Court File and Parties
Court File No.: CV-23-91818 Date: 2023/10/10 Superior Court of Justice - Ontario
Re: 1000446500 Ontario Inc., Applicant And: Direct Motor Company Ltd., Respondent
Before: Regional Senior Justice C. MacLeod
Counsel: R. Aaron Rubinoff and Jessica Barrow, for the Applicant (Landlord) Anne M. Tardiff and Daniel Chomski, for the Respondent (Tenant)
Heard: October 4, 2023
Decision and Reasons
[1] The issue before the court is the right of the Applicant landlord to terminate a commercial lease. The lease was originally signed in 1994 and extended and renewed on various occasions thereafter. Previous iterations of the lease contained a right for the landlord to obtain early termination of the lease in certain circumstances during certain windows of time. That provision is not articulated in the most recent “Lease Amendment and Extension Agreement”, signed on September 30, 2016. The parties disagree about whether the right of early termination continues to apply.
[2] The landlord’s right of early termination was a limited right which applied only during the second renewal term of the original lease and during the renewal term of the previous lease extension. Then it only applied if the tenant’s right of first refusal was triggered and the tenant declined to purchase the property. In that case, the landlord was given the right to terminate the lease on one year’s notice.
[3] The current term runs until August 1, 2027. The landlord received an offer to purchase in January of this year and pursuant to the right of first refusal, notified the tenant. When the tenant advised it would not be exercising its right of first refusal, the former landlord sold the property and the new landlord purported to give one year’s notice. The tenant resists this and has indicated its intention to occupy the property until the termination of the lease.
[4] The narrow question before the court is whether the tenant must vacate the property in March of 2024 (pursuant to the notice) or may remain in occupation until the termination of the lease in July of 2027 (if the notice is invalid). For the reasons that follow, I find that the landlord is unable to demonstrate it has a right of early termination during the current term. As a consequence, the tenant need not vacate the property in obedience to the purported notice and is entitled to remain in occupation until the end of the lease term.
The Application and the Evidence
[5] This is an Application under Rule 14.05 (3) (d) of the Courts of Justice Act to determine rights that depend on the interpretation of a “contract or other instrument”. It is precisely the kind of issue where the focused and efficient adjudication contemplated by the application rule is most appropriate. There are no facts in dispute and no credibility issues. There is one affidavit from each party and there were no cross examinations. The evidence consists of the documents and the leasing history and very little else.
[6] One of the reasons this is possible is because the parties to this lease were scrupulous in documenting their agreement when executing, amending, extending and renewing the lease. This is not a case in which there are gaps in the record or undocumented side agreements. Neither party seeks to rely upon extraneous evidence, the history of negotiations, or expert opinions about industry standards. The issue is purely a question of the meaning to be ascribed to the plain words of the lease documents.
[7] I was referred to jurisprudence summarizing the modern Canadian law of contractual interpretation. Many of those decisions are concerned with the proper use of extraneous evidence about context and surrounding circumstances. Ontario First Nations (2008) Limited Partnership v. Ontario Lottery and Gaming Corporation, 2021 ONCA 592, at para 46, City of Ottawa v. ClubLink Corporation ULC, 2021 ONCA 847, at para. 54, J.R. Lawn Maintenance & Snow Removal Inc. v. Paszkiewicz, 2023 ONSC 3406, at paras. 40 & 41 are examples. That is frequently a live issue, but in this case, I have no such evidence to be concerned about. The only evidence of context is the history of the lease renewals, the use of the land and the documents themselves.
[8] In a recent decision, this court held that “the rules of interpretation for leases are the same as for other contracts”. The court defined the task as “to determine the objective mutual intention of the parties when they entered into the lease, as reflected in the “ordinary meaning” of the words used in the material provisions, read within the context of the lease as a whole.” Quantrix Plastics Inc. v. 2818881 Ontario Inc., 2023 ONSC 3721, at para. 20. That is precisely the task in the case at bar. Everything turns on the meaning of the phrase “the right to terminate this Lease during the renewal term only, prior to the expiry date thereof”.
