Court File and Parties

COURT FILE NO.: CV-20-641839

DATE: 20220829

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Pinnacle International (One Yonge) Ltd. Plaintiff

AND:

Torstar Corporation Defendant

BEFORE: Pollak J.

COUNSEL: Julie E. Schatz & Meg Bennett, for the Plaintiff Timothy Pinos & Jessica l. Kuredjian, for the Defendant

HEARD: February 14, 2022

ENDORSEMENT

[1] The plaintiff, Pinnacle International (One Yonge) Ltd. (“Pinnacle”), is a Canadian real estate developer of luxury condominium residences and owns various real estate properties. Pinnacle is the Landlord of the Defendant, Torstar Corporation (“Torstar”), a Canadian media conglomerate that primarily publishes daily and community newspapers and operates digital businesses.

[2] The Plaintiff brings a motion for summary judgment of its Action claiming the amount of $2,004,985.74, plus interest accrued thereon, arising from the alleged breach of its commercial lease agreement with the Defendant. Torstar also brings a motion for summary judgment dismissing Pinnacle’s Action. Both parties agree that the matter is appropriate for summary judgment.

[3] Pinnacle claims that Torstar, profited from three separate subleases of the rental space, which in accordance with the lease between the parties, must be paid to it. The net profit on subleases is determined by deducting reasonable costs incurred in connection with the sublease.

[4] I agree with the parties that this Action may be decided by summary judgment. The issue is the interpretation of the Lease to determine if Torstar profited from the Subleases. The evidence is not in dispute. Summary judgment is a proportionate, more expeditious and less expensive means to achieve a result in this case. All of the requirements set out by our Supreme Court of Canada in Hyrniak v. Mauldin, 2013 SCC 7, and out Court of Appeal have been met.

[5] Pursuant to the Lease, Torstar pays Basic Rent on a per square foot per annum basis (Sections 1.6 and 4.2), plus Additional Rent on a per square foot basis. The Additional Rent consists of Realty Taxes, Operating Costs including a management fee to the landlord and Utilities.

[6] The issue of these two motions is the interpretation of Section 8.1 of the Lease, which permits Torstar to sublet its premises provided that it pay any net profits from subleasing the premises to Pinnacle as “Additional Rent”. The relevant portion of Section 8.1 provides as follows:

Assignment, Subletting… Any profit (net of all reasonable costs incurred by the Tenant in connection therewith) earned by the Tenant in assigning this Lease or subletting or licensing all or any part of the Premises…shall be paid by the Tenant to the Landlord as Additional Rent…

[7] The dispute is with respect to the interpretation of “Net of all reasonable costs incurred by the Tenant in connection therewith”. Section 1.4 of the Lease provides that the “Rentable Area” of the third floor is 65,534 square feet, which includes 18,827 square feet of open air space (the “Atrium”).

[8] Torstar has entered into 3 subleases with College Boreal (“Boreal”), Lifemark Health Corp. (“Lifemark”) and Perimeter Medical Imaging Inc.(“Perimeter”). Torstar’s defence is that it has incurred significant financial losses in connection with these Subleases.

[9] Torstar’s argument is that it entered into the Boreal Sublease, for the “entire Third Floor” which is “deemed” to measure 46,707 square feet at a Basic Rent of $7.50 per square foot per annum plus the Additional Rent attributable to the space payable by Torstar to Pinnacle.

[10] Torstar also paid real estate commissions and legal fees for the Boreal Sublease. Together with the three-month fixturing period of the Lease, Torstar submits it incurred reasonable costs in the amount of $878,992 in connection with the Boreal Sublease. It relies on a comparison of the total rents paid by Torstar to Pinnacle in respect of the Third Floor to the total rents paid by Boreal to Torstar, minus “reasonable costs” totaling $878,992, resulting in a total loss of $2,615,380.72, as a result of the Boreal Sublease.

[11] Torstar submits that “reasonable costs” includes its costs with respect to the atrium space adjacent to the subleased space to be deducted from profit earned on the sublease. It claims such “costs are incurred in connection with the sublease”. Pinnacle’s position is that such is a commercially unreasonable and unsupportable interpretation of the Lease. Torstar’s submission is that the appropriate method to determine whether a profit has been made is to take the amount of rent Torstar received under this sublease and compare it to the rent Torstar paid to Pinnacle for the third floor. This would result in a loss.

[12] Torstar’s position is that the rent it pays for the unusable third floor Open Air Space is a cost to it in connection with the sublease of the “entire Third Floor” to College Boreal and must be included in any calculation or profit under section 8.1 of the Lease”.

[13] Torstar’s position is also that the rent-free fixturing periods that are provided for in each of the 3 Subleases as a term of each sublease (referred to below), are reasonable costs incurred in connection therewith. Pinnacle’s submission with respect to all three Subleases is that the cost of the rent-free fixturing periods cannot be included as “reasonable costs incurred … in connection” with the Subleases because they occurred prior to the commencement dates of each of the Subleases.

