Court File and Parties
Court File No.: CV-21-00668087-0000 CV-22-00684303-0000
Date: 2022-12-01
Superior Court of Justice – Ontario
Re: Eva Ungar and Torandim Limited, Applicants And: MOD Developments (Charles) Limited Partnership by its General Partner MOD Developments (Charles) Inc., Respondent
And Between: MOD Developments (Charles) Limited Partnership by its General Partner MOD Developments (Charles) Inc., Applicant And: Eva Ungar and Torandim Limited, Respondents
Before: Koehnen J.
Counsel: Stephen Brunswick and Jennifer J. Lake, for Eva Ungar and Torandim Limited Michael P. Farace, for MOD Developments
Heard: November 22, 2022
Endorsement
[1] These reasons arise out of two competing applications that seek the court’s direction on what are fundamentally the same underlying issues. The questions arise because the contractual agreements between the parties were silent with respect to certain issues that have now arisen. The fundamental question is which of the parties should bear the risk and ensuing cost related to those issues.
Commercial Background
[2] Torandim Limited and Eva Ungar (the “Applicants”) owned apartment rental properties at 55 Charles Street East and 61-63 Charles Street East in Toronto. MOD Developments (Charles) Limited Partnership (“MOD”) purchased the two buildings in separate Agreements of Purchase and Sale dated December 18, 2017. MOD intended to redevelop the buildings and construct a 52 story Condominium, commercial and residential rental complex on the site. The Agreements of Purchase and Sale provided for cash consideration of approximately $75,000,000 to the Applicants plus the transfer of 100 rental apartments in the complex to the Applicants. The Applicants would then operate the 100 apartments as Rental Units going forward. The balance of the Development consisted of 565 Condominium units and seven townhouses which MOD would sell; a commercial underground parking garage which MOD would retain; and approximately five stories of commercial space which MOD would also retain and rent out.
[3] The Agreements of Purchase and Sale envisaged separate entrances for the Condominiums and the Rental Units.
[4] A common part of any Condominium Development in Toronto is what is known as a Section 111 Agreement. This is an agreement that the City of Toronto requires the developer to enter into which sets out a variety of conditions for the development including the sort of amenities it will contain. The City ultimately imposed conditions in the Section 111 Agreement that required a common entrance for the Condominium and the Rental Units as well as amenities beyond those that the Agreements of Purchase and Sale between the Applicants and MOD called for. MOD has presented cost-sharing agreements to the Applicants pursuant to which they would be required to pay their proportionate cost of common expenses towards the maintenance of these additional amenities. The Agreements of Purchase and Sale are silent about who would bear the cost of municipal requirements above and beyond those agreed to in the Agreements of Purchase and Sale between the Applicants and MOD.
[5] Against this backdrop, the following issues have arisen between the parties:
a. Are the Applicants required to contribute to the cost of maintaining amenities in the Development beyond those specified in the two Agreements of Purchase and Sale between the Applicants and MOD?
b. Should the Applicants or should MOD have control over leasing the Rental Units in the new Development?
c. Should MOD or the Applicants receive rents from the apartment Rental Units between the time they are occupied and the time that the 100 Rental Units are conveyed to the Applicants?
A. Principles of Contractual Interpretation
[6] The parties agree on the relevant principles of contractual interpretation.
[7] The first and best evidence of the agreement between the parties is the written agreement.[^1] Courts should interpret the contract as a whole and strive to enforce the reasonable expectations of the parties and not defeat them.[^2] When considering any potential ambiguities, courts should objectively consider which is the more objective and reasonable interpretation.[^3]
[8] In applying the parties’ reasonable expectations, courts should avoid harsh or absurd results and consider commercial efficacy.[^4] The context in which an agreement is formed is an integral part of the interpretive process and is not something that is considered only when the words viewed in isolation suggest an ambiguity.[^5]
B. Maintenance Costs of Additional Amenities
[9] The definition of “Condominium” in both Agreements of Purchase and Sale provides, among other things, that:
The Condominium shall not include and shall be separate and distinct from the Apartment Units and any common elements associated therewith and any apartment units and/or common elements to be conveyed to the 6 1-63 Charles Property owner, pursuant to the 6 1-63 Charles APS.[^6]
[10] Schedule F to each Agreement of Purchase and Sale sets out additional conditions relating to the entrance to the Rental Units. Article 5 of Schedule F provides, among other things, that there would be an “entrance vestibule” with
- “Sufficient floor space to accommodate temporary placement of delivery packages and groceries while the intercom is being used. Ensure the use of the intercom does not interfere with clear ingress and egress via the entrance doors.”
