D Lands Inc. v. KS Victoria and King Inc., 2022 ONSC 1029

COURT FILE NO.: CV-21-00665037-00CL DATE: 20220419 ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST)

BETWEEN:

D LANDS INC. Applicant (Claimant) – and – KS VICTORIA AND KING INC. Respondent (Respondent)

Peter R. Jervis and Adam Babiak, counsel for the Applicant (Claimant) Phillip Sanford, Jonathan Nehmetallah and P. David McCutcheon, counsel for the Respondent (Respondent)

HEARD: February 7, 2022

Reasons for Judgment

Dietrich J.

Overview

[1] A 99-year lease of land at 18 King St. East, in the City of Toronto (the “Lease”), lies at the heart of this proceeding.

[2] The applicant D Lands Inc. (the “Landlord”) owns the land. The respondent, KS Victoria and King Inc. (the “Tenant”), owns the 18-storey building on the land (the “Building”). The Tenant is engaged in the business of private equity real estate investment. It conducts its business in the Building and sublets space in the Building to other tenants. Both the Landlord and Tenant are successors to the parties who negotiated the Lease in 1968.

[3] The Lease resets every 25 years. The Landlord and Tenant were unable to agree on the Tenant’s rent for the 25-year period commencing December 1, 2018. Failing an agreement, the Lease provides that the rent is to be determined, through arbitration, with reference to the “appraised value of the Demised Premises.” The Lease states that the rent will be 6.5 per cent of the fair market value of the land as if vacant, unimproved, unencumbered, and free of leases as of the first day of the period, plus a percentage of the rental income from the Building.

[4] In accordance with the term of the Lease, the Landlord and Tenant arranged for an arbitration before a three-member tribunal to determine the rent.

[5] The three-member tribunal, composed of subject matter experts, W.A. Derry Millar (Chair), Hon. Frank J.C. Newbould Q.C., and Jeffrey L. Davies, sat for 22 days of hearings and three days of closing and reply submissions.

[6] The majority of the tribunal (the “Majority”), in its Majority Partial Final Award (the “Majority Award”), dated June 4, 2021, concluded that the appraised value of the Demised Premises at December 1, 2018 was $63,300,000.

[7] The minority of the tribunal (the “Minority”), in its Minority Award, concurring in part and dissenting in part (the “Minority Award”), determined that the appraised value of the Demised Premises at December 1, 2018 was $95,000,000.

[8] The Landlord brings this application pursuant to s. 45(1) of the Arbitration Act, 1991, S.O. 1990, c. 17 (the “Arbitration Act, 1991”) seeking leave to appeal the Majority Award. In the alternative, the Landlord applies pursuant to s. 46 of the Arbitration Act, 1991 seeking an order setting aside the Majority Award as an unreasonable and erroneous exercise of the arbitral tribunal’s mandate and jurisdiction.

[9] If leave to appeal is granted, the Landlord asks this court to find that the Majority erred in its interpretation of the Lease and to vary the Majority Award in accordance with the Minority’s determination of fair market value. If the Landlord is unsuccessful in its application for leave, the Landlord asks that its application be granted declaring that the Majority exceeded its jurisdiction, and that the court remit the matter to the arbitral tribunal for redetermination of the fair market value of the Demised Premises, with directions.

[10] The Tenant submits that the Landlord has no right of appeal from the Majority Award. The Tenant further submits that the Landlord failed to establish any errors in the Majority Award, and that the Majority Award is correct, reasonable and entirely within the jurisdiction of the arbitral panel.

[11] For the reasons that follow, leave to appeal from the Majority Award is granted, and the appeal is dismissed. The Landlord has not discharged its burden of proof of establishing that the Majority made an error in law in its interpretation of the Lease. The Landlord’s application for alternative relief is also dismissed. The Landlord has not discharged its burden of establishing that the Majority exceeded its jurisdiction.

Issues

[12] The issues in this matter are as follows:

(1) Is an appeal of the Majority Award permitted and, if so, should this court grant leave to appeal under s. 45 of the Arbitration Act, 1991?

(2) If leave is granted, did the Majority i) err in its interpretation of its mandate to appraise the fair market value of the Demised Premises; and ii) fail to correctly interpret certain terms of the Lease?

(3) If an appeal is not allowed, did the Majority exceed its jurisdiction?

Background Facts Regarding the Lease

[13] In the early- to mid-1960s, Andotte Investments Limited (“Andotte”) assembled the subject lands.

[14] Once assembled, Andotte sold the subject lands to Metropolitan Life Insurance Company (“Metropolitan Life”) and then entered into a sale and leaseback agreement with Metropolitan Life on May 11, 1967 (the “Sale and Leaseback Agreement”). The Lease was made pursuant to the Sale and Leaseback Agreement. The Sale and Leaseback Agreement incorporated certain instruments by reference, which set out certain restrictions, rights and covenants registered on title to the subject lands.

[15] Andotte and Metropolitan Life signed the Lease on December 1, 1968. The Lease incorporates the Sale and Leaseback Agreement by reference and incorporates the said restrictions, rights and covenants. The Landlord and the Tenant disagree on whether the said restrictions, rights and covenants are “encumbrances”, or form part of the definition of “Demised Premises” and reflect Andotte’s assembly of the subject lands.

[16] Section 27.06 of the Lease provides that it shall be construed and enforced in accordance with the laws of the Province of Ontario.

A. The Application for Leave to Appeal

Is an appeal of the Majority Award permitted?

[17] Article 26 of the Lease sets out the parties’ agreement respecting arbitration, the relevant provisions of which can be summarized as follows:

a) Where the terms of the Lease provide that any matter shall be determined by arbitration or appraisal, such arbitration or appraisal shall be conducted in accordance with Article 26 (s. 26.01);

b) Such arbitrations are to be conducted by a 3-member or 1-member arbitral tribunal (s. 26.02) in accordance with the “rules then obtaining of the American Arbitration Association” (s. 26.07);

c) The arbitrators “shall have the right only to interpret and apply the terms of this lease, and may not change any such terms or deprive any party to this lease of any right or remedy expressly or impliedly expressed in this lease” (s. 26.03); and

d) The determination of the majority of the arbitrators or sole arbitrator shall be conclusive upon the parties and judgment upon the same may be entered in any court having jurisdiction thereof (s. 26.04).

[18] The rules promulgated by the American Arbitration Association governing this arbitration were the ICDR Canada Rules, which were effective as of January 1, 2015. Those rules were silent on rights of appeal.

Positions of the Parties

[19] The Landlord submits that the arbitration agreement, the Lease in this case, is silent on the right of appeal on a question of law. Accordingly, s. 45 of the Arbitration Act, 1991 applies and allows an appeal to the court on a question of law with leave. The Landlord submits that the Majority erred in law in its interpretation of the Lease. As such, the court should grant leave because the quantum of the rent is important to the parties and its determination will significantly affect the rights of the parties. The Landlord further submits that the appeal is justified because it cannot terminate the Lease unless the Tenant defaults on its obligations and that, in exchange for annual rent from the Tenant, the Landlord has given up its rights, including its rights to sell the land to a developer.

[20] The Tenant submits that the Majority Award is not subject to an appeal by statute because when the Lease was drafted, the then-governing statute, the Arbitrations Act, R.S.O. 1960, c. 18 (the “1960 Arbitrations Act”), required the parties to opt in to a right of appeal, and the parties did not. By contrast, s. 45 of the Arbitration Act, 1991 provides an opt-out regime for appeals on questions of law, meaning that the parties must agree to affirmatively exclude a right of appeal.

[21] The Tenant further submits that the Lease is not silent on rights of appeal and, as such, the original parties to the Lease opted out of the right of appeal now afforded by s. 45 of the Arbitration Act, 1991. They did so by agreeing that the determination of the majority of the arbitrators “shall be conclusive”, and “conclusive” is defined in the Oxford English Dictionary as, among other things, “final, definitive.” Accordingly, there is no right of appeal.

Law

[22] Section 16 of the 1960 Arbitrations Act provides: “Where it is agreed by the terms of the submission that there may be an appeal from the award, an appeal lies to a judge in court and from him to the Court of Appeal.” That section also sets out the procedure to be followed.

[23] Section 16 of the Arbitrations Act, R.S.O. 1980, c. 25 (the “1980 Arbitrations Act”) provides similarly: “Where it is agreed by the terms of the submission that there may be an appeal from the award, an appeal lies to the Divisional Court.” This section also sets out the procedure to be followed.

