COURT FILE NO.: CV-21-657966
DATE: 20220414
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Matiu Dentistry Professional Corporation
Applicant
– and –
Canadiana Towers Limited
Respondent
Chaytor, K. for the Applicant
Waldman, D.., for the Respondent
HEARD: October 7, 2021
SUGUNASIRI, J.:
REASONS FOR JUDGMENT
Overview:
[1] On May 1, 2011, Matiu Dentistry Professional Corporation (“Tenant”) entered into a lease agreement with Canadiana Towers Limited (“Landlord”) for Suite B at 2373 Bloor Street West in Toronto. The Tenant operates Bloor West Dental Care there. The Lease was for an initial ten-year period with two options to renew for a period of five years each. In October of 2020 the Tenant exercised its option to renew. By that time, the Landlord had notified the Tenant of alleged unpaid tax arrears payable under the Lease. The Lease deprives the Tenant of the option to renew if it is in “material default” which includes non-payment of any amounts owing under the Lease. The Tenant takes the position that no additional amounts are owing and that the Landlord did not in any event give proper notice of any such arrears in the manner stipulated by the Lease. The central issue in the cross-applications is whether the Tenant was entitled to renew the lease and whether the Guarantor of the lease, Dr. Matiu, owes the Landlord $60,000 for back taxes and other charges.
[2] For the reasons that follow, I allow the Tenant’s application because I agree that it was not in default at the time it exercised its option to renew the Lease. The Landlord breached its obligation to provide the Tenant with a reconciliation of Operating Costs to determine if the Tenant owed any “Additional Rent”. In so finding I conclude that the taxes in issue are included in the definition of “Operating Costs” under the Lease and therefore must be reconciled before requiring payment from the Tenant. At the time of the cross-Applications the Landlord had not provided any such reconciliation and no monies are currently owing from the Tenant nor its Guarantor. I dismiss the Landlord’s cross-application.
Analysis:
Background facts
[3] The parties agree that 2373 Bloor Street West in Toronto is a mixed commercial and residential use building. It has four commercial units (Suites A-D) and sixteen residential units. Dr. Matiu operates a dental practice out of Suite B. Mr. Yellovich is the President and sole shareholder of Canadiana Towers having taken it over from his parents. Mr. Yellovich has worked for the Landlord since 1999 and has been the contact person for the Tenant since lawyers negotiated the Lease between the parties in 2011. The Lease is for the continued operation of Bloor West Village Dental Care in Suite B. Dr. Matiu purchased the practice from another dentist in 2011. Suffice it to say that neither party were directly involved in the Lease negotiations although counsel would have had to obtain instructions from their clients to complete the Lease.
The Lease
[4] Both parties agree to the basic structure of the Lease:
a. It had a ten-year term commencing June 1, 2011 and ending May 31, 2021(“Expiration Date”) (section 3.3);
b. The Tenant was required to pay “Minimum Rent” as well as “Additional Rent”. “Additional Rent” includes a fixed amount of $10,752.00/annum (sections 4.3(a) and 6(c)), the Tenant’s “Proportionate Share” of “Operating Costs” fixed at $896/month subject to adjustment (sections 1.23, 1.25, 1.27, 1.5 and 6(c)) as well as the “Proportionate Share” of all “Taxes” that are imposed from time to time against the “Building” or any part thereof (sections 1.23, 1.25, 1.27, 1.3, 1.5 and 5.2);
c. The Landlord was to provide the Tenant with an annual Reconciliation Statement of Operating Expenses to determine the Tenant’s Proportionate Share of Operating Costs. If the Tenant had overpaid in a given year through the required fixed payments, the Landlord could hold the funds for the next year or reimburse the Tenant (section 6(c));
d. The Tenant could exercise an “Option to Renew” for two further terms of five years. as long it was not in “material default” of the Lease (section 17.21); and
e. Dr. Matiu personally guaranteed the Tenant’s obligations under the Lease.
[5] There is no dispute that the Tenant paid the Minimum Rent and the fixed Additional Rent as required. The dispute is whether the Tenant lost its right to renew for failing to pay its Proportionate Share of Taxes when informed of them in March of 2020. The Tenant takes issues with the imposition of these taxes, method of calculation, and whether the Landlord gave it proper notice of default prior to October 1, 2020, when it exercised its right to renew.