- A lobby area “with unimpeded access to the residential elevators while providing sufficient floor area to accommodate seating for six people.”
- Two high-speed elevators.
[11] This clearly contemplated a small, modest entry and lobby, both with relatively little space.
[12] MOD contemplated a much more lavish entrance for the Condominium including a two-story lobby with a concierge’s desk.
[13] The City ultimately required a common entrance for the Condominium and three elevators for the rental apartments.
[14] The Applicants acknowledged in Section 4 of Schedule F that MOD had not finalized architectural plans and had not sought approvals from governmental authorities for any part of the Development when the Agreements of Purchase and Sale were signed. It went on to add that “it is likely that… it may be necessary to enter into a cost-sharing agreement between the Applicants and the Condominium relating to shared facilities.” The Applicants also acknowledged in that same section that the details of such cost-sharing arrangements would be “determined through the Development approval process” by MOD “in its discretion.” Finally, the Applicants acknowledged and agreed in Section 4 of Schedule F that they would, “acting reasonably” enter into or assume those cost-sharing agreements.
[15] MOD has now presented a draft cost-sharing agreement to the Applicants pursuant to which the Applicants would be required to pay 15% of the costs of all of the amenities of the Condominium. This reflects the proportion that the rental apartments comprise of the Development’s residential component. The Applicants agree that they should pay a portion of the costs of certain amenities that they knew from the outset would be shared. They submit that they should not, however, be required to pay for the maintenance of those amenities that they never agreed to such as the larger lobby, the concierge desk, the management of the Condominium, the superintendent and the third elevator. It appears that some of these costs can be significant. By way of example, the evidence before me was that the concierge alone would cost over $560,000 per year.
[16] MOD submits that the Applicants should be required to pay their proportionate cost of these amenities because
(i) The tenants of the Rental Units will benefit from them. (ii) Section 4 of Schedule F allows MOD to enter into such cost-sharing agreements “in its discretion.” (iii) Section 3 of Schedule F provides that the Applicants will take title to the Rental Units subject to a number of encumbrances including:
(b) registered agreements with any Governmental Authority and registered agreements with utilities, service providers and/or with local ratepayer associations, including without limitation, any Development, site plan, subdivision, Condominium, engineering and/or other municipal agreement or similar agreements;
(e) any agreement which is necessary for the operation, maintenance or repair of the Apartment Units and/or Condominium;
[17] The Section 111 Agreement is registered on title. MOD submits that it is also an agreement necessary for the operation and maintenance of the Rental Apartments and the Condominium.
[18] The final piece of this contractual puzzle is contained in the closing wording of Section 5A of Schedule F which provides:
Subject to the prior written consent of the Vendor, not to be unreasonably withheld or delayed, and for which consent the Vendor is invariably entitled to consultation with the party, authority or agency seeking, ruling or recommending or advising that certain amendment(s) and/or changes be made, the Purchaser may, from time to time and within the spirit and intent of the Agreement, change, vary or modify the plans and specifications pertaining to Apartment Units and shared common element areas, including those set out above, provided that any changes or substitutions made are reasonably comparable to or better than the specifications set out above, as determined by the Purchaser's architect and the Vendor acting reasonably.
[19] This closing language contains a number of relevant points. First, MOD may change the plans and specifications. Second, those changes must be “within the spirit and intent of the Agreements of Purchase and Sale.” Third, the written consent of the Applicants is required for such changes. Fourth such written consent will not be unreasonably withheld. And finally, the Applicants will be entitled to consultation with the authority requiring the changes.
