Court File and Parties
COURT FILE NO.: CV-21-662535
DATE: 20221216
ONTARIO SUPERIOR COURT OF JUSTICE
RE: KMH CARDIOLOGY CENTRES INCORPORATED, Applicant
-and-
LAMBARDAR INC., Respondent
BEFORE: FL Myers J
COUNSEL: David Shiller, for the Applicant
R. Seumas M. Woods and Alysha Li, for the Respondent
HEARD: December 4, 2022
ENDORSEMENT
The Application and Outcome
[1] The applicant applies for an order referring specific disputes under three commercial leases to an “independent professional consultant” for resolution by an expert and not as an arbitration as agreed by the parties in the leases.
[2] The respondent submits that the issues between the parties call for legal interpretation of the leases and is a job for the courts and not for an expert appointed by the parties.
[3] For the reasons that follow I grant the order as asked.
The Facts and the Three Disputes
[4] As this application turns on identical wording of clauses in each of three leases, few facts are necessary. I will just identify the parties and the nature of the disputes so as to inform the interpretation of the leases.
[5] Vijay Kanmar founded the applicant KMH. He built one of Canada’s largest providers of nuclear cardiology services. KMH services include nuclear medicine, cardiology, PET scans, and MRI diagnostic services.
[6] KMH operates in several location. Three of its locations are involved in this proceeding.
[7] The respondent Lambardar Inc. is owned by Mr. and Mrs. Kanmar. It owns and leases to KMH the three office properties that are the subject of this proceeding.
[8] Lambardar built a single-story head office for KMH on Hadwen Rd. in Mississauga. It has also leased to KMH two smaller offices on Avenue Road and Don Mills Road in Toronto.
[9] Some years ago, Mr. Kanmar sold KMH to its current owners. He has no remaining interest in KMH. The details of the transaction are not important except to note that it was a sophisticated transaction involving sophisticated professionals on all sides.
[10] The leases that are currently in issue for the three properties were negotiated and signed as part of that transaction. They represent the product of arms’ length negotiations among sophisticated and well-represented parties.
[11] Issues have arisen among the landlord and tenant concerning the proper calculation of operating costs for the 2017 through to 2020 fiscal years. Specifically: Is the area of the basements on Hadwen and Avenue Road included in the calculation of the gross leasable office area of the buildings? Is the landlord entitled to charge a 15% administration fee on taxes? And is the landlord entitled to charge for the services of its site supervisor provided through a separate corporation?
[12] These issues for four fiscal years have a cumulative total value of approximately $900,000. Of that total, the issue with the Hadwen basement is worth almost $700,000 alone. The Avenue Road basement is worth about $90,000. The administration fee on taxes is worth about $70,000. And the cost of site supervision is worth almost $50,000.
[13] The issue regarding the basements involves a question of whether to include the basement space in each building as part of the “gross leasable office space” of the building. If it is included, then the proportion of the building occupied by the tenant is decreased accordingly and, in the case of Hadwen, significantly.
[14] Hadwen has always been a single-tenant head office occupied by KMH. The basement is unfinished and may be unheated. Wires and utilities leading to KMH’s equipment on the first floor are exposed in the basement. The basement has no windows and minimal access by a single stairway. It is used largely for storage (although there is a debate as to which of the parties’ stuff is stored there). The tenant says that it had an option to rent the basement for 18 months and it did not exercise the option. The landlord has tried to lease the basement without success. The landlord may have now renovated the basement in years subsequent to the years in issue in this proceeding.
[15] Under the relevant terms of the Hadwen and Avenue Road leases, the issue is simply whether the basement space in each building is “gross leasable office space”. There are factual disagreements at both sites as to what use is, has been, or can be made of the basement and which of the landlord or tenant is using each.
[16] The issue on taxes requires a review of two lease terms. Taxes are defined in s. 2.03 (b) of the leases as follows:
"Taxes" means the aggregate of all taxes, rates, charges, levies and assessments payable by Landlord accruing in respect of the calendar year in which each Fiscal Year begins and imposed by any competent taxing or assessing authority upon or in respect of the Building, the Land and all improvements therein or thereon, plus a fifteen percent administration fee. [Emphasis added.]
[17] The tenant points to the definition of operating costs in s. 2.02 of the leases however:
“Operating Costs” means…without limitation:
(g) an administration fee of fifteen percent (15%) of Operating Costs in such Fiscal Year (excluding costs under this Section 2.02(g), Taxes and other taxes);
(h) Taxes (excluding the amounts payable by Tenant or other tenants in the Building pursuant to Section 2.08) or similar sections in the leases of those other tenants; [Emphasis added.]