The Back Taxes
[6] In or around March of 2020, the Landlord updated its accounts and determined that it had not collected the Tenant’s “Proportionate Share” of Taxes since 2011. The Landlord calculated the Proportionate Share by applying the following fraction to the tax bills it received and paid:
Square footage of Suite B
Square footage of the ground floor of the Building (the commercial area)
[7] On April 7, 2020 the Tenant received a letter from the Landlord demanding payment of $60, 235.71 in unpaid taxes. The letter had been sent or left at the Tenant’s premises. Dr. Matiu did not receive it until April 7, 2020 because she had left for a family vacation to Cuba and did not return until March 22, 2020. She and her family were then required to self-isolate for 14 days upon her return. An April 7, 2020 email from the Landlord caused Dr. Matiu’s husband to attend at the dental office to retrieve the letter.
[8] On April 20, 2020 Dr. Matiu sought the underlying financial data that formed the basis of the Landlord’s calculations. Having received no response, Dr. Matiu send a second letter dated May 8, 2020. On the same day Dr. Matiu received an email from the Landlord indicating that a letter had been delivered to the dental office for pick up. The letter enclosed redacted tax bills from the City of Toronto for 2011 to 2019 and indicated that the Tenant’s Proportionate Share was 25.81%.
[9] Between April and October of 2020, the Tenant attempted to address the “back taxes” but has never paid it, even as a pre-payment with the understanding that it would receive the funds back if paid in error. On October 1, 2020 the Tenant sent its notice to the Landlord exercising its Option to Renew.
[10] The Landlord argues that the Tenant is in “material default” of the Lease agreement by failing to pay its Proportionate Share of the Taxes, and therefore cannot renew. The Tenant counters by arguing that no Taxes were owing at the time of renewal because they form part of the Operating Costs that are required to be reconciled on a yearly basis to determine if further amounts are outstanding. The Landlord states that Taxes are not a part of the “Operating Costs” as defined by the Lease and therefore does not require the yearly reconciliation to require payment. The dispute therefore turns on whether Taxes are part of Operating Costs. If they are, then there has yet to be a Reconciliation to determine if the Tenant owes anything further in each year. On this basis the Tenant would not have been in default of the Lease at the time of renewal.
[11] In my view, the Lease clearly contemplates unpaid taxes as being part of “Operating Costs” and requires the reconciliation process before the Landlord can require payment of them from the Tenant.
The “Back Taxes” were not crystallized at the time of renewal
[12] Neither party know the ins and outs of the lease negotiations or what they bargained for. The Landlord’s counsel provided a draft of the Lease to the Tenant’s counsel for his comment. It appears from their emails that the Landlord relied on the terms of its lease with the previous dentist for its new Lease with the Tenant. The parties had an opportunity to call the Landlord’s representative who negotiated the Lease terms with the previous dentist and call the previous dentist to speak to what the parties intended in the impugned parts of the Lease. No such evidence was tendered. Where the parties to a contract cannot speak to their intentions or the circumstances surrounding its formation, the court applies the contract interpretation principles set out in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53. In so doing, I interpret the meaning of “Operating Costs” by first looking at the words used, in the context of the section and the rest of the Lease and bearing in mind the objectively known factual matrix. I must then take a practical approach “consonant with business common sense.” (See Myers, J.’s comments in Metro Ontario Real Estate Limited v. Woodland Park Plaza Inc., 2021 ONSC 3911 at paras 37.)
