COURT FILE NO.: 20-84460
DATE: 20210408
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
TJ SQUARED INC.
Applicant
– and –
LOW MURCHISON RADNOFF LLP
Respondent
Jonathan Collings, for the Applicant
Ronald S. Petersen, for the Respondent
HEARD: March 5, 2021
REASONS FOR decision
beaudoin j.
[1] The Applicant, TJ Squared Inc. (the “Business”) seeks leave pursuant to ss. 9 and 11 of the Solicitors Act, R.S.O. 1990, s. 9. 23. (the “Act”) to assess an account rendered by Low Murchison Radnoff LLP (“LMR”) to their client 1605992 Ontario Inc. (the “Landlord”).
Background
[2] The Business is a corporation that was created to operate a Morning Owl Café located at 1621 Woodward drive in Ottawa. The building is owned by 1605992 Ontario Inc. (the “Landlord”). LMR is counsel to the Landlord. Neither the Applicant nor any of its principals have ever retained LMR for any reason.
[3] The Landlord had a head lease with 1033517 Canada Inc (Morning Owl Corp.,) which is the franchisor for all Morning Owl Corp. products and services. The head lease dated June 1, 2019, has a five-year term. Geoffrey Vivian and Jordan O’Leary, the principals of Morning Owl Corp., executed the lease jointly and severally as indemnifiers.
[4] By consent to sublease dated August 19, 2019 between the Landlord, Morning Owl Corp., and their principals, the Business agreed to sublease the building subject to all of the terms in the head lease. Julie Sheremeto, Josee Menard, and Travis Giroux, as the principals of the Business, executed the sublease as additional indemnifiers. All parties were represented by counsel.
[5] The head lease contained the following relevant provisions.
ARTICLE 6 NET LEASE AND ADDITIONAL RENT
6.1 This Lease shall be absolutely net to the Landlord, except as is otherwise set out in this Lease, and any amount or obligation in respect of the Leased Premises that is not expressly declared in this Lease to be the Landlord’s responsibility, whether or not contemplated at the date of this Lease, will be the responsibility of the Tenant.
ARTICLE 15 REMEDIES OF LANDLORD
(b) in the event of any other default by the Tenant under this Lease, which the Tenant fails to remedy within fifteen (15) days after receipt of written notice from the Landlord specifying such default (or such longer period as may be reasonably necessary under the circumstances), the Landlord may, in addition to such other remedies as it may have at law, including the right to damages or specific performance, enter into and upon the Lands and terminate this Lease or take such reasonable steps as may be necessary to remedy such default, and for that purpose the Landlord shall have the right to enter onto the Lands, and all costs incurred by the Landlord in so doing shall be promptly paid to it by the Tenant; and …
ARTICLE 26 ASSIGNMENT AND SUBLETTING BY THE TENANT
26.1 The Tenant covenants that it will not assign this Lease or sublet (a “Transfer”) the whole or any part of the Leased Premises without the prior written consent of the Landlord, provided such consent shall not be unreasonably withheld, delayed or conditioned and provided further, however, and it is made a condition of the giving of such consent that the proposed assignee of this Lease shall agree in writing to assume and perform all of the terms, covenants, conditions and agreements by this Lease imposed upon the Tenant herein in the form acceptable to the Landlord, acting reasonably.
1.03 Consent by Landlord in any instance shall not constitute a waiver of the necessity for such consent in any other instance. This prohibition includes any Transfer which would otherwise occur by operation of law. If a Transfer occurs in any case without the consent of Landlord when required, Landlord may collect Rent from the assignee, subtenant or occupant, and apply the net amount collected to the Rent herein reserved, but no such Transfer will be considered a waiver of this covenant, or the acceptance of the subtenant or occupant as tenant. Despite a Transfer, Tenant shall remain fully liable under this Lease. A Transfer, if consented to by Landlord, will be prepared by Landlord or its solicitors and all legal costs of its preparation shall be paid by the Tenant immediately upon demand.
1.04 Landlord’s consent to any Transfer shall be subject to the following conditions:
(e) any document evidencing any Transfer permitted by Landlord or setting out any terms applicable to such Transfer or the rights and obligations of Tenant or the proposed transferee thereunder, shall be prepared by Landlord or its solicitors and all associated legal costs shall be paid to Landlord by Tenant forthwith on demand.
[6] The Sublease contained the following covenants:
Notwithstanding any the terms in the Sublease, the Sublessee hereby agrees with the Tenant and that each of them shall observe and fulfil all of the obligations of the Tenant under the Lease.
