Court File and Parties

COURT FILE NO.: CV-19-1104 DATE: 2023-08-01

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

4391 King St. Inc. Plaintiff – and – Brian Alger Defendant

COUNSEL: L. Szymura and J. Sabo, for the Plaintiff Appearing on his own behalf

HEARD: November 14, 15, 16, and 17, 2022

The Honourable Justice SMITH

Reasons for Judgment

Introduction

[1] The defendant was a partner in a company which operated – under the name Mother’s Pizza Parlor and Spaghetti House – a small chain of restaurants (“Mother’s” or the “tenant”). One of the restaurants was in a stand-alone building (the “property” or the “restaurant”) which is part of a shopping plaza at 4391 King St. in Kitchener, Ontario (the “plaza”).

[2] In 2014, Mother’s entered into a 10-year lease (the “lease”) with the then owner (the “original landlord”) of the plaza. The term of the lease was from May 1, 2014, to April 30, 2024. As part of the arrangement with the original landlord, the defendant (who was at all material times an officer and director of Mother’s) signed an indemnity agreement by which he agreed to be personally responsible for all obligations of the tenant for the fourth, fifth and sixth years of the lease, that is, from May 1, 2017 to April 30, 2019. [1]

[3] In 2015, the plaza was purchased by the plaintiff corporation, and it assumed the rights and obligations of the original landlord under the lease.

[4] In 2017 and 2018 the tenant was not in good financial health and began to experience difficulty in making its rent payments to the plaintiff. Eventually it defaulted on the lease in November 2018, making only a partial payment of rent in that month. The tenant made no payment of rent during the month of December 2018 and only partial payment in January 2019. On January 21, 2019, the tenant advised the plaintiff that it would be closing its Kitchener restaurant and, on February 8, 2019, it filed an assignment in bankruptcy.

[5] The plaintiff now seeks to recover unpaid rent and other damages from the defendant pursuant to the terms of the indemnity agreement he signed.

[6] The defendant acknowledges that he signed the indemnity agreement but says that the failure of Mother’s was in part caused by the failure of the plaintiff to attend to plumbing and pest issues at the property, that he is not responsible for some of the costs now claimed by the plaintiff, and that equipment and furnishings of substantial value were left behind at the restaurant when it closed. The defendant says that if he is liable for any amount owing to the plaintiff, that amount should set off against the damages incurred because of the plaintiff’s failure to correct the plumbing and pest issues, and against the value of the equipment and furniture left behind.

[7] For the following reasons, I have found that the plaintiff has proven on a balance of probabilities that it is entitled to most of the damages it has claimed and that the defendant is not entitled to any set off.

The lease and the indemnity agreement

[8] As I have said, the lease covered the 10-year period running from May 1, 2014 to April 30, 2024. The plaintiff assumed the position of the original landlord on the lease on December 22, 2015. The lease is a net lease and it contains the following provision (art. 2.01) under the heading “Intent of Lease:”

This is a completely carefree lease and it is the mutual intention of the parties hereto that the rentals herein provided to be paid shall be net to Landlord and clear of all taxes (except Landlord's income taxes) cost and charges arising from or relating to the Leased Premises and that Tenant shall bear all costs of and be responsible for all matters in relation to the operation, maintenance and repair of the Leased Premises save as otherwise provided herein and shall pay all charges, impositions· and expenses of every nature and kind relating to the Leased Premises together with the Tenant’s share of common area maintenance charges (as hereinafter defined) and Tenant's covenants with Landlord accordingly [emphasis added].

[9] The lease required the payment of a deposit for first and last months’ rent and set the monthly rent on a graduated scale as follows (exclusive of HST): $10,985 per month for the first three years, $11,830 per month for following four years, and $12,675 for the final three years. The tenant was also responsible for “additional rent” to be paid monthly for its share of the cost to the landlord of maintaining and operating the plaza. Rent (including additional rent) was to be paid on the first day of each month. Overdue rent was to bear interest at a rate of prime plus 5%.

