COURT FILE NO.: CV-21-659232-0000

DATE: 2021-10-12

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Midtown-Yonge Properties Inc.

AND:

1363656 Ontario Ltd.

BEFORE: J. T. Akbarali J.

COUNSEL: Stephen Schwartz and Emily Quail, for the plaintiff

Breanna Needham, for the defendant

HEARD: October 7, 2021

ENDORSEMENT

Overview

[1] The plaintiff/vendor sold a commercial office tower to the defendant/purchaser pursuant to a purchase agreement dated April 26, 2018. The purchase agreement contemplated that certain adjustments would take place after closing. In this action, the vendor claims $67,457.38 in adjustments from the purchaser. The purchaser does not dispute the quantum of the adjustments, but argues that it is not responsible; the vendor’s right of recovery lies against the tenants. Both parties agree that this action involves a question of contractual interpretation where no material facts are in dispute. I am thus asked by each to determine the issue summarily.

Is this action appropriate for summary judgment?

[2] An action is appropriate for summary judgment when the record allows the judge to make the necessary findings of fact, apply the law to the facts, and is a proportionate, more expeditious and less expensive means to achieve a just result: Hryniak v. Mauldin, 2014 SCC 7, at para. 49.

[3] I agree with the parties that this case is appropriate for summary judgment. The material facts are not in dispute. The parties agree that theirs is a valid contract, and that the contractual interpretation governs the question of the adjustments. They agree on the amount of the adjustment the vendor is owed. The only issue is whether the purchaser contractually agreed to be responsible for those adjustments, or if the vendor’s remedy lies against the tenants.

The Contractual Dispute

[4] In brief, the dispute relates to adjustments to the purchase price that were to be made pursuant to the agreement. The property changed hands on June 27, 2018. The parties agree that revenue and expenses up to closing were for the vendor’s account, and revenue and expenses after closing were for the purchaser’s account. Some expenses were subject to adjustment after-the-fact, because they were not known with certainty at closing.

[5] In early 2019, the vendor calculated the adjustments it was owed to be $70,777.55. It provided its calculations to the purchaser. The vendor’s calculations of adjustments are in the record, and to the extent I can identify them based on my review of the document, they appear to relate to expenses of the property that ultimately the tenants are responsible to pay. These are what is commonly known as additional rent – rent that commercial tenants pay over and above the base rent to cover their share of common expenses. The evidence in the record indicates that additional rent is typically estimated at the start of the year, and reconciled at the end of the year based on actual costs.[^1]

[6] After some communication between the parties, the purchaser sent out two invoices to each tenant reflecting the necessary reconciliation: one for the period of the vendor’s ownership, and one for the period of the purchaser’s ownership. Tenants were advised to pay each party directly.

[7] Three tenants paid the vendor directly, but none of the other tenants did. Equally they did not pay the purchaser for the amount owed to the vendor. After taking into account the funds the vendor received, the parties agree that the vendor is owed $67,457.38 in adjustments.

[8] The disagreement is whether the purchaser has to pay the vendor the outstanding amount for the adjustments, or the vendor has to collect the amounts owing from the tenants.[^2] This is a question of contractual interpretation.

[9] The full text of the provisions at issue is set out in Schedule A. The key sections are sections 3.4 and 3.5.

[10] Section 3.4a provides, in part:

Subject to those items referred to in Section 3.5, the adjustments (herein referred to the “Adjustments”) shall include all operating costs and recoveries, realty taxes, local improvement rates and charges, current rents, prepaid rents (and interest thereon, if payable pursuant to the Leases), security deposits (and interest thereon, if payable pursuant to the Leases), current expense, realty taxes and operating cost recoveries from the Tenants, utility deposits and other adjustments established by usual practice in the City of Toronto for the purchase and sale of similar properties. … It is understood and agreed that rent for the month of Closing shall be adjusted as if paid in full by all Tenants.

[11] Section 3.4b provides, in part:

… The expense and operating cost recoveries from and reconciliations with the Tenants for the period prior to the Adjustment Date shall be re-adjusted between the Vendor and Purchaser, if necessary, within sixty (60) days after the determination of the final expense and operating cost recoveries from and reconciliations with the Tenants for the lease year of the Leases in which the Closing Date occurs. Such determinations shall be made by the Purchaser. Provided that the Vendor provides reconciliations, calculations and back-up material substantiating such reconciliations for the period in 2018 prior to the Closing Date, the Purchaser covenants to complete operating cost recoveries and reconciliations with the Tenants for the 2018 calendar year by June 30, 2019 and to promptly provide supporting information to the Vendor to determine any re-adjustment required as a result thereof.