[13] The relevant portions of the Lease read:
Section 1.21 “Operating Costs”
“Operating Costs” means the total of all expenses, costs, fees, rentals, disbursements and outlays of every kind of nature directly or indirectly incurred, accrued, paid, payable or attributable, whether by or on behalf of Landlord or by or on behalf of any manager or agent of Landlord in each Rental Year, (a) for owning (other than the original debt financing and acquisition costs), operating, maintaining, servicing, upkeeping, decorating, redecorating, upgrading, repairing, restoring, reconstruction, renewing, renovating, improving, rebuilding, replacing, expanding, extending, altering, equipping, insuring, cleaning, lighting, security, policing, supervising, managing and administering the Building or any part thereof, (including within limitation, the Common Facilities, made available for use in common by the commercial tenants of the Building, for the period of such common use) calculated as if the Building was fully completed, fully occupied and fully operational by tenants for the whole of each such Rental Year, and (b) for Landlord to discharge its obligations or exercise any of its rights or remedies under this Lease or under other leases or agreements in the Building; and, without limitation, Operating Costs include the aggregate of:
(i)the cost of all insurance on lands, buildings, improvements, equipment and other property in the Building, and the cost of any deductible amount paid by Landlord in connection with a claim by Landlord under such insurance.
(xiv)all costs and expenses incurred by or on behalf of Landlord in contesting, appealing or resisting the Taxes or Business Taxes or related assessments (including, without limitation, legal fees on a complete indemnity basis, appraisal and other professional fees and administration and overhead costs) on all or any part of the Building; any governmental tax or levy imposed on the Building or any part thereof based on square footage or gross area; Capital Tax; and all Taxes, Business Taxes and all other taxes, if any, not recovered, or which in Landlord’s opinion are not recoverable, from tenants or occupants of the Building;
ARTICLE 6 – CONTROL OF BUILDING BY LANDLORD and PAYMENT
c)The Tenant, in each of the first five years of the Lease, shall pay to the Landlord as Additional Rent in sum of Eight Hundred and Ninety-six dollars per month as set out in Section 4 its Proportional Share of the Operating Costs incurred by the Landlord in such year. The Additional Rent provided to be paid herein shall be paid by monthly installments in advance on the first day of each and every month throughout the Term in an amount to be reasonably fixed from time to time by the Landlord as an estimate of actual expenses. The Landlord shall, within sixty (60) days of the end of each calendar year within the Term hereof or so soon thereafter as possible submit to the tenant a statement setting out the Operating Costs and the Tenant’s Proportionate Share thereof. To the extent that the tenant’s Proportionate Share is greater than the amount actually paid by it, the Tenant shall forthwith upon receipt of the said statement pay such difference to the landlord. In the event that the Tenant’s proportionate Share is less than the amount actually paid, such excess payment shall, at the option of the landlord, be retained by the Landlord to the next succeeding installment or installments of Additional Rent due hereunder and may be refunded by the Landlord to the Tenant.
[14] A plain reading of these sections favour the Tenant’s position that unpaid Taxes fall within the Operating Costs subject to annual reconciliation. Section 1.21(xiv) defines “Operating Costs” as including “any governmental tax or levy imposed on the Building or any part thereof based on square footage or gross area; Capital Tax; and all Taxes, Business Taxes and all other taxes, if any, not recovered…, from tenants or occupants of the Building.” Contrary to the Landlord’s argument, part (xiv) is not limited to the Landlord’s expenses of contesting or resisting taxes. I also note that part (xiv) uses the term, “Taxes”, a defined term in the Lease and one of the provisions that the Landlord relies on to levy Additional Rent against the Tenant. It was open for the Landlord to call the previous dentist or have evidence of how Taxes were treated in the Lease with the previous dentist. The emails between negotiating counsel did not seem to change these particular terms. Absent that direct testimony, the words on the page dictate meaning as long as it does not lead to an absurd result. In this case, the Tenant’s interpretation is not absurd and indeed it accords with the overall structure of the Lease.
The Tenant’s interpretation is harmonious with the Lease as a whole and business common sense
[15] The Lease provides for Minimum Rent as a fixed monthly amount and has several heads of Additional Rent. Additional Rent is defined as “(a)… any and all sums of money or charges required to be paid by Tenant under this Lease (except Minimum Rent and Percentage Rent) whether or not designated as “Additional Rent”…” The two main heads of Additional Rent are “Operating Costs” and “Taxes”. The Tenant is responsible for its Proportionate Share of each. The Lease is structured to protect the Landlord from bearing the burden of the Building’s Operating Costs including Taxes by requiring the Tenant to pre-pay on a monthly basis, its contribution to the Building’s expenses. Because the fixed amounts are an estimate of what the Tenant’s proportionate contribution to Operating Costs might be, it makes commercial sense that the parties have built in a mechanism for the Landlord to reconcile the expenses with the payments the Tenant made to determine if more is owing, or if the Tenant is owed either a refund or has a credit for the following year. It does not make sense for the Tenant’s Proportionate Share of its Taxes to be outside this reconciliation process.