[10] Pursuant to the indemnity agreement, which appears as an appendix to the lease, the defendant provided a broad personal indemnification and took on all the obligations of the tenant under the lease for the period May 1, 2017 to April 30, 2019. Among other broadly worded provisions, the indemnification includes the following provision near its conclusion:

15. Indemnitor shall, without limiting the generality of the foregoing, be bound by this Indemnity in the same manner as if the Indemnitor were Tenant named in the Lease.

[11] I will refer to other key provisions of the lease agreement where appropriate under the headings which follow.

The plaintiff’s claims

[12] The plaintiff makes claims for damages under seven headings, as follows (all figures inclusive of HST):

(1) Rent and additional rent for the period November 1, 2018 to April 30, 2019 in the amount of $112,691.17;

(2) Real estate commission fees ($42,968.25) incurred in the effort find a new tenant for the property;

(3) Utilities costs totalling $3,634.00;

(4) Cleaning costs of $366.97;

(5) Costs incurred repairing and replacing the HVAC unit at the property, totalling $15,776.00;

(6) Legal fees ($497.50) incurred addressing the tenant’s bankruptcy; and

(7) An administrative fee provided for in the lease of 15% of all the defendants damages except for rent and additional rent.

[13] I will address each claim in turn.

Rent and additional rent

[14] The evidence established beyond doubt that, apart from two partial payments, the tenant failed to pay its rent during the period claimed by the plaintiff – November 1, 2018 to April 30, 2019. The evidence further establishes that the base rent owing for each of those six months was $11,830 per month plus HST. Additional rent for the months of November and December 2018 was set at $4,647.50 per month plus HST. For the four months in question in 2019, additional rent was fixed at $4,812.28 per month plus HST.

[15] The partial payments to which I have referred were made in November 2018 ($9,422.00) and January 2019 ($5,346.88) but otherwise, as I have said, rent went unpaid, although what is owing to the plaintiff is also offset by the deposit paid by the tenant. The plaintiff has set out the calculation of the rent owed by the tenant in tables which were marked as exhibits A and B during argument. Subject to submissions respecting additional rent to which I will return below, the plaintiff’s calculations, including the interest owed, are not challenged by the defendant. The total amount owing, with interest calculated on the contractually fixed rate (prime plus 5%) is $112,691.92.

[16] The defendant’s submission with respect to the additional rent claimed by the defendant relates to the additional rent claimed for the four months in 2019 ($4,812.28 per month + HST). The lease provided that the landlord could estimate the monthly additional rent, bill on the basis of that estimate, and at the end of each year, when the actual costs were known, adjust the additional rent to reflect those actual costs. In the new year, the tenant would be sent a reconciliation showing the difference between the estimated and actual additional rent. The reconciliation for 2018 showed that estimate for Mother’s share of the plaintiff’s costs was $7,791.58 less than the actual cost. In other words, Mother’s owed the plaintiff that extra amount.

[17] However, there is no evidence about whether the estimated additional rent for 2019 had to be reconciled, or by how much, or whether reconciliation required the tenant to pay more, on the one hand, or to be compensated for over-payment, on the other. From this lacuna in the evidence, the defendant argues that the plaintiff cannot show that the amount claimed for additional rent in 2019 is not too high.

[18] I am satisfied that the plaintiff has shown on a balance of probabilities that the additional rent for 2019 was at least the amount claimed by the plaintiff. The evidence establishes that both the estimated and actual additional rent increased each year and that the estimate for 2019 was less than the actual additional rent for 2018. Moreover, as counsel argues, no reconciliation was provided to Mother’s for the 2019 additional rent because by the time that that reconciliation was to be delivered – early 2020 – Mother’s had ceased to be a tenant for over a year. The terms of the contract requiring the delivery of a reconciliation “to the Tenant” and the adjustment of additional rent no longer applied.

[19] But the defendant also argues that he should not be liable for either the rent or additional rent claimed by the plaintiff because the plaintiff’s own negligence in connection with plumbing and pest issues was the cause of the restaurant’s failure and the tenant’s consequent inability to meet its rent obligations.

