lease contained in the 1990 Arbitration Decision governs the parties.

[21] Justice McEwen did not, however, refer to any legal encumbrances that were in force in 2014 or how they might affect re-development or value. In those circumstances I interpret McEwen J. as saying legal encumbrances must be taken into account but that the specific nature of the encumbrances or their specific effect on the property would be left to the arbitrator.

II. The Arbitrator’s Decision

[22] Parc-IX submits that the arbitrator ignored both 1990 decision and the decision of McEwen J. by failing to take into account the legal encumbrance imposed by the City of Toronto’s Official Plan.

[23] By the time of the 2014 rental re-set, the City of Toronto’s Official Plan Policy 3.2.1.6 required that if an existing rental building were replaced and the replacement resulted in the loss of six or more rental units, at least one of which was at or below the mid-range rent, then the new development had to contain rental units of at least the same number, size and type as the old building. This is known as the Rental Replacement Unit (“RRU”) policy.

[24] Parc-IX submits that the arbitrator failed to apply the RRU policy by interpreting the ground lease in a manner that created a distinction between legislative restrictions that he described as arising from the land or the lease and those arising from the building. Parc-IX submits that the arbitrator considered only those restrictions that, in his view, arose from the land or the lease. He categorized the RRU Policy as arising from the building and held that he did not have to consider it even though it limited re-development and land market value.

[25] Had the arbitrator done so, I would agree with Parc-IX that this would have been a jurisdictional error because it contradicted the decision of McEwen J. and the 1990 decision.

[26] I also agree that certain paragraphs of the arbitrator’s reasons could, if read in isolation, be interpreted as creating the sort of distinction that Parc-IX noted. By way of example, in paragraphs 42 and 43 of his reasons, the arbitrator stated:

42. …. It would also be unfair for the Tenant to benefit from a value based on a legal restriction which affects the Building and is solely within its control by reason of the terms of the Lease and the commercial bargain between the parties.

43. On the basis of cases, the RRU is a legal encumbrance arising from the Building built and operated by the Tenant that does not affect the Land and should not be considered in the determination of Land Market Value.

44. I find that the parties did not intend that restrictions arising from the Building like the RRU would be a restriction on the Land or the Landlord under the re-set clause.

[27] To the extent that those paragraphs are meant to express the view that the RRU policy need not be considered because it affects the building rather than land, I agree with Parc-IX that such an approach would be contrary to the interpretive principle in the 1990 arbitration decision and contrary to the decision of McEwen J.

[28] If, however, one reads the decision as a whole, the distinction on which Parc-IX bases this application is more a question of wording that of substance. At the end of the day, the arbitrator recognized and considered the RRU policy but found that its application to the building did not prevent replacement of the building with a condominium. As a result, there was no legal encumbrance that prevented Parc-IX from achieving the highest and best use of the property, namely re-development as a condominium building. In arriving at this conclusion, the arbitrator relied on, among other things, Parc-IX’s own expert.

[29] The issue arises because only one of the 95 units in the building was rented out at below mid-range rent. That unit was leased to the daughter of an employee of Parc-IX. [5]

[30] The arbitrator then went on to consider those facts and found:

60. …. However, a market vendor in [Parc-IX’s] position would take all steps available in advance of a sale to maximize value by eliminating any prospect that the RRU would apply.

61. A market purchaser who had to consider the RRU because of Unit 303 which had a below mid-range rent would also consider steps to deal with the below market rent in Unit 303, both to maximize rental income and to open the opportunity to re-develop the land without triggering the RRU during the 25-year rent re-set term.

62. Based on my findings below that the three units relied on by the Tenant as mid-range rents would not trigger the RRU, I find that the RRU restriction would not be activated even if it were held to be an encumbrance on the Land.

[31] Although paragraph 62 of the arbitral award refers to three units being below the mid-range rent, Parc-IX conceded before me that only one unit, unit 303, was below the mid-range rent.

[32] In paragraph 76 of his reasons, the arbitrator noted that, at the time of the 1990 arbitration, neither party could avoid the application of the legislation then in force. By 2014, the situation was different and Parc-IX was able to manage around the RRU policy. In paragraph 79 he noted that the 1990 decision was based on a finding that condominium development was not available because the land would not meet the legal requirement for a condominium. By 2014, however, condominium re-development was available provided that no unit was rented below a mid-range rent.

[33] Although there was one unit rented below mid-range rent, that was a non-arm’s length transaction. Even though there was no manipulation of rents and even though the City strictly enforced the RRU, the uncontradicted evidence before the arbitrator was that Parc-IX had substantial leverage over the tenant in unit 303, could have offered her one of the thousands of other apartment units that Parc-IX owned in downtown Toronto or could have bought out the tenant with an incentive payment to re-develop the building as a condominium. Even Parc-IX’s expert at the hearing conceded that it would make common sense to do so. [6]

[34] The arbitrator also noted the commercial unreasonableness of blindly applying the RRU policy to the circumstances at hand. It would allow Parc-IX to complete the arbitration and have the ground rent for the next 25 years set at the lower value associated with a rental building but then go out the next day, move the tenant out of unit 303 and begin the process of condominium re-development.