The Boreal Sublease

[14] Torstar has claimed a total of $878,992 as “reasonable costs” incurred in connection with this sublease. Pinnacle accepts $579,016 as “reasonable costs” to be deducted from the profit earned from this Sublease but disputes the fixturing period cost of $299,976.

[15] As mentioned above, Torstar also submits that the basic and Additional Rent amounts paid by it to Pinnacle for the Atrium Space on the third floor, as “reasonable costs incurred in connection with the Boreal Sublease”. Pinnacle disputes this claim.

[16] I find that on the basis of the evidence, Torstar has never surrendered the third floor Atrium Space before the expiry of the Lease in August 2020, and that it paid the rent on the entire Rentable Area of the Third Floor measuring 65,534 square feet which includes the Atrium Space.

[17] Our Court of Appeal for Ontario has summarized the principles governing the contractual interpretation in the case of Weyerhaeuser Company Limited v Ontario (Attorney General), 2017 ONCA 1007 at para 65.:

a. the court must determine the parties’ intention according to the language used in the written document, based on the “cardinal presumption” that the parties intended what they said;

b. the court must read the text of the written document as a whole, giving the words of the contract their ordinary and grammatical meaning, in a manner that gives meaning to all of the contract’s terms, avoiding an interpretation that would render one or more of those terms ineffective;

c. the court must read the written document in the context of the surrounding circumstances known to the parties at contract-formation, including facts known to or reasonably knowable by the parties (e.g. the genesis, purpose and commercial context of the written document), but the subjective intentions of the parties are not to be considered; and

d. the court must read the written document in a fashion that accords with sound commercial principles and good business sense, avoiding a commercially absurd result, objectively assessed.

[18] The Lease provided that the rentable area on the Third Floor of the Building was 65,534 square feet. The Atrium Space is 18,827 square feet of that 65,534 space. Torstar leased (and paid for) 65,534 square feet on the Third Floor for the entire term of the Lease.

[19] Pinnacle argues that Torstar cannot use the terms of the Boreal Sublease to interpret provisions in the Lease. Torstar chose to define the rentable space in the Boreal Sublease as being the “entire third floor” but that does not mean that Boreal in fact leased the entire Third Floor as defined and agreed to in the Office Lease. Schedule A to the Boreal Sublease supports the conclusion that Torstar did not sublease the entire Third Floor as the diagram of the subleased premises omits the Atrium Space.

[20] The purpose of Section 8.1 is to prohibit Torstar from making a profit by subletting. Section 8.1 permits only costs that are “reasonable” to be deducted. The term “reasonable” must be given appropriate consideration.

[21] I find that Torstar’s position of deducting the costs of basic and Additional Rent associated with the Atrium Space cannot be accepted, as that space was not leased to Boreal. The costs are not “reasonable cost incurred” in connection with the Boreal Sublease within the meaning of Section 8.1 of the Office Lease. These costs are not “reasonable”.

[22] Torstar’s submission is based on the language of the Boreal Sublease to suggest that, because the Boreal Sublease which states that as Boreal subleased the “entire third floor”, the Atrium Space should be included in the profit calculation under Section 8.1 of the Lease. Further, because the landlord consented to the Boreal Sublease, it has agreed to this approach. I do not accept this submission.

[23] I accept that in determining what the parties’ intentions were in entering the Lease, the parties did not intent that costs associated with portions of a floor (the Atrium) that Torstar chose not to sublease would be a “reasonable expense incurred in connection with” a sublease. Such interpretation would permit Torstar to circumvent the purpose of Section 8.1, to prevent a profit arising from a sublease. Torstar chose to sublease a portion of the space it leases at a much higher price and deduct the amount of rent it pays to the landlord for the portion of leased premises it retained as a cost of the sublease. I am of the view that Torstar’s interpretation is inconsistent with the reasonable business expectations and the plain wording and purpose of Section 8.1.

[24] Pinnacle’s submission is that to determine if a profit was made, the area Torstar sublet must be assessed in relation to the area Torstar leased. Under the Boreal Sublease, Torstar sublet an area on the Third Floor comprising 46,707 square feet at a rate of $7.50 per square foot. Schedule A to the Boreal Sublease identifies the area Torstar sublet to Boreal as being the actual floor space of the Third Floor, which does not include the Atrium.

[25] Torstar’s argument is based on an inappropriate comparison of rents paid by Torstar under the Lease for the total Third Floor area (65,534 square feet including the Atrium) and rents received by Torstar under the Boreal Sublease for a portion of the Third Floor (46,707 square feet) excluding the Atrium space. The square footage of both leases was not the same. Torstar subleased only 46,707 square feet of the Third Floor and did not surrender the Atrium Space at any time over the Lease’s term.

