Court File and Parties
COURT FILE NO.: CV-21-657900 DATE: 2021-11-05 SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Luccar Investments Inc. AND: Ilda Dukaj and Donny Dukaj
BEFORE: W.D. Black J.
COUNSEL: Alexi N. Wood, for the Applicant Emraan Dharsi, for the Respondents
HEARD: October 15, 2021
Endorsement
[1] This application relates to a commercial tenancy.
Background
[2] The applicant landlord (the “Applicant” or the “Landlord”) owns the premises at 1065 and 1067 College Street in Toronto (the “Property”). The Property is zoned for both commercial and residential uses, and the commercial unit is located on the ground floor (the “Premises”).
[3] Prior to April 2019, the Premises were operated as a laundromat. As a result the Premises were dilapidated and between 2016 and 2019 had to undergo extensive renovations.
[4] The respondents (the “Respondents” or the “Tenants”) are common law spouses who had a plan to operate a daycare facility.
[5] On April 25, 2019, the parties entered into a commercial lease for the Premises, which the Respondents leased as a location from which to operate their daycare business.
[6] Although work had been done on the Premises between 2016 and 2019, it was apparent to all parties that if the Premises were to be used as a daycare, considerable alterations would need to be made. In recognition of this fact, and in particular the time it would take to remove the old laundry machines and related items, the Landlord offered the Tenants one month of free rent. The Tenants accepted this offer.
The Lease
[7] The term of the lease was from July 1, 2019 to June 30, 2024: 60 months in total.
[8] In addition to an obligation for the Tenants to pay rent (discussed below), the Landlord points to certain other provisions of the lease as being important to this application. Section 11 sets out the Tenants’ obligation to obtain prior written approval in advance of any work done to the Premises. Schedule A to the lease contains similar language, requiring the Landlord’s written consent for necessary alterations and improvements proposed by the Tenants. Section 15 deals with abatement of rent, specifically in relation to any delay on the part of the Landlord in completing the steps necessary for occupancy by the Tenants.
[9] The Tenants took possession of the Premises on July 1, 2019. As contemplated, they had to dismantle the pre-existing laundromat. To that end, they removed and disposed of laundry machines and related equipment. Once that was done, they began the specific renovations required for their daycare, commissioning and submitting plans to the City of Toronto, and obtaining a building permit issued on May 25, 2020 (which was to remain open until February 23, 2021).
Payments Required and Outstanding
[10] It is common ground that the Tenants have not made any payments to the Landlord since January 2021.
[11] The lease requires the Tenants to pay base rent, utilities and services, taxes, maintenance and insurance (“TMI”), and certain specified “Business Improvement Area” (“BIA”) fees.
[12] At the time of the hearing of the application, the Tenants had failed to pay a total of 10 monthly rental payments (in the amount of $54,822.94), utility payments (in the amount of $1,740.83), TMI payments of $19,296.88, and BIA payments of just over $2,000.00. Collectively, this results in arrears totaling almost $78,000.00.
The Fire Code Inspection
[13] The Tenants say that they have withheld rent because of the consequences of an inspection of the Premises under the Fire Code, O. Reg. 213/07 failed by the Landlord in September 2020. According to the Tenants, this meant that they could not take occupancy of the Premises and that this, in turn, prevented them from opening their daycare in October 2020 (as they had planned).
[14] It is this failed Fire Code inspection that lies at the heart of this dispute. While the Landlord points to additional conduct alleged to be in breach of the lease, and while the Tenants articulate positions in response to these alleged additional breaches, ultimately, the Tenants’ position depends heavily on the ramifications of the failed Fire Code inspection.
[15] Consistent with this, the Tenants maintain – and, indeed, it seems to be agreed – that up to the date of the Fire Code inspection in September 2020, the relationship between the parties was fine and no significant difficulties or disputes had arisen.
[16] The Tenants say that as a result of the failed Fire Code inspection, they could not take “occupancy” of the Premises until some months after the planned opening of the daycare in October 2020.