[20] The defendant says that the restaurant had plumbing issues beginning in April of 2018. It seemed that the dish-washing area always had a layer of water on it, and this coincided with an uptick in insects found in the kitchen. According to the defendant, the exterminator that the tenant hired formed the view that there was an insect infestation in the walls of the restaurant and recommended opening up interior walls in the restaurant to find the source of leaks and eliminate any insect infestation. Before that work could be done, in October 2018, Region of Waterloo Public Health (“RWPH”) inspected the restaurant, found various deficiencies, including pests, and ordered the restaurant to close until the deficiencies were remedied. Remedial work was done, and the restaurant did re-open, but it could not recover from the forced closing and the reputational damage it suffered because of the findings of the RWPH inspector (which were reported in the local press).

[21] There are several difficulties with the defendant’s position on this point. First, there is no evidence that the plaintiff was ever made aware of the plumbing and pest issues prior to the closing down of the restaurant in October 2018. As the defendant conceded in cross-examination, none of the emails in evidence refers to either problem and the defendant testified that he was reticent about raising the issue because they were behind in their rent (which may suggest that the plumbing issues were not the cause of the failure to pay rent). In this regard, Shawn Hopps, the manager of the plaza and one of its owners, testified that the tenant never raised any issue with plumbing at the restaurant – although he did recall being told of a problem with pests, but that was after the restaurant had been shut down by the RWPH.

[22] Second, the defendant conceded in cross-examination that the plumbing in the restaurant was “up to code” when the tenant took over the premises, that only Mother’s used the plumbing, and that the evidence showed that at least one of the problems was that the drains were plugged with grease – which was not the responsibility of the landlord. While the lease does require the landlord to make repairs to the plumbing system (art. 10.04), it also provides that the plumbing fixtures shall not be used for any purpose other than that for which they were designed, that “no foreign substance” shall be introduced to the plumbing and that the tenant will bear the expense of attending to “any breakage, stoppage or damage” it has caused (art. 10.09). Similarly, article 10.11 provides that damage caused by the tenant’s own negligence will be repaired at the expense of the tenant. The lease also requires the tenant to keep the premises “at all times” in a “clean and wholesome condition” (art. 10.08).

[23] Third, with respect to pests – and the related issue of interior walls – the lease provides that the cost of pest extermination was to be borne by the tenant (art. 10.15) and that responsibility for maintaining and repairing interior walls fell to the tenant (art. 10.04).

[24] Fourth, the closing of the restaurant by RWPH was the result of Mother’s multiple failures relating to cleanliness and food safety, none of which was caused by the landlord nor were its responsibility to correct. To take just one example, the health inspector noted that one of the employees used a dirty toilet bowl brush to clean a sink in which dishes were cleaned.

[25] Fifth, the evidence also supports the conclusion that Mother’s was losing money before any problem with pests or plumbing was identified. It suffered significant net losses in both 2017 and 2018, and was unable to pay its rent beginning in November 2018. While it seems clear that the fact that Mother’s was shut down temporarily by WRPH was a serious blow to the fortunes of the tenant, it is also clear that Mother’s was already in financial trouble when that blow was delivered. I note also that the defendant was part of the management of two other Mother’s restaurants which were sold in 2018 because they were not profitable, and a third which was closed because it too was unprofitable.

[26] In summary, I accept the evidence of Mr. Hopps that he was not made aware by the tenant (or anyone else) of the problems the restaurant was experiencing with plumbing and pests before the restaurant was shut down by the Health Unit. Accordingly, even if the correction of these problems had been the responsibility of the landlord, it could not have attended to them since it did not know about them until it was too late. However, the lease supports the conclusion that these issues were not the responsibility of the landlord, especially since the evidence supports the conclusion that the tenant did not keep the premises in a “clean and wholesome condition.” Indeed, Mother’s failed not because the landlord failed to live up to its obligations, it failed because the restaurant was not kept clean and because it was already losing money.

[27] Accordingly, I do not accept the defendant’s argument that any claim for rent and additional rent made by the plaintiff should be set off against damages caused by the plaintiff’s failure to correct the plumbing and pest issues. This head of damages has been proven by the plaintiff on a balance of probabilities.