[24] In contrast to the 1960 Arbitrations Act and the 1980 Arbitrations Act, the Arbitration Act, 1991 provides a statutory right of appeal as follows:

45(1) If the arbitration agreement does not deal with appeals on questions of law, a party may appeal an award to the court on a question of law with leave, which the court shall grant only if it is satisfied that,

(a) the importance to the parties of the matters at stake in the arbitration justifies an appeal; and

(b) determination of the question of law at issue will significantly affect the rights of the parties.

[25] Subsection 2(2) of Arbitration Act, 1991 provides that this Act applies to an arbitration conducted under an arbitration agreement made before the Act comes into force, if the arbitration is commenced after that day.

[26] Subsection 2(3) of the Arbitration Act, 1991 provides that the Act applies, with necessary modifications, to an arbitration conducted in accordance with another Act, unless that Act provides otherwise; however, in the event of conflict between this Act and the other Act, or regulations made under the other Act, the other Act or regulations prevail.

Analysis

[27] For the reasons that follow, I find that an appeal from the Majority Award is permitted.

[28] The 1960 Arbitrations Act was in place when the original parties signed the Lease. The Lease did not include a statutory right of appeal and it did not specifically exclude a right of appeal.

[29] The arbitration was commenced by Notice of Arbitration delivered by the Landlord on October 12, 2018. The arbitration took place in August, September and October 2020 and January 2021. At those times the Arbitration Act, 1991 was in place.

[30] The Tenant asserts that the arbitration agreement must be interpreted in light of the legal regime prevailing at the time it was written. Therefore, because the 1960 Arbitrations Act created an opt-in regime for an appeal, the Tenant contends that the parties were required to affirmatively include a right of appeal in their arbitration agreement, if they intended to allow for an appeal of the arbitration award. The Tenant further asserts that the case at bar is very similar to Labourers’ International Union of North America, Local 183 v. Carpenters and Allied Workers Local 27 (1997), 34 O.R. (3d) 472 (C.A.). In LIUNA, the arbitration agreement was written when the 1980 Arbitrations Act was in place, which also created an opt-in regime for an appeal, and the parties had agreed to a “speedy resolution of any dispute ... by final and binding arbitration” (at para. 15).

[31] In LIUNA, at para. 20, the Court of Appeal for Ontario held that the proper approach to the problem of agreements containing arbitration clauses that overlap the provisions of the former and present Arbitration Acts is to analyze each agreement within the context that it was written. The parties in LIUNA were denied access to an appeal on the basis that they could have provided for an appeal if they had wanted one in their arbitration agreement, but they failed to do so, and at the time of making their agreement, it was not necessary to expressly exclude a right of appeal. The Court of Appeal was not persuaded by the Landlord’s argument that the parties did not intend to exclude an appeal because they failed to employ the language of exclusion of the later statute.

[32] In the same case, the Court of Appeal held that an examination of the language of the agreement, and the circumstances surrounding its making, was necessary in order to determine the parties’ intentions. The Court of Appeal included in its examination the fact that the 1980 Arbitrations Act was the legal regime in place, and it included an opt-in mechanism in respect of appeals. It also included an examination of the effect of the parties’ agreement to a “speedy resolution” reached by “final and binding” arbitration. Examining both the language of the agreement and the circumstances surrounding its making, the Court of Appeal concluded that the parties intended to exclude any review of the resolution of their dispute, including a right of appeal. It applied a fact-driven determination of the intention of the parties and concluded that the facts before it led to the conclusion that the parties to the agreement had at least by implication agreed that there would be no appeal, and therefore the appeal was excluded.

The Parties’ Intention

[33] Applying the principles set out in LIUNA, I must take a fact-driven approach to determine the intention of the original parties to the Lease regarding a right of appeal. This approach includes consideration of the applicable provisions of the statutory regime in force at the time that the arbitration agreement was reached.

[34] As noted, the 1960 Arbitrations Act included an opt-in regime for an appeal from an arbitration award. As in the LIUNA case, the original parties to the Lease had the opportunity to expressly provide in their arbitration agreement a right to appeal from an arbitration award. However, the facts of the LIUNA case, and the facts of the case at bar, differ in a material way. In LIUNA, the provisions of the regime in force at the time – the 1980 Arbitrations Act – were a critical consideration in the analysis. The parties to the arbitration agreement in LIUNA agreed to a “speedy resolution of any dispute … by final and binding arbitration under the Arbitrations Act, R.S.O. 1980, c. 25.” However, in the case at bar, the original parties to the Lease did not make their arbitration agreement subject to the regime in force at the time, being the 1960 Arbitrations Act. Rather, they opted out of the 1960 Arbitrations Act and specifically availed themselves of the “rules then obtaining” of the American Arbitration Association governing Canadian domestic arbitrations. On December 1, 1968, these rules were the Canadian-American Commercial Arbitration Facilities Rules of Procedure; and on October 12, 2018, they were the ICDR Canada Rules. Neither set of rules directed the arbitration to be conducted under any particular Act or legislation, and both sets of rules were silent on rights of appeal from an arbitral award. The selected regime left it to the parties to provide for an appeal.

[35] The original parties, in their arbitration agreement, did not expressly provide for an appeal or exclude an appeal. I accept the Landlord’s submission that the original parties to the Lease did not make their arbitration agreement with reference to the 1960 Arbitrations Act but rather agreed to be bound by the Canadian-American Commercial Arbitration Facilities Rules of Procedure in place at the time. In an earlier dispute between the Landlord and the Tenant, this court held, in Justice Conway’s unreported decision D Lands Inc. v. KS Victoria and King Inc. (March 29, 2019), Toronto, CV-19-00613987-00CC (S.C.), that “[t]he parties broadly agreed that arbitration would be conducted under the ICDR Rules.” Justice Conway found that only express language could “carve out” from the provisions of the ICDR Rules.

Language of the Agreement and Surrounding Circumstances

[36] Based on the principles set out in LIUNA, I must also examine the language of the agreement and the circumstances surrounding its making in order to determine the original parties’ intention.

[37] Section 26.04 of the Lease provides that “[t]he determination of the majority of the arbitrators ... shall be conclusive upon the parties and judgment upon the same may be entered in any court having jurisdiction thereof.” The agreement is otherwise silent with respect to an appeal of the arbitrators’ determination.

[38] The Landlord asserts that the use of the word “conclusive” does not have the same effect as “final and binding” or “final and conclusive” does. In LIUNA, at para. 22, the Court of Appeal held that an arbitral decision described as “final and binding” reflected an intention to exclude a right of appeal.

[39] The Landlord submits that the phrase “conclusive upon the parties” or “conclusive” is not used in legislation or jurisprudence to indicate that a proceeding is terminated with no further right of appeal. The Landlord further asserts that “conclusive” generally appears with reference to proof or evidence, and it submits that Black’s Law Dictionary defines “conclusive” as “decisive.” Accordingly, the Landlord asserts that “conclusive on the parties” as set out in the arbitration agreement should be interpreted to mean that the arbitrators decisively address the parties’ submission, leaving no residual issue to be decided by a further tribunal.

[40] The Landlord further submits that the phrase “conclusive upon the parties” should be interpreted in the context of the agreement’s forward-looking, flexible nature. Specifically, the Lease contemplates a 99-year relationship, and Article 26 provides that arbitrations will be governed under the rules “then obtaining” of the American Arbitration Association, a dynamic rules regime. The Landlord asserts that the provision reflects the original parties’ intention not to be bound to the state of affairs and arbitral standards prevailing in 1968 but rather that each arbitration under the Lease will be conducted according to an updated, contemporary ruleset.

[41] The Tenant asserts that the Oxford English Dictionary defines “conclusive” as, among other things, “final, definitive.” Accordingly, it contends that the use of the word “conclusive” encompasses the concept of finality and has the same effect as “final and binding.” The Tenant further asserts that the parties’ intention to preclude any appeal is further evidenced by a party’s entitlement to enter judgment upon the determination of the majority of the arbitrators in any court having jurisdiction.

