COURT FILE NO.: CV-21-656215

DATE: 20210531

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

METRO ONTARIO REAL ESTATE LIMITED

Applicant

– and –

WOODLAND PARK PLAZA INC.

Respondent

Krista Chaytor and Caitlin Steven, for the Applicant

Mark Dunn and Carlie Fox, for the Respondent

HEARD: May 25, 2021

FL Myers J

REASONS FOR JUDGMENT

The Application

[1] Metro is a tenant operating a Food Basics brand store at the respondent’s plaza in Cambridge, Ontario.

[2] The tenant applies for a declaration that it validly renewed the lease dated as of July 19, 1990 for the period March 1, 2021 to February 28, 2026. It also seeks damages in the amount of $25,968.85.

[3] The issues in the case are: (a) whether the tenant was in default when it purported to exercise its renewal right; and (b) whether the tenant was entitled to cure its default and exercise the renewal right after the initial date for exercising the renewal right had passed.

[4] For the reasons that follow, I find that the tenant has validly exercised its renewal right and grant the declaration as sought. I do not assess damages in this summary application.

The Relevant Lease Terms – CAM and Municipal Realty Tax

[5] The landlord says that the tenant was in default of its obligations to reimburse the landlord for the tenant’s proportionate share of common area and maintenance expenses (“CAM”) and realty taxes at the plaza.

[6] The terms of the lease requiring the tenant to reimburse the landlord for CAM are set out in a very detailed rider to the lease. They require the tenant to pay CAM for the current year equal to the prior year’s CAM divided monthly.

[7] The lease provides for a process under which the landlord must tell the tenant the actual amount of CAM incurred in a prior year and substantiate it. The tenant then has 45 days to pay to balance the account.

[8] The prior year’s CAM is subject to a reconciliation process that is expected to take months over the next two years. Within 120 days of year-end, the landlord is required to provide a statement of the actual expenses for the year signed by an officer, If the landlord is late, then the amount payable by the tenant is reduced by 15%. The landlord is required to keep and produce backup documents for up to two years for review. Liability for the costs of the review depends on the outcome. So, the parties do not know the prior year’s CAM amount with finality for months or years.

[9] At least thirty days prior to the commencement of each lease year, the landlord is required to deliver a detailed estimate of the upcoming year’s CAM expenses. But nothing in the rider terms make it a default for the tenant to fail to pay the amount set out in the annual estimate. The tenant is required to pay an amount equal to the prior year’s CAM not the current year estimate. Ultimately, the tenant has 45 days from the landlord’s substantiated statement after year-end to bring the account into balance.

[10] There is a different rider setting out the parties’ agreement concerning the payment of municipal realty taxes. The rider says that if the tenant is assessed individually, it is required to pay the taxes when due. Where the city levies realty tax against the plaza as a whole, the tenant is required to pay its proportionate share of those taxes. But when the plaza is taxed as a whole the landlord receives the tax bills. The rider does not say whether the landlord is to send the bills to the tenant so it can pay its share to the city or, if the landlord pays, when or how the tenant is to reimburse it.

The Facts

[11] For 26 or 27 years the parties seem to have followed a process for paying CAM and municipal tax that differed from the processes set out in the lease. The landlord sent the tenant a document called a “rental advice notice” (“RAN”) that purported to set out the tenant’s obligations for CAM and realty tax for the upcoming year on a level monthly basis. Apparently, the tenant paid the amounts as asked.

[12] Starting in 2018, the tenant changed how it was reimbursing the landlord for CAM and tax. It began demanding that the landlord substantiate fully all amounts charged as required by the lease. Pending final reconciliation, the tenant paid a monthly amount that it set a few thousand dollars per month less than the amount claimed by the landlord in its RAN. The landlord did not object or make demand. Rather, it engaged in a laboriously slow process of reconciling each year’s CAM and taxes.

[13] The landlord’s staff seem to have found the tenant’s demands for reconciliation irksome at best. But rather than having a meeting or two with accounting staff to work through the numbers and invoices quickly, the parties sent emails to each other every few months slowly and painstakingly moving the reconciliation process forward.