Real estate commission

[28] The lease provided that if the tenant failed to pay its rent the lease would be terminated and, among other remedies, the landlord was entitled to recoup from the tenant “reasonable expenses … attributable to the termination” (art. 15.01). Relying on this provision, the plaintiff claims real estate commission fees of $42,968.25 it incurred when it secured a new tenant for the property.

[29] The defendant has admitted that those fees were incurred by the plaintiff in finding a new tenant after Mother’s left the property but argues that article 15.01 does not specifically mention real estate fees as a recoverable expense and, therefore, no such expense should be recovered by the plaintiff.

[30] I disagree with the defendant. This expense was clearly an expense attributable to the termination of the lease and was reasonably incurred in the plaintiff’s effort to mitigate its losses. Although I think that this conclusion is fully sustainable on a plain reading of the lease, I note that it is also supported by prior authority (see 1714959 Ontario Inc. v. Goldenshtein, 2017 ONSC 6805, at paras. 10, 23; Ivest Properties Inc. v. Philthy McNasty’s Restaurants Inc., 2011 ONSC 4487, at para. 20 and Schedule A; Saltzman Family Holdings Ltd. v. Duncan-Cosburn, [2007] O.J. No. 4957 (S.C.J.), at paras. 31 – 32).

[31] The plaintiff succeeds in its claim for the real estate fees incurred in finding a new tenant.

Utilities

[32] The tenant failed to pay the utilities costs attributable to it during the period November 2018 to April 2019. The defendant has admitted that those unpaid costs totalled $3,634.00 and that that amount was owed to the plaintiff by the tenant. Pursuant to the indemnity agreement, the defendant is liable for this amount. The plaintiff’s claim in this regard succeeds.

Cleaning

[33] The lease provides that the tenant was to leave the premises at the time of termination of the tenancy “in a clean and tidy condition” (art. 10.08).

[34] The plaintiff says that the restaurant was not clean when Mother’s left and that cleaning costs were therefore incurred in the amount of $366.97. The defendant says that the restaurant was cleaned before the tenant departed and that this expense is therefore not reasonably claimed by the plaintiff.

[35] I accept that the defendant made some effort to clean the restaurant before Mother’s left, but I also accept Mr. Hopps’ clear evidence that the restaurant was in poor shape and that there was cleaning still to be done when the plaintiff entered the premises after the departure of Mother’s. The amount claimed is modest and perfectly reasonable and is the responsibility of the defendant pursuant to the indemnity agreement. This claim succeeds.

HVAC system

[36] The plaintiff says that the tenant failed to maintain the restaurant’s HVAC system and that the cost of repairing ($1,199.81) and replacing ($14,577.00) it therefore falls to the defendant.

[37] The lease provided that the tenant was responsible, at its own expense, for the operation, maintenance and regulation of the HVAC system at the property (art. 7.02).

[38] The plaintiff had routine maintenance done to the property’s HVAC unit after the departure of Mother’s during which the unit was found to be in poor condition. It seems to me that the repairs executed are properly described as part of the maintenance of the unit and would properly be attributed to the tenant (which should have been maintaining the unit during its tenancy) if there was evidence that the problems with the unit could be attributed to the tenancy of the tenant. In this case, however, the inspection of the unit was conducted 5 months after Mother’s had left and the repairs were conducted a month after that. I heard no evidence, expert of otherwise, that allows me to conclude that the problems with the unit were attributable to Mother’s use of the unit and not to its use after Mother’s left.

[39] With respect to the replacement of the unit after the repairs were completed, I observe that the lease provides that it is the landlord’s responsibility – “whenever reasonably required” – to “replace” the HVAC system (art. 10.04). The plaintiff can only succeed on this front, it seems to me, if it can establish that the replacement of the HVAC unit was required because of the tenant’s failure to maintain it and not because the unit was of such an age that the plaintiff was “reasonably required” to replace it. The evidence before me does not allow me to determine that the tenant failed to maintain the unit, or the age of the unit, or that its replacement was not reasonably required. I conclude that the plaintiff has not made out is claims in connection with the HVAC unit.

