Ontario Superior Court of Justice

Court File No.: CV-18-00602566-0000
Date of Judgment: 2025-04-25
Heard: February 10, 11, 12, 13, 14, 17, 18, 19, 20, and 21, 2025

Between:
AZZ Galvanizing Canada Limited (Plaintiff)
– and –
Empire Steel Inc. and 5018046 Ontario Inc. o/a Innovative Blast Technologies (Defendants)

Appearances:

• Daniel S. Murdoch and Hannah Kellett, for the Plaintiff
• Samir (Sam) Gebrael and Yara Ismail, for the Defendant, Empire Steel Inc.
• George Limberis and Maryam Samani, for the Defendant, 5018046 Ontario Inc. o/a Innovative Blast Technologies

Judge: Edward Akazaki

Reasons for Judgment

Overview

Empire Steel is a trader in steel products. When it leased the old Westinghouse factory complex in Hamilton, its plan was to occupy a portion and sublet the remainder. It promised the subtenants, including AZZ Galvanizing Canada (“AZZ”), to split the electrical bill according to each party’s consumption as a portion of Empire’s electrical bill. Empire made these promises before equipping the units with separate meters. It hired a company to install them, only to discover the obvious: the buildings previously had a single owner-occupant and could not be metered for the subtenants without segmenting the electrical system.

Empire decided not to incur the cost of extra electrical work. Instead, Empire charged the subtenants monthly amounts for hydro, without regard to the bill from the hydro company. In all but a handful of instances, Empire charged the subtenants thousands of dollars more per month than what it paid the hydro company. Empire argued that the deals with the subtenants constituted amendments to the subleases. In truth, Empire decided not to perform the obligation to pass on the electrical charges based on separate metering and saw its breach as an opportunity to obtain additional rent.

AZZ dutifully paid what Empire charged for several years. The peace ended, however, after AZZ’s American parent closed the Hamilton plant and sublet it to Innovative Blast Technologies (IBT). IBT was a local manufacturer looking to downsize its operations. Warned by a relative, who just happened to be IBT’s previous landlord, about IBT’s energy consumption, Empire’s principal tripled the hydro charge to AZZ without any consultation with either AZZ or IBT, from $9,769 to $30,303. When IBT added a production shift, Empire hiked the rate again, to about $53,340, before charging $35,755 during the remaining term of IBT’s occupancy.

IBT protested the rate hike and withheld all payments to AZZ. AZZ asked to see Empire’s hydro bills, and Empire refused. Knowing that the jig would be up sooner or later, Empire looked for a way to offset the overcharges. It instructed its accountant to perform a retrospective review of its taxes, maintenance, and insurance (TMI) charges, with the catch that the review would affect only AZZ.

As the “meat in the sandwich,” AZZ could not recover payment from IBT without justifying the hydro rate increase and could not justify it without obtaining the hydro bills from Empire. Its sole option was to sue both and seek the court’s protection. It took a court order for Empire to divulge its hydro bills. They showed not only that the rate increases during IBT’s occupancy were unjustified, but also that Empire had been breaching s. 3(1) of the sublease since the outset by charging more to the subtenants than the electric company’s invoice, by a wide margin.

In the ensuing litigation, AZZ expanded its suit to the recovery of the historical overcharges. Empire defended by pointing to the TMI accounting which, to no one’s surprise, showed AZZ owed TMI retroactively. Empire and IBT traded crossclaims over IBT’s storage of materials on undemised space in the outdoor yard and the derelict condition of the old factory facilities. Empire and IBT’s issues did not change the core dispute at trial – the amount of hidden overcharging by Empire for electricity consumption by AZZ and IBT. For the reasons detailed hereafter, judgment will issue for AZZ to recover the amount of the overcharging, and the counterclaims and crossclaims are dismissed. I will allow the claim by Empire against AZZ for IBT’s use of the outdoor yard, but given its modest quantum it only operates as a set-off against Empire’s liability to AZZ.

Additional Background

The parties’ dispute arose from a series of subleases subordinate to a 2012 head lease granted to Empire by Siemens Canada for an old factory complex in the industrial park behind the Stelco Works in Hamilton. Before Siemens, the building complex served as the Canadian headquarters of the electrical giant Westinghouse and consisted of a factory with the municipal address of 20 Myler St., office buildings at 30 Milton St. and 286 Sanford Ave., and a parking lot at 42 Westinghouse Ave.