[14] The reconciliation for 2019 is not yet completed.

[15] The landlord asserts that by failing to pay the amounts set out in the RAN, the tenant was simply stretching its payments and, in effect, taking an interest-free loan from it.

[16] The tenant says it was never required by the lease to pay the amount in the RAN. The CAM process calls for annual reconciliations before it can become liable and only after accounting for the 15% reductions to which it is entitled due to the landlord’s lateness. In fact, the landlord has never provided a CAM statement signed by an officer within 120 days of a lease year-end as required by the lease. RAN statements are based on calendar years rather than lease years (March 1 to February 28) as required by the CAM rider. Moreover, the lease does not require the tenant to pay equal monthly instalments of realty tax to the landlord as provided for in the RAN.

[17] The tenant says it was improperly pre-paying CAM and tax.

[18] No one asked me to determine if the RAN process had become binding by some form of convention or estoppel. I was not asked whether, if the RAN process was binding, the tenant’s subsequent actions were sufficient notice to re-assert the payment terms set out in the lease. The landlord just assumed that the tenant’s deviation from the RAN amounts to a default. The tenant, for its part, denies it has committed any default and says that the landlord owes it a 15% discount for being late with its reconciliations. The tenant argues that the landlord should be estopped from re-asserting the RAN three years into the reconciliation processes that they have undertaken.

[19] I have not been provided with sufficient accounting evidence to understand what was properly due each month under the lease and whether the tenant’s payments were sufficient. No one has tried to reconcile CAM as required under the RAN with how it would be calculated under the lease rider.

[20] As to tax, my sense is that by paying equal monthly payments under the RAN, instead of paying the three tax instalments required by the city, the tenant pre-paid tax at the beginning of the year but, after the third tax instalment became due each year, the ensuing monthly instalments were in arrears. But, the technical issue is whether the landlord was entitled to demand equal monthly payments of realty tax under the lease and to declare the tenant in default when it was not sent the tax bills to pay.

[21] Apart from the 15% penalty, the differences are timing only. Over time, the total CAM and taxes will be the same whether calculated on a calendar year or a fiscal year. But the timing of payments will differ. However, as will become apparent below, the landlord is trying to seize on a timing difference to preclude the tenant from renewing the lease.

[22] These parties did not communicate. They sent paper at each other. The tenant never said why it was changing from the RAN process. It did not forthrightly go to the landlord to tell it that as a cashflow conservation measure it did not want to continue prepaying CAM and tax (if that was the case). It did not assert its rights under the lease. It waited for the landlord to react. The one time the landlord pushed for a tax payment, the tenant paid it immediately although, as it turns out, it had already paid that amount.

[23] For its part, the landlord did not object or try to assert either the RAN process or the lease terms. It just went along sending reconciliation emails with invoices and ledgers back and forth slowly, forestalling any real understanding as to whether it was actually asserting rights.

[24] Until renewal time.

The Lease Renewal

[25] The lease required the tenant to give notice of exercise of its right to renew the lease for the next five year term by no later than August 3, 2020. It did so in June of that year.

[26] The landlord did not reply before the August 3, 2020 date.

[27] In December, 2020, six months later, the landlord took the position that the tenant was in default in June when it delivered its renewal notice so it was not entitled to exercise its renewal right at that time. The tenant immediately paid under protest the amount of arrears specified by the landlord and re-asserted its renewal right. The landlord says it was too late to renew as the August 3^rd date had passed.

[28] The landlord says that it did not delay its response from June to December on purpose. It was busy with the pandemic. Nevertheless, had it responded before the August 3, 2020 deadline, it is common ground that the tenant could have cured the alleged default and renewed the lease. The landlord gives itself leeway because of the pandemic but does not allow the tenant a day or two to cure an alleged breach in order to renew.

[29] The landlord rightly says that at common law, it is not required to notify the tenant that it is in default at the renewal deadline. Unless the landlord proposes to re-enter or to take another remedy, it is technically not required to notify the tenant that it is in default. The tenant bears the risk that it is in default at renewal time.