[17] The Landlord says that there is evidence showing that the Tenants were not ready to open their daycare in October 2020. According to the Landlord, this demonstrates that the remedial steps required to address the failures identified in the Fire Code inspection did not result in any delay. The Landlord also argues that, starting around the same time (i.e., Fall 2020), the Tenants began to breach other provisions of the lease. In particular, the Landlord says that the Tenants’ installation of a fence around boulevard space adjacent to the Premises was in violation of the lease.
The Fence
[18] While the Tenants had permission to install a fence to enclose outdoor space to be used in the operation of the daycare, the Landlord complains that the actual fence installed, which it was never given an opportunity to approve (as required by the lease), extends beyond the boundaries of the Premises and impedes the walkway for the residential Tenants occupying the second floor of the Property. The Landlord also submits that the fence does not match the aesthetic of the Property.
Landlord’s Position on Delay from Fire Inspection
[19] Regarding the Fire Code inspection and the necessary modifications to make the Premises compliant, the Landlord agrees that certain upgrades were required and that those remedial steps took place between September 2020 until sometime in February 2021. However, it maintains that it did not delay (as alleged by the Tenants) in taking the necessary steps. Rather, it takes the position that the Tenants were delayed by other matters and, in any event, were not ready to open the daycare in Fall 2020.
[20] Specifically, the Landlord points to communications between the Tenants and the Ministry of Education during the relevant timeframe, which show that (1) the Tenants did not have certain necessary background checks and COVID-19 protocols in place until March 2021 and (2) did not incorporate the entity that was to operate the daycare until March 4, 2021.
Tenants’ Position on Delay from Fire Inspection
[21] On these points, the Tenants’ reply (in oral argument in particular – some of what follows was not contained in the Tenants’ factum) is that, notwithstanding their lack of Ministry of Education approvals and their lack of incorporation, they could have and would have operated an unlicensed daycare, with up to 5 children, as of October 2020. Therefore, they submit that the delay stemming from the Fire Code inspection did in fact prevent them from operating an unlicensed version of their daycare until they were able to comply with the Ministry of Education’s formal licensing requirements.
[22] The Tenants’ position is that the relevant definition of “occupancy” for the purposes of this situation is “municipal occupancy”, meaning that all municipal approvals are in place and the facility can be opened and operated safely, and not simply “physical occupancy” in the sense of access to the Premises for the purposes of ongoing modifications while awaiting the Landlord’s compliance with outstanding Fire Code inspection related items.
[23] With respect to the fence, the Tenants maintain that they tried to comply with the Landlord’s aesthetic and believed that they had the necessary permission and approval to proceed. They say that a daycare consultant advised them that the fence had to be chainlink (or at least that most daycare fences were chainlink) and that they were therefore somewhat constrained in their choice of material.
Legal arguments on “Occupancy”
A. Landlord’s Argument
[24] On the question of “occupancy”, the Landlord relies on the British Columbia Court of Appeal’s decision in Illingworth v. Evergreen Medicinal Supply Inc., 2019 BCCA 471.
[25] In that case, a tenant (“Evergreen”) withheld rental payments on two purported bases. First, it argued that the landlord was responsible for all outstanding construction costs for the premises in question and that it was in default on that obligation. Second, it submitted that the landlord had agreed to defer rental payments until it obtained a license from Health Canada to operate a production facility for medical marijuana.
[26] The lease between the parties in Illingworth specified that if the premises were not “available for occupancy” at the start of the five-year lease term, there would be an abatement of rent.
[27] Whereas the commencement of the lease term was stated to be January 1, 2014, the tenant was not able to secure its Health Canada license to produce marijuana until March 2017 and paid no monthly rent until that time. In December 2016, the landlord demanded payment of all rental arrears from January 1, 2014 and included a notice of termination on the grounds that the tenant had failed to pay rent and taxes as required. In February 2017, the landlord gave notice to the tenant to vacate the premises and demanded possession. The tenant refused to leave, taking the position that the landlord owed the tenant money for unpaid construction costs.
[28] At the hearing of the initial petition, the tenant did not dispute its non-payment of monthly rent between January 2014 and February 2017. Instead, it maintained that the landlord was responsible for (and delinquent with respect to) all outstanding construction costs. It also alleged that the landlord had agreed to defer rental payments until it was able to obtain its Health Canada licence.