[20] The Applicants say they were not kept informed or consulted about the changes that the City wanted. The evidence that I was taken to suggests that, even if the Applicants were not consulted at every single step, they had a meaningful opportunity to put their position to the City but that the City rejected the Applicant’s views.
[21] That, however, still does not determine whether the Applicants should pay 15% of all of the maintenance costs associated with the additional amenities. It is clear that the reasonable expectation of the Applicants was to have a small, modest, separate lobby area. This made commercial sense because the Applicants were subject to limitations on whom they could rent to, and what they could charge. The previous tenants of the Applicants had a right of first refusal to any of the units. Those tenants were paying relatively modest rents. Those rents did not necessarily support more luxurious amenities such as those of a concierge or a multistory lobby.
[22] Although Schedule F gave MOD the right to change the specifications contained in it, those changes had to be “within the spirit and intent of the Agreements of Purchase and Sale.” The spirit and intent of those agreements was to construct a small, modest, separate lobby area for the Rental Units.
[23] The Agreements of Purchase and Sale are silent about who would bear the additional costs associated with changes to the specifications. It strikes me that MOD and the Condominium are the parties better able to bear the risk of the cost of amenities like the concierge than are the Applicants. The Applicants have only limited ways of passing those costs on to the tenants. If tenants in the former buildings take up units in the new building, their rent is the same as it was in the old buildings, subject to such annual increases as Ontario’s rent control laws permit; currently 2% per year. That situation will prevail for 10 years at which time the Applicants will be able to charge either market rents or a multiplier of the CHMC rents for the neighbourhood. If new tenants take up units, they will be charged 1.5 times the CMHC rent for the neighbourhood and will then be subject to such rent increases as are permitted by law.
[24] It seems clear from the context of the Development that MOD wanted to build a Condominium Development with a different social and economic profile than the two buildings that the Applicants formerly operated. Social policy in the city of Toronto required that the social and economic profile of the Rental Units be maintained which is why the Development was required to have a number of Rental Units equal to the number of units that were being demolished. It was the City for its own social policy reasons that required a common lobby area with the Condominium.
[25] The issue of commercial efficacy is particularly relevant here. The budget statement that MOD proposes to provide to Condominium purchasers foresees its maintenance charges increasing by 7.5% annually after December 31, 2023. MOD has therefore sought and obtained contractual protection for those increases. As noted earlier, rental increases are subject to limits of 2% in Ontario. It is therefore impossible for the Applicants to protect themselves against any increased costs beyond a 2% rent increase.
[26] With respect to the concept of discretion, although s. 4 of Schedule F gives MOD discretion to develop the cost-sharing agreements, the description of the nature of that discretion in Schedule F differs from the description of discretion in other provisions of the agreement. Other provisions of the Agreements of Purchase and Sale refer to MOD’s sole and unfettered discretion or complete discretion. MOD’s deponent agreed that the discretion to enter cost-sharing agreements did not give MOD free rein and that such discretion had to be exercised reasonably.
[27] MOD submits that the Applicants could use part of the $75 million they received on the sale of the two buildings to fund the costs of these additional amenities. While that may be true, in my view, it misses the point. The point is not whether the Applicants have enough money themselves to fund those costs, the point is one of the reasonable expectations of the parties as revealed in the Agreements of Purchase and Sale. Those agreements contemplated that the Applicants would receive as consideration for the sale of the two buildings $75 million and 100 rental apartments with minimal, modest amenities. There was no expectation that the proceeds of sale would be used to fund the expenses associated with more luxurious amenities that would be imposed on the Applicants against their will.
[28] The proposed cost sharing arrangement also has the Applicants paying a proportionate cost for the management and maintenance costs of the Condominium. The rental apartments will have their own manager and superintendent. That is consistent with the concept that the Rental Units should be separate and apart from the Condominium units. The Section 111 agreement imposes no restrictions on the ability to have separate management or maintenance services. Maintaining separate services in this regard is consistent with the language of the Agreements of Purchase and Sale and is consistent with the reasonable expectations of the parties.