The Lease Renewal Terms

[30] At common law, if renewal is only available under a lease where the tenant is not in default, it is up to the tenant to be sure that it is not in default when it exercises its right to renew. But the common law is subject to the parties’ right to agree otherwise.

[31] In this lease, the renewal clause 4.A provides that if the tenant is not in default, it can elect to give notice to renew on or before 210 days before the beginning of the next renewal term (by August 3, 2020). Clause 4.B provides that if the tenant fails “to give notice in writing exercising” its renewal right, the right is not extinguished. Rather, the renewal right continues until the landlord notifies the tenant of its “failure to exercise” its renewal right and the tenant then fails to exercise the right to renew with in a further thirty days of the landlord’s notice.

[32] Clause 4.B provides further that if the landlord does not give notice to the tenant that it has failed to exercise its renewal right and the current lease term ends, then the lease is automatically extended on a month to month basis. The monthly lease can be terminated on one month’s notice by either party. But, if the landlord gives notice to the tenant that it is terminating the lease in a month, then prior to termination, the tenant can exercise its right to renew and restore the lease for the remaining renewal term and all future renewal terms.

[33] Under clause 4.B of the lease, the tenant could fail to renew, stay on as a monthly tenant, and reinstate the lease years later including all future renewal rights. The parties have excluded the common law. When a long term lease expires at common law and the tenant remains in possession, the common law would have implied a yearly lease terminable on six months notice and excluded any further renewal options. See: Budget Car Rentals Toronto Ltd. v. Petro-Canada Inc., 1989 CanLII 4148 (ON CA). In addition, unlike the common law, this lease requires the landlord to give notice to the tenant if the landlord intends to terminate the lease when the tenant fails to exercise the renewal right.

Analysis

[34] The landlord submits that clause 4.B only applies where the tenant does not give any notice to renew. Here, the landlord says that the tenant did give notice but the notice was ineffective to exercise the renewal right because the tenant was in default at the time. The landlord argues that a tenant who gives no notice is entitled to notice from the landlord and then can renew for the rest of the renewal terms. But a tenant who gives a notice that the landlord says is ineffective to exercise the renewal right, loses its right to renew as long as the landlord says nothing until after the 210 day deadline has passed.

[35] Neither clause 4.A nor 4.B speaks expressly to an ineffective attempt to give notice. Both parties agreed that if the tenant had cured its alleged default before August 3, 2020 it could have renewed the lease by giving a new, timely notice.

[36] I have to interpret what the parties intended where the tenant gave notice that the landlord says was ineffective to exercise the renewal right.

[37] Under Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, to interpret the meaning of the lease, I start with the words used, in the context of the section and the rest of the lease, bearing in mind the objectively known factual matrix. Moreover, I take a practical approach consonant with business common sense.

[38] At a high level of abstraction this is a distinctly tenant-friendly renewal clause. It reflects a decision to exclude the common law. It allows the tenant to renew even if it misses the deadline and allows the lease to expire in accordance with its terms. It puts a burden on the landlord who wishes to end the renewal right to give notice to the tenant even after the 210 deadline and even after the lease has ended and become a month to month lease. It allows the re-assertion of future renewal rights months or years after the lease has ostensibly terminated.

[39] In my view, the parties intended the lease to strongly protect the tenant’s renewal rights.

[40] Mr. Dunn argues that the opening words of clause 4.B, “[i]f Tenant shall fail to give notice in writing” show that the protections of that clause do not apply to a tenant who gave notice but was disentitled from exercising the renewal right due to default. I disagree. He leaves out the next word. The clause says “[if Tenant shall fail to give notice in writing exercising” the renewal option. In addition, the clause requires the landlord to give notice “of Tenant’s failure to exercise” the renewal right. In my view, an ineffective exercise is a “failure to exercise” and a failure “to give notice in writing exercising” the renewal.

[41] When the landlord told the tenant that it had not exercised the renewal right because of its default, the tenant then had thirty days in which to exercise the renewal right. It paid the amount claimed by the landlord under protest and asserted its rights. In my view this was effective.