In 2013, Empire subleased part of the premises at 20 Myler to AZZ, a subsidiary of a U.S. manufacturer of electrical and industrial enclosures and other products made of galvanized steel. Empire occupied some of the premises and subleased the remainder to other manufacturing companies. The lease granted to AZZ required it to pay Empire, in respect of the demised portion of the factory building, all additional rent payable by Empire to Siemens. This consisted of AZZ’s consumption of utilities and a proportionate share of TMI on a square-foot division between the subleased portion and the entire leased premises. The other subtenants’ leases were worded and organized differently, but to the same effect.

Empire’s sublease to AZZ was extant only as a blurry and small-print copy. Neither the loupe feature on Case Center nor a physical magnifying glass helped much to render it more legible. The critical provision in the sublease to AZZ was s. 3(1), the substance of which the parties did not dispute. For clarity, I reproduce the following paraphrasing of the subsection from the Amended Statement of Claim, after my further editing and emphasis for ease of review:

AZZ agrees to pay to Empire all amounts in respect of the Subpremises which Empire is required to pay to Siemens under the Head Lease as Additional Rent including, without limiting the generality of the foregoing, all utilities consumed in respect of the Subpremises and AZZ's Proportionate Share of Empire's share of Taxes and Empire's proportionate share of operating costs, all as defined in the Head Lease. AZZ's Proportionate Share shall be the fraction, the numerator of which is the area of the Subpremises and the denominator of which is the area of the Premises.

The general agreement in this subsection was to pay a portion of Empire’s liability under the head lease. The subsection then divided the terms of payment for additional rent two ways. AZZ’s obligation to pay for utilities was for the amount consumed “in respect of the Subpremises.” For electricity, this meant the charges for hydro used in the demised subpremises. The remaining operating costs AZZ was obligated to pay, described elsewhere in the document and in the head lease as the TMI, were to be an allocation based on the fraction of the subpremises in relation to the whole premises leased by Empire from Siemens.

In aid of the measurement of consumption of utilities, a term of the sublease required Empire to install check meters to ensure AZZ paid only for the electricity it used. The other subleases also obligated Empire to install check meters and to charge for consumption. Empire hired a company to install the meters. However, they did not function because the factory was wired for a single occupant.

To avoid the cost of isolating the electrical systems for the subtenancies, Empire negotiated separate electricity deals with each subtenant based on a square-foot measurement of its occupancy. The rationale for these formulas made some rough sense, in that Empire could compare the subtenants’ electrical load, and the size of the demised units was based on manufacturing capacity and equipment. However, Empire did not conduct any technical assessment of the subtenants’ equipment and hours of operation to measure the expected load. Nor did it make allowance for its own share of the hydro bill.

Two years into the five-year lease, the Canadian market for AZZ’s products dried up. AZZ notified Empire of its intention to leave. For a while, AZZ’s portion of the factory remained vacant. In 2016, AZZ found a sub-subtenant, IBT. IBT was downsizing its operations from a factory on Kenora Ave.

By happenstance, IBT’s landlord on Kenora Ave. was the uncle of Empire’s president. The uncle warned him that IBT was a heavy electricity user that drove the hydro bill beyond $30,000 a month. Instead of meeting with IBT as it did with AZZ and the other subtenants, Empire unilaterally almost doubled the hydro bill from a base annual rate of $1.50 per square foot to $2.70 per square foot and charged for IBT’s extra shifts at $0.30. For its part, IBT was already upset with AZZ for having created the expectation that the monthly hydro bill would be a flat amount of $9,769 and would not vary with additional work shifts. IBT refused to pay AZZ for Empire’s invoices for hydro, the first one being $30,303 and subsequent ones being yet higher. IBT also refused to pay rent to AZZ for the first eight months, citing deficiencies in the building.

In 2017, AZZ and IBT involved legal counsel. IBT then paid eight months of back rent but refused to pay for utilities, notably the electric bill. AZZ remained stuck in the middle, because IBT protested the hydro charges and demanded to see the actual Alectra Utilities bills to Empire. Empire refused, demanding first to see IBT’s electric bills from its previous location. This was disingenuous because Empire was already privy to IBT’s electric bills from the prior landlord through the family connection. Empire also attempted to justify the rate increase by reference to a Toronto Sun article about hydro rate inflation and to increased hydro bills since IBT moved in.