[18] The tenant says that 2.02 (g) excludes the administration fee on taxes. Might that be because the definition of “Taxes” already includes a 15% administrative fee perhaps? The issue here, of course, is who should decide this tricky interpretive question, the court or an expert appointed by the parties.
[19] Finally, on the issue of site supervision, s. 2.03 (n) of the leases prevents the landlord from claiming as part of the operating costs:
(n) salary of any executive head office personnel of Landlord;
[20] The tenant says that charging a site supervisor through a separate corporation does not alter the fact that the landlord’s site supervisor is its own executive head office personnel. Therefore the tenant asserts that it should not be charged for the site supervisor as part of operating costs.
The Relevant Lease Terms
[21] As is typically the case, the leases require the landlord to estimate the tenant’s share of operating costs at the beginning of each year. The tenant then pays on a monthly basis one-twelfth of the total estimated operating costs allocated to it. After the year is over, the leases require the landlord to provide a written statement reconciling the actual costs incurred in the year against the initial estimate. The tenant must then make up any shortage or the landlord must repay any excess collected from the tenant.
[22] Section 4.7 (c) provides:
If Tenant disputes the accuracy of any Statement, Tenant shall nevertheless make payment in accordance with the Statement, pending resolution of the dispute, but, subject to Section 4.8, the disagreement shall be referred by Landlord for prompt decision to an independent professional consultant approved by the Tenant, acting reasonably, who is qualified by education and experience to make such decision and who shall be deemed to be acting as an expert and not an arbitrator. The consultant's signed determination shall be final and binding on both Landlord and Tenant. Any adjustment required to any previous payment made by Tenant or Landlord by reason of any such determination shall be made within fourteen (14) days thereof, and the party required to pay such adjustment shall bear all costs of the consultant, except that if the amount to be paid is three percent (3%) or less of the amount in dispute, Tenant shall pay all such costs. [Emphasis added.]
[23] The clause provides that disputes concerning the accuracy of the landlord’s reconciliation statement shall be referred to an independent professional consultant who is qualified by education and experience to make such decision. She is to decide as an expert and not as an arbitrator.
[24] It is important however that the appointment of an expert is “subject to Section 4.8”. Section 4.8 provides the tenant with a right to require the landlord to provide reasonable backup information for the operating costs claimed. If the tenant is dissatisfied with the backup, it has the right to have its accountant or auditor attend at the landlord’s office to conduct an audit of the operating costs. Section 4.8 provides:
4.8 Audit Right
Within one ninety (90) days of Landlord delivering the Statement, Tenant shall have the right, to request, in writing, reasonable back up information from the Landlord pertaining to the Operating Costs (the "Tenant's Notice"). If Tenant, acting reasonably and in good faith, is not satisfied with the information provided then Tenant shall have the option, at its sole expense and within sixty (60) days of Landlord providing response to Tenant's Notice, to audit the Operating Costs for the Statement year (the "Audit") on the following terms and conditions:
(a) such Audit shall be conducted in the Landlord's Toronto office, Monday to Friday, during the hours of 9:00 a.m. to 5:00 p.m.;
(b) Tenant agrees to contract with the Tenant's accountant/auditor in a manner other than on a commission basis or on a basis where compensation is based upon a percentage of the recoveries obtained;
(c) prior to the commencement of any audit Tenant and Tenant's accountant/auditor shall first sign a confidentiality agreement in a form required by Landlord acting reasonably;
(d) Tenant's accountant/auditor shall complete its audit within thirty (30) days of its commencement and issue its report to Landlord and Tenant within thirty (30) days after completion of the audit; and
(e) if Landlord or Tenant are unable to resolve any disagreements relating to the payment by Tenant of Tenant's Proportionate Share of Operating Costs within fifteen (15) days thereafter, then the matter shall be resolved pursuant to the Section 4.7(c).[Emphasis added.]
[25] The leases make clear in s. 4.8 (e) that if the tenant conducts an audit, any dispute remaining after the audit will then be resolved by the expert under s.4.7 (c).
[26] The landlord has refused to appoint an expert to promptly resolve the three disputes over the four fiscal years. It submits that the disputes are matters of lease interpretation for the court. They are not simple mathematical disputes concerning the “accuracy” of the landlord’s reconciliation statements.
[27] As a result of the delay in resolution of the issues, the tenant has paid some $900,000 more than it says it was properly required to pay.
The Role of an Expert as an Alternative Dispute Resolver
[28] The issue raised by the landlord involves the role of an “expert” appointed under a contract or lease to resolve disputes. The term “expert” in this context refers to someone who is not intended to be an arbitrator or a judge of the court.