[42] Moreover, I do not see how the landlord was entitled to simply assert that the tenant was in default of its obligation to reimburse it for expenses without providing some notice to the tenant. These parties had never operated under the strict terms of the lease governing reimbursement of CAM and taxes paid by the landlord. For the past few years they had been mired in a painstakingly slow reconciliation process without either side asserting formal rights. Especially where the parties have deviated from the additional rental terms of the lease, the landlord cannot simply assert a default without providing statements or some form of notice that it says payments are due. See: 2373322 Ontario Inc. v Nolis, 2017 ONSC 1518, at para. 55.

[43] To hold otherwise would allow a landlord to deviate from the payment terms of the lease and then sit back and wait for the deadline to pass to then spring an assertion of default on the tenant after it is too late for the tenant to do anything about it. Under Mr. Dunn’s interpretation, the tenant in that circumstance would be better off to not give notice of renewal and only assert its renewal right some time in future when it knows that the landlord and it are ad idem. The problem is that the tenant does not know that there is a dispute over how it is paying rent and does not know that it would do better by withholding its renewal notice.

[44] It cannot be a proper interpretation of a tenant-centric clause to incentivize a landlord to lie in the weeds waiting to call, “gotcha” or to incentivize the withholding of notice by the tenant. That is not a practical interpretation or one that complies with business common sense.[^1]

[45] A practical, business-oriented interpretation encourages both parties to communicate and resolve differences as they arise.

[46] The landlord asserts an inconsistent position. It demands rent by a calculation that does not comply with the lease terms but makes technical arguments to prevent renewal under the lease terms strictly construed by it.

[47] I understand that the tenant might be seen to have been playing its own game. Ms. Chaytor places great emphasis on the tenant’s good faith overpayment of taxes when the landlord demanded it once before and then again in December, 2020. However, its actions are equally interpreted as a tenant who knows it is squeezing the landlord on cashflow and is ready to pay up the second the landlord pushes back.

[48] But it does not matter at the end of the day. Where the process in the lease for reimbursing the landlord for CAM and tax expenses is not being followed, I cannot see how the landlord can later claim a retroactive default without providing a demand or an invoice or some form of notice as found by Broad J. in Nolis. And even if the tenant was in default on June, 2020, clause 4.B still applies to let it cure and reinstate the renewal right as it did. The deadline is not effective until thirty days after the landlord gives notice of the tenant’s failure to exercise the renewal right.

Outcome

[49] If the tenant was playing a game, it had a willing participant in the landlord. The landlord could have asserted its rights whether under the RAN or the strict lease terms. It could have picked up the phone and had a conversation with the tenant to speed up its payments and the entire reconciliation process.

[50] Neither party treated the other as a respected colleague with whom they had been doing business literally for three decades. Springing a renewal default without any notice may reflect years of frustration but is unfair overkill when what is missing is open, honest, respectful communication.

[51] The applicant is entitled to the declaration that it effectively renewed the lease as sought at para. 124 (a) of its factum on Caselines page A575.

[52] The costs claimed by the tenant are reasonable and are less than those claimed by the landlord. Accordingly, the respondent shall pay the applicant its costs in the amount of $33,500 by July 2, 2021.

[53] I make no order for damages on a summary application. As discussed, I have yet to see a proper accounting and the manner of accounting turns on which basis for paying CAM and tax applies (or applied at various time periods). Rather than holding discovery and a trial to consider esoteric questions of estoppel by convention and the type of notice necessary to terminate an estoppel, I expect that the parties will prefer to sit down and negotiate these issues in a businesslike manner. The amounts of money at stake are modest.

[54] However, if either wants to continue asserting its right to an award of money damages, I will convert the application to an action and give directions to allow them to head to trial. Counsel may contact my Judicial Assistant to schedule a case conference to discuss future steps if they wish to do so.

FL Myers J

Released: May 31, 2021

COURT FILE NO.: CV-21-656215

DATE: 20210531

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

METRO ONTARIO REAL ESTATE LIMITED

Applicant

– and –

WOODLAND PARK PLAZA INC.

Respondent

REASONS FOR JUDGMENT

Fl Myers J

Released: May 31, 2021

[^1]: For clarity, I am not making a finding that the landlord took such an approach in this case.