[12] The vendor argues that the adjustments it seeks are general adjustments, and that the parties expressly agreed in s. 3.4b to re-adjust the expense and operating cost recoveries from and reconciliations with the tenants “between the vendor and purchaser.”

[13] The purchaser relies on s. 3.5a of the agreement, which provides, in part:

any amounts due and owing but unpaid on the Adjustment Date by the ‎Tenants under the Leases for rent or any other amounts under the Leases ‎for the period prior to the Adjustment Date (the "Rent Receivables") shall ‎remain the property of the Vendor on Closing and there shall be no ‎adjustment in favour of the Vendor on the statement of adjustments for ‎such Rent Receivables; however, the Vendor shall continue to have the ‎right after Closing to recover by way of action from the Tenants any Rent ‎Receivables (but such action shall not include distraint proceedings or ‎termination of the Leases). …

[14] The purchaser argues that the adjustments in question are rent receivables under the agreement, which clearly preserves the vendor’s right to pursue the tenants for those receivables. The vendor argues that rent receivables are different than the general adjustments. It states that to be a rent receivable, the amount had to be due and owing, but unpaid, on the closing date. In other words, rent receivables are amounts the vendor should have collected by closing, but for whatever reason, had not. Those amounts are not subject to adjustment because they are the property of the vendor. In contrast, general adjustments, which the vendor argues include adjustments to additional rent, are those adjustments that were unascertained, and therefore not yet “due and owing” at closing, and as such are subject to section 3.4, not section 3.5a.

[15] At its heart, the question before me is whether the adjustments in question are rent receivables, which shall not be an adjustment in favour of the vendor on the statement of adjustments, or general adjustments under section 3.4 which shall be re-adjusted between the vendor and the purchaser.

[16] The parties agree on the principles the court must bring to contract interpretation. They rely on Sattva Capital Corp v. Creston Moly Corp., 2015 SCC 53, at para. 47, and Starrcoll Inc. v. 2281927 Ontario Ltd., 2016 ONCA 275 at paras. 20-21, among others. From these authorities, I distill the following key principles:

a. The interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction to determine the intent of the parties and the scope of their understanding.

b. The court must read the contract 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 formation of the contract.

c. The meaning of words is often derived from a number of contextual factors, including the purpose of the agreement and the nature of the relationship created by the agreement.

[17] In my view, the adjustments the vendor seeks are not rent receivables addressed in section 3.5, but are general adjustments subject to section 3.4. I reach this conclusion for the reasons set out below.

[18] First, section 3.5 defines “rent receivables” as “any amounts due and owing but unpaid on the Adjustment Date by the Tenants under the Leases for rent or any other amounts under the Leases for the period prior to the Adjustment Date.” Year-end reconciliations to additional rent were not “due and owing but unpaid” on closing. Rather, on closing, the tenants had the obligation to pay their ongoing rent obligation, including an estimate of additional rent, and they had the contractual obligation to reconcile those amounts at the end of the year when the costs would become certain, but there was no outstanding reconciliation. A payment cannot be due and owing without the ability to know what it is.

[19] Second, by the terms of section 3.5, there shall be no adjustment in favour of the vendor for rent receivables. This is consistent with the character of rent receivables as having nothing to do with the changeover of the property. Had a tenant not paid their rent in May 2018, that debt would have nothing to do with the purchaser, and that outstanding rent would be a rent receivable. Section 3.5 preserves the vendor’s right to recover such outstanding debts from the tenant. It does not have anything to do with reconciliations that, by their nature, cannot take place for months after the closing date.

[20] Third, the “adjustments” in section 3.4a include “realty taxes and operating cost recoveries from the tenants.” If the reconciliation of additional rent is a rent receivable, this phrase becomes devoid of meaning.

[21] Fourth, section 3.4b specifically contemplates that “the expense and operating cost recoveries from and reconciliations with the tenants for the period prior to the adjustment date shall be re-adjusted between the vendor and purchaser…” If rent receivables, being amounts owing under the leases for rent “or any other amounts” under section 3.5a are not limited to those due and owing but unpaid on closing, but include amounts that have to be subsequently reconciled, what does the above-quoted phrase from section 3.5b mean? From where would the tenants have a separate obligation to reconcile expenses and operating cost recoveries if not in their lease?