[29] While the judge hearing the initial petition agreed that the intention was that no rent would be payable until such time as the license was secured, a series of further proceedings then arose. These further proceedings culminated in the decision of the Court of Appeal, on which the Landlord in the case before me relies.
[30] In considering the issue of the meaning of “available for occupancy” for the purposes of the abatement claimed by the tenant, the Court of Appeal observed, at para. 114, that:
The critical phrase in clause 6.10 is undefined….the lease does not state that “available for occupancy” requires the completion of construction of the building or of the tenant’s improvements, obtaining a Health Canada license, the issuance of an occupancy permit, or some other specified event, either within or outside the control of the parties.
[31] At para. 115, the court continued, saying that:
To ascertain the parties’ intention, clause 6.10 must be considered by reading the lease as a whole. The clause provided for the abatement of rent and was plainly intended to relieve Evergreen from paying rent after the “date of commencement” of the lease in the event the premises were not available for occupancy. In other words, not being “available for occupancy” must refer to an incomplete or unsatisfactory occupancy status after the date Evergreen took legal possession of the premises and was otherwise required to pay rent.
[32] The court held that it was satisfied that “available for occupancy” meant “available for physical occupancy”, pointing to substantial evidence that the tenant understood and represented itself to be in possession of the premises on and after January 1, 2014, marketed its business to the community from that point forward, raised funds from investors, and controlled access to the premises.
[33] The court also upheld the lower court’s finding that the parties intended for Evergreen to have both legal possession and physical occupancy of the premises effective January 1, 2014 and that this in fact occurred. Evergreen, the Court of Appeal noted, was present in the premises from that date onward and “relied on its physical possession and control” to “advance its corporate interests; and it held itself out as based there”: at para. 123.
[34] Drawing on Illingworth, the Landlord argues that, similarly, the Tenants took physical possession at the commencement of the lease term knowing that considerable ongoing work would be required in order for the Premises to operate as a daycare. Like Illingworth, it also argues that the Tenants “relied on their physical possession and control” of the Premises for the purposes of applying for licensure, marketing to potential customers, and other activities related to its intended operation of the daycare on the Premises.
[35] In any event, the Landlord says that the Tenants cannot unilaterally withhold rent on the basis of their interpretation of the abatement clause under the lease and that the Tenants’ non-payment of rent exceeds any reasonable attribution of delay to the modifications required by the Fire Code inspection. In other words, it argues that the Tenants’ unilateral withholding of many months of rental payments exceeds what could reasonably be construed as stemming from any Fire Code inspection-related delay and that this was done without any determination as to whether the Tenants possessed a right to abatement in these circumstances. Thus, the Landlord argues, the Tenants have engaged in impermissible self-help, such that the Landlord is entitled to payment of back rent and vacant possession based on forfeiture of the lease.
B. Tenants’ Argument
[36] The Tenants, for their part, rely on the Court of Appeal for Ontario’s decision in 1284468 Ontario Ltd. v. 1121157 Ontario Ltd., 2003 CanLII 9692.
[37] In that case, the tenant submitted an extensive list of problems concerning the leased premises – including various building code deficiencies preventing the occupation of the premises for a number of months – to the landlord. The trial judge held that the terms of the lease obligated the landlord to deliver the major structural, mechanical, and electrical systems of the premises in good working order at the time the tenant took possession.
[38] The trial judge concluded that because of the municipality’s refusal to permit occupancy, the tenant was entitled to an abatement of rent until the building code deficiencies were rectified and that the tenant was entitled to set-off against the rent the costs to repair the deficiencies. The Court of Appeal saw no reason to interfere with these conclusions, which it described as reasonable in light of the evidence before the trial judge.
[39] The Tenants before me point to this case as authority for the proposition that, in commercial leases, “occupancy” refers to “municipal occupancy”: in other words, occupancy requiring municipal approval. They argue that Illingworth did not deal with pre-existing violations of municipal requirements and that, in this case, they simply could not operate until these pre-existing violations, which it alleges were known to the Landlord but not known them, were rectified.
Additional Considerations re Alleged Delay in Occupancy
[40] In order to assess the parties’ respective arguments relative to the Fire Code inspection issue, some additional detail is helpful.