[42] As noted by J. Kenneth McEwan and Ludmila Herbst in Commercial Arbitration in Canada, loose-leaf (Toronto: Thomson Reuters Canada Ltd., 2022) at para. 10:74, the words “final and binding” have been problematic in exclusion clauses, and on some authorities may be insufficient to exclude an ability to appeal: Peters v. D’Antonio, 2016 ONSC 7141 (S.C.) and Metropolitan Separate School Board v. Daniels Lakeshore Corp., [1993] O.J. No. 2375 (Gen. Div.); however, an arbitral decision described as “final and binding”, “final”, “binding” and “not subject to any appeal” in an arbitration agreement may preclude parties from seeking leave to appeal the award on a question of law pursuant to s. 45 of the Arbitration Act, 1991: Weisz v. Four Seasons Holdings Inc., 2010 ONSC 4456, 103 O.R. (3d) 783 (S.C.); 108 Media Corporation v. BGOI Films Inc., 2019 ONSC 880 (S.C.), additional reasons 2019 ONSC 2211 (S.C.), at paras. 20-21 of the original decision; Ontario v. Abilities Frontier Co-operative Homes Inc. (1996), 5 C.P.C. (4th) 81 (Gen. Div.), leave to appeal refused [1997] O.J. No. 238 (C.A.); Piazza Family Trust v. Veillette, 2011 ONSC 2820, 279 O.A.C. 175 (Div. Ct.), additional reasons 2011 ONSC 3561 (Div. Ct.); McAsphalt Marine Transport Ltd. v. Liberty International Canada (2005), 15 C.P.C. (6th) 167 (Ont. S.C.), at para. 23; Highbury Estates Inc. v. Bre-Ex Ltd., 2015 ONSC 4966, at paras. 46-53.

[43] The Landlord relies on the case of Diorite Securities v. Trevali, 2019 ONSC 4225. In that case, the arbitration clause required a dispute to be settled pursuant to the “Arbitration Act (Ontario)”, and provided that the parties agree to be “bound by any decision reached pursuant to such arbitration.” In examining the contract as a whole and that clause in particular, the court found that, without further wording to indicate the decision was intended to be final, the language was insufficient to exclude a right of appeal under s. 45 of the Arbitration Act, 1991. This conclusion was reached irrespective of the fact that the agreement had been entered into pursuant to the 1980 Arbitrations Act. The Landlord also relies on the decision reached in National Ballet of Canada v. Glasco (2000), 49 O.R. (3d) 230 (S.C.), at paras. 35-39, where the court found that “binding” was not akin to “final and binding”, leaving it open to the parties to seek leave to appeal under s. 45 of the Arbitration Act, 1991.

[44] I am persuaded by the analysis in the jurisprudence that leads to the conclusion that if it is the intention of the parties to forgo appeal rights, the waiver of that substantive right should be clearly and unequivocally established. Such a waiver, in the context of s. 45 of the Arbitration Act, 1991, will preclude an appeal with respect to any error of law, irrespective of the consequences for either party.

[45] Though not binding on this court, the analysis of the word “conclusive” in the context of arbitration agreements in the case of Shell Egypt West Manzala GmbH v. Dana Gas Egypt Ltd., [2009] EWHC 2097 (Comm) is instructive. Shell Egypt was referenced by the Alberta Court of Appeal in Enmax Energy Corp. v. TransAlta Generation Partnership, 2015 ABCA 383, 609 A.R. 221.

[46] In Shell Egypt, at para. 38, the England and Wales High Court (Commercial Court) stated that “‘final and binding’, in the context of arbitration, and arbitration agreements, has long been used to state the well-recognised rule in relation to arbitration, namely that an award is final and binding in the traditional sense and creates a res judicata between the parties.” In this context, the High Court considered the words insufficient to exclude rights of appeal under the relevant statute. Furthermore, it considered the addition of the word “conclusive” to “final and binding” to be insufficient, in the context, to exclude the ability to appeal.

[47] At paras. 45 and 47 of the decision, the High Court stated:

[45] I accept Mr Hildyard’s submission that meaning has to be given to the word ‘conclusive’ in the phrase ‘final, conclusive and binding on the parties’. However, in my judgment all three words, in context, are apt to describe the effect of a valid arbitral award on the parties, even in the absence of any agreement excluding the right of appeal. To some extent the meanings conveyed by each of the three words overlap; but this does not, in my view, point to a conclusion that the clause, let alone the word ‘conclusive’, should be construed as an agreement to exclude rights of appeal. The effect of a valid arbitral award is described at some length at pp 412–414 of Mustill and Boyd The Law and Practice of Commercial Arbitration in England (2nd edn); see also the 2001 Companion Volume, p 209, to the effect that the earlier text is not affected in substance by the 1996 Act. An award can be said to be ‘binding’ in that each party promises to abide by the award and to perform it; it is not a mere expression by the arbitrator of his view as to the referred dispute, which a party is at liberty to disregard. An award is ‘final’ in the sense that the successful claimant is precluded by the award from bringing the same claim again in a fresh arbitration or action. An award can be said to be ‘conclusive’ of issues of fact and law, in that an award prevents a party in a subsequent arbitration or claim from disputing for a second time an issue of fact or law on which he has failed. Moreover an award can also be said to be ‘conclusive’ in that it precludes a party from reopening in a later dispute individual issues of law or fact which had been necessarily decided by the award.

[47] I agree that the word ‘conclusive’ does not alter the position, and that a phrase such as ‘final, conclusive and binding’ in the context of an arbitration agreement such as cl 14 of the FIA does no more than restate what has long been the rule in relation to arbitrations, namely that an award is final, conclusive and binding in the traditional sense, in that it creates a res judicata and issue estoppel. Such words, by themselves and absent any other contextual indicators, are not sufficient, in my judgment, to amount to an agreement to exclude rights of appeal under s 69 of the 1996 Act. [Emphasis added.]

[48] The entirety of the analysis of the law in Shell Egypt does not form part of the jurisprudence in Ontario. However, in Glasco, the Superior Court of Justice concluded that the word “binding”, as used by the parties in their arbitration agreement was not akin to “final and binding”, and a leave to appeal pursuant to s. 45 of the Arbitration Act, 1991 was available to the parties.

[49] In Diorite Securities, the arbitration agreement was entered into under the 1980 Arbitrations Act and provided for disputes to be “settled” by arbitration, with the parties agreeing to be “bound” by any arbitral award. This court concluded that despite the fact that the parties had not “opted in” to appeal rights under the 1980 Arbitrations Act and had chosen the word “bound”, this language did not exclude a right of appeal under s. 45 of the Arbitration Act, 1991. Justice Pattillo wrote at paragraph 17:

The arbitration clause itself states only that the parties agree to be bound by any decision. In the absence of additional wording to indicate the decision is intended to be final, the agreement to be bound means no more in my view than the parties agree to abide by the decision.

[50] The parties expressly intended to rely on the ICDR Rules in place at the time of the arbitration, which were silent on a right of appeal. Based on this express intention, the language of the arbitration agreement in the Lease, and the circumstances surrounding its making, I find that the parties did not intend to, expressly or impliedly, exclude the possibility of a right of appeal in respect of a determination by an arbitral tribunal.

Should this court grant leave to appeal under s. 45 of the Arbitration Act, 1991?

[51] There is no dispute that the subject arbitration is governed by the Arbitration Act, 1991, which applies to arbitrations under arbitration agreements made before the day that the Act came into force if the arbitration is commenced after that day.

[52] Section 45(1) of the Act provides a statutory right of appeal on questions of law with leave to the Superior Court where the arbitration agreement does not deal with appeals on questions of law. I must first determine whether the Landlord has raised a question of law.

[53] The Landlord submits that the Majority erred in law in the interpretation of the arbitrators’ valuation mandate, as set out in sections 3.01(c) and 27.01(n) of the Lease, which caused it to grossly undervalue the Demised Premises.

[54] The Tenant submits that the Lease is a contract, and contractual interpretation is a question of mixed fact and law, meaning that the Lease must be considered in light of the factual matrix: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 50. In Sattva, leave to appeal was sought pursuant to s. 31 of the British Columbia Arbitration Act, R.S.B.C. 1996, c. 55. The Supreme Court of Canada held that a party seeking leave must identify an extricable question of law.

[55] The Tenant further submits that the Supreme Court of Canada directed that courts should be cautious in identifying extricable questions of law in disputes over contractual interpretation: Sattva, at para. 54. The legislature has sought to restrict appeals. Accordingly, care must be taken to ensure that the proposed ground of appeal has been properly characterized.

[56] The Landlord asserts that the errors made by the Majority involved more than its application of the principles of contractual interpretation. The Landlord asserts that the Majority failed to interpret the Lease in accordance with the governing principles of contractual interpretation and failed to apply binding authority regarding the interpretation of similarly-phrased ground rent renewal clauses. Specifically, it misdirected itself on the meaning of “unencumbered.”