The Tenant hereby covenants and agrees with the Landlord that it shall remain responsible for all such liabilities and responsibilities arising under the Lease including, without limitation, the payment of the rent and the performance and observance of the covenants, conditions and agreements in the Lease contained, notwithstanding this Consent to Sublease.
The Sublessee hereby covenants and agrees with the Landlord that the Sublessee shall be considered a Tenant under the Lease and the Sublessee shall from and after August I, 2019 and shall comply with all terms, conditions and covenants binding on the Tenant contained in the Lease and shall operate its business in a matter that ensures it and the Tenant pay all sums of any kind whatsoever and perform all obligations of any kind whatsoever as and when the same are due pursuant to the terms of the Lease during the balance of the term of the Lease and any renewal thereof.
[7] The Business began operations in July 2019. On March 17, 2020, it was obliged to close due to the COVID-19 pandemic. The principals of the Business decided that it was not economically viable for the Café to remain open.
[8] On March 19, 2020, the Business advised the Landlord of its situation and sought a postponement of rent. The Business followed up with a further email dated March 19, 2020 again seeking leniency for its occupancy costs of the Building.
[9] Later that same day, the Landlord responded with his understanding that the government was helping small businesses along with the banks and he provided some forms from his accountant that could be of assistance to everyone.
[10] On March 30, 2020, the Business sent an email to Morning Owl Corp. to advise that the April rent would not go through. The Landlord was copied with that email.
[11] On April 27, 2020, the Business continued to seek financial help from the Landlord and asked that the Landlord apply for the government rent subsidy program, which could only be initiated by the Landlord.
[12] There was a meeting with the Landlord on May 25, 2020 to discuss how to resolve the situation, including applying for the government rent subsidy.
[13] On June 9, 2020, LMR, acting on behalf of the Landlord, advised that the Landlord would only apply for the rent reduction program if the Business would pay 25% of the rent owing.
[14] For the remainder of June 2020, Mr. Collings, on behalf of the Business, attempted to negotiate with the Landlord to settle the amount of outstanding rent and building expenses but no agreement was reached. Mr. Collings alleged that there was an unsubstantiated increase in additional rents.
[15] At this point in time, LMR allocated the litigation issues to Ron Petersen while Sarah Saad continued to deal with the negotiation and execution of the sublease.
[16] Mr. Petersen advised that he had received instructions to start court proceedings to recover the amounts due from the tenant, the sublessee and the indemnifiers. The Landlord made a counterproposal to reduce the term of the lease in order to “stop the bleeding.”
[17] By email dated July 17, 2020, the Business made a further offer to settle the rent and additional rent arrears, on the basis that the Landlord would apply for the rent subsidy program. The Landlord was advised that the Business had an interested buyer for the Café as of that date. On August 4, 2020, the Business followed up with a revised proposal.
[18] On August 5, 2020, the Landlord advised that it would accept the proposed settlement if all of its legal fees were paid as well as the legal fees for its lawyer to review the new lease with the new tenants. As of the date of that email, the Landlord estimated its legal fees to be approximately $7000.
[19] The next day, the Landlord sent the following email:
During our first meeting with you in the parking lot, Frank specifically recommended resolving this situation without using lawyers. From that meeting, it was evident to both Frank & myself that you had no intention of ever reopening the business and that you were going to take advantage CEBA and furthermore have us apply for the CERCA alleviating you of 75% of rent owing. However, your lack of a reasonable resolution left us no choice but to contact our lawyers and hold you accountable for your lease obligations. At this point, do not contact us directly. Have your lawyer contact our lawyer unless you agree to the offer that was presented to you.
[20] By email dated August 7, 2020, Mr. Collings advised LMR that the Business agreed to pay the Landlord’s reasonable legal fees related directly to the property issue, conditional on receipt of LMR’s invoices.
[21] By this time, the Business had a firm deal for someone (the “Buyer”) to take over the café and this transfer of the lease required the Landlord’s consent. The Landlord then insisted upon conducting due diligence for the Buyer and this took over two weeks.
[22] Throughout that time, the Landlord, Morning Owl Corp., the Business, and the Buyer were engaged in negotiations for the determination of length and nature of personal indemnification once the transfer was completed. On August 27, 2020, LMR indicated that the legal fees for the Landlord exceeded $11,000 but no invoices were provided.
[23] Finally, after direct negotiation, the parties came to an agreement whereby Morning Owl Corp. and its principals would stay on as indemnifiers until August 31, 2023, and the Business and its principals would stay on as indemnifiers until August 31, 2021. The transfer was scheduled to close on September 1, 2020.
[24] The necessary documentation was executed by the Business on August 31, 2020. The others executed the agreement at later dates.