[16] The application of the reconciliation process to Taxes is also harmonious with fairness principles. The yearly reconciliation allows the Tenant to pay any Additional Rent owed above the fixed monthly amounts on a yearly basis. This allows the Tenant to budget and plan for the next year. It is unfair for the Landlord to lie in the weeds for 9 years, as it did here, and then demand immediate payment of a lump sum in the year that the Tenant is entitled to renew the Lease.
[17] Having ruled that Taxes are including in the reconciliation process set out for Operating Costs, it is also clear, that Article 6(c) of the Lease makes the reconciliation a condition precedent of requiring payment from the Tenant of its Proportionate Share. The Landlord did not provide argument or case law to suggest otherwise. This approach is in line with the court’s decision in 2373322 Ontario Inc. v. Nolis (2017 ONSC 1518). In that case Justice Broad considered the impact of a similar reconciliation requirement in a commercial lease. While he concluded that the Tenant’s obligation to pay Additional Rent in accordance with the reconciliation remained even if the Landlord did not do the reconciliation, he also noted that until the landlord provided the statements, the tenants were in default of its obligations to pay additional rent.
[18] I conclude that the Tenant’s obligation to pay its Proportionate Share of the Taxes had not crystallized at the time it exercised its Option to Renew. The Tenant was therefore not in default at the time and was entitled to renew. Similarly Dr. Matiu is not obliged to pay the Taxes before the Landlord reconciles the amounts owing. Having so concluded, I need not determine if the Landlord gave the Tenant proper notice as required by the Lease.
The Landlord is statute barred from claiming the Tenant’s Proportionate Share of Taxes for 2014 and prior
[19] Sections 4 and 17 of the Real Property Limitations Act (R.S.O. 1990, c. L.15) state, in relevant part, as follows:
No person shall … bring an action to recover any land or rent, but within ten years next after the time at which the right … to bring such action, first accrued to the person making or bringing it.
(1) No arrears of rent, or of interest in respect of any sum of money charged upon or payable out of any land or rent, or in respect of any legacy, whether it is or is not charged upon land, or any damages in respect of such arrears of rent or interest, shall be recovered by any distress or action but within six years next after the same respectively has become due, or next after any acknowledgment in writing of the same has been given to the person entitled thereto or the person’s agent, signed by the person by whom the same was payable or that person’s agent.
[20] The Tenant argues that the Landlord cannot seek rent arrears for 2014 and prior because it is past the six-year limitation period set out by the RPLA. The Landlord did not oppose this submission other than to note that Taxes would still be owing for 2015 onwards. I agree with this application of the RPLA.
Proportionate Share is calculated using the square footage of the Building as defined
[21] As noted above, the Landlord’s failure to reconcile Taxes owing as part the Operating Costs does not relieve the Tenant from its obligation to pay them as Additional Rent once reconciliation statements are provided. The parties seek direction on what “Proportionate Share” means.
[22] Under the Lease, “Proportionate Share” means a fraction which has as its numerator the Rentable Area of the Leased Premises and a denominator which is the Rentable Area of the Building. Its mathematical depiction is:
Proportionate Share = Rentable Area of the Leased Premises
Rentable Area of the Building
[23] The definition raises confusion because neither the numerator nor the denominator are fully defined terms as they should be. The Lease defines “Rentable Area of the Premises” and “Building”. Although there is no definition of “Rentable Area of the Leased Premises”, the parties agree that the numerator is the square footage of Suite B which the Tenant rents for its dental practice. The controversy is the denominator. The Tenant asserts that it is as worded – the square footage of the rentable area of the Building. In turn, the Lease defines “Building” as:
Section 1.5 “Building”
“Building” means the land and premises described in Schedule “A” attached hereto as such lands and premises may be altered, expanded or reduced from time to time and the building improvements, equipment and facilities erected thereon or situate from time to time designated from time to time therein and municipally known as 2373 Bloor Street West in the City of Toronto.