[57] Leave to appeal on questions of law, if required, will be given if the court is satisfied that a) the importance to the parties of the matters at stake in the arbitration justifies an appeal, and b) the determination of the question of law at issue will significantly affect the rights of the parties: Arbitration Act, 1991, at s. 45(1). I am satisfied that both conditions are met in this case. The alleged errors raised on the appeal affect the valuation of the Demised Premises by as much as $31 million and would reduce the Tenant’s rent obligation by over $1 million per year and by over $25 million over the 25-year rental period.

[58] For these reasons, leave to appeal is granted.

The Appeal of the Majority Award

The Standard of Review

[59] Neither party made submissions on the standard of review.

[60] Since the decision of the Supreme Court of Canada in Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65, 441 D.L.R. (4th) 1, there is a difference of opinion on the proper standard of review in cases of commercial arbitration.

[61] In McEwan and Herbst’s Commercial Arbitration in Canada, the authors discuss the standard of review in appeals of arbitral awards as follows:

Determining the appropriate standard of review is important: in this regard, obtaining leave to appeal from an arbitral award, where required, “represents only the first obstacle that the [appellant] must pass. Once leave is granted, the [appellant] must still convince the Court that the decision should be changed”. The standard of review may also influence the court's view of whether there is arguable merit in the issue when considering whether leave to appeal should be given.

What the standard of review on appeals from arbitral awards is or should be is again a matter of some debate. As described below, the situation seemed to become clear in 2014 with a decision of the Supreme Court of Canada made under s. 31 of British Columbia's then Arbitration Act (s. 59 of the new Arbitration Act) [Sattva]; that decision was applied in a variety of arbitration cases until late 2019. In late 2019, the Supreme Court of Canada released a new decision on standards of review [Vavilov], dealing in part with statutory appeal provisions – which sections such as s. 59 are examples of. However, that decision arose in the administrative law context, and did not address arbitration specifically. Starting in early 2020, courts in Canada have sometimes followed the 2014 approach, and sometimes the 2019 approach.

[62] In 2021, the Supreme Court of Canada had an opportunity to address the issue in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7, 454 D.L.R. (4th) 1. The majority declined to determine the standard because the arbitrator’s award in that case could not stand under either standard. However, Côté, Brown and Rowe JJ. went on to add, in joint concurring reasons, at para. 120: “where a statute provides for an ‘appeal’ from an arbitration award, the standards in Housen v. Nikolaisen, 2002 SCC 3, [2002] 2 S.C.R. 235 apply. To this extent, Vavilov has displaced the reasoning in Sattva and Teal Cedar.” They note the difference between commercial arbitration and administrative decision-making but determine that the correctness standard applies. They state, at para. 119:

There are important differences between commercial arbitration and administrative decision‑making (Sattva, at para. 104). Those differences do not, however, affect the standard of review where the legislature has provided for a statutory right of appeal. Appellate standards of review apply as a matter of statutory interpretation. As this Court explained in Vavilov, “a legislative choice to enact a statutory right of appeal signals an intention to ascribe an appellate role to reviewing courts” (para. 39).

[63] The Court of Appeal for the Northwest Territories also had occasion to consider the issue in 2021, before the decision in Wastech was released. In Northland Utilities (NWT) Limited v. Hay River (Town of), 2021 NWTCA 1, the Court of Appeal reviews a number of post-Vavilov decisions involving arbitrations and concludes, at para. 44: “the revised standard of review framework described in Vavilov applies to commercial arbitration decisions reviewed as a result of a right of appeal given by statute.”

[64] The complaints raised by the Landlord regarding the Majority’s alleged failure to interpret the Lease in accordance with governing principles of contractual interpretation, and its failure to apply binding authority, if justified, give rise to extricable questions of law. Further, the appeal of the Majority Award arises as a result of a right of appeal pursuant to the Arbitration Act, 1991. In my view, the standard of review on these questions is correctness.

Interpretation of the Mandate and the Lease

Did the Majority a) err in its interpretation of its mandate to appraise the fair market value of the Demised Premises; and b) fail to correctly interpret certain terms of the Lease?

[65] The parties agree that the issue before the arbitral tribunal was the determination of the “appraised value of the Demised Premises as vacant, unimproved and unencumbered and free of any leases.” At the arbitration, the Landlord and the Tenant took differing views as to the meaning and effect of many of the terms of the Lease, the use to which the subject lands could reasonably be put, and the values attributed to the various potential uses. The arbitral tribunal acknowledged and addressed these differences.

[66] The determination of the fair market value of the Demised Premises turned on the definition of Demised Premises, and the use to which the subject lands could be put.

[67] The Landlord submitted that the Demised Premises should be valued as a capital asset, based on the fee simple owned by the Landlord. In its view, the correct valuation would include the entire subject lands, as if a “vacant gravel lot”, on which any proposed development, including condominiums, would be permitted.

[68] The Tenant submitted that, given the unique terms of the Lease, only an office tower would be permitted, with set-backs from 10 King St. and 20 Victoria St., and that if residential uses were permitted, a condominium development would not be permitted. The set-backs would result in a smaller area and one that would be more constrained than the building envelope described by the Landlord.

[69] Each of the Landlord and the Tenant provided the arbitral tribunal with extensive expert evidence in support of its respective views on the potential uses of the subject lands.

[70] The arbitral tribunal considered and weighed the evidence of the experts. It concluded that the highest and best use of the subject lands would be a mixed use residential and commercial building.

[71] The Majority concluded that the Demised Premises, defined to be something less than the entire area of the subject lands, could be used only for a mixed-use development with rental residential and office space, together with ancillary retail but not for condominium residential development.

[72] The Minority concluded that a “canyon form” mixed-use residential building, including condominiums, and commercial development using the entire area of the subject lands, would be legally permitted.

[73] The difference in the valuation of the Demised Premises arrived at by each of the Majority and the Minority – as much as $31 million – owes to the different conclusions drawn by each as a result of its respective interpretations of the Lease.

[74] Both the Majority and the Minority acknowledged and proceeded on the basis that the factual matrix was essential to their interpretation of the Lease. Both identified and relied on the principles of interpretation as set out in Sattva and in Weyerhaeuser Company Limited v. Ontario (Attorney General), 2017 ONCA 1007, 77 B.L.R. (5th) 175. These principles required them to examine the Lease as a whole and to read the text in a fashion that accords with sound commercial principles and good business sense.

[75] The Minority concurred with the Majority’s description of the factual matrix and other statements set out in paragraphs 1 to 17 of the Majority Award.

[76] The pertinent sections of the Lease for the purposes of this appeal are as follows:

Section 3.01. Tenant covenants and agrees to pay Landlord ... the following net annual rentals, hereinafter called the “Net Rent”:

(c) for each year of the period of twenty-five years beginning on December 1, 2018, the sum which is equivalent to six and one-half per cent (6½%) of the appraised value of the Demised Premises at the beginning of that period plus two per cent (2%) of the said “gross annual income” from the Property [1] for such year, but not less than the average Net Rent for the preceding twenty-five year period ...

Section 26.03. The arbitrator or arbitrators shall have the right only to interpret and apply the terms of this lease, and may not change any such terms or deprive any party to this lease of any right or remedy expressly or impliedly expressed in this lease. In any arbitration involving the management or repairs, alterations or reconstruction of the Building or the assignment or hypothecation of this lease or any subletting, it is understood that the arbitrator shall take into consideration and give due weight to the fact that Tenant has retained title to and ownership of the Building, that the Building is the property of Tenant but stands on land which is leased from Landlord, and that the Building shall become the property of the Landlord only upon the termination of this lease by expiration of its term or otherwise.

Section 27.01. For the purposes of this lease, unless the context otherwise requires:

(d) The term “subtenant” shall mean any tenant or licensee of space in or on the Building (other than Tenant); the term “sublease” shall mean any lease or other agreement for the use or occupancy of such space; and the term “subrent” shall mean any rent or other charge for such use or occupancy.

(n) The term “appraised value of the Demised Premises” shall mean the fair market value thereof as vacant, unimproved and unencumbered and free of any leases, such value to be determined in accordance with the provisions of Article 26 hereof.

