COURT FILE NO.: CV-20-00003190

DATE: 20210519

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

2501306 Ontario Inc. Applicant

– and –

Country Garden Academy Inc., (o/a) Country Garden Montessori Academy Respondent

Sara Erskine, for the Applicant

Gwendolyn Adrian, for the Respondent

HEARD: March 31, 2021

REASONS FOR DECISION

DE SA J.:

Overview

[1] This is an Application under Rule 14.05(3)(d) for the determination of the appropriate rent payable by the Respondent (Tenant) for a 3 year renewal period beginning December 1, 2020 under the Lease dated November 27, 2014 (the “Lease”) for the property located at 601 Newpark Drive, Newmarket, Ontario (the “Property”).

[2] According to the terms of the Lease, the Minimum Rent for the renewal period must be “based on the prevailing market rates at the time of renewal for comparable premises”.

[3] The parties cannot agree on the prevailing market rates and have brought an application for a determination of the Minimum Rent for the renewal period.

[4] The Applicant’s expert appraiser, Schaufler Realty Advisors Ltd., has opined that the market rent for the Property is $23.00 per sq. ft. net averaged over a 3-year lease term.

[5] The Respondent’s expert appraiser, David Rober (“Mr. Rober”), has opined that comparable premises would rent for between $12.00 and $14.00 per sq. ft.

[6] After reviewing the evidence filed by both parties, in my view, the market rent for the Property is properly situated at $18.00 per sq. ft.

[7] The reasons for my decision are below.

Summary of Facts

The Property

[8] The Applicant, 2501306 Ontario Inc. (“250”) acquired the property at 601 Newpark Drive, Newmarket, Ontario (the “Property”) in early 2018. The Property is a nearly 9,000 sq. ft. building on 4.7 acres of land zoned for Parks & Open Space, with an exception to allow uses of commercial recreational center, banquet hall, place of assembly, day nursery or elementary/secondary school. The Property was built in 1986 by Magna Mechatronics Mirrors Lighting (“Magna”) as a day nursery or pre-school for its employees.

[9] Despite the Property’s open space zoning, and its very narrow use exceptions, the surrounding neighbourhood is zoned industrial/residential and not commercial.

[10] The Property is in good condition for its age with recent renovations. It has amenities specifically for the use of the school including, lots of parking, a paved basketball court, large outdoor play areas, soccer field, and 3 portables along the west side of the building that are improved with decking, hydro and heating.

[11] The Property is located in the original Magna campus not far from the intersection of Bayview Avenue and Mulock Drive in Newmarket. There remain some industrial buildings occupied by Magna to the west of the Property, with newer residential subdivisions to the north and east of the Property.

The Lease

[12] In acquiring the Property, 250 took assignment of a Commercial Lease dated November 27, 2014 between 259846 Ontario Limited and the tenant, Country Garden Academy Inc. (“Country Garden”) (“Lease”).

[13] Country Garden is a Montessori School operated by Dan Hilsentegar. It has operated from the Property for approximately 21 years. Mr. Hilsentegar indirectly owned the Property through a corporation for 15 years prior to selling the Property to 259846 Ontario Limited in November 2014. After selling the Property, Country Garden leased the premises from 259846 Ontario Limited.

[14] The original term of the Lease was from November 27, 2014 to November 30, 2017. The Lease specifies that the Use of the Premises is for an Education Facility, and that the Tenant shall not use the Property for any other purpose.

[15] The Minimum Rent for the original term of 3 years was $110,000 per year or $9,166.67 per month, plus all additional costs of operating and maintaining the Property. This is $12.36 per sq. ft. of interior space (net) per year. Article 4.3 of the Lease further states:

The Tenant acknowledges and agrees that the annual Minimum Rent set forth in the Lease is based upon the occupancy of the building, associated structures and the lands of the property.

[16] Under the Lease, Country Garden has an Option to Renew for two periods of three years each. The Lease provides that the renewal rent will be:

(d) the Minimum Rent upon any renewal shall be negotiated ninety (90) days prior to the commencement of the renewal terms and shall be based on the prevailing market rates at the time of renewal for comparable premises;

[17] Country Garden exercised its first Option to Renew the Lease for the 3-year period from December 2017 through November 30, 2020. The Minimum Rent for the first renewal term was $118,250.00, or $13.28 per sq. ft. of interior space (net) per year.