Empire then instructed its bookkeeper in early 2018 to perform a five-year reconciliation of the TMI charges – for AZZ only. The reconciliation report was revised twice and concluded that Empire had been undercharging AZZ.

In addition to evidence concerning the hydro charges and the TMI accounting, the court heard how IBT owed Empire occupation rent for off-lease storage of materials and equipment in the outdoor yard, and IBT’s claim for abatement based on the poor condition of the premises.

Toward the end of the sublease, in 2018, the posturing escalated until Empire locked IBT out. On August 1, 2018, AZZ sued Empire and IBT for damages. The defendants, in turn, issued counterclaims and crossclaims.

In December 2021, in partial settlement of a discovery undertakings and refusals motion before Associate Justice Ilchenko, the plaintiff and IBT obtained copies of the Alectra bills retroactive to 2013. From this disclosure, AZZ discovered that Empire was overcharging the subtenants for electricity from the outset. During IBT’s sub-subtenancy, the amounts charged to AZZ all exceeded the electric bill for the whole facility.

During the weekend prior to the trial, AZZ and IBT settled the claims between them, save for any claim over by AZZ resulting from net liability to Empire. IBT also reserved its claims against AZZ as set-off, in the same manner as any set-off by IBT against Empire’s crossclaim. This partial settlement did narrow the issues for the court to decide.

When one follows the escalation of the dispute, by point and counterpoint, the hydro overcharging issue was the true issue in contention. IBT’s secondary complaints, such as the derelict condition of some of the toilets and at least one invasion by a raccoon family, did not rise to the point of justifying the rent strike based on inability to use the premises. Once the lawyers squared off, IBT substantially made up the rent arrears but refused to relent on the hydro bills. Empire’s 2018 retroactive review of TMI charges only for AZZ was an attempt to redraw the battle lines of the hydro dispute. In a further tactical adjustment, AZZ advanced the proposition that the calculation of the ratio for its hydro charge allocation should include portions of the former Westinghouse/Siemens premises that were unoccupied and not in use.

Issues

The pleadings and the evidence presented at trial require the court to determine the following:

1. Competing square footage calculations
2. AZZ’s claim against Empire for hydro overcharges
3. Empire’s limitations defence
4. Empire’s counterclaim against AZZ for TMI undercharging/AZZ’s claim against Empire for TMI overcharging
5. Empire’s claim against AZZ or by crossclaim against IBT for: (a) the value of IBT’s use of outdoor storage space; (b) overholding beyond the sublease term; and (c) the cost of cleaning out an electrical substation
6. IBT’s claim, by way of set-off against Empire and any claim over by AZZ, for the economic value of various deficiencies it had to repair, or which impacted its manufacturing process
7. Prejudgment interest rate

1. SQUARE FOOTAGE CALCULATIONS

Once Empire’s overcharging for hydro came to light after the interlocutory discovery orders, AZZ sought to maximize Empire’s liability by interpreting s. 3(1) as requiring the same formula for the utilities as for the TMI. This meant the court heard extensive evidence regarding the choice of denominator for dividing the square-footage of AZZ’s subleased premises. Using an expansive definition of the word “premises” and addingddd interest for unpaid rent, AZZ presented a damages calculation of $2,789,000.

According to a February 11, 2014, email from its office manager, Ms. Cadete, Empire based its percentage calculations for apportioning the gas bill and other expenses on AZZ’s 78,154 square foot unit by dividing it by 302,281 square feet as the footprint for the “premises” leased from Siemens. AZZ instructed its valuation expert to present an alternative ratio based on a 500,000 square foot reference in a realtor’s marketing flyer.

The head lease from Siemens contained conflicting definitions of the “premises”. Indeed, the art. 1.1 definition of the property included decommissioned office property but, remarkably, did not include the 20 Myler St. main factory building. The parties agreed at the outset of trial that the property descriptions in the head lease were nonsensical. I therefore need not recite the provisions and the logical incongruities. This did not stop AZZ and Empire from advancing competing measurements of the demised premises. Apart from the figure in the realtor’s flyer, AZZ’s 500,000 square feet was a rough estimate of the entire former Westinghouse complex. Empire based its 302,281 square foot measurement on the total building space in use by the subtenants and by Empire.