[35] In my view, the arbitrator properly applied the interpretive guidelines established in the 1990 arbitration decision and in the decision of McEwen J. He applied the RRU policy but concluded that it did not, on the facts of this case, preclude condominium development. In doing so he relied on Parc-IX’s own expert evidence. The arbitrator did not exceed his jurisdiction in doing so but operated squarely within his jurisdiction.

III. Standard of Review

[36] The parties spent some energy on the standard of review. Parc-IX submits that the standard of review from an arbitrator’s decision is correctness. Manulife submitted that the standard of review is reasonableness.

[37] Since the decision of the Supreme Court of Canada in Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65, [7] there has been some conflict about the proper standard of review from an arbitrator’s decision on jurisdiction. Some cases have held that the standard is reasonableness. [8] Others have held that it is correctness. [9]

[38] The question in this case is somewhat academic given that I have found that the arbitrator applied both 1990 decision and the decision of McEwen J. correctly. I would, in any event, have applied the correctness standard to a review of an arbitrator’s decision for the reasons set out at para. 72 of Ontario First Nations (2008) Limited Partnership v. Ontario Lottery and Gaming Corporation, 2020 ONSC 1516. [10]

[39] Quite apart from the standard of review, the proper interpretation of section 46 of the Arbitration Act also comes into play here. Parc-IX seeks review pursuant to section 46 (1) of the Arbitration Act which provides that the court may set aside an award if, among other things:

3. The award deals with a dispute that the arbitration agreement does not cover or contains a decision on a matter that is beyond the scope of the agreement.

[40] This does not provide a right of appeal but a limited right of review based on jurisdictional grounds. Jurisdiction is determined not by asking whether the arbitrator made a correct decision but by asking whether the arbitrator had authority to make the inquiry he made. [11]

[41] Here there is no doubt that the arbitrator had the authority to determine the ground rent. He was obliged to do so by applying all relevant legal restrictions. The arbitrator did so by applying the RRU policy and asking whether it precluded condominium development. Not only did the arbitrator have authority to make that inquiry, he was obliged to do so under the 1990 decision and under the decision of McEwen J.

[42] What Parc-IX really complains about here is not the arbitrator’s jurisdiction to make the inquiry but the arbitrator’s answer to the inquiry. That, however, is beyond the purview of a jurisdictional review.

IV. Costs

[43] In addition to setting aside a substantive award, Parc-IX also applies to set aside the cost award made in Manulife’s favour.

[44] Parc-IX complains that the arbitrator awarded almost $900,000 in costs which was unreasonable because neither party achieved the outcome it sought. Parc-IX submits that a precedent was established by the 1990 decision which held that each party should pay its own costs despite Parc-IX being substantially successful in that arbitration.

[45] The determination of the cost award in 1990 decision was based on the exercise of discretion applied to the circumstances of that case. It would be an improper exercise of discretion to determine costs in 2020 simply by applying the result that was arrived at in 1990. Costs are to be determined on the facts of each case. Parc-IX has advanced no reason to suggest that the arbitrator had no jurisdiction to make the cost award he did. Rather, the complaint is predicated on dissatisfaction with the result of the cost award.

Disposition

[46] For the reasons set out above, I dismiss Parc-IX’s application to set aside the arbitrator’s award and grant Manulife’s cross application to recognize and enforce the arbitrator’s award.

[47] Both parties have agreed that costs of this application should be fixed at $45,000 including HST and disbursements. I therefore order Parc-IX to pay Manulife its costs which I fix at $45,000.

Koehnen J. Date: February 18, 2021

Footnotes:

[1] Standard Life Assurance Co. v. Parc-IX Ltd. (1991), 3 O.R. (3d) 782 at para. 18, 29, 38. [2] Arbitration Act, 1991, S.O. 1991, c. 17. [3] The Manufacturer’s Life Insurance Company v. Parc-IX Limited, 2018 ONSC 3625 at para. 4. [4] Manulife at para 32. [5] More particularly, it was rented to the daughter of an employee of the company that managed the building which in turn was an affiliate of Parc-IX. On the application before me both parties argued the matter as if it were the daughter of an employee of Parc-IX. [6] Arbitrator's decision at para 142, 144, 146. [7] Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65. [8] Friedman v. Friedman Holdings Inc., 2020 ONSC 2692, [2020] O.J. No. 2346. [9] Ontario First Nations (2008) Limited Partnership v. Ontario Lottery and Gaming Corporation, 2020 ONSC 1516. [10] Ontario First Nations (2008) Limited Partnership v. Ontario Lottery and Gaming Corporation, 2020 ONSC 1516. [11] Evans, Commercial Arbitration in Canada, loose-leaf. 10- 24.15; FCA Canada Inc. v. Reid-Lamontagne, [2019] O.J. No. 171 at paras. 46 – 47, 49, 51, 52, 54.