Background and the Terms of the Lease
[9] By way of background, the property in question (“the leased property”) is located on Hunt Club Road in the City of Ottawa and is adjacent to land at 2565 Bank Street, where the Respondent (“the tenant”) has operated a car dealership since 1987. The leased property was owned by Luigi and Guiseppina Cesaratto. In 1994, the Cesarattos agreed to lease the property to the Applicant but to give the Applicant a right of first refusal if the Cesarattos at any time wished to sell the property and received an offer to purchase.
[10] The original lease, signed in June of 1994, was a three-year lease with the possibility of two five-year extensions. Paragraph 2.3 reads as follows:
2.3 Renewal. Provided this Lease is not terminated pursuant to any of the provisions hereof, whether the same be for default, the breaking of any covenant or otherwise, the Tenant shall have the option of renewing this Lease for two (2) successive and consecutive periods of five (5) years each, from and after the expiration of the initial term hereof. Each such option shall be exercised by the Tenant by forwarding written notice to the Landlord at least one hundred and eighty (180) days prior to the expiration of the initial term or any successive renewal term, as the case may be, and shall be upon the same terms and conditions as herein contained, including all options to purchase or lease and rights of first refusal, if any, save and except that there shall be no further right of renewal beyond the last of such successive terms and that the Minimum Rent during each renewal term shall be the following: ...
[11] The lease contained a right for the tenant to terminate it on six months notice, contained a right of first refusal for the tenant to purchase the property and, in very specific language, gave the landlord a limited right to terminate the lease on one year’s notice. Those provisions were interlinked and read as follows:
15.1 Early Termination by Tenant. Notwithstanding any other provision herein contained, the Tenant shall have the right to terminate this Lease prior to the expiry date of the Term or any renewal or extension hereof, by delivering a written notice thereof to the Landlord at least six (6) months prior to the effective date of such termination.
15.2 Right of First Refusal to Purchase Land and Building. The Landlord hereby grants to the Tenant the right of first refusal to purchase the Lands and/or the lands described in Schedule "D" (hereafter collectively called the "Option Lands") together with all structures, improvements and equipment thereon. Upon receipt by the Landlord of a bona fide offer from a third party to purchase any part of or all of the Option Lands, which offer the Landlord is willing to accept, and each time any such offer is received, the Landlord shall immediately notify the Tenant in writing of the full details of such offer, including the name and address of any offeror and shall provide a copy of such offer to the Tenant, whereupon the Tenant shall have thirty (30) days after receipt of such notice in which to elect to exercise the Tenant's prior right to purchase the Option Lands on the terms of the offer. If the Tenant elects not to purchase the Option Lands, the Landlord may sell the Option Lands or such part thereof as is included in the offer, pursuant to the terms of such offer. If, however, a sale is not completed on any such offer, then this right of first refusal shall continue in full force and effect. Further, if a sale is completed for part of the Option Lands, then this right of first refusal shall continue in full force and effect with respect to the balance of the Option Lands. The Landlord shall not enter into a contract for the sale of all or any part of the Option Lands without first granting to the Tenant for a period of thirty (30) days a prior right to acquire same at the price and under the terms and conditions that the Landlord is willing to accept from third parties.
15.3 Early Termination by Landlord. Notwithstanding any other provision herein, the Landlord shall have the right to terminate this Lease during the second renewal term only , prior to the expiry date thereof, if circumstances have given rise to the exercise of the option to purchase set forth in section 15.2 hereof, and the Tenant has failed to exercise same; provided however that the Landlord shall have first given the Tenant one (1) year's prior written notice thereof, and this Lease shall then expire one year from the date such notice is received by the Tenant, or earlier if the second renewal term ends prior to the expiry of such notice period.
[12] The balance the parties appear to have struck in negotiating this lease is as follows. The tenant is given a right of early termination and a right of first refusal to purchase the property throughout the term of the lease. The landlord is given a right to terminate the lease if the landlord receives an offer to purchase and the tenant declines to exercise its right to purchase, but this right of early termination can only be exercised in the last five years of the term assuming the tenant exercises both rights to continue the lease.
