KS Slater Inc. v. The Federation of Canadian Municipalities, 2021 ONSC 772

COURT FILE NO.: CV-20-646228

DATE: 20210201

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

KS SLATER INC.

Applicant

– and –

THE FEDERATION OF CANADIAN MUNICIPALITIES

Respondent

Nancy Roberts and Alyssa Clutterbuck, for the Applicant

Matthew J. Halpin and Simon Gollish, for the Respondent

HEARD: January 28, 2021

Fl Myers j

REASONS FOR JUDGMENT

The Application

1KS Slater Inc. is the landlord of a commercial building located at 66 Slater Street, Ottawa, Ontario. It applies for an order that its tenant, The Federation of Canadian Municipalities, failed to exercise properly its option to release it from the obligation to lease the 18th floor of the building with its lease of the 19th and 20th floors.

2The issue turns solely on the interpretation of the provisions of the lease dated March 11, 2020 as amended that specify how the option is to be exercised in the event that the tenant does not wish to lease the 18th floor.

3For the reason that follow, in my view, the tenant’s purported exercise of the option did not comply with the terms of the lease and was therefore invalid. Under the agreed upon terms of the option, the tenant was not entitled to exercise the option to release the 18th floor when it purported to do so. Moreover, the option expired that day. It is no longer open to be exercised.

4In my view, the lease allocated to the tenant the risk that its future funding status would not be known before the option expired. The interpretation submitted by the tenant would reverse the allocation and allow it to escape the lease despite its future funding status not being known at the drop dead date (or even today).

5The parties negotiated and agreed upon the words that they agreed upon. Had the parties agreed to allow the tenant to release the 18th floor when its future funding was unknown, the lease would have said so.

The Facts

6The relevant clause reads as follows:

6. Tenant's Option to Release

IF the Tenant provides the Landlord a written copy of correspondence from the Federal governing body having unilateral authority over the Tenant's program currently entitled "Municipalities for Climate Innovation Program" (the "Program") in respect to the Tenant's loss of expected funding or reduced current funding in amounts that are greater than SEVENTY FIVE Percent (75%) from the previous year's Federal funding for said Program as defined in this Section 6 of Schedule "D" for the Program (the "Funding Confirmation") (the "Mandate Loss"), THEN, the Tenant shall have the right (the "Option to Release") to release a portion of Suite 1800 up to the entire Suite 1800 located on the 18th floor of the Building (the "Release Premises") effective June 30, 2020 (the "Release Date'). In order to exercise such Option to Release, the Tenant must provide the Landlord with written notice (the "Release Notice") on or before June 30, 2020 failing which notice, the Option to Release shall be terminated and of no further force or effect.

Subject to the foregoing, if the Tenant validly exercises its Option to Release and delivers the written Release Notice together with the Funding Confirmation of the Mandate Loss on or before June 30, 2020, this Lease shall be amended effective as of the Release Date.

7The option to release provided that until June 30, 2020 the tenant could give the landlord a letter from a government in respect of “the Tenant’s loss of expected funding…[for an identified programme] (the “Funding Confirmation”) (the “Mandate Loss”)”.

8If the tenant provided a notice to the landlord “together with the Funding Confirmation of the Mandate Loss by June 30, 2021”, the lease would be deemed amended to eliminate the 18th floor.

9While the tenant recognizes that the subjective bargaining positions of the parties and the prior drafts of the agreement are not properly part of the analysis of the contractual provision, it asks the court to take note of the objective factual matrix within which the parties were negotiating the lease.

10The tenant says that during lease negotiations in late 2019, it brought home to the landlord that it only needed the 18th floor if a particular government-funded program was going to be funded by the government on an ongoing basis. The tenant told the landlord that it would not know the outcome of its request for funding until the next federal budget that was then expected to be announced in March, 2020. The landlord disputes the tenant’s characterization of the degree and specificity of its knowledge. I do not need to resolve this question to decide the case.

11During the pre-contractual negotiations of the lease, as drafts of the lease continued to be exchanged, the tenant’s broker told the landlord:

[The Tenant] can't go unconditional with the lease until Federal Budget day, which is in March but apparently the date hasn't been announced yet. The full space they will need and are planning to take is dependent on the assurance that the funding is coming on all of their programs.

12The lease was not made conditional on the existence of funding for the program in the next budget however. The parties agreed to two limitations set out in the option. The option could only be exercised if the proper governmental official provided “the Funding Confirmation of the Mandate Loss on or before June 30, 2020”. There has to be both confirmation of a loss of expected funding and it had to be provided by the drop dead date.

13Initially, the lease provided that the option to release the 18th floor had a drop dead date of April 30, 2020 by which it had to be exercised or else it would lapse. When the pandemic hit, the government went into emergency mode. It did not introduce a budget in March as expected. In fact, it has not yet introduced a budget for the April, 2020 – March 31, 2021 fiscal year.

14In April, 2020 the tenant asked for an extension of time to exercise the option. It indicated that if it was not given an extension of time, it might have to exercise the option then out of an abundance of caution. There was no discussion about whether the tenant was entitled to exercise the option at that time. However, the landlord agreed to an extension until June 30, 2021.

15On June 30, 2021, the tenant purported to exercise its option without providing a letter from the government. It explained:

When the Lease was executed by the Parties, the Tenant had initiated discussions with the federal government for continued funding for the Program in the Federal Government's 2020 budget. Unfortunately, due to the unforeseen COVID-19 pandemic, the Federal Government did not issue a federal budget this spring and the government necessarily has turned its attention to the national pandemic response.