Positions of the Parties

[77] The Landlord submits that the Majority’s error in interpreting the arbitrators’ valuation mandate caused it to grossly undervalue the subject lands. The Landlord asserts that the Majority a) failed to apply the principles of contractual interpretation as set out by the Court of Appeal in Weyerhaeuser; b) failed to give effect to an ordinary, grammatical and harmonious interpretation of all the terms of the Lease, including “unencumbered and free of any leases”; c) mistakenly relied on section 26.03 of the Lease; d) mistakenly applied historic, expired restrictions in the valuation exercise; and e) failed to give effect to the commercial purpose of the rent renewal clause.

[78] In essence, the Landlord asserts that the Majority erred in failing to execute on the arbitrators’ mandate, which was to value the Demised Premises as vacant land, subject only to restrictions registered on title, and all applicable zoning and Planning Act restrictions, as if the Demised Premises were held and conveyed in fee simple without any consideration of the agreement between the Landlord and Tenant as reflected in the terms of the Lease. The Landlord concedes that if the restrictions, rights and covenants included in the Lease were still in place in 2018, they would have had a legal effect that would have needed to be considered in determining the use of the land. However, according to the Landlord, because those restrictions, rights and covenants are not part of the definition of “Demised Premises”, they are merely descriptive.

[79] In taking this approach, the Landlord submits that the Majority erred by ignoring the principle set out by the Court of Appeal that required it to ascribe the “ordinary and grammatical” meaning to “encumbrances and free of any leases”, and instead interpreted these words in a way that rendered them ineffective. The Landlord submits that the Majority also erred by ignoring binding jurisprudence on the interpretation of “unencumbered” in rent renewal valuation clauses. The Landlord submits that both errors are extricable errors of law.

[80] The Tenant submits that the arbitrators’ mandate was first, to determine the real property to be valued and second, to determine how to value that real property. It contends that the Landlord’s application conflates these two issues and, in so doing, fails to appreciate that the Majority, in fact, executed on the arbitrators’ mandate, as it was required to do.

[81] The Tenant also submits that the Majority made no legal error in interpreting the arbitrators’ valuation mandate, and that it was required to arrive at a value reflecting the interest in the subject lands leased to the Tenant in 1968, which was an interest in land substantially less than a full fee simple interest.

[82] The Tenant further submits that it was correct for the Majority to focus on the unique leasing terms (e.g., the Tenant’s obligation to pay participation rent, the “office use only” development limitation, and a specific rule regarding interpretation of the Lease). It contends that these leasing terms distinguished the Lease from the leases found in the jurisprudence relied on by the Landlord, making much of that jurisprudence irrelevant to the arbitrators’ mandate.

Law

[83] The principles of contractual interpretation were set out by the Supreme Court of Canada in Sattva at paragraphs 47, 50, 53, 55 and 57 as follows:

[47] ... The overriding concern is to determine ‘the intent of the parties and the scope of their understanding’. To do so, a decision-maker 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 ...

[50] ... Contractual interpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix.

[53] Nonetheless, it may be possible to identify an extricable question of law from within what was initially characterized as a question of mixed fact and law. Legal errors made in the course of contractual interpretation include “the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor”. Moreover, there is no question that many other issues in contract law do engage substantive rules of law: the requirements for the formation of the contract, the capacity of the parties, the requirement that certain contracts be evidenced in writing, and so on.

[55] ... As mentioned above, the goal of contractual interpretation, to ascertain the objective intentions of the parties, is inherently fact specific. The close relationship between the selection and application of principles of contractual interpretation and the construction ultimately given to the instrument means that the circumstances in which a question of law can be extricated from the interpretation process will be rare ...

[57] While the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement. The goal of examining such evidence is to deepen a decision-maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract. The interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract. While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement. [Citations omitted.]

[84] The principles of contractual interpretation set out by the Court of Appeal in Weyerhaeuser, at para. 65, state that an adjudicator should:

(i) determine the intention of the parties in accordance with the language they have used in the written document, based upon the “cardinal presumption” that they have intended what they have said;

(ii) read the text of the written agreement as a whole, giving the words used their ordinary and grammatical meaning, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective;

(iii) read the contract in the context of the surrounding circumstances known to the parties at the time of the formation of the contract. The surrounding circumstances, or factual matrix, include facts that were known or reasonably capable of being known by the parties when they entered into the written agreement, such as facts concerning the genesis of the agreement, its purpose, and the commercial context in which the agreement was made. However, the factual matrix cannot include evidence about the subjective intention of the parties; and

(iv) read the text in a fashion that accords with sound commercial principles and good business sense, avoiding a commercially absurd result, objectively assessed.

Analysis

[85] For the reasons that follow, I find that the Majority instructed itself correctly on the applicable legal principles regarding contractual interpretation by reference to appropriate cases, which were also argued on this appeal, and I find that the Majority did not err in its application of those principles. I also find that the Majority did not ignore binding jurisprudence on the interpretation of “unencumbered” in rent renewal valuation clauses but properly distinguished such jurisprudence. Accordingly, I would dismiss the Landlord’s appeal.

Reliance on section 26.03

[86] The Landlord submits that the Majority failed to apply the principles of contractual interpretation by mistakenly relying on s. 26.03 of the Lease.

[87] The Majority began its analysis of the arbitrators’ mandate by citing the principles of contractual interpretation, to which both parties had referred in the arbitration, including Sattva and Weyerhaeuser. These principles require the adjudicator to “read the text of the written agreement as a whole, giving the words used their ordinary and grammatical meaning”: Weyerhauser, at para. 65. Article 26 of the Lease is titled “Arbitration and Appraisal.” This section requires that any arbitration or appraisal be conducted in accordance with Article 26. Section 26.03 gives the arbitrators the right “only to interpret and apply the terms of this lease, and [they] may not change any such terms or deprive any party to this lease of any right or remedy expressly or impliedly expressed in this lease.” Section 27.01(n) directs that the fair market value of the Demised Premises is to be “determined in accordance with the provisions of Article 26 hereof.”

[88] In applying the principles of contractual interpretation, the Majority concluded that section 26.03 could not be ignored and was a section of the Lease to which meaning had to be given.

[89] The Landlord asserts that this general provision does not override or permit the arbitrators to ignore the ordinary and grammatical meaning of the terms “unencumbered and free of any leases” and that these terms ought not to have affected the arbitrators’ appraisal or their interpretation of their valuation mandate.

[90] The Lease specifically directs that the valuation is to be determined in accordance with Article 26, which prescribes a rule of interpretation that, in my view, cannot be ignored. These terms were chosen by the original parties to the Lease. The arbitrator is required to apply the terms of “this lease,” without changing any terms or depriving any party to any express or implied right in “this lease.” It was correct for the Majority to conclude that by using this language in section 26.03 of the Lease, the original parties intended the Lease to be a foundational document that could not be ignored in the valuation process. In the arbitration process, the terms of the Lease may not be changed, and the parties may not be deprived of their rights under the Lease in the arbitration process, including in the determination of the fair market valuation of the Demised Premises. I do not find that the Majority mistakenly relied on section 26.03.

[91] By relying on that section, the Majority did not include “this Lease” in its interpretation of “any leases” in the phrase “unencumbered and free of any leases.” The Majority accepted the submission of the Tenant that “free of any leases” referred to subleases from the Tenant to the subtenants. In my view, it was open to them to do so. The Majority acknowledged that “Lease” is not defined in the Lease itself but is referred to throughout as “this lease.” The Majority acknowledged the distinction between the Lease (“this lease”), as a foundational document that could not be ignored by virtue of the direction in section 26.03, and the subleases from the Tenant to subtenants. The Majority interpreted the Lease to mean that for the purposes of section 27.01(n), the leases referred to in the phrase “free of any leases” referred to the subtenant leases and not “this lease.”

[92] As noted in Sattva, at para. 55, “[t]he close relationship between the selection and application of principles of contractual interpretation and the construction ultimately given to the instrument means that the circumstances in which a question of law can be extricated from the interpretation process will be rare.” I do not find that the Majority erred in law in applying the principles of contractual interpretation that resulted in its construction of the Lease. The Majority’s interpretation required them to give effect to the existence of the Lease and its terms in the determination of the fair market value of the Demised Premises. Section 26.03 of the Lease definitively requires that the arbitral panel “interpret and apply the terms of this lease.”

Participation Rent and a Condominium as a Permitted Use

[93] The Landlord asserts that the Majority erred in finding that development on the subject lands at the valuation date could not include condominium use. This determination reduced the gross floor area for residential use and reduced the value of the Demised Premises.