[22] The interpretation advanced by the purchaser renders much of section 3.4b meaningless, while the interpretation advanced by the vendor preserves meaning in section 3.5. The vendor’s interpretation is also consistent with the fact that, on closing, the tenant’s contractual relationship is with the purchaser, not the vendor. It makes sense that the obligation to collect additional rent owing from a year-end reconciliation would fall to the party who has an ongoing contractual relationship with the tenant.

[23] The purchaser argued, relying on 1058972 Alberta Ltd. v. Montagu Properties, 2014 ABQB 472, at paras. 61-62, that it was open to the vendor to seek to require the purchaser to pay the adjustments by including a clause in the contract to that effect. In fact, that is exactly what the vendor did, in section 3.4b.

[24] In conclusion, I grant summary judgment in favour of the plaintiff in the amount of $67,457.38.

Costs

[25] The parties filed their costs outlines and offers to settle and agreed that, once I had determined the motion on its merits, I would review the materials filed on costs and determine costs without taking additional submissions.

[26] The three main purposes of modern costs rules are to indemnify successful litigants for the costs of litigation, to encourage settlement, and to discourage and sanction inappropriate behaviour by litigants: Fong v. Chan (1999), 1999 CanLII 2052 (ON CA), 46 O.R. (3d) 330, at para. 22.

[27] Subject to the provisions of an Act or the rules of court, costs are in the discretion of the court, pursuant to s. 131 of the Courts of Justice Act, R.S.O. 1990, c. C.43. The court exercises its discretion taking into account the factors enumerated in r. 57.01 of the Rules of Civil Procedure, including the principle of indemnity, the reasonable expectations of the unsuccessful party, and the complexity and importance of the issues. Overall, costs must be fair and reasonable: Boucher v. Public Accountants’ Council for the Province of Ontario, 2004 CanLII 14579 (Ont. C.A.), 71 O.R. (3d) 291, at paras. 4 and 38. A costs award should reflect what the court views as a fair and reasonable contribution by the unsuccessful party to the successful party rather than any exact measure of the actual costs to the successful litigant: Zesta Engineering Ltd. v. Cloutier, 2002 CanLII 25577 (ON CA), 2002 CarswellOnt 4020, 118 A.C.W.S. (3d) 341 (C.A.), at para. 4.

[28] In this case, the plaintiff is the successful party and is presumptively entitled to its costs.

[29] The plaintiff’s bill of costs discloses costs on a partial indemnity scale of $11,402.18, all inclusive, and $15,865.95, all inclusive, on a substantial indemnity scale. The defendant’s bill of costs discloses all-inclusive partial indemnity costs of $8,229.23, and all-inclusive substantial indemnity costs of $12,343.84.

[30] Both parties delivered offers to settle. The defendant’s offer is dated July 20, 2021 and is for $20,000, all inclusive. It is apparent that the defendant did not beat its offer. The plaintiff’s offer, dated August 4, 2021 is for $60,000, all inclusive. The plaintiff has beaten its offer.

[31] The plaintiff is thus entitled to partial indemnity costs to the date of its offer, and substantial indemnity costs thereafter. Unfortunately, the costs outline does not indicate which costs were incurred subsequent to the delivery of the offer. Given the timing of the offer, after delivery of the parties’ records, I assume that preparation of the factum and the preparation for and attendance at the hearing post-dated the offer. I thus calculate the claim for costs to be $10,688.00 in fees, or $13,115.82, all inclusive.

[32] In my view, the time spent by, and the hourly rates of, plaintiff’s counsel are reasonable. The cost is proportionate having regard to the issues and the amount at stake in the proceeding. Moreover, the claimed costs are roughly in line with the costs incurred by the defendant, and thus I find they fall within the unsuccessful party’s reasonable expectations of costs.

[33] I conclude that the costs claimed are fair and reasonable in the circumstances. The defendant shall pay costs of $13,115.82, all inclusive, within thirty days.

J.T. Akbarali J.