[29] It would seem to impose a harsh result that is contrary to commercial efficacy to require the Applicants to pay for amenities they did not want and the cost of which they are unable to recover.
[30] The Section 111 Agreement also requires a third elevator for the Rental Units. The Rental Units will have their own elevator bank separate and apart from those associated with the Condominium units. In my view, any additional maintenance costs attributable to the third elevator should be borne by the Applicants. The elevator cost is unique to the Rental Units. It is not a cost associated with the Condominium and is of no benefit to the Condominium. To the extent that the parties did not anticipate that the City would require an additional elevator for the Rental Units, it strikes me that that is a risk that is more properly placed on the Applicants. It is the Applicants who want to operate Rental Units. They should bear the cost of any governmental requirements that are unique to the rental apartments.
[31] The proposed cost sharing agreements also contemplate that the Applicants would be funding 15% of the reserve fund associated with the Condominium. A reserve fund is one that is maintained by a condominium corporation to build up a reserve from which to pay for future capital repairs and replacements. The Development will have some capital expenses that are shared between the Condominium and the Rental Units. For example, it has a single mechanical and heating system, a single roof system and a uniform set of exterior windows. On the other hand, there are also capital costs that will be entirely separate between the Condominium and the rental apartments such as maintaining the elevator banks, replacing hallway carpets and painting of hallways.
[32] The Agreements of Purchase and Sale are silent about any contribution by the Applicants to a reserve fund of the Condominium. The Section 111 Agreement contains no requirement in this regard.
[33] The Applicants submit that there is ambiguity about the extent to which the Condominium’s reserve fund could be used for repairs to areas that do not belong exclusively to the Condominium Corporation. As a result, they propose to maintain a separate reserve fund into which they will place 4% of rental revenues each year which the Condominium Corporation could audit. I was not taken to any evidence to suggest that this was inadequate. This strikes me as a fair solution to the issue.
C. Who Controls Leasing of the Rental Apartments?
[34] The Agreements of Purchase and Sale are silent about who is to lease out the Rental Units to the new tenants. MOD takes the position that it should do so because of the way the various agreements work in tandem with respect to the Rental Units.
[35] MOD notes that it is the registered owner of the Development and will remain so until the residential Condominium has been registered at which point the purchasers of the Condominium units will assume title. MOD notes that it is also the registered owner of the rental apartments until title to those apartments is transferred to the Applicants.
[36] The Agreements of Purchase and Sale do not provide a specific date by which MOD will transfer title to the Rental Units to the Applicants. Instead, the Applicants have a collateral mortgage against the project to secure the transfer of title in the rental apartments to them. That collateral mortgage matures 90 days after the registration of the Condominium. In effect, MOD must transfer title in the Rental Units to the Applicants no later than 90 days after the registration of the Condominium.
[37] In section 3.10 (b) of the Section 111 Agreement, however, MOD committed to the City that the Replacement Rental Units would be available for occupancy by the time 70% of the Condominium Units are ready for occupancy.
[38] It will likely be the case that MOD will obtain occupancy permits for 70% of the Condominium units well before the Condominium is registered. That is to say, at a time when MOD remains the registered title holder of the Rental Units.
[39] MOD submits that as title holder, it should enter lease agreements with tenants.
[40] In addition, MOD submits that it has an obligation under section 10.1 of the Section 111 Agreement to indemnify the City for any obligations under that agreement, including the obligation to repopulate the Rental Units. Given that MOD is indemnifying the City for any breach of the agreement in this regard, MOD says it should have control of repopulating the Rental Units.
[41] In my view the provisions of the Section 111 Agreement do not assist MOD. That Agreement is one entered into between MOD and the City. It does not govern the commercial relationship between MOD and the Applicants. The City has an understandable interest in repopulating the Rental Units as quickly as possible. It is part of the City’s public policy regarding development that, if a development takes away rental apartments, the development should replace as many as possible of them as possible. That policy is presumably motivated by a desire to preserve affordable rental housing within the City core. To further that policy, it is in the interests of the City to have those Rental Units occupied as quickly as possible. Those considerations are separate from the commercial considerations between MOD and the Applicants.