[24] Schedule “A” provides the legal description for the location of the Building. In other words, the Tenant’s share of expenses is relative to the entire building including the residential units. This puts its Proportionate Share at approximately 8%. The Landlord submits that the denominator is restricted to the square footage of the commercial units and that it is implied or reasonable to assume that “Building” is restricted to the commercial area. The denominator in the definition of “Proportionate Share” should have used the term “Rentable Area of the Premises” which the Lease defines as the area expressed in square feet (or, at Landlord’s option, in square metres) as certified by the Architect or Land Surveyor of all ground floor premises in the Building set aside for leasing by the landlord from Time to Time. The Landlord argues that this makes commercial sense, especially in the context of Taxes because Taxes are levied differently for residential and commercial units. Using this approach, the Tenant’s “Proportionate Share” of “Taxes” would be closer to 25%. The Landlord’s equation would be:
Proportionate Share = Rentable Area of the Leased Premises
Rentable Area of the Premises
[25] In practical terms, this translates into the Tenant’s Proportionate Share equalling:
Square footage of Suite B
Square footage of the ground floor of the Building
[26] I agree with the Tenant’s interpretation. In the absence of direct evidence on the intention of the parties, Sattva supra requires the Court to look at the plain meaning of the words. The definition of “Proportionate Share” uses the word ‘Building” which is a defined term in the Lease. “Building” means the entire property including the residential units. In the absence of a request to rectify the Lease, the court must assume that words are used purposively. The Lease refers to the word “Building” throughout including in the definition of Operating Costs. The Landlord had an opportunity to correct any error in the definition of “Proportionate Share” when it negotiated the Lease with the new Tenant. It did not. The fact that the City might levy taxes for commercial and residential use differently does not change the plain words of “Proportionate Share”, which uses the defined term “Building” and excludes the defined term “Rentable Area of the Premises”.
[27] Further, the definition of “Taxes” in the Lease appears to contemplate all manner of real property taxes levied against the Building. Section 5.2 of the Lease states that the “Tenant shall pay as Additional Rent to Landlord in each Rental Year during the Term Tenant Proportionate Share of all Taxes that are imposed from time to time against the Building or any part thereof including, without limitation, the Common Facilities whether or not there are separate real property tax bills or separate real property assessment notices issued by any lawful taxing authority…” It would be unfair and commercially absurd for the Tenant to be liable to pay for taxes levied against the whole Building but not receive the benefit of the square footage of the whole Building in determining its Proportionate Share.
[28] In sum, the denominator for “Proportionate Share” means what it says – the Rentable Area of the Building. There is no methodology built into the Lease to determine what that square footage is. The parties will have to agree how to quantify the denominator. This ruling will also impact on how the Tenant’s share of the overall Operating Costs are calculated since Article 6(c) uses the same defined term of “Proportionate Share” to describe the Tenant’s obligation thereunder.
Conclusion:
[29] I grant the Tenant’s Application and declare that Lease has been renewed for the period June 1, 2021 to May 31, 2026 and that the Tenant has one remaining Option to Renew for a five-year period from June 1, 2026 to May 31, 2031. The Tenant does not seek the injunctive relief listed at 1(c) in the Notice of Application. I also conclude that the Tenant’s Proportionate Share of Operating Costs and Taxes takes into consideration the square footage of the entire Building and not just the commercial ground floor. Finally, Taxes form part of Operating Costs and require reconciliation before becoming due and payable by the Tenant. I otherwise dismiss the Landlord’s cross-application.
Costs:
[30] The Tenant is presumptively entitled to its partial indemnity costs. The parties provided their Bills of Cost/Cost Outline and have similar amounts. The Landlord shall pay the Tenant its partial indemnity costs including disbursements and HST of $40.864.02 payable within 30 days of today’s date.
P.T. Sugunasiri, J.
Released: April 14, 2022
COURT FILE NO.: CV-21-657966
DATE: 20220411
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Matiu Dentistry Professional Corporation
Applicant
– and –
Canadiana Towers Limited
Respondent
REASONS FOR JUDGMENT
P.T. Sugunasiri, J.
Released: April 14, 2022