Legal fees

[40] The plaintiff claims as an expense under article 15.01 (see para. 28, above) legal fees ($497.50) it incurred addressing issues relating to the bankruptcy of Mother’s. The defendant admits that these fees were incurred and they would not have been incurred but for the tenant’s bankruptcy. They are, therefore, an expense attributable to the termination of the lease. By virtue of the indemnification agreement, the defendant is liable for this amount.

Administration fee

[41] The defendant has admitted that pursuant to the terms of the lease the plaintiff is entitled to collect from the tenant an administration fee of 15% of the damages caused by the landlord (art. 15.01(ii)). The defendant is liable for this fee pursuant to the indemnification agreement. The fee applies to all the damages I have found above except those relating to rent and additional rent.

[42] Accordingly, the fee may be calculated as follows:

Real estate commission: $42,968.25 Utilities costs: $ 3,634.00 Cleaning costs: $ 366.97 Legal fees: $ 497.50 Relevant damages: $47,466.72 Admin. fee ($47,466.72 x 15%): $ 7,120.00

[43] The defendant is liable for the administration fee in the amount of $7,120.00.

Assets left behind

[44] I have already found that the defendant is not entitled to set off in connection with the plumbing and pest issues. I turn now to whether any of the damages for which I have found him to be liable should be set off against the value of any assets left behind by Mother’s at the property.

[45] I am unable to accept the defendant’s position in this regard. First, there is entirely unsatisfactory evidence about the articles that the defendant says were left behind or what value could be attributed to any such articles. I note that Mr. Hopps testified that what was left behind had little value and that none of it was sold.

[46] Irrespective of these considerations, however, the lease provides that:

• any fixtures installed by the tenant may be removed by the tenant “if the Tenant has paid the rent and additional rent” (art. 10.03(d));
• fixtures installed by the tenant become the property of the landlord upon the termination of the lease (art. 10.07(c));
• upon termination of the lease the landlord is not liable for any loss or damage to the tenant’s goods, chattels, fixtures and leasehold improvements (art. 15.01(b)(ii));
• any goods, chattels, fixtures, inventory, equipment and other property left at the property will be deemed to have been abandoned by the tenant after seven days and may be dealt with by the landlord “in any manner whatsoever without compensation to the Tenant” (art. 15.08).

[47] With respect to article 15.08, I am satisfied that neither the tenant nor the defendant took any step – either within seven days of the termination of the lease or indeed at all – to signal in any way that the items left behind at the restaurant were not being abandoned. Reading the provisions of the lease together, I conclude that the defendant is not entitled to any set off for the value of any items left behind at the property after Mother’s ceased to operate. Indeed, the lease allowed the landlord to deal with such items “in any manner whatsoever without compensation to the Tenant.”

Conclusion and costs

[48] In summary, then, the defendant is liable in damages to the plaintiff for rent, additional rent, and interest related thereto in the amount of $112,691.92. He is further liable for other damages in the amount of $47,466.72, and for the plaintiff’s administration fee in the amount of $7,120.00. In total, the defendant will pay damages to the plaintiff in the amount of $167,278.64. He is not entitled to any set off.

[49] Pre-and post-judgment interest on the damages for rent and additional rent will be at the contractual rate of 5% plus prime from the date of the plaintiff’s calculation of the rent, additional rent and interest owing (November 14, 2022). Pre- and post-judgment interest on all other damages will be at the rates set pursuant to the Courts of Justice Act, R.S.O. 1990, c. C.43.

[50] If the parties cannot agree on costs, which I encourage them to attempt to do, the plaintiff may serve and file brief written costs submissions within 10 days of the date of this judgment. The defendant may serve and file brief responding costs submissions within seven days of receipt of the plaintiff’s costs submissions. The plaintiff may serve and file reply submissions, if any, within three days of the receipt of the defendant’s submissions.

I.R. Smith J

Released: August 1, 2023

COURT FILE NO.: CV-19-1104 DATE: 2023-08-01 ONTARIO SUPERIOR COURT OF JUSTICE 4391 King St. Inc. Plaintiff – and – Brian Alger Defendant REASONS FOR JUDGMENT I.S. Released: August 1, 2023

Footnote

[1] Another partner in the business provided an indemnity agreement covering the first three years of the lease.