Using the dimensions in a schematic attached to the flyer entered as evidence, I calculated 476,339 square feet based on AZZ’s inclusion criteria. By adding untenanted but available space to Empire’s calculation, I derived a figure of 356,389 square feet. The main difference between the two methods was the inclusion in the larger figure of decommissioned office space totalling 119,500 square feet, the majority of which appeared to be the former Westinghouse headquarters. That office building, used by Westinghouse and Siemens for their substantial corporate requirements, clearly was of no use to Empire and the subtenants.

Each method was unfair and flawed in its own ways. AZZ’s inclusion of unused space was unfair for apportioning building operation costs associated with energy consumption and accommodation of workforce. Subsection 3(1) of the sublease clearly stated that utility charges would be passed on based on consumption and not based on a ratio of the size of the sublet premises compared to the whole property. Empire would have been wrong to exclude untenanted space for elements of TMI, such as insurance and property tax, since the empty spaces and buildings still had to be insured and included in property tax assessments. Maintenance would obviously be low for a decommissioned building.

The square footage of the whole property was irrelevant to the apportionment of electricity use, because much of it was not in use and Empire was not an industrial user. As discussed below, the relative size of the manufacturers’ units could be a fair measure, in the absence of separate metering. I could see how the gas service, used to heat the buildings, could be apportioned in the same manner as TMI, because consumption would be based on occupied space and because the subtenants’ units were not sealed off. However, AZZ’s claim for overcharging was for hydro.

The square footage would have been relevant to TMI. Empire was likely overcharging for TMI, because its calculations did not include buildings it owned but no one occupied. By not including these spaces, the subtenants effectively subsidized Empire’s ownership of unoccupied buildings or spaces. Nevertheless, as will be explained in the analysis of Empire’s set-off claim, TMI entailed too many intangibles and Empire’s manipulation of data inputs for the court to make any conclusions based on the evidence.

The mathematical relation between the AZZ subpremises and the whole premises was therefore immaterial to the issues. The only square footage potentially relevant to the hydro consumption issue was AZZ’s square footage in relation to other occupied premises used by manufacturers.

2. AZZ’S CLAIM AGAINST EMPIRE FOR HYDRO OVERCHARGES

From the outset of AZZ’s tenancy, Empire was in breach of its contractual obligation to provide separate metering for utilities. Electricity was the principal energy for the industrial equipment. Empire originally retained a metering company called Golden Horseshoe to install check meters. This turned out to be a comedy of errors, because the contractor’s electricians simply installed the meters in tenanted areas without having first ascertained whether the electrical services had been isolated. Measurement was random and bore no resemblance to consumption patterns.

Empire ought to have had the factory wiring inspected before promising the subtenants they would be charged for hydro based on separately metered consumption. Having taken on an ageing building at considerable up-front cost, Empire’s principal Sherif Khalifa decided it would be too costly to work on the wiring to allow for the proper operation of the check meters. In other words, Empire argued frustration of the contractual requirement to provide check meters, or at least an excuse for non-performance. There was no evidence of the estimated cost or of the steps Empire took to ascertain what needed to be done.

Like much of Empire’s evidence, the bald statement at paragraph 9 of Mr. Khalifa’s summary trial affidavit of prohibitive cost appeared to be an after-the-fact justification. Without the evidence of an estimated cost, no argument based on frustration of contract can succeed. For Empire to be relieved of the obligation to provide separate metering, the impediment had to be a “supervening event” beyond either party’s control: Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58, [2001] 2 S.C.R. 943, at para. 55. Had the cost of the work been truly prohibitive, the court could consider it as evidence of frustration or excuse for non-performance. Since Empire submitted no evidence of the cost, no such legal remedy for non-performance is available. Empire’s decision not to incur the cost of a wiring alteration, or to obtain an estimate for such work, was simply a self-interested breach of its obligation to provide the separate metering.

Mr. Khalifa decided instead to negotiate separate hydro estimates with the subtenants, based on a rate per square foot of subleased premises. He then charged the subtenants between $1.30 and $2.00 per square foot, but the rates varied over time. Only he knew what the electricity bills were. By his admission, to mitigate the risk of undercharging the subtenants, the rates he negotiated with the subtenants brought in $30,057 per month net of HST. This did not include a period when a fourth subtenant, Alstom, was also in the premises and paying $2.00 per square foot for 7,800 square feet.