[13] For purposes of this decision nothing turns on the distinction between a lease extension and a lease renewal found in Black’s Law Dictionary, Tenth Edition, pp. 703 & 1488 where an “extension” is defined as a continuation of the same contract and a “renewal” is defined as the re-creation of a legal relationship or the replacement of an old contract with a new one. To avoid confusion, however, it is important to note that the parties use the term “renewal” for the extension of the original three-year term. As mentioned, the original lease was for a three-year term and at the option of the tenant the term could be “renewed” for two additional five-year terms. Those additional five-year periods are referred to as “renewal terms” and it is only during the “second renewal term” that the landlord gains the conditional right of early termination.
[14] The tenant took advantage of both renewal rights. The lease ran from 1994 to 1997. The first renewal term ran from 1997 to 2002. The second renewal term ran from 2002 to 2007. Nothing occurred to trigger any right of first refusal or any right of early termination.
[15] In 2006, the parties entered into a new agreement. By this date, Luigi Cesaratto was deceased and the land had passed to the surviving owner. This was an agreement to renew the lease for an additional five to ten years with certain amendments. The “Lease Amending and Extension Agreement” provided that the term of the lease was extended by a further five years and the tenant was given another right of renewal for an additional five years after that.
[16] The agreement contained the following language:
The term of the lease dated January 15, 1994 is hereby extended for the period of five (5) years from August 1 st , 2007 to July 31, 2012 (the “extended term”) and the Tenant shall have the option of renewing the extended term of the Lease for one (1) additional five (5) year term after the expiration of the extended term. Such option shall be exercised by the Tenant by forwarding written notice to the Landlord at least 180 days prior to the expiration of the extended term and shall be upon the same terms and conditions as contained in the Lease as herein amended, including all options to purchase and rights of first refusal, if any, save and except that there shall be no further right of renewal.
This agreement shall be read together with the Lease and the parties confirm that except as modified herein, all covenants and conditions in the lease remain unchanged, unmodified and in full force and effect.
The parties agree on the following modifications and amendments to the Lease: b) Paragraph 15.3 of the lease is deleted and the following provisions substituted therefore: Early Termination by Landlord Notwithstanding any other provision herein, the Landlord shall have the right to terminate this lease during the renewal term only, prior to the expiry date thereof, if circumstances have given rise to the exercise of the option to purchase set forth in section 15.2 hereof, and the tenant has failed to exercise same; provided however that the Landlord shall have first given the Tenant one (1)years prior written notice thereof, and this lease shall then expire one year from the date such notice is received by the Tenant, or earlier if the renewal term ends prior to the expiry of such notice.
[17] The language substituted for the original paragraph 15.3 is virtually identical to the language in the original lease. Paragraphs 15.1 and 15.2 which gave the tenant the right of early termination and a right of first refusal were evidently carried forward unchanged. In the new paragraph 15.3, as before, the landlord was given a right of early termination if an offer to purchase was received and the tenant declined to purchase the property, but again, that right only applied in the last five years of the lease (the “renewal term”) if the lease was renewed. It did not apply during the first five years (the “extended term”). The only change in wording from the original 15.3 was to delete the phrase “during the second renewal term only” and to replace it with “during the renewal term only”. In the new agreement, there was only one renewal term.
[18] The renewed lease had a potential term of ten years and this is what occurred. The extended term of the lease ran from 2007 to 2012 and the renewal term ran from 2012 to 2017.
[19] In 2016 the parties entered into a further “Lease Amending and Extension Agreement”. That document contained the following language:
The term of the Lease dated January 15, 1994 is hereby extended for the period of five (5) years from July 31, 2017 to August 1, 2022 (the “ the second extended term") The Tenant shall furthermore have the option of renewing the second extended term of the Lease for one (1) additional five year term after the expiration of the second extended term.[the second renewal term] Such option to renew, shall be exercised by the Tenant by forwarding written notice to the Landlord at least 180 days prior to the expiration of the second extended term and shall be upon the same terms and conditions as contained in the Lease and the First Lease Amending and Extension Agreement as herein referred to, including all options to purchase and rights of first refusal, if any, save and except that there shall be no further right of renewal.