Country Garden Exercises Second Option to Renew for a Further 3 Years

[18] In October 2019, the principal of 250, Paul (Bai) Chen, emailed Mr. Hilsentegar stating that he did not want to renew the tenancy at the end of its current renewal term. At the time, Mr. Chen believed that 250 did not have to renew the Lease for the further term if it required the Property of its own use.

[19] In the period between October 2019 and March 2020, there were an exchange of emails between Mr. Hilsentegar’s counsel, Mr. Chen and Mr. Hilsentegar concerning whether 250 was interested in buying-out the Lease early and whether Country Garden would rent a different property. Nothing came of those emails.

[20] In or about mid-April 2020, Country Garden provided notice that it was exercising its second Option to Renew the Lease for a further 3 years. Counsel for 250 confirmed receipt of the notice and invited Country Garden to contact counsel regarding renewal rates.

250 and Country Garden do not agree on the Prevailing Market Rates at the Time of Renewal

[21] On May 6, 2020, based on the advice of a real estate agent, 250 proposed $250,000 per annum as the Minimum Rent for the renewal period. This Minimum Rent was based on 250’s understanding of the prevailing market rates at the time for comparable school properties.

[22] In response, on May 19, 2020, counsel for Country Garden sent lease rates lower than the original Minimum Rent under the Lease.

[23] On June 12, 2020, 250 proposed the market rate of $20.00 per sq. ft. for the Lease. This was not accepted by Country Garden.

[24] 250 and Country Garden could not agree on the prevailing market rates at the time of renewal for comparable premises. They initially sought to agree on appraisers to provide opinions on market rent for the Property.

[25] Counsel for Country Garden proposed three appraisers. 250 wanted to use the appraiser used by its financial institution when it purchased the Property and who was familiar with the Property.

[26] The parties have since been unable to successfully negotiate a new Minimum Rent, nor agree upon the prevailing market rates for comparable premises as required under their Lease.

Market Rent Appraisal Reports Tendered on the Application

[27] The Respondent obtained a market rent report from David Rober of York Simcoe Appraisal Corporation, estimating the current market rent range of the Property as of June 12, 2020 was $14.00 to $16.00 per sq. ft. (“Rober June 2020 Report”). The Rober June 2020 Report compared school and commercial properties leased or listed from May 2018 through to June 2020. Attached as Appendix “A” to these Reasons is an appraisal chart of comparables from the Rober June 2020 Report.

[28] Subsequent to the commencement of the application, Mr. Rober prepared a new appraisal report dated November 27, 2020 estimating that the market rent range of the Property was $12.00 to $14.00 per sq. ft. (“Rober November 2020 Report”). Attached as Appendix “B” to these Reasons is an appraisal chart of comparables from the Rober November 2020 Report.

[29] Schaufler Realty Advisors Ltd. (“Schaufler”) was retained by 250 to review the Rober appraisals. Schaufler concluded that:

(a) Mr. Rober understates the value of the market rent;

(b) The information in the Rober November 2020 Report regarding the comparables was inconsistent, sparse and in some cases incorrect;

(c) Mr. Rober relied on and placed the greatest emphasis on 4 active listings that are not comparable to the Property, and do not meet any definition of value;

(d) Mr. Rober included properties that were not zoned for and could not be used as a school;

(e) Mr. Rober omitted data in the immediate subject area and investigated transactions from remote, poorer markets; and

(f) There is no evidence that school properties like the subject Property have been measurably affected by the pandemic.

[30] Schaufler’s own appraisal report of the estimated market rent for the Property as at August 5, 2020 concluded that the market rent for the Property was $20.00 to $25.00 per sq. ft., with its best estimate of $23.00 per sq. ft. net averaged over a 3-year lease term. Attached as Appendix “C” to these Reasons is an appraisal chart of comparables from the Schaufler August 2020 Report.

[31] According to Rober, one of the weaknesses with the Schaufler Report is that it does not base its estimate on comparable properties in industrial parks. Rather, the comparable properties used in the Schaufler Report are on major streets and in commercial areas. These superior locations can, and do, command a higher rental rate because there is more demand for them.

[32] Rober also points out that none of the comparable properties used in the Schaufler Report have similar zoning. Rober specifically used comparable properties mainly in industrial areas to ensure that restricted use zoning was taken into account.

[33] Mr. Rober also takes the position that the Schaufler Report relies on prices in 2018 and 2019 without taking into account the impact of the COVID-19 pandemic.