[29] Arbitrators and judges are neutral officials who resolve disputes on evidence. The evidence is submitted pursuant to rules and established procedures. There can be more or less formality as the parties may agree or the law provides.
[30] Judges and arbitrators are not supposed to bring their own personal knowledge to bear on the facts. Rather, they conduct an adversarial hearing in which the parties arm them with the evidence they need to decide the issues joined by the parties. If special expertise is required to understand a technical or esoteric area, the parties will provide the arbitrator or judge with expert evidence to help him or her draw appropriate inferences that may exceed his or her knowledge.
[31] There are appeals available in court proceedings and there can be appeals provided in an arbitration.
[32] Experts, by contrast, are people appointed to solve a problem themselves based on their own knowledge and expertise. They do not necessarily hear any evidence or submissions from the parties. There can be as much or as little process as the parties agree upon. The expert is expected to decide the issues based on his or her own understanding of what is involved. He or she is an agreed expert in the field after all. There is no appeal.
[33] An expert decision is typically fast and inexpensive. Even if it takes longer that one hopes, it will virtually always be far more efficient and affordable than any form of arbitration or litigation.
[34] At para. 8 of Applied Industrial Technologies, LP v Sirois, 2018 ABQB 818 Eamon J. quoted some of the attributes of an expert determination:
Then Lord Justice Moore-Bick of the England and Wales Court of Appeal, in the Preface to Kendall, Freedman, and Farrell, Expert Determination (London: Sweet & Maxwell/Thomson Reuters; 5th ed, 2015) observed at pp v-vi:
The use of an independent third party to determine a question that calls for the exercise of skilled judgment has traditionally been seen as a means of avoiding disputes, but, as the authors point out, there is a growing recognition that expert determination is a valuable means of resolving disputes that have already arisen. Some of its advantages, in particular, speed, privacy and the ability to choose the decision-maker, are shared with arbitration, but there are many differences to which the authors draw attention. The distinction between arbitration and expert determination is of considerable significance, not least because, unlike arbitration, expert determination does not have the benefit of a statutory framework, but, depending on the language the parties have used, it is not always easy to decide on which side of the line the parties’ chosen procedure falls….
[35] The landlord submits that the parties simply could not have intended to clothe an expert with authority to interpret their leases and to make decisions of mixed fact and law or decisions of law. Surely, it submits, such questions require procedural fairness, submissions, and a neutral trier. The landlord relies on Guttman et al v. Dube et al, 2013 ONSC 6284 and the following statement by Newbould J.:
So far as wanting a third accountant to deal with this issue, it is entirely outside the purview of an accountant. It is a legal issue.
[36] The landlord submits that questions of “accuracy” of the operating costs are limited to simple, technical points like adding up a column of numbers drawn from invoices.
[37] The landlord’s position is altogether too parochial in my view. It cannot be assumed that sensible parties must prefer expensive legal trappings to resolve all their problems. In each case one must construe the appointment language in the context of the agreement as a whole to discern the breadth and scope of the parties’ intentions.
[38] Where parties appoint a person or firm with specific expertise, such as an accountant or a quantity surveyor, to name but two common classes of expert appointments, it is fair to draw some inference about the scope of the problems assigned to the experts from their defined expertise as Newbould J. did in Guttman.
[39] The fact that some questions of interpretation or even questions of law may be involved however is not a bar to the use of an expert. As Eamon J. noted in Applied Industrial Technologies:
[128] Contract law allows for the same flexibility in designing expert determination. I respectfully adopt the words of Moore-Bick LJ in Premier Telecom at para 9:
... Only by construing the contract can one identify the matters that were referred for his decision, the meaning and effect of any special instructions and the extent to which his decisions on questions of law or mixed fact and law were intended to bind the parties.
To like effect, see also: Expert Determination at para 11.6 - 8.
[40] In this case several attributes of the contract lead to my conclusion that the parties intended the disputes in issue here to go to an expert.
[41] First, the expert mechanism is limited specifically to the determination of operating costs in the context of these commercial leases. That is a field on which much expertise exists. One need only consider retaining a senior person from a major commercial landlord or tenant firm, or specialized accountants, or real estate brokers, and other real estate professionals. Whereas a court may require expert evidence to understand what is meant in the trade by the phrase “gross leasable office space” or whether a site supervisor is usually an expense of the landlord’s head office or one that is passed on to tenants, any number of industry people would know the answers off the tops of their heads.
[42] Why should the parties necessarily be presumed to want to have lawyers painstakingly parse their words seeking a supposed objectively inferred mutual intention instead of just asking someone who knows what is done by reasonable, experienced, knowledgeable, fair people in the business?