[42] The period of time between the occupancy of the Rental Units and the registration of the Condominium will be relatively short. Probably a question of several months to a year. The Applicants will own the Rental Units in perpetuity. Given that time difference, there is no doubt in my mind that the Applicants have a greater commercial interest in controlling the repopulation process than does MOD. In addition, the Applicants have an existing relationship with former tenants. To the extent that new tenants occupy the premises, the Applicants as landlords have a legitimate commercial interest in establishing the relationship directly and in the vetting the tenants who will live in the building.
[43] Moreover, the Applicants have extensive experience in leasing apartments. MOD’s deponent on cross-examination admitted that MOD has no experience in relocating tenants and admitted that it would make more sense for the Applicants to be involved in repopulating the Rental Units than for MOD.
[44] In my view it would be more consistent with principles of contractual interpretation for the Applicants to control the repopulation process. The Rental Units are being constructed for the benefit of the Applicants. Delivery of the Rental Units constitutes part of the purchase price for the two buildings the Applicants sold to MOD. The Applicants will be titleholders to those Rental Units in perpetuity, unless of course they transfer the interest to another party. That gives the Applicants an objective, reasonable expectation to control the rental process. If they do not control that process, they are not getting the benefit of full title to the Rental Units at a critical time, namely tenant selection and relationship building. It is, in my view more consistent with the objective expectations of the parties to have the long-term owner of the Rental Units repopulate them.
[45] The Applicants agree to comply with the repopulation requirements contained in the Section 111 agreement. They note that my reasons can direct such compliance. I do so as part of these reasons. To the extent that MOD should face any liability to the City for any alleged breach by the Applicants of those obligations, MOD has the assurance that there is real estate in the form of 100 Rental Units that it can seize to enforce any judgment arising out of any breach by the Applicants of the repopulation requirements in the Section 111 Agreement.
D. Is MOD Entitled to Interim Rents?
[46] Regardless of who controls the repopulation process, MOD submits that it is entitled to any rent received from the Rental Units before title to those units is transferred to the Applicants. In this regard, MOD relies on s. 4 (f) of the Vendors and Purchasers Act, R.S.O. 1990, Chapter V.2 which states that
Every contract for the sale and purchase of land shall, unless otherwise stipulated, be deemed to provide that,
(f) the purchaser is entitled to possession or the receipt of rents and profits upon the closing of the transaction.
[47] MOD submits that on the closing of the Agreements of Purchase and Sale it became entitled to any rents arising from the properties that MOD purchased from the Applicants. That right continues until MOD transfers those properties back to the Applicants.
[48] MOD submits that this makes commercial sense because it is paying for the full cost of construction and will have to continue to do that through financing until the Condominium is registered at which point it can close the sales transactions with the purchasers.
[49] In my view that does not take into account the overall context of the transaction.
[50] As noted earlier, the Rental Units were part of the consideration that MOD paid to the Applicants for the transfer of their two buildings. The Rental Units were always to be constructed for the benefit of the Applicants. Given that the Rental Units were part of the consideration, it is in my view more consistent with the reasonable expectations of the parties that the benefit of those Rental Units would accrue to the Applicants as soon the units began earning rent. That interpretation gives the Applicants the full benefit of the consideration they agreed to for the sale of the properties. If MOD wanted to depart from that fundamental concept, it should have made that exception to the underlying purpose of the transaction clear in the Agreements of Purchase and Sale.
[51] The essential nature of the transaction between MOD and the Applicants is to make the Applicants the beneficial owners of the Rental Units. The Supreme Court of Canada has defined a beneficial owner as the “real owner of property even though it is in someone else’s name.”[^7] In such circumstances, the legal owner of the property is a trustee who holds the property for the benefit of another so that the benefit of the property accrues not to the trustee but to the beneficiary. The trustee in those circumstances cannot hold property for its own benefit but can do so only for the benefit of the beneficiary.[^8]
[52] MOD submits that a trust is not possible in the circumstances because, once the two buildings the applicant sold were demolished, there was no longer any certainty of object as a result of which there could be no trust. I do not accept that argument. Any requirement of certainty of object is fully satisfied by the time the Rental Units are occupied by tenants.