Date: October 12, 2021

Schedule A

3.4 General Adjustments

(a) Subject to those items referred to in Section 3.5, the adjustments (herein referred to the “Adjustments”) shall include all operating costs and recoveries, realty taxes, local improvement rates and charges, current rents, prepaid rents (and interest thereon, if payable pursuant to the Leases), security deposits (and interest thereon, if payable pursuant to the Leases), current expense, realty taxes and operating cost recoveries from the Tenants, utility deposits and other adjustments established by usual practice in the City of Toronto for the purchase and sale of similar properties. In addition, the Adjustments shall include the other matters referred to in this Agreement which are stated to be the subject of adjustment and shall exclude the other matters in this Agreement which are stated not to be the subject of adjustment. It is understood and agreed that rent for the month of Closing shall be adjusted as if paid in full by all Tenants.

(b) Adjustments shall be made as of the Adjustment Date on an accrual basis. From and after the Adjustment Date, the Purchaser shall be responsible for all expenses and shall be entitled to all rent and other income from the Property. The Vendor shall be responsible for all expenses and entitled to all rent and other income from the Property for that period ending prior to the Adjustment Date. The expense and operating cost recoveries from and reconciliations with the Tenants for the period prior to the Adjustment Date shall be re-adjusted between the Vendor and Purchaser, if necessary, within sixty (60) days after the determination of the final expense and operating cost recoveries from and reconciliations with the Tenants for the lease year of the Leases in which the Closing Date occurs. Such determinations shall be made by the Purchaser. Provided that the Vendor provides reconciliations, calculations and back-up material substantiating such reconciliations for the period in 2018 prior to the Closing Date, the Purchaser covenants to complete operating cost recoveries and reconciliations with the Tenants for the 2018 calendar year by June 30, 2019 and to promptly provide supporting information to the Vendor to determine any re-adjustment required as a result thereof.

(c) If any item subject to adjustment cannot be determined on Closing, an estimate shall be made by the Vendor for purposes of Closing and a final adjustment shall be made when the particular item can be determined. With the exception of adjustments arising in respect of realty tax and assessment appeals pursuant to Section 3.5(b) hereof, all claims for re-adjustments must be made within a fifteen (15) month period following Closing. provided, however, that after the expiry of such period, the adjustments made by the parties shall be final and binding.

(d) The provisions of this Section 3.4 shall not merge on, but shall survive, Closing.

3.5 Specific Adjustments

a) any amounts due and owing but unpaid on the Adjustment Date by the ‎Tenants under the Leases for rent or any other amounts under the Leases ‎for the period prior to the Adjustment Date (the "Rent Receivables") shall ‎remain the property of the Vendor on Closing and there shall be no ‎adjustment in favour of the Vendor on the statement of adjustments for ‎such Rent Receivables; however, the Vendor shall continue to have the ‎right after Closing to recover by way of action from the Tenants any Rent ‎Receivables (but such action shall not include distraint proceedings or ‎termination of the Leases). Any rent or any other amounts under the ‎Leases collected by the Purchaser on and following Closing shall be paid ‎first to the Purchaser towards current rent and other amounts then owing ‎under the Leases. Any Rent Receivables collected by the Purchaser shall ‎be held in trust by the Purchaser subject to payment of any arrears ‎incurred by the Purchaser in payment of amounts due under the Leases for ‎the period after Closing and prior to the date of receipt by the Purchaser of ‎the applicable Rent Receivables and, after payment of current rent and ‎arrears to the Purchaser, the balance of collected Rent Receivables shall ‎be paid to the Vendor; …

[^1]: In its written argument, the vendor objected to the purchaser’s affiant’s affidavit insofar as the affiant purported to give evidence about her experience in dealing with adjustments following the sale or purchase of a commercial building. The vendor argued that the evidence was opinion evidence, and thus inadmissible. These arguments were not made at the hearing of the motion. In any event, I agree that the purchaser’s affiant is not entitled to give opinion evidence. However, in my view, the affiant’s evidence relates more to her personal experience; she does not purport to offer evidence as an expert in the industry about industry practice. It is of very little, if any, relevance because the issue I have to decide does not turn on the affiant’s experience, but rather turns on what the parties agreed to in their contract. However, the background information the affiant provides with respect to additional rent is helpful context, and it is for that purpose that I refer to it.

[^2]: The purchaser argued that it neither had to pay the adjustments to the vendor, nor collect them on the vendor’s behalf. I do not understand the vendor’s argument to be that the purchaser has a collection obligation, so I do not address that argument in these reasons.