Mr. Khalifa testified that he managed the risk in this manner because he would bear the loss if he ended up undercharging. This evidence was inconsistent with the agreed statement of fact, in which Empire conceded that the rates for other subtenants changed from time to time. Chapel Steel’s rate increased from $1.30 to $1.75 and then settled at $1.50, and Triple Crown’s ranged from $1.50 to $2.00. In AZZ’s case, Empire’s unilateral upping of the rate from $1.50 to $2.70 after IBT’s move-in became the impetus for this legal dispute. I do not believe Mr. Khalifa’s evidence that he would have absorbed a loss. He changed the rates when he felt the need, and that he always brought in a margin on the hydro charges and ensured Empire never paid for electricity for its own operation.

At $30,057 per month, the amounts collected from the subtenants were generally higher than the total electrical bills which ranged from $15,000 to $25,000, subject to a few low and high outlier figures before the sub-sublease to IBT. During IBT’s occupancy, the bills rose on average to about $36,000. Thus, during the period before IBT, Empire paid nothing for electricity and received additional amounts from the subtenants. After IBT moved in, it was hard to determine whether Empire started to pay for its own use, because Empire raised the rate charged to AZZ to $2.70 per square foot.

Empire was always in control of the charges for hydro passed down to subtenants, and it made sure it collected more than it paid to the utility.

Empire argued that the deals it reached with the subtenants after the Golden Horseshoe fiasco amounted to new agreements or waivers by the subtenants of their rights to individual metering. It also pleaded that these deals estopped the claim against them for overcharging. Without determining whether Mr. Khalifa seized the moment to profit from the failure of the check metering and his refusal to reconfigure the wiring, I would have accepted the bona fides of his negotiated solution, if he had been transparent about Empire’s actual electrical bills. Instead, Empire kept the subtenants in the dark about the bills. It only disclosed the bills after AZZ sued it and after the court ordered their disclosure.

The hydro rate estimates Mr. Khalifa negotiated could, at most, be considered as evidence of an estoppel or waiver of AZZ’s reliance on the requirement in Schedule A of the sublease for Empire to install check meters. There was no evidence that AZZ waived the provision in s. 3(1) that charges for utilities were to be based on consumption. If AZZ agreed to the flat-rate billing, the only significance of this was the acknowledgement of the sublandlord’s estimate of expected consumption for the purposes of s. 3(1). The estoppel or waiver argument therefore does not assist Empire against its breach of the contractual undertaking to charge a portion of the actual cost to AZZ.

The negotiation of hydro rate estimates with AZZ did not amount to an amendment of the lease terms. Rather, it was a means of implementing the covenant by AZZ to pay for its use of utilities in the face of Empire’s refusal to pay for the implementation of check metering. In other words, Empire and AZZ used the price per square foot as an alternate means of charging for consumption, in accordance with s. 3(1).

In Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, at paras. 73 and 103, the Supreme Court of Canada held that the defendant had breached its duty of honest performance of a business agreement with the plaintiff before deciding not to renew it. Although it was within its contractual rights to give notice of non-renewal, the defendant had kept the plaintiff in the dark about plans by a favoured competitor to take over the plaintiff’s book of business. Concealment of information is the first step toward dishonest performance. After five years of concealment, Empire’s approach to the business dispute, including its instructions to counsel in the litigation, amounted to bad faith.

The proof of this assessment is found in comparing Empire’s conduct to honest performance, in the circumstances. Once it became clear that the check metering did not work without altering the factory wiring, Empire could have performed the alterations. At the very least, it could have obtained an estimate for the work. If the work turned out to be prohibitively expensive, Mr. Khalifa could have disclosed the hydro bills and negotiated a means of allocating the expenses among Empire and the subtenants. Ultimately, the overcharging breached the provision in the sublease with AZZ requiring it to pay no more than its share of Empire’s obligation to Siemens.

Empire argued that AZZ deceived IBT about the cost of the hydro by representing that the charges would be a flat $9,769 per month, without mentioning extra shift charges. IBT’s principal expressed his upset, when later it turned out that Empire would be charging for additional shifts. The dispute between AZZ and IBT has been settled. More importantly, the only bearing it has on the litigation between AZZ and Empire is that IBT refused to pay for hydro after Empire went beyond the extra shifts and started charging a base rate of $2.70 per square foot. IBT’s response to Empire’s electricity billing was entirely reasonable. Anyone being charged three times the expected amount has grounds to question the amount. AZZ demanded to see Empire’s electric bill, not to go after Empire, but to justify Empire’s charge for IBT’s use.