[41] The Tenants allege that the Landlord was aware for at least many months, if not years before entering into the lease, that the fire protection features of the Premises were lacking. In particular, they argue that the Landlord was aware of the requirement for a 45-minute fire rating separation (since that requirement was shown on drawings commissioned by the Landlord in 2017 and 2018).
[42] The evidence does not unequivocally lead to this conclusion. While it is true that Mr. Alves, one of the principals of the Applicant, was asked in cross-examination about the drawings, he was not asked a specific question about his knowledge of the compliance of the Premises with the Fire Code requirements. It is not clear to me that reference on earlier drawings to the 45-minute fire rating separation would inevitably lead the Landlord to understand that the Premises lacked that protection and were therefore in breach of the Fire Code requirements.
[43] What is clear, however, is that the Landlord did become aware of Fire Code violations following an inspection by Toronto Fire Services on September 3, 2020. It is also clear that, once it was aware of the violations, the Landlord arranged for the necessary modifications and that those modifications were completed and approved by February 24, 2021. Accordingly, the period during which the violations were known to both parties, and during which necessary alterations took place, covered approximately 5.5 months.
[44] The Tenants argue that they were otherwise ready to commence at least limited operations as of October 2020 and that the Landlord’s delay in addressing the Fire Code violations delayed the Tenants’ “municipal occupancy” by a period of some months.
[45] The Landlord acknowledges the Fire Code violations that it says (and the evidence supports) were brought to its attention on or just after September 3, 2020. It says that it addressed the necessary modifications reasonably expeditiously.
[46] It also maintains that the Tenants were, in any event, not in fact ready to commence operations as of October 2020 because various other prerequisites to opening the daycare were not yet in place. Specifically, as set out above, the Landlord notes that the Tenants did not complete required background checks or COVID-19 protocols to obtain a daycare license until March of 2021 and did not incorporate the corporate entity through which the daycare would operate until March 4, 2021. The Landlord points out that these steps were not impeded by dealing with the outstanding Fire Code violations, and that they constitute an independent source of delay which meant that the daycare could not open and operate until March or April of 2021. Therefore, it submits that the time spent undertaking necessary alterations to comply with the Fire Code requirements was irrelevant to the timing of the Tenants’ opening.
[47] As further evidence that the delay associated with the Fire Code violations was immaterial, the Landlord notes that the Tenants’ daycare operation did not actually commence until June 2021. According to the Landlord, this shows that the Fire Code issues, which were addressed by late February 2021, played no role in delaying the Tenants’ opening.
[48] It is in response to these arguments that the Tenants say that even without a license from the Ministry of Education they could have operated an unlicensed daycare with up to five children as customers. They argue that, but for the Fire Code-related delays, they would have commenced doing so in October 2020 and that, therefore, the delays prevented them from earning at least some income between October 2020 and March 2021.
[49] Moreover, the Tenants highlight the fact that they paid rent in good faith until December 2020. They argue that they only began withholding rent in January 2021, when it became clear that the Landlord’s assurances that the Fire Code issues were being dealt with expeditiously and would be completed very soon were not proving accurate.
Conclusion on Delay in Occupancy
[50] In my view, the answer to the Fire Code issue lies in between the parties’ respective positions.
[51] I do not accept, as set out above, that there is compelling evidence demonstrating that the Landlord was aware before September 2020 that the Premises were in breach of several Fire Code provisions and that these violations would have to be rectified before the Tenants could safely operate their business. In this sense, this case is distinguishable from the 1284468 Ontario Ltd. case on which the Tenants rely.
[52] On the other hand, it is fair to attribute at least some of the delay in the commencement of the Tenants’ business operations to the time necessarily spent addressing the Fire Code violations once the Landlord was in fact aware of those violations.
[53] As set out above, that time encompasses the period from September 3, 2020 to February 24, 2021. Therefore, the maximum potential abatement of rent would be 5.5 months.
[54] However, there is at least some uncertainty about the Tenants’ ability to operate their business, or a version of it, throughout that timeframe. While the Tenants now allege that they could have commenced an unlicensed daycare operation as early as October 2020, it is noteworthy that they made no such allegation before the oral argument of this application. Moreover, although the Fire Code issues were definitively addressed as of February 24, 2021, the Tenants did not actually commence operations, even on an unlicensed basis, before June 2021.