The Federal Government, as publicly stated, remains in an emergency response phase and, for the foreseeable future, it will remain focused on Canada's immediate health, safety and economic needs, and it is not possible to engage conversations on the subject of unrelated program funding.

Due to the above mentioned circumstances, that are beyond the control of the Tenant, it will not be possible for the Tenant to provide the a [sic] copy of the correspondence as contemplated by the Lease. Therefore, Tenant requests the Landlord's acceptance of this notice to release the 18th Floor of the Building. [Emphasis added.]

16It is apparent that at that date, the tenant did not know if its funding for the relevant program had been confirmed. Due to the pandemic, funding discussions with the government were not possible and a budget had not been released.

17The landlord did not agree to the tenant’s request to allow it to exercise the option without the required letter from the government. Later that afternoon, the tenant provided the landlord with a copy of an email to the tenant from the relevant Assistant Deputy Minister.

Per our communication, MCIP is a 5 year program that has been designed to support municipalities in all provinces and territories to implement low carbon and climate resilient projects, through a combination of direct funding, technical assistance, awareness raising, and knowledge mobilization activities. This program is scheduled to sunset at the end of the current fiscal year (i.e ., by March 31, 2021). Program funding has not been renewed, nor has a decision been made to renew funding for the program. Accordingly, at this time, I agree that the FCM should not forecast additional program funding beyond what is provided for within the current funding agreement. I look forward to our continued work and partnership together. Please let me know if you need any further information on this.

18The landlord takes no issue with the form of the communication or the identity of the ADM. Rather, it says that the content does not satisfy the lease language.

Analysis

19The tenant says that with the prior funding coming to an end at the end of the fiscal year, the ADM’s statement that “funding has not been renewed” is sufficient to confirm the loss of expected funding as set out in the lease. However, this ignores the rest of the sentence: “nor has a decision been made to renew funding for the program”. In other words, funding has not been renewed…yet. The ADM did not confirm the loss of funding. Rather, she made a temporal statement that funding had not been renewed at that date. The tenant’s letter earlier in the day made this clear.

20I see no ambiguity in the lease terms. For the option to be exercised there must be a “loss of expected funding” confirmed by the government. The defined terms “Funding Confirmation” and “Mandate Loss” leave no doubt as to the parties’ agreed intentions. For the clause to apply, the government must confirm that the program mandate had been lost.

21The tenant may have desired funding certainty and in its negotiations communicated a desire for the budget to be released before it committed to take the 18th floor. The landlord made competing demands and the parties agreed to the words that they included in their lease contract.

22The tenant agreed that it would lose the right to release the space if it had not received confirmation of its loss of funding by June 30, 2020. The tenant thereby accepted the risk that it would not having funding certainty by the drop dead date. I do not agree with the tenant’s submission that the lack of renewal by the drop dead date is “equivalent” to a loss of funding. That reverses the allocation of risk that it accepted.

23The tenant seeks to rely on its pre-contractual bargaining position to say that government confirmation that it had not yet made a decision amounts to loss of expected funding or its Mandate Loss. In effect, it asks me to amend the lease to insert a provision allowing it to exercise the option if a budget has not yet been released or if it did not know if it had suffered a Mandate Loss by the drop dead date. Even if the prior negotiating position might be part of the objective factual matrix (which I do not think is correct) the tenant agrees in its factum that the court cannot use “surrounding circumstances” to overwhelm the words that the parties actually used.

24I understand that the object of contractual interpretation is to bring business sense to the parties’ agreed upon intentions. I understand as well that studying the objectively known circumstances can often assist in that endeavour. But that does not mean that a court can ignore the plain meaning of the words used in an agreement to provide one party with an outcome that it said it wanted or needed during the negotiations, when it agreed to something else.

25As a fall back, the tenant relies upon the doctrine of frustration and the Frustrated Contracts Act to ask the court to declare the lease of the 18th floor frustrated and therefore void. I see no frustration on the facts here. The pandemic delayed the government’s funding decision beyond the drop dead date agreed to by the parties. They turned their minds to timing and agreed. All that is happening now is the natural outcome of that agreement. The option has expired before the tenant can give the notice that it might want to give if the government confirms the loss of funding for the program at some future date. Holding the tenant to the lease does not frustrate its intent. It carries out the contractual intent that if the option is not exercised before it expires, the lease will continue.

26As a final fallback, the tenant seeks relief from forfeiture. There is no forfeiture here. The landlord has not imposed a disproportionate penalty on the tenant due to its breach of the lease. It has not breached the lease at all. Nor has the landlord exercised a right to penalize it or to impose a remedy for a breach. All that happened was that a time limit expired in accordance with its terms. There is no forfeiture to relieve against.

27Neither is there a disproportionate outcome. The outcome is exactly as conceived. Either the 18th floor was going to be leased or it was not. The landlord has not done anything inequitable to bring this about. Neither is the requirement to pay rent on the space at the agreed rental amount disproportionate. It is the natural outcome of the lease terms.

28Accordingly, I grant the relief sought in para. 49 of the landlord’s factum.

29Under s. 24.1 of the lease, the landlord is entitled to substantial indemnity for its legal costs in the event that it commences legal proceedings to compel performance of the lease. As the tenant has yet to recognize its obligations with respect to the 18th floor, I find that this application falls within that clause of the lease. Mr. Halpin did not contest the reasonableness of the quantum of the landlord’s claim for $54,604 in costs. I find the amount reasonable on a substantial indemnity basis and order the tenant to pay the landlord $54,604 all-inclusive for costs.

FL Myers J