[94] The Lease provides that the Landlord would earn a participation rent of two per cent of the gross annual income of the Building. The Majority considered the fact that when Metropolitan Life purchased the land from Andotte, it did so on the basis that an office building was being built on the land and that, as part of the annual rental income, it would earn a participation rent of two per cent of the gross annual income of the building.

[95] The Majority concluded that a ground rent based on a condominium redevelopment was inconsistent with section 3.01(c) of the Lease, which requires that ground rent be calculated at 6.5 per cent “of the appraised value of the Demised Premises ... plus two per cent (2%) of the said ‘gross annual income’ from the Property.” The Majority found that it was impossible to reconcile a value based on the creation and disposition of a condominium with a rent based in part on annual income. In the case of a condominium development, there would be no annual income from the units sold as condominiums. Having found that the Majority did not err in its determination that the existence of the Lease and its terms could not be ignored, I find that its conclusion that participation rent was a factor in the determination of fair value was correct.

[96] The Majority Award states, at para. 17: “We conclude that the participation rent is not a matter in this arbitration. That does not mean that the participation clause is not a relevant factor in considering what use could be made of the property under the Lease.” The Minority concurred with this statement.

[97] The Majority found that this participation rent provision was incompatible with a condominium development from which the Landlord would derive no income from the condominium units.

[98] Further, the Majority held that at the end of the Lease, the Building, if a condominium development, could not be conveyed to the Landlord as required under the Lease. The Majority stated, at para. 24 of the Majority Award: “[I]t would be a breach of the Lease for part or all of the Building to have been sold as condominiums and thus preclude the Landlord from getting the Building back at the end of the lease. It is not reasonable in those circumstances for the Landlord to have the Demised Premises valued as if a condominium could be built on the Demised Premises.”

[99] The Landlord asserts that the Majority erred in coming to this conclusion because for the purposes of the valuation exercise, the Demised Premises must be valued as if “unimproved”, meaning, as if there were no Building on the land. Further, the Landlord submits that the participation rent as set out in the Lease was not a relevant factor because that agreement is contained in the Lease, and the fair market value of the Demised Premises per section 27.01(n) of the Lease, is to be determined as if “free of any leases.” As noted, the Majority correctly concluded that they could not ignore the terms of the Lease, and the Minority agreed that the participation rent was a relevant consideration.

The Delivery of the Building

[100] In its further analysis of the use to which the subject lands could be put in order to determine fair market value, the Majority found that it would be a breach of the Lease, and the Landlord would be deprived of a further right, if part or all the subject lands were developed into a condominium. The Majority found this to be so because the Lease provides that the Landlord is entitled to receive the Building from the Tenant at the end of the Lease. If the Building included condominium units, which would not be owned by the Tenant, the Tenant would be unable to comply with its obligation to deliver the Building to the Landlord at the end of the Lease.

[101] The Landlord submits that these findings, and their ramifications, result from an incorrect application of the principles of contractual interpretation. The Landlord contends that section 27.01(n) of the Lease clearly provides that the Demised Premises means the fair market value thereof “as vacant, unimproved and unencumbered and free of any leases …” and, therefore, the very fact of the Lease should be ignored and that any legal ramifications flowing from the fact that the subject lands are encumbered with the Lease are to be given no consideration. This very argument was put to the arbitrators for their consideration. The Majority did not accept it. Again, I find that, the Majority in having determined that the existence of the Lease and its terms could not be ignored, its conclusion that the delivery of the building to the Landlord at the end of the Lease was a relevant factor in determining the use to which the subject lands could be put was correct. Again, I find that the Majority, having determined that the existence of the Lease and its terms could not be ignored, was correct to conclude that the delivery of the building to the Landlord at the end of the Lease was a relevant factor in determining the use to which the subject lands could be put.

The Demised Premises

[102] Article I of the Lease provides a description of the subject lands. It is titled “Demised Premises - Term of Lease.” This Article refers to the subject lands as the “Demised Premises” and sets out a metes and bounds description of the lands. Immediately following that description, the Lease provides as follows:

EXCEPTING AND RESERVING therefrom,

(1) any and all buildings, structures and improvements now or at any time hereafter erected, constructed or situated upon the Demised Premises or any part thereof prior to or during the continuance of the term of this lease (such buildings, structures and improvements, and the foundations and footings thereof, and all fixtures, plants, apparatus, appliances, furnaces, boilers, machinery, engines, motors, compressors, dynamos, elevators, fittings, piping, connections, conduits, ducts, equipment, partitions, furnishings and personal property of every kind and description now or hereafter affixed or attached to any such building, structure or improvements [illegible words] the heating, cooling, lighting, plumbing, ventilating, air conditioning, refrigeration, cleaning or general operation of any such building, structure or improvement, together with any and all renewals and replacements of, additions to and substitutes for any such building, structure or improvement or any of the above referred to property, made by Tenant, being hereinafter sometimes collectively called the “Building”, that is, all but the land);

(2) any fixtures or articles of personal property belonging to tenants or occupants of the Building; and

(3) the interest of Tenant, as lessor, in and to all present and future leases of space in the Building;

all such items hereinbefore excepted having been reserved by Tenant unto itself, subject to the terms, covenants, conditions, limitations, agreements and provisions of this lease, by the deed given by Tenant to Landlord conveying the Demised Premises and bearing even date herewith and intended to be registered simultaneously herewith.

SUBJECT, however to the following:

(1) The state of facts shown on the plan of survey of the Property prepared by T.E. Merriman, O.L.S., dated November 27, 1968 and any additional facts which a further accurate plan of survey would disclose;

(2) The restrictions set out in the Indenture dated the 28th day of October, 1964, between National Trust Company, Limited, as Grantor, and Tenant, as Grantee, and registered in the Registry Office for the Registry Division of Toronto on the 28th day of October, 1954 as Instrument No. 57741 E. S.;

(3) The rights of support and enclosure set out in the Indenture dated the 1st day of May, 1956, between Guardian Realty Company of Canada, Limited, as Grantor, and The Great-West Life Assurance Company, as Grantee, and registered in the said Registry Office on the 1st day of May, 1956 as Instrument No. 42806 E. S.;

(4) A covenant in favour of the owner or owners of lands to the north of the demised premises that no erection shall be made above the level of the ground upon that portion of the demised premises having a length of thirty-nine feet (39’) and a width of six feet (6’) shown shaded in red on the said plan of survey, said covenant being set out in an Indenture dated the 21st day of February, 1919, between Eva Eliza James, et al, as Grantor, and The Huron & Erie Mortgage Corporation, as Grantee, and registered in the said Registry Office on the 1st day of March, 1919 as Instrument No. 45837 S.;

(5) A right to light for the windows on the second, third and fourth floors in the northerly part of the easterly wall of the four-storey brick building standing on the lands immediately to the west of the northerly portion of the demised premises;

(6) The covenants and agreements set out in the Agreement dated the 11th day of May, 1967, between Landlord and Tenant registered in the said Registry Office on the 24th day of May, 1967, as No. 62170 E. S.;

(14) the matters hereinbefore expressly excepted from the Demised Premises and such legal implications as may arise therefrom.

TO HAVE AND TO HOLD the same subject as aforesaid, unto Tenant, and, subject to the provisions hereof, its successors and assigns, for the term of ninety nine (99) years commencing on the 1st day of December, 1968, and expiring on the 30th day of November, 2067, unless this lease shall sooner terminate as hereinafter provided.

[103] The Landlord asserts that the Majority erred in its mandate to determine the fair market value of the Demised Premises because it incorrectly interpreted the definition of “Demised Premises.” The Landlord asserts that all the items described after the metes and bounds description in Article 1 of the Lease, that is, the restrictions, rights and covenants, do not form part of the definition of “Demised Premises” and are merely descriptive, or are encumbrances, which must be excluded from the fair market value determination of the Demised Premises. Further, the Landlord submits that these restrictions and qualifications are irrelevant because most are no longer registered on title.

[104] The Tenant submits that the Landlord is incorrect in its conclusion that the arbitrators were required to come to an unencumbered value for the subject lands. It asserts that the proper approach was to value the capital asset that was created in 1968 when Metropolitan Life acquired it. In the result, the arbitrators were obliged to rely on the definition of “Demised Premises” as set out in the Lease entered into by the parties in 1968. That definition, in the Tenant’s view, had two component parts: the metes and bounds description, and the restrictions, rights and covenants set out in Article 1 of the Lease.