This Second Amending and Extension Agreement shall be read together with the Lease and the First Lease Amending and Extension Agreement and the parties confirm that except as modified herein, all covenants and conditions in the Lease and the First Amending and Extension Agreement shall remain unchanged, unmodified and in full force and effect.
[20] Unlike the first Amending and Extension Agreement, the Second Amending and Extension Agreement contains no substantive amendments to the lease. It does not mention paragraph 15.3.
[21] The question then is whether paragraph 15.3 (as amended by the first Amending and Extension Agreement) continues in force as one of the “same terms and conditions” and if it does, whether the wording “during the renewal term only, prior to the expiry date thereof” should be read to provide for a right of early termination by the landlord during the “second renewal term”.
[22] The first five years of the new extension (the “second extended term”) passed uneventfully and the Respondent tenant gave notice it was exercising the option to extend for a second five years. The “second extended term” ran from 2017 to 2022. The “second renewal term” runs from 2022 to 2027.
[23] On January 3, 2023, the lawyers for the landlord wrote to the Respondent tenant to advise that the landlord had received an offer to purchase the lands and that, subject to the tenant’s right of first refusal, the landlord proposed to accept it. On January 30, 2023, the lawyers for the tenant replied indicating firstly, that they had concerns as to whether this offer was a bona fide offer, secondly, reserving all of the tenant’s rights should it later transpire that the offer was not a bona fide third party offer and thirdly, advising that the tenant was “not interested in acquiring the subject property at this time.”
[24] Subsequently, the landlord sold the property to the current Applicant on the terms set out in the offer to purchase. On March 10, 2023, the Applicant as the new owner and landlord purported to exercise the early termination provision by giving 12 months notice. Counsel for the tenant responded by denying that the right was applicable under the Second Amending and Extension Agreement. In particular, the tenant took the position that the “amended Section 15.3 was not drafted to be available for the duration of the Lease term, nor to apply to all renewal or extension terms.” The tenant took the view that “had the parties intended for Section 15.3 to apply throughout the remaining term of the lease and all future renewals or extensions, it would not have used such precise language referring to a singular renewal term, nor have used the word “only”.
[25] This Application was brought on April 4, 2023. The landlord seeks a declaration that the landlord had the right to early termination of the lease, that the notice of early termination is valid and an order that the tenant vacate the property no later than March 9, 2024. In response, the tenant argues that the landlord did not have such a right, that the notice is not valid and seeks dismissal of the Application.
Analysis and Decision
[26] There is no doubt that the wording of the second Amending and Extension agreement incorporates the terms of the original lease except to the extent that those terms were amended by either of the Lease Amendment and Extension agreements. The current agreement explicitly requires that the new Amendment and Extension Agreement be read together with the terms of the first Amendment and Extension Agreement (itself attached as Schedule A) and the Lease.
[27] As discussed above, paragraph 15.3 of the lease was amended by the First Extension and Amendment Agreement but is not specifically mentioned in the Second agreement. I have no difficulty in finding that the amended s. 15.3 remains part of the extended lease. The wording of the agreement is that all terms and conditions of the Lease and the first Amending and Extension Agreement continue in full force and effect. This, however, does not answer the question whether s. 15.3 remains in force. It may be a right that has expired because the wording of the parapraph provided that it could be exercised “during the renewal term only, prior to the expiry date thereof”.
[28] A situation such as this occurred in the case of 743133 Ontario Inc. v. Upper Canada District School Board, 2017 ONSC 2185 cited in argument. In that case s. 2.05 of the lease specified that “the landlord and tenant each have a one time right of termination ("Right of Termination") on the second (2nd) anniversary of the commencement date providing that the exercising party is not, and has not, been in default under the terms of this lease”. The lease was renewed without deleting s. 2.05 but since it was clearly a “one time right of termination”, it had expired and was of no further force and effect.
[29] In the case at bar, the situation is not quite so clear. The right of termination is not said to be a “one time right”. The right applied during “the second renewal term” in the original lease and during the “renewal term” under the first Amending and Extension Agreement. The question is whether the right now also applies during the “second renewal term” as defined in the second Amending and Extension Agreement.