[25] On September 1, 2020, LMR provided its invoice to the Landlord totaling $17,582. The next day, Mr. Collings wrote to Ms. Saad and suggested that the account should be reduced.
[26] Mr. Petersen responded on September 2, 2020 that the Landlord would not complete the transaction unless its legal fees were paid in full.
[27] Mr. Collings, replied as follows:
Sarah, Thank you for your message. We are aware of the terms of the agreement – I will confirm instructions and advise. Just to be clear, is LMR refusing to provide its detailed dockets and entries before payment is made? As you are aware, this will be a factor for the Court to consider on assessment under the Solicitors Act in any future proceedings. I will get back to you on payment shortly.
[28] Mr. Collings then sent a later-email to LMR which said:
Our clients agree to make payment and it will be delivered shortly, likely via wire, along with the signed release. Our clients reserve their rights pursuant to s. 9(1) of the Solicitors Act, which gives an automatic statutory right to assessment. We look forward to concluding this transaction.
[29] This invited the following response from Mr. Petersen:
Good afternoon, I have been asked to respond to your email. With respect, there is no automatic statutory right to assessment. You must apply to the court for an order. However, the agreement did not reserve rights to assessment or review of the account. Nevertheless, they are reasonable in the circumstances. The transaction has not closed, and we have not provided our consent to the assignment. Our clients do not wish to incur additional fees, if, at some point your clients decide to try and assess the account. These additional fees will be the responsibility of all of the tenants and guarantors under the lease as additional rent. Your clients will either have to accept the payment of these fees without reservation for the transaction and the related defaults by your clients or the sublease (will) not occur and we will move on behalf of our clients to exercise their rights. Please advise.
[30] Mr. Collings advised as follows:
Ron, Thank you for your email. In the circumstances, our clients have no choice but to agree and make the payment on the terms you have set out. It should be deposited shortly, and we will provide proof when completed. The signed release is attached. Please provide your client’s executed copy.
The Law
[31] Pursuant to ss. 9(1) and (2) of Act, the Business, as a party chargeable on the invoice, has the right to seek assessment of an account as if it were the recipient of the invoice.
Assessment where a party not being the principal, pays a bill of costs
9 (1) Where a person, not being chargeable as the principal party, is liable to pay or has paid a bill either to the solicitor, his or her assignee, or personal representative, or to the principal party entitled thereto, the person so liable to pay or paying, the person’s assignee or personal representative, may apply to the court for an order referring to assessment as the party chargeable therewith might have done, and the same proceedings shall be had thereupon as if the application had been made by the party so chargeable.
What special circumstances may be considered in such case
(2) If such application is made where, under the provisions hereinbefore contained, a reference is not authorized to be made except under special circumstances, the court may take into consideration any additional special circumstances applicable to the person making it, although such circumstances might not be applicable to the party chargeable with the bill if he, she or it was the party making the application.
[32] The Act further provides, even when an invoice is paid, that the Court may refer it for assessment where special circumstances exist that appear to require the assessment.
Payment not to preclude assessment
11 The payment of a bill does not preclude the court from referring it for assessment if the special circumstances of the case, in the opinion of the court, appear to require the assessment.
[33] The Court of Appeal has provided some guidance in the application of these sections. In Echo Energy Canada Inc. v. Lenczner Slaght Royce Smith Griffin LLP, 2010 ONCA 709, 104 O.R. (3d) 93, s. 11 of the Act was in issue. Justice Rosenberg discussed “special circumstances” as follows at paras. 31 and 32:
31 Thus, special circumstances will tend to either undermine the presumption that the account was accepted as proper or show that the account was excessive or unwarranted. The appellant relies upon both aspects. It submits that the presumption was rebutted in this case because the person approving the accounts had no real interest in reviewing them and ensuring that they were reasonable. It also submits that on their face the accounts are excessive given that a company with limited resources spent almost $840,000 in litigation. I can deal with this latter submission summarily. The appellant adduced no evidence that this amount was grossly excessive given the nature and complexity of the litigation. That said, it seems to me that the size of the accounts can be a factor to consider under the first leg of special circumstances.
32 The cases identify a number of circumstances in which the presumption may be rebutted. For example, clients cannot be expected to bring assessment applications while a solicitor is still representing them for fear of alienating the solicitor. Special circumstances may also exist if the client makes known its concerns within a reasonable time… However, in the end, special circumstances is a fact-specific inquiry: …Any number of factors specific to the particular case can amount to special circumstances if they undermine the presumption. (internal citations omitted.)
[34] In allowing the appeal in that case, Rosenberg, J.A. found that the application judge had taken a lawyer-focused, rather than client-focused approach.