[55] I also find that the Tenants’ unilateral withholding of rent and other payments was an unduly aggressive self-help remedy. Indeed, notwithstanding that the maximum period of delay attributable to the Landlord would be 5.5 months, the Tenants have now withheld all payments since January of this year, such that the period of non-payment, despite the fact that the Tenants have been operating their business since June, is now eclipsing 10 months.
[56] In my view, given the questionability of the Tenants’ claim that they could have commenced unlicensed operations but for the Fire Code delay as early as October 2020, the fair period for abatement of rent and related payments is 4 months.
[57] Apart from the other issues discussed below, I conclude that the Tenants should pay outstanding arrears of rent for all months beyond the 4 months that I have found to be the appropriate period of abatement. They should also immediately commence paying the regular amounts required under the lease. For greater certainty, those amounts should include all amounts listed in paragraph 11 above; in other words, I do not accept the Tenants’ contention that their payment of BIA amounts relieves them from paying TMI amounts. Both payments are properly due and owing under the lease.
[58] While the Tenants must immediately commence all regular payments under the lease, I am allowing the Tenants 45 days from the date of this decision to pay all outstanding arrears (again, all amounts net of 4 months of abatement).
Conclusion re The Fence
[59] With respect to the fence, which I perceive to be the second-most pressing issue between the parties, in my view, the Tenants, in proceeding to construct the fence without consulting the Landlord, were in breach of the provisions of s. 11 and Schedule A of the lease.
[60] The Tenants rely on language added to the lease at the time of a pre-tenancy tour of the Property, which confirms that approval from the City of Toronto was required for the fence. Because the Tenants obtained such approval, they argue that they were able to proceed to construct the chainlink fence that their consultant advised was standard for daycares.
[61] I find that the requirement for City of Toronto approval did not supersede or oust the need for the Tenants to consult with the Landlord as s. 11 and Schedule A clearly contemplate.
[62] In my view, however, the dispute surrounding the fence arose in the context of a series of misunderstandings that no doubt resulted from the deteriorating communication between the parties as a result of the various other issues arising between them.
[63] My expectation, therefore, is that if the parties meet and communicate reasonably about the issues regarding the fence, it should be possible for them to arrive at a plan to revise, and to the extent required, modestly relocate the fence. The Landlord has confirmed, contrary to the Tenants’ understanding (or misunderstanding), that the fence can be chainlink and need not be iron. So long as the parties cooperate and act reasonably, they should thus able to arrive at a mutually satisfactory design and plan for the fence that can be put into place with minimal disruption and cost. As such, I order the parties to discuss the requirements for the fence and for the Tenants to provide a modified design plan for the fence, including moving its boundaries as required. The meeting should take place within 30 days of the date of this decision and the revised plans should be provided by the Tenants within 30 days after that. It may well be, given the time of year, that the actual modifications to the fence cannot be undertaken until the Spring. Nevertheless, the parties should still cooperate to implement the necessary and agreed changes at the earliest reasonable time.
No Forfeiture
[64] Implicit in my conclusions above is that I am not persuaded that forfeiture is required at this time. While the Tenants have been unduly aggressive in their unilateral withholding of rent and related payments, I also find that there have been miscommunications and misunderstandings that have beset and negatively impacted the relationship between the parties to date.
[65] That said, in order to remain in the Premises, the Tenants must bring their payments up to date as directed above.
[66] The parties should then make every effort, including with respect to the fence issue, to communicate appropriately with one another and work cooperatively to address any concerns. The parties showed the ability to do so up until September 2020, and I see no reason, notwithstanding the disagreements that have led to this proceeding, why they cannot do so again. I am prepared to allow them to do so, but they should understand that further disputes will have to be handled differently, and that the Tenants cannot unilaterally withhold payments in the future.
[67] In my view, the other items and issues raised in the Landlord’s application and the late-breaking application of the Tenants are encompassed in my findings above. Having addressed what I understand to be the main items of contention between the parties, I am confident that they will be able to resolve any other issues between them so long as they act reasonably.
No Costs
[68] Given that success here is divided, I decline to order costs.
W.D Black J.
Date: November 5, 2021