[43] Second, this clause does not appoint an accountant or a person with any specifically defined expertise. If all that the person was to do was to add up a column of numbers, as submitted by Mr. Woods, an elementary school math teacher or a high school student could have been specified. Here instead, the parties agreed that whoever is to be appointed must be “qualified by education and experience to make such decision”. This suggests that a broader swath of disputes are expected and that the parties agree to pick an appropriate expert for each “such decision” required.
[44] Third, I agree with both parties that the word “accuracy” denotes correctness or meeting a set standard. While that can be mathematical correctness, accuracy is not necessarily so limited.
[45] Fourth, before the parties get to appointing an expert, the tenant has the unilateral right to call for documentary backup and then to audit. Anyone can add up the costs in the backup documents produced. An auditor is sent in where production alone does not yield a satisfactory outcome to the tenant acting in good faith. An audit is a more searching investigation. Mr. Woods agrees that auditors are entitled to make conclusions involving interpretation that arise in the scope of their duties generally.
[46] If the parties are not content with the outcome of an audit, it can hardly be thought that the dispute that then goes to the expert is just adding up a simple column of numbers. I think it fair to assume that the tenant’s accountant or auditor will be competent to add the numbers. Section 4.8 (e) provides for the expert to then “resolve any disagreements relating to the payment by Tenant of Tenant's Proportionate Share of Operating Costs” remaining after disclosure of documents and audit. That cannot be simply adding up a column of numbers. It will necessarily have to involve some judgments or interpretations made by each side as to why their column of numbers has the correct or correctly calculated inputs.
[47] Mr. Woods submits that with $900,000 in issue and $700,000 turning on just one point, the parties should be assumed to want litigation over an unappealable expert resolution without any mandatory procedural protections. But the parties are sophisticated. They knew the amounts of money historically spent each year on operating costs. They presumably could judge the materiality of the amounts in issue. They could also appreciate the likely costs of the various dispute resolution mechanisms and any other relevant factors. The landlord was previously the operator of the sites. The new owner of the tenant must have done its due diligence with all the sophisticated professionals help guiding it in the transactions. Yet the parties did not put a dollar limit or any other kind of cut-off in s. 4.7 (c).
[48] The process calls for a “prompt” decision. That means that formal processes are eschewed and civil litigation in court is off the table.
[49] In my view, it is completely within the domain of reasonable commercial parties to take a topic that is well-understood in their world, like determining a proper and fair allocation of operating costs, and to decide to leave the resolution of disputes to an expert in the field. The civil justice system is slow and expensive in Ontario. Practical business people may prefer prompt and affordable decisions especially to practical problems. If the issues are especially legal, perhaps they will appoint a real estate lawyer as their expert qualified by education and experience. Here, while the questions all involve interpretation, understanding how to deal with basement space in the deciding allocation of expenses across all “gross leasable office space” and considering whether the landlord’s site supervisors are part of its executive head office complement, are much more practical questions than legal.
[50] Not all legal questions require Solomonic wisdom. Often, they just need someone authorized to decide. So while perhaps the tax question is closer to one of pure interpretation, it is simple. I do not believe the tenant’s lawyer would provide an opinion that differs from the view of virtually any experienced person of business who looks at the lease terms set out above.
[51] I cannot read into s. 4.7 (c) the limitation submitted by the landlord, that it was only intended to apply to simple mechanical math problems and that all issues involving interpretation of the leases must be resolved in court. Nothing in the leases say that and the wording discussed above, especially the expert’s variable qualifications and the tenant’s right to conduct an audit prior to calling in the expert, suggest that a much broader and more complicated scope of disputes are expected to be subject to expert resolution.
[52] In my view, the three disputes in issue are all disputes as to the accuracy of the landlord’s operating costs reconciliation statement as contemplated by s. 4.7 (c). Therefore the landlord is obliged to appoint an expert approved by the tenant to resolve the disputes promptly.
[53] Order to go declaring that the landlord is required to appoint an independent professional consultant under clause 4.7 (c) of the three leases in issue to deal with the three remaining issues identified herein. I make no order on the merits of the issues. Neither do I impose a timeframe or any other procedural steps. The parties have an agreement that governs their required actions.
[54] Costs should follow the event. But I agree with Mr. Woods that the process was lengthened and extra work was required due at least in part to delays by the landlord. At minimum, the landlord is entitled to costs of the first hearing. I have reviewed the parties’ Costs Outlines. The hours and rates claimed are reasonable and within market. In my view the fair and reasonable amount of fees and disbursements that the landlord should pay to the tenant net of costs thrown away is $50,000 all-in.
FL Myers J
Date: December 16, 2022