Analysis

General Principles

[34] The overriding concern in contractual interpretation is to determine the intent of the parties by reading the agreement as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of the formation of the agreement. See: Sattva Capital Corp. v. Creston Moly Corp, 2014 SCC 53, [2014] 2 SCR 633; The Manufacturers Life Insurance Company v. Parc-IX Limited, 2018 ONSC 3625, at para. 69; and McRae Cold Storage Inc. v. Nova Cold Logistics ULC, 2018 ONSC 7494, at para. 34.

[35] The purpose of the exercise is to find a construction which gives expression to, rather than defeats, the overall objective of the parties entering into the agreement. See: The Manufacturers Life Insurance Company, supra, at para. 70.

“Prevailing Market Rates” under Article 12.1(d)

[36] The determination of the Minimum Rent under the Option to Renew requires the Court to interpret Article 12.1 of the Lease.

[37] Article 12.1 (d) of the Lease provides that the renewal rent rate will be:

(d) the Minimum Rent upon any renewal shall be negotiated ninety (90) days prior to the commencement of the renewal terms and shall be based on the prevailing market rates at the time of renewal for comparable premises;

[38] In Mapleview-Veterans Drive Investments Inc. v. Papa Kerollis VI Inc., the Ontario Court of Appeal considered whether a rent renewal clause in a lease was valid. The renewal clause in Mapleview provided for the rental rate to be the “then current rate”. See: Mapleview-Veterans Drive Investments Inc. v. Papa Kerollis VI Inc., 2016 ONCA 93, at paras. 26 – 31.

[39] The Court of Appeal held that the “then current rate” can be readily ascertained through resort to expert evidence of the rental rates for comparable spaces as at the renewal date. It is an objective standard and the functional equivalent of saying the “then market value” or the “then prevailing market rate”.

“Comparable Premises” under Article 12.1(d)

[40] It is evident from the expert reports that the determination of the appropriate rate for the Minimum Rent for a “comparable premise” is hardly a science. No two properties are exactly alike. The location, surrounding neighborhood, size, condition, amenities, demand, zoning, and available uses are clearly all relevant factors to be considered.

[41] The Applicant takes the position that the “use” is a primary factor in determining the prevailing market rate for a “comparable premise”.

[42] Part 1 of the Lease specifically provides that the premise’s use is an “Education Facility”. Under “Part 8 – Use”, the Lease further provides that the Tenant shall occupy the premises solely for the use set out above. It further provides that the premises “shall not be used for any purpose other than as set out above without the express consent of the Landlord given in writing.”

[43] I agree that “use” is an important factor. Both the Rober June 2020 Report and the Rober November 2020 Report also acknowledge that the subject site is improved with a Montessori school and the building improvements significantly add to the property value as a whole.

[44] I also agree with the Applicant that the Rober reports reference a number of “comparables” that lack the same amenities and improvements. Moreover, the market rate of $12-$14 per sq. ft. does seem low when considered against the rents of other schools listed in the Schaufler Report.

[45] Both of the Applicant’s experts agree that basic market principles of supply and demand dictate market rental rates. As such, a property remotely located which is limited in uses cannot be fairly compared to properties located on busy traffic arteries that allow dozens of general uses without a “downward adjustment” which takes into account the superior attributes and leasing potential of the comparable property.

[46] Mr. Rober also testified that the global pandemic was having an adverse effect on commercial leases despite a similar effect not being in evidence in the overall real estate market.

[47] In his testimony, Mr. Rober explained that a number of properties have reduced their pricing during the pandemic reflecting a drop in the market rate. This fact is also not reflected in the Schaufler Report.

[48] Considering the expert reports, in my view, the appropriate rate is higher than the rate proffered by the Respondent’s expert, but lower than the rate put forward by the Applicant. Looking at the various comparables in both reports, together with the other evidence tendered, in my view, the appropriate rate for the Property is $18 per sq. ft. (9,000 sq. ft.).

[49] Accordingly, I make the following declaration:

The Minimum Rent for the Renewal Period of December 1, 2020 through November 30, 2023 for the Leased Premises at 601 Newpark Drive, Newmarket, Ontario, L3X 2S2 under the Lease dated November 27, 2014 (and as extended) is $18.00 per square foot per annum.

[50] In the circumstances, each party will bear its own costs.

Justice C.F. de Sa

Released: May 19, 2021

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

2501306 Ontario Inc. Applicant

– and –

Country Garden Academy Inc., (o/a) Country Garden Montessori Academy Respondent

REASONS FOR DECISION

Justice C.F. de Sa

Released: May 19, 2021