[26] I do not accept Torstar’s position that after the expiry of the Canada Post Sublease, it surrendered the Atrium Space and accordingly, could not have leased the Atrium Space to Boreal. The evidence does not support this finding. Further, Torstar continued to pay rent for that space.

[27] I find that the appropriate and commercially sensible comparator in determining whether a profit was made from the Boreal Sublease is the amount paid by Torstar on 46,707 square feet under the Lease and the amount paid for that same space under the Boreal Sublease (i.e. the square footage of the Third Floor less the Atrium Space).

[28] Finally, Torstar paid real estate commissions and legal fees for all 3 subleases.

Fixturing Periods

[29] All 3 subleases included a ninety day fixturing period to permit the tenant to install its fixtures and its inventory in the leased premises.

[30] Pinnacle objects to the rents lost during the fixturing period being deducted by Torstar. It submits that such is inconsistent with the application of the clear words of Section 8.1. All of the rent-free fixturing periods are provided for under each of the Boreal, Lifemark, and Perimeter Subleases, in similar language as:

Fixturinq Period: [Torstar] hereby grants to the Subtenant a period of ninety (90) days (the "Fixturing Period) commencing on October 3, 2011 to complete all of the Subtenant's work, to install its fixtures and inventory and to open for business within the Sublet Premises. During the Fixturing Period, the Subtenant shall be bound by all of the terms, covenants and conditions of this Sublease and the Head Lease (including without limitation, the payment of all utilities, consumed within the Sublet Premises and the obligation to maintain insurance) except those requiring payment of Basic Rent and Additional Rent.

[31] I find that the “fixturing costs” claimed by Torstar, can be deducted as “reasonable costs” in all of the 3 subleases.

[32] I agree with Torstar’s position that rent-free fixturing periods do constitute a “reasonable cost” pursuant to Section 8.1 of the Lease.

[33] Each of the fixturing period clauses provide that each subtenant is required to be bound by all the terms of the Lease and Sublease during the fixturing period but does not have to pay Torstar any of the Basic Rent or Additional Rent. The parties agree that fixturing periods are frequently used as inducements for tenants to enter into leases or subleases. I do find that the rent paid by Torstar during fixturing periods are “reasonable costs” incurred “in connection with” the sublease.

[34] The Pinnacle witness admitted that: (i) the practice in the commercial leasing industry is to allow a fixturing period that is rent free; (ii) in the case of the Subleases, Torstar still had to pay rent to Pinnacle for the spaces even though the subtenants were not being charged rent by Torstar; (iii) the only reason he excludes it as a cost is that it was incurred before the formal start of the Subleases; and, (iv) if the Subleases had commenced prior to the start of the fixturing period, the fixturing periods would be recognized as costs of the Subleases.

[35] Pinnacle submits that Torstar’s deduction of costs associated with fixturing periods that were granted to all three subtenants prior to commencement of the sublease terms should be rejected as no actual “costs” were incurred during these fixturing periods. I do not accept this submission as such would result in a commercially unacceptable result which would not have been contemplated by the parties.

[36] Finally, the real estate commissions and legal fees incurred by Torstar, can also be deducted as “reasonable costs”.

[37] To conclude, I find that the amount of the Atrium rent paid to Pinnacle is not a “reasonable cost” pursuant to Section 8.1 of the Lease. The fixturing periods rent lost by Torstar to induce the 3 subtenants to enter into the subleases and the legal fees and real estate commissions are reasonable costs, within the meaning of the Lease. These findings will allow the parties to determine the exact amount of additional rent, if any, to be paid to Pinnacle by Torstar.

[38] The reasonable costs can be deducted from the rent paid to Torstar pursuant to the subleases. To determine if Torstar profited in connection with the sublease, the rent received for the actual square footage subleased is compared to that same square footage lease to Pinnacle. From that amount, Torstar may deduct the amount that I have found to be reasonable costs, pursuant to the Lease. Should there be any profit, this amount must be paid as additional rent by Torstar to Pinnacle, with pre and post-judgment interest.

Costs

[39] As the Plaintiff Pinnacle, has been in the successful party on this motion, they are entitled to costs on a partial indemnity scale. If the Plaintiff requests costs to be payable on a higher indemnity scale, as a result of the operation of the Rules regarding settlement offers, the Plaintiff may make submissions of no more than two pages, double spaced sent the Defendant, uploaded to Caselines with a copy sent to my assistant Roxanne Johnson at Roxanne.johnson@ontario.ca by 12 p.m. on September 8, 2022. The Defendant may make submissions of no more than two pages, double spaced sent to the Plaintiff, uploaded to caselines with a copy sent to my assistant by 12 p.m. on September 22, 2022. No reply submissions will be accepted.

Pollak J.

Date: August 29, 2022