[105] The Majority accepted this definition and stated at para. 9 of the Majority Report that the definition of Demised Premises “begin[s] with a metes and bound[s] description ... then create[s] exceptions to the Demised Premises”, as set out in Article 1 of the Lease.

[106] The Landlord asserts that the Majority erred in its interpretation of the parameters of the “Demised Premises” to be valued because it incorrectly considered these historical restrictions and qualifications as “encumbrances”, which reduced the size of the Demised Premises available for development. The Landlord asserts that this consideration was contrary to section 27.01(n) of the Lease, which requires the fair value of the Demised Premises to be determined as if the land were “unencumbered and free of any leases” (emphasis added). The Landlord submits that instead of ignoring these historical restrictions and qualifications, most of which were no longer registered on title, or considering those restrictions and qualifications as descriptive only, the Majority found that the restrictions were part of the definition of the “Demises Premises.”

[107] The Majority rejected the Landlord’s arguments in support of a finding that the lands to be valued were the whole of the subject lands without regard to any of the restrictions, rights and covenants, and that the entirety of the subject lands were the lands to be considered in determining the use to which the lands could be put. The Majority concluded that section 27(1)(d) of the Lease does not state that the market value of the “land” free of encumbrances is to be appraised. Instead, section 27.01(n) identifies the “Demised Premises” as the subject of the appraisal, and the restrictions and qualifications “are included in the definition of the Demised Premises that is to be valued” (Majority Award, at para. 27). The Majority found that the appraised value was intended to reflect what a buyer on the open market would pay for the “Demised Premises”, being the land subject to the restrictions and qualifications. The Majority accepted the Tenant’s submission that it is the interest leased to the Tenant in 1968 that the Lease requires to be valued. The Majority also found that the fact that some of the indentures referred to may no longer be valid was not relevant because the indentures are part of the definition of Demised Premises. It found that they are not encumbrances against the Demised Premises (Majority Award, para. 30).

[108] The Minority rejected the Tenant’s contention that the restrictions stated in the Lease constrain the developable area of the subject lands.

[109] The Landlord contends that the ordinary, grammatical and harmonious interpretation of the words in section 27.01(n) leads to the conclusion the Minority reached; that is, that the Demised Premises must be valued as the fee simple without any regard to the Building (an improvement) or the Lease (an encumbrance) or the restrictions, rights and covenants (encumbrances and no longer of any effect because most are not registered on title).

[110] I find that the Majority did not err in its application of the principles of interpretation in coming to its conclusion. The Majority found that the principles of contractual interpretation required the arbitral panel to give effect to an ordinary, grammatical and harmonious interpretation of all the terms of the Lease, including the phrase “unencumbered and free of leases” as it appears in section 27.01(n) of the Lease.

Did the Majority ignore binding authority in its interpretation of the Lease?

Positions of the Parties

[111] The Landlord asserts that there is nothing in the Lease or in the circumstances in which the Lease was entered into to suggest that the definition of “encumbrance” and “unencumbered”, as found in these authorities, should be qualified or derogated from. The Landlord contends that the direction to the arbitrators, as set out in section 27.01(n) of the Lease, was to appraise the Demised Premises “as … unencumbered.” This means that they were required to disregard any right or interest in the land diminishing its value, which could survive its conveyance. These “encumbrances” were those set out in Article 1 of the Lease as well as the Lease itself.

[112] The Tenant submits that the unique terms in the Lease mean that the Lease is and must be considered distinct from the leases referred to in the case law. Hence, much of the case law relied on by the Landlord was irrelevant.

Analysis

[113] The Landlord referred the arbitral tribunal to a number of cases dealing with ground lease rental reset clauses. It referred this court to many of the same cases. The Majority considered most of these cases and distinguished them on their facts. For example, in Victoria University (Board of Regents) v. GE Canada Real, 2016 ONCA 646, 76 R.P.R. (5th) 104, the Court of Appeal found that “demised lands” was a defined term, and its definition was limited to a description of the metes and bounds of the parcels of land in issue. The Majority found that the case of Victoria University could be distinguished from the case before it on the basis that the latter involved a definition of “Demised Premises” that was not limited to metes and bounds but also included exceptions, or qualifications.

[114] The Landlord also relied on the case of Musqueam Indian Band v. Glass, 2000 SCC 52, [2000] 2 S.C.R. 633. In Musqueam, the lease in question stated that for the rent reset, the rent was to be a fair rent for the land and that it was to be assumed that the lands were unimproved and in the same state as they were at the date of the lease. Justice McLachlin (in dissent) held, at para. 9, that “In construing a lease, our first consideration is the language of the lease itself. Here, that language is clear. In a real estate document, ‘land’ usually means ‘a right to receive a good title in fee simple.’ ... Nothing in the leases at issue here suggests that either ‘land’ or ‘value’ should be assigned any definition other than the generally accepted one.” The facts respecting the definition of the subject lands before the arbitral tribunal in this case were unlike the facts in Musqueam. In the case before the tribunal, the Majority found that there was language in the Lease that allowed for an interpretation of the definition of the subject lands as being something other than, and less than, the fee simple. The definition of the “Demised Premises” contained a metes and bounds descriptions limited by exceptions, restrictions and qualifications. Because the interpretation in Musqueam was focused on a lease with a definition of “Demised Premises” different than the definition found in the case before the arbitral tribunal, the Majority concluded that the principles espoused in Musqueam did not apply to the case before them.

[115] Also in Musqueam, at para. 39, Justice Gonthier held that: “The leases do not refer to ‘current leasehold value’ or to ‘the value of the land leased on the terms and conditions contained in this lease’ as did the lease on reserve land in Leighton, supra. In the absence of any indication that the leasehold value is to be used to set the rent, ‘current land value’ means freehold value.” Unlike in Musqueam, the Lease before the arbitral tribunal included a direction that the determination of the fair market value of the Demised Premises, as determined by the arbitral tribunal, was subject to a rule of interpretation prescribed by the Lease, as set out in section 26.03. The Majority found that it was required to apply that rule of interpretation.

[116] In The Manufacturers Life Insurance Company v. Parc-IX Limited, 2018 ONSC 3625, at para. 111, Justice McEwen interpreted the result in Musqueam to mean that “if the parties wish to embark on a hypothetical valuation that departs from the legal realities of the marketplace [which in the case of Musqueam was the fact the land was reserve land], then they must include express words in the contract to make that intention clear. They are not otherwise free to ignore the nature of the capital asset being valued.” In the case at bar, the Majority found that the parties to the Lease, by including the restrictions, rights and covenants in the definition of “Demised Premises”, had intentionally reduced the size of the capital asset to something less than the fee simple for the purposes of determining the rent.

[117] The Majority also relied on the case of Wotherspoon v. Canadian Pacific Ltd., [1987] 1 S.C.R. 952, at p. 1021, where the Supreme Court of Canada agreed with the Nova Scotia Supreme Court that the term “‘encumbrance’ has no technical meaning ... the word is to be interpreted according to the context in which it is found.” In the case of the Lease, the arbitral panel is directed to determine the fair market value of the Demised Premises in accordance with Article 26. Article 26.03 directs the arbitral panel to interpret and apply the terms of the Lease. The Majority considered this provision, to which it determined that it was required to give meaning, as part of the context in which “encumbrance” is used in section 27.01(n). In doing so, it followed a principle of interpretation as endorsed by the Supreme Court of Canada in Wotherspoon that “encumbrance” was to be interpreted according to the context in which it is found.

[118] Regarding the restrictions and qualifications at Article 1 of the Lease, the Tenant asserts that they are and were to be respected for the 99-year term of the Lease. The Landlord disagrees, as did the Minority. The Minority Award states that the factual matrix took it to the opposite conclusion. The Minority based its conclusion on its observation that the parties to the Lease were represented by highly respected law firms, which chose not to refresh the restrictive covenants at the time of their agreement. The Minority found that their lawyers were deemed to know “the potential for the Restrictions to be removed from the title after forty years and hence, well in advance of the valuation date, December 1, 2018.” The Minority notes that, as a fact, no restrictions or qualifications remained on the parcel register as of the valuation date or afterwards, and that the Tenant offered no explanation as to why the restrictive covenants were not refreshed. The Minority found that the bid of a willing purchaser of the Demised Premises would not be constrained by the restrictions and qualifications because the purchaser would search the parcel register and find, as of the valuation date, no restrictions on title.