[30] In favour of the landlord’s argument that the right must apply during the new renewal term is the historic pattern under the lease. As discussed earlier, the tenant had a continuing right of early termination and a continuing right of first refusal. These are contained in paragraphs 15.1 and 15.2 of the Lease and there is no dispute that these provisions have applied during the term and all additional terms or renewal terms of the Lease.
[31] The pattern under the lease can be shown in the following chart:
Dates & Term Tenant’s Right of Early Termination Tenant’s Right of First Refusal Landlord’s Right of Early Termination Original Lease 3 years: 1994 - 1997 YES YES NO Original Lease – 1 st “Renewal Term” 5 yrs. 1997 – 2002 YES YES NO Original Lease – 2 nd “Renewal Term” 5 yrs. 2002 – 2007 YES YES YES First Amendment and Extension Agreement – “Extended Term” 5 yrs. 2007 – 2012 YES YES NO First Amendment and Extension Agreement – “Renewal Term” 5 yrs. 2012 – 2017 YES YES YES Second Amendment and Extension Agreement – “second extended term” 5 yrs. 2017 – 2022 YES YES NO Second Amendment and Extension Agreement – “second renewal term” 5 yrs. 2022 -2027 YES YES IN DISPUTE
[32] The landlord argues that each time the parties entered into a lease or extended the lease, there was a right during the final renewal period for the landlord to terminate the lease in the case the tenant decided not to exercise the right of first refusal. Although there was a specific amendment in the first Amendment and Extension Agreement to take into account the fact that there was only one renewal term under the extended lease, the right otherwise continued as set out in the original Lease. That is, during the final five years of the term if the tenant exercised the right of renewal.
[33] Since the second Amendment and Extension Agreement made no further amendment to paragraph 15.3 but all terms of the lease continued in force, in the view of the landlord, the amended Paragraph 15.3 must be read to apply during the current “renewal term”. The landlord argues that this is in keeping with the pattern under the lease and with the bargain made by the parties. The tenant was given a continuing right of early termination and a continuing right of first refusal. In exchange the Landlord was given a limited right of early termination.
[34] This is a plausible interpretation of the lease. The tenant cannot argue that this interpretation is not commercially reasonable because it is exactly what the parties agreed upon in 1994 and in 2006. There is no language in the second Amendment and Extension Agreement that purports to delete paragraph 15.3. If the phrase “during the renewal term” is regarded as generically applying to any subsequent renewal term then it is possible to read the second Amendment and Extension Agreement which creates a new extension term and a new renewal term as continuing the Landlord’s right of early termination “during the renewal term only”.
[35] The tenant rejects this interpretation and argues that the parties used very precise language to provide for a very limited right. In the original lease, the right of early termination applied only in the “Second Renewal Term” and then only in specific circumstances. If the landlord wished to sell the property during the original term or the first renewal term, even if the tenant declined to exercise the right of first refusal, the landlord could not terminate the lease. During those two terms of the lease, any purchaser would have taken the property subject to the rights of the tenant. Only in the Second Renewal Term, prior to the expiry thereof, was the Landlord given the right of early termination. This right was an exception to the general terms of the lease. Without paragraph 15.3, the Landlord would have had no right of early termination.
[36] When the parties negotiated an extension of the lease in 2006, they turned their mind to paragraph 15.3. It was amended to delete the reference to the “second renewal term” as that term had expired. The parties agreed to a new right of early termination during the new “Renewal Term” that was created by the Lease Amending and Extension Agreement. In 2016, however, when the parties signed the Second Lease Amending and Extension Agreement, there was no further amendment to paragraph 15.3. The new Amending and Extension Agreement names the first period under the extension as the “Second Extension Period” and names the renewal term as the ”second renewal term”. Since 15.3 was amended to delete reference to the “second renewal term”, the tenant argues that it could not have been the intention of the parties to grant a right of early termination during this “second renewal term” or they would have said so.
[37] In support of this narrower reading, the tenant points out the language of the second Lease Amending and Extension Agreement which states that the tenancy “shall be upon the same terms and conditions as contained in the Lease and the First Lease Amending and Extension Agreement as herein referred to, including all options to purchase and rights of first refusal, if any, save and except that there shall be no further right of renewal.” It is notable that this language is specific that the “options to purchase and rights of first refusal” continue but does not mention the right of early termination. Although the same language is used in the first Amendment and Extension Agreement, the difference is that the earlier agreement also specifically amends paragraph 15.3 to make it clear that it does apply to create a right of early termination during the renewal term 2012 to 2017.