[35] In Clatney v. Quinn Thiele Mineault Grodzki LLP, 2016 ONCA 377, 131 O.R. (3d) 511, the Court of Appeal considered the meaning of “special circumstances” within other provisions of the Act, and concluded as follows:
86 With this in mind, I view the authorities and the objectives of the Solicitors Act as supporting the following broader test: “Special circumstances” are those in which the importance of protecting the interests of the client and/or public confidence in the administration of justice, demand an assessment.
87 In The Law of Costs, loose-leaf, 2nd ed. (Toronto: Canada Law Book, 2015), at para. 306.3, Mark M. Orkin identifies the relevant circumstances as including but not limited to:
• the sophistication of the client;
• the adequacy of communications between solicitor and client concerning the accounts;
• whether there is evidence of increasing lack of satisfaction by the client regarding the services relating to the accounts;
• whether there is overcharging for services provided;
• the extent of detail of the bills;
• whether the solicitor/client relationship is ongoing; and
• whether payments can be characterized as involuntary.
[36] Considering the arguments advanced by LMR, I turn to the duty of good faith and honest performance as set out in Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494. The Supreme Court held at para. 33, that good faith contractual performance “is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance.”
[37] In Bhasin, Cromwell, J. said the following at paras. 70 and 73:
The principle of good faith must be applied in a manner that is consistent with the fundamental commitments of the common law of contract which generally places great weight on the freedom of contracting parties to pursue their individual self-interest. In commerce, a party may sometimes cause loss to another — even intentionally — in the legitimate pursuit of economic self-interest. Doing so is not necessarily contrary to good faith and in some cases has actually been encouraged by the courts on the basis of economic efficiency. The development of the principle of good faith must be clear not to veer into a form of ad hoc judicial moralism or “palm tree” justice. In particular, the organizing principle of good faith should not be used as a pretext for scrutinizing the motives of contracting parties.
... I would hold that there is a general duty of honesty in contractual performance. This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance. Recognizing a duty of honest performance flowing directly from the common law organizing principle of good faith is a modest, incremental step.
The Applicant’s Position
[38] The Applicant submits that the magnitude of the account and the conduct of the parties establish special circumstances that merit referral for assessment.
[39] The Applicant submits that special circumstances are established in this case by:
a. The lack of an ongoing relationship between the client and LMR;
b. The significant size of the invoice, especially in relation to a prior similar transaction;
c. The refusal to provide particulars of the invoice before the commencement of this Application, coupled with:
i. a patronizing reaction to the Business’ intention to exercise its assessment rights; and
ii. the stated intention to seek costs of the assessment process, irrespective of outcome, from the Business as expenses under the lease;
d. The involuntary nature of the payment in light of the refusal to complete the assignment transaction unless the invoice was paid in full.
e. LMR’s stated intention to pass on any reduction in fees to the Landlord, tenants and guarantors.
[40] The Applicant argues that the above factors constitute special circumstances that could bring the administration of justice into disrepute if the invoice is not referred to assessment. The Applicant maintains that these circumstances rebut any presumption of implied reasonableness of the invoice that may have arisen from the payment of the invoice.
The Respondent’s Position
[41] The Respondent argues that the Applicant agreed to waive any right to assess the legal fees in issue and has breached that agreement, and that no special circumstances exist to allow the Court to exercise its discretion to permit the Applicant to assess the legal fees of the Landlord.
[42] The Respondent further submits that the Applicant’s request to assess the accounts is an attempt to act in bad faith and potentially set aside or amend the agreement drafted and managed with the advice of experienced counsel.
[43] The Respondent adds that any result of an assessment is that the Landlord would have to pay any reduction and the Landlord would pass on the cost to the tenant, subtenants and its guarantors.
[44] The Respondent says that the details of the accounts have been provided and no work is disputed nor quantum of time on the accounts. The Respondent submits that the accounts of the lawyers for the tenants and the accountant have not been provided to the Court to show the costs of the other parties to potentially show a gross difference between the costs between counsel. The Respondent says that Mr. Collings’ fees reflect only a fraction of the time and issues that LMR had to respond to.
[45] According to the Respondent, much of the issues arose as a result of
• the Applicant’s default in paying rent,
• the Applicant’s refusal to reopen after it was permitted to do so pursuant to the restrictions imposed by the Province of Ontario,
• the Applicant’s allegations of misrepresentation and attempts to amend the agreement.
[46] The Respondent maintains that all the work done by counsel for the Applicant was directly attributable to the increase in legal fees of the Landlord.
[47] The Applicant raised the issue of assessment before closing and the Respondent argues that it waived its right to assess the legal fees of the Landlord.