[119] The Landlord asserts that the Majority erred in its conclusion that the Lease was not an encumbrance and ignored binding authority on this point. The Landlord contends that the term “unencumbered” is unqualified throughout the Lease. Further, it submits that, as endorsed by the Supreme Court of Canada, the generally accepted definition of “encumbrance” bears a very broad meaning, encompassing “every right to or interest in the land which may subsist in third persons to the diminution of the value of the land, but consistent with the passing of the fee by the conveyance”: Wotherspoon, at p. 1021. The Landlord also relies on a broad definition of “unencumbered”, adopted by the Divisional Court in Revenue Properties Co. (1993), 101 D.L.R. (4th) 172, at pp. 17-18, where Steele J. cited authority for the statements that an encumbrance is an interest in land that diminishes its value; and that a lease is an encumbrance if it diminishes the value of the land. Steele J. concluded that in the absence of words requiring the lands to be considered unencumbered, the value must take into account the fact that the lands are subject to a lease.

[120] In concluding as it did, the Majority relied on the principles of contractual interpretation to apply the facts that it considered relevant to the mandate. The Majority did not, in my view, make an error in its use of the principles of contractual interpretation and its reliance on relevant case law.

[121] In the case of Parc-IX, Justice McEwen found that a direction in a ground lease to appraise as if “unencumbered” would require disregarding the existence and terms of the underlying ground lease. At para. 122, McEwen J. stated that “absent language to the contrary, legal encumbrances triggered as a result of the very nature of the agreement entered into between the parties must be accounted for in the calculation of fair market value ... In my view, the rule therefore is: if parties to a rent re-set situation wish to disregard an aspect of market reality when valuing the property, then the contract must expressly provide for this.” McEwen J. found at para. 123, that absent any language showing an intention to disregard encumbrances, the agreement must be interpreted as meaning that the parties did not intend to ignore the impact of development restrictions that accompany the existence of the ground lease.

[122] In the case before the arbitral tribunal, the Majority found that the language of the arbitration agreement evidenced that the parties had agreed, in particular, in section 27.01(n) and s. 26.03, that the interpretation and application of the terms of the Lease would be relevant to the determination of the fair market value of the Demised Premises.

[123] The Minority disagreed with the Majority regarding its interpretation of Article 26.03 and found that this provision was only a governance provision, which was qualified by s. 27.01(n) of the Lease.

[124] For the reasons given, I disagree with the Landlord’s assertion that the Majority ignored binding principles arising out of Musqueam and Parc-IX Limited when it interpreted the Lease as it did. The Majority considered some of the authorities submitted by the Landlord and distinguished them on their facts. The Majority was not presented with any jurisprudence relating to a rent re-set provision in a ground lease that specifically directed the arbitrators to interpret and apply the terms of the Lease. The Minority also considered the Lease, stating, at para. 117: “According to the case law, it is extremely important to analyze this question [whether the appraisal of market value should be constrained by the lease] into the context of the Factual Matrix. The law recognizes that leases are not all the same and the respective appraisal clauses in different leases can be very different.”

Conclusion on the Appeal

[125] As the Supreme Court of Canada held in Sattva, at para. 55, ascertaining the intention of the parties is an inherently fact-specific goal. In this effort, all the arbitrators considered a complex factual matrix, on which they agreed in part. Each closely examined and relied on various portions of the Lease in reaching a conclusion. Both the Majority and the Minority identified and applied the rules of contractual interpretation as set out in Sattva and Weyerhaeuser. Both considered relevant authorities. The Majority and the Minority came to different conclusions when they applied the relevant rules of interpretation and the jurisprudence to the factual matrix. This is unsurprising given the close relationship between the selection and application of principles of contractual interpretation and the construction ultimately given to the Lease. I conclude that the Majority did what it was mandated and expected to do. It read the contract as a whole, giving the words their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of the formation of the contract. The Majority focused on all the words in the parties’ contract as objective evidence of the parties’ intentions. In issuing the Majority Award, I find that the Majority did not apply an incorrect principle, fail to consider a required element of a legal test, or fail to consider a relevant factor. It considered relevant jurisprudence. Accordingly, the Landlord’s appeal is dismissed.

B. The Landlord’s Application re Jurisdiction

[126] In the alternative, and in any event, the Landlord asserts that the Majority Award should be set aside for lack of jurisdiction.

Positions of the Parties

[127] The Landlord asserts that by misinterpreting its mandate, the Majority impermissibly acted outside the scope of the arbitration agreement. Specifically, the Landlord asserts that the Majority ought to have considered the particular question of the appraisal of the Demised Premises on December 1, 2018 as if vacant, unimproved, and unencumbered, but instead of resolving that question, the Majority considered a different one, that is, the appraisal of the Demised Premises as if encumbered and constrained by the Lease’s terms. The Landlord argues that the latter issue was not contemplated by the arbitration agreement.

[128] Accordingly, the Landlord asks this court to set aside the Majority Award in accordance with s. 46(1)3 of the Arbitration Act, 1991. No leave to appeal is required under this section.

[129] The Tenant submits that this court has jurisdiction to dismiss an application that has no merit at any stage of the proceeding. It submits that this application by the Landlord is an appeal in the guise of an application to avoid the leave to appeal process and, therefore, should be dismissed. The Tenant submits that the application process under s. 46 of the Arbitration Act, 1991 does not apply to awards based on an unreasonable or mistaken interpretation of the arbitration agreement. The Tenant further submits that where the arbitrators were acting within the terms of the arbitration agreement, it is not open to a court to consider whether the arbitrator’s decision was reasonable or unreasonable, correct or incorrect. In other words, the courts must not stray into the merits on a complaint of excess jurisdiction.

[130] The Tenant asserts that the Landlord has not raised a true issue of jurisdiction. Rather, the Landlord, in setting out the issue it claims the Majority ought to have addressed, uses the same formulation as the Landlord used in its arguments for leave.

[131] The Tenant further asserts that the question of jurisdiction is without merit. The Landlord argues that the Majority could only apply “relevant legal restrictions” under its mandate; however, these are the same arguments as the Landlord made in its application for leave on the contractual interpretation issue. Accordingly, the Tenant submits, the Landlord has not raised a true jurisdictional issue and this application should be dismissed.

[132] The Tenant also submits that the Landlord is precluded from raising an argument based on the arbitrators acting in excess of their jurisdiction, because it did not take the preliminary step of raising the question of jurisdiction with the arbitral panel, which it could have done once the Majority Award was granted.

Analysis

[133] Section 46 of the Arbitration Act, 1991 sets out the grounds on which, on a party’s application, the court may set aside an award. Included in those grounds is the following, at s. 46(1)3: “[t]he award deals with a dispute that the arbitration agreement does not cover or contains a decision on a matter that is beyond the scope of the agreement.”

[134] I accept the Tenant’s arguments that the Landlord has not raised a true issue of jurisdiction. The issue in the arbitration was, in essence, a contractual interpretation issue. The issue has already been considered in the Landlord’s application under s. 45 of the Arbitration Act, 1991.

[135] I also agree with the Tenant’s submission that the Landlord’s application under the guise of s. 46(1) is an attempt at a second kick at the can. As stated by the Court of Appeal in Alectra Utilities Corporation v. Solar Power Network Inc., 2019 ONCA 254, 145 O.R. (3d) 481, at para. 24, leave to appeal to S.C.C. refused, 38665 (November 7, 2019): “[The] grounds for setting aside an arbitration award [under s. 46(1)] are, in general, not concerned with the substance of the parties’ dispute”; and, at para. 27: “Section 46(1)3 is not an alternate appeal route and must not be treated as such” (emphasis in original).

[136] Accordingly, this application is dismissed.

Costs

[137] The parties were encouraged to agree on the matter of costs. If they have been unable to do so, the Tenant may serve and file written submissions not exceeding three pages (excluding a costs outline or bill of costs, and offers to settle, if any) within 14 days. The Landlord may serve and file responding submissions not exceeding three pages (excluding a costs outline or bill of costs, and offers to settle, if any) within 14 days thereafter. Reply submissions may only be made with leave.

Dietrich J.

Released: April 19, 2022

COURT FILE NO.: CV-21-00665037-00CL DATE: 20220419 ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST)

BETWEEN: D LANDS INC. Applicant (Claimant) – and – KS VICTORIA AND KING INC. Respondent (Respondent)

REASONS FOR JUDGMENT Dietrich J.

Released: April 19, 2022

[1] “Property” is defined to mean “the Demised Premises and the Building as the latter terms are defined in Article 1 hereof.”