[38] This failure to mention the right of early termination in the language of the 2016 agreement is not definitive. All terms and conditions of the lease as amended in 2006 continue to apply “including” the right of first refusal and options to purchase. None of the other terms of the lease are listed including the tenant’s own right of early termination. The landlord points out that there is some authority for the proposition that options to purchase are personal rights that may not be automatically included in a lease renewal. See H. Haber, Understanding the Commercial Agreement to Lease, 2 nd Edition, Canada Law Book, 2006 @ p. 262. I mention this as a possible explanation for the language of the agreement but without adopting this as the current state of the law. Nevertheless, when read together with the very specific naming of the various extension and renewal terms and with the language that the landlord’s right of early termination is available during the specific renewal term, “only, prior to the expiry thereof” it is fair to read the lease as providing this right to the landlord only during specific circumscribed windows of time.
[39] This is the landlord’s Application and it is the landlord’s notice of termination purporting to rely upon a limited right given to the landlord in specific circumstances at specific times. The onus is therefore on the landlord to demonstrate that the landlord has the right it purports to exercise. There is no inherent right to terminate a commercial tenancy simply because of a change in ownership. The right must be found in the specific language of the tenancy agreement.
[40] I agree with the Respondent tenant that had the original lease been renewed without reference to Paragraph 15.3, the right of early termination in that paragraph would have expired. This is because the right was neither triggered nor exercised during the “second renewal term, only, prior to the expiry thereof.” The amendment to Paragraph 15.3 in the first Amending and Extension Agreement created a new and different right which was applicable during the “Renewal Term, only, prior to the expiry thereof” as established by the Amending and Extension Agreement. The ”renewal term” in the new paragraph 15.3 referred to the “renewal term” created by the first Amendment and Extension Agreement.
[41] The second Amending and Extension Agreement did not amend paragraph 15.3 to attach the right to the new “Second Renewal Term”. What the agreement refers to as the “Second Renewal Term” is actually the fourth “renewal term” since the beginning of the lease but it is described as the “Second Renewal Term” in the agreement consistent with the use of the term “second extension term”.
[42] The lease and the two agreements are consistent in referring to the first term (three years under the lease and five years under both subsequent agreements) as the “term” or as an “extension term” and the additional terms available to the tenant if the tenant exercises the “option to renew” as “renewal terms”. The agreements also distinguish between the renewal terms by naming them.
[43] In this case, the first Amendment and Extension Agreement created an “Extension Term” and a “Renewal Term” while the second Amendment and Extension Agreement created a “Second Extension Term” and a “Second Renewal Term”. The language of s. 15.3, it will be recalled, had been amended to delete reference to the original “second renewal term” granted by the original lease and by inserting the “renewal term” which referred to the renewal term created by the first Amendment and Extension Agreement. I agree with the tenant that had the parties intended paragraph 15.3 to apply to all future renewal terms, it would have been simple to say so. In that context, silence about paragraph 15.3 in the Second Amending and Extension Agreement cannot be interpreted as a further amendment. The specific creation of a new “second renewal term” is not a term captured by the plain wording of paragraph 15.3.
[44] I prefer the interpretation advanced by the tenant. The parties used very specific language to grant a very limited and circumscribed right of early termination. The landlord cannot successfully show that the parties intended to renew this right and attach it to a renewal term other than the renewal term that is specifically referred to in the language of the agreement. There is no right of early termination during the the current term of the lease. That is 2022 to 2027.
Summary and Conclusion
[45] In summary, I am unable to find in favour of the landlord and to declare the notice of termination to be valid. The Application is dismissed. The tenant is entitled to remain in occupation until the end of the lease in 2027.
Costs
[46] I asked counsel to confer and to seek agreement on the matter of costs. If they are unable to do so and wish to make costs submissions, they may arrange to do so within 30 days.
Justice C. MacLeod Date: October 10, 2023