[48] The Respondent accuses the Applicant, through its lawyer, of lying to the Landlord in order to obtain the benefit and close the transaction. The Respondent argues that it is the Applicant’s dishonesty, along with the bargain that was struck between the parties, that attempts to bring the law into disrepute.
Analysis
[49] I begin this discussion by observing that the amount in issue in this 187-page application, is probably not much more than $7000. Mr. Collings concedes that his client must first be entirely successful on this application and be awarded full indemnity costs. His client must then be entirely successful on the assessment and be once more awarded full indemnity costs in order to recover any financial benefit from this application. Mr. Collings responds that there is an important principle in issue. His client’s determination to pursue this matter, regardless of costs, undermines their assertions that they were always doing everything possible to avoid legal expenses.
[50] I further consider that this application does little to advance the reputation of the legal profession. On the one hand, there are accusations of exploiting a client who was in a vulnerable position and responding allegations of lying and bad faith bargaining.
[51] The case law requires that I consider the particular facts of this case and I note the following:
This was a net lease. The tenants and the subtenant were obligated to pay all extra costs including all legal costs incurred by the Landlord in the event of the transfer of a lease.
The Business was in default under the term of its lease. The Business and its principals were facing a potential liability for more than $400,000 in unpaid rent over the term of the sublease.
The Covid 19 pandemic introduced a new uncertainty for tenants and landlords. Government assistance was made available during this evolving situation. Everyone had to learn the new rules in order to determine their eligibility for any assistance.
Rather than attempt to continue to operate the café, the Business decided to sell. Fortunately, a buyer was found who paid a fraction of the price for its assets.
Given the terms of the head lease and the sublease, the rights and obligations of multiple parties and of the individual indemnifiers had to be considered.
In the end, the Business and its indemnifiers were able to limit their future liabilities to the sum of $28,299.24 for rent arrears and all the legal costs of the Landlord.
[52] I turn now to the factors set out in Clatney.
The sophistication of the client
[53] At all times, the Business was represented by counsel.
The adequacy of communications between solicitor and client concerning the accounts
[54] The Landlord advised in early August that its legal accounts were approximately $7000 and provided responses as to the status of its accounts with LMR whenever they were requested. LMR then provided its itemized four-page invoice.
Whether there is evidence of increasing lack of satisfaction by the client regarding the services relating to the accounts
[55] The Business did raise concerns about LMR’s account. It made it known that it would seek to have that account assessed.
Whether there is overcharging for services provided
[56] There is insufficient evidence to conclude that there was any overcharging. The Business claims it only spent $5,582.41 for Mr. Collings’ services. The Applicant compares the Landlord’s account to the small amount charged at the time of the first sublease in 2019. Given the entirely different circumstances, I do not find that comparison to be helpful.
[57] The Landlord had to deal with the tenant, its two principals, its accountant, the Business, its three principals and a new buyer who did not have counsel. Morning Owl Corp.’s account and the accountant’s fees have not been disclosed. Given the lack of progress in negotiations and allegations of excessive additional rent made by Mr. Collings, LMR assigned litigation counsel to the file and this added to the costs.
The extent of detail of the bills
[58] A four-page itemized invoice was provided, although there were no time dockets.
Whether the solicitor/client relationship is ongoing
[59] This is not applicable.
Whether payments can be characterized as involuntary
[60] The Business places particular emphasis on this factor. It claims that it found itself in an impossible situation and that the Landlord took advantage of their vulnerable predicament.
Conclusion
[61] I am not satisfied that special circumstances exist to refer this matter for an assessment. While the account was higher than the Business might have expected it to be, I cannot find that it was exorbitant. The Landlord was dealing with a tenant in default and this triggered consequences for multiple parties during a global pandemic. The possibility of litigation increased costs.
[62] Mr. Collings offered to settle his client’s outstanding default on terms that included the right to assess LMR’s account. That offer was rejected. The Landlord made it clear that it would only settle the matter if its legal fees were paid in full. That counteroffer was accepted, resulting in a binding contract to pay the amount of the invoice. The Business and its principals obtained a significant benefit from the settlement. There is no basis to go behind that agreement.
[63] The application is dismissed. The parties are to provide me with their written submissions as to costs within 20 days of the release of this decision.
Mr. Justice Robert N. Beaudoin
Released: April 8, 2021
COURT FILE NO.: 20-84460
DATE: 20210408
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
TJ SQUARED INC.
Applicant
– and –
LOW MURCHISON RADNOFF LLP
Respondent
REASONS FOR decision
Beaudoin J.
Released: April 8, 2021