Conclusion
[53] In light of the foregoing, I order as follows:
a. The Applicants are required to bear the cost of maintaining amenities in the Development only insofar as those amenities are dedicated uniquely to the Rental Units. In the case of shared amenities such as the lobby, the Applicants are required to contribute to the cost of maintaining those amenities only to the extent of the cost that could fairly be attributed to that amenity as originally contemplated in the Agreements of Purchase and Sale. Thus, for example, the Applicants should be required to contribute to the Condominium an amount equal to what the Applicants would have had to spend to clean and maintain the small vestibule and lobby contemplated by the Agreement of Purchase and Sale but no more than that. In the case of the third elevator, the Applicants will bear the cost of maintaining it because it is an amenity devoted exclusively to the use of the Rental Units.
b. The Applicants will have control over leasing and repopulating the Rental Units in the Development. The Applicants will assume MOD’s obligations in this regard to the City as set out in the Section 111 Agreement.
c. The Applicants are entitled to receive rents from the Rental Units as soon as rent begins to be paid even if legal title to the Rental Units has not yet been registered in the Applicants’ names.
[54] Both parties referred to audits in their submissions and the need or lack of need for the Applicants to contribute to the cost of the audits. The parties differed in their description of the audits. The Applicants view the audits to which they were being asked to contribute as the audits of the Condominium Corporation’s annual financial statements. The Applicants are not required to contribute to any such financial audits. MOD viewed the audit as referring to engineering audits of the residential portion of the Development which would determine which amenities were shared and which amenities were unique to either the Condominium or the Rental Units, what maintenance or replacement is required, when it is required and how much each side should contribute. If that is the case, I would be inclined to require the Applicants to contribute to the cost of those audits. Given the ambiguity in the evidence on that issue, I make no formal ruling on that issue at this time. If the parties require further guidance on the point, they can approach me for a case conference.
[55] Any party seeking costs arising out of these reasons may make written submissions within 10 days of their release. Responding submissions will be due 7 days later with a further three days provided for reply.
Koehnen J.
Released: December 1, 2022
[^1]: H & M Hennes & Mauritz Inc. v. T.E.C. Leaseholds Limited, 2010 ONSC 2014, at para. 10 [^2]: Metropolitan Toronto Condominium Corporation No. 1250 v. The Mastercraft Group Inc, 2009 ONCA 584; Beer v. Townsgate I Ltd. (1997), 1997 CanLII 976 (ON CA), 152 D.L.R. (4th) 671 (Ont. C.A.) at p. 682, para. 29 [^3]: Amberber v. IBM Canada Ltd., 2018 ONCA 571 at para 63. [^4]: H & M Hennes & Mauritz Inc. v. T.E.C. Leaseholds Limited, 2010 ONSC 2014, at para. 30. [^5]: Dumbrell v. The Regional Group of Companies Inc., 2007 ONCA 59 at paras. 51,52 & 54; G. Ford Homes Ltd. v. Draft Masonry (York) Co. Ltd., 1983 CanLII 1719 (ON CA) at para 9. [^6]: With appropriate changes to the address in the agreement relating to 55 Charles St. [^7]: Canada (Attorney General) v. British Columbia Investment Management Corp., 2019 SCC 63, [2019] 4 SCR 559 at para. 156 citing Pecore v. Pecore, 2007 SCC 17, [2007] 1 S.C.R. 795, at para. 4, which in turn quotes Csak v. Aumon (1990), 1990 CanLII 8070 (ON SC), 69 D.L.R. (4th) 567 (Ont. H.C.J.), at p. 570. [^8]: Canada (Attorney General) v. British Columbia Investment Management Corp., 2019 SCC 63, [2019] 4 SCR 559 at para. 156.