Mr. Khalifa’s overreaction to his uncle’s warning about IBT’s energy consumption became the second inflection point for this case. Seemingly out of protest over AZZ’s departure or choice of sub-subtenant, he had no meaningful dealings with IBT and insisted that AZZ serve as the middleman. Perhaps he was not solely to blame for the misinformation that fueled the emerging conflict. Nevertheless, IBT did provide an estimate of its expected hydro consumption based on equipment brought to Myler St. and anticipated shift hours. Since s. 7 of the AZZ sublease to IBT provided a 100% flow-through of AZZ’s obligations to pay Empire, the obvious alternative to Mr. Khalifa’s method of raising the electrical charges based on what his uncle charged IBT would have been to meet with IBT and take inventory of the process equipment and production schedule. Since the electric company sells units of consumption in kilowatt hours and all electrical machinery is rated in watts or its Imperial equivalent, horsepower, a business-to-business meeting between Empire and IBT could have avoided the entire dispute.

By overreacting to his uncle’s warning, Mr. Khalifa unilaterally raised the price Empire charged AZZ for electricity beyond any reasonable measure as contemplated in the lease. Whether it was reasonable for IBT to stage a strike in its obligation to pay AZZ is no longer an issue for the court to decide, because those parties made their peace on the eve of trial. IBT did not even pay AZZ the $9,769 per month that AZZ had related to IBT as the hydro bill during AZZ’s occupancy. Had it done so, perhaps a more rational business discussion would have ensued instead of legal escalation. Chief among the irrational conduct was Empire’s refusal to disclose its electrical bills to AZZ. Subsection 3(1) of the sublease obligated AZZ to pay Empire a portion of the electrical expense Empire was required to pay under the head lease. Section 6.1 of the head lease required Empire to contract directly with the utility. It was therefore an implied term of the sublease to AZZ that Empire disclose the hydro bills to AZZ. There would have been no other way to hold Empire to account.

Empire’s alternative measure of electricity based on a rate per square foot could, at the outset, have been motivated by risk management and the fear of undercharging. It should have become evident to Empire that it was charging its subtenants substantially more than the total electrical expense for the facility, month after month. The failure to bring this to the subtenants’ attention amounted to dishonest performance under the leases. IBT’s hydro bill strike then became the catalyst for the litigation.

On October 12, 2016, AZZ’s Vance Washburn wrote to Daniele Cadete, Empire’s office manager, about IBT’s upset over being charged $2.70 per square foot:

I understand the number of shifts worked, but I also need to be able to explain why IBT's rate per square foot is $2.70 and AZZ's was $1.50. I need to be able to show/demonstrate why the cost is higher than AZZ's, and the only way I believe we can do that is show before and after hydro charges/bills to substantiate the increased rates. Is it possible to get copies to show this information?

In response to this email, Ms. Cadete responded that Empire was “under no obligation to disclose the Hydro bills.” She then related Mr. Khalifa’s proposal to measure IBT’s usage based on hydro consumption at “their last place of business” and to obtain IBT’s past hydro bills. Mr. Khalifa, the court heard, already had this information from the uncle. The inescapable conclusion is that Mr. Khalifa was deflecting attention away from the over-charging by Empire in the hope that IBT’s disclosure of the large hydro bills from the prior location would cause AZZ to retrain its turrets against IBT.

On May 12, 2017, Mr. Khalifa reiterated Empire’s refusal to disclose the hydro bills. On November 7, 2017, Empire’s lawyer cited confidentiality owed to “other tenants” as grounds for the continued refusal. This turned out to be a made-up justification, since the Alectra bills contained no information about other tenants. At trial, AZZ’s counsel submitted that the real reason for Empire’s refusal was the concealment of the fact that Empire had been unlawfully profiting from the hydro charges to subtenants from the outset. On the evidence, it is hard to avoid this conclusion.

However inadvertent the overcharging may have been in the beginning, Empire knew, once the lawyers were involved, that it could face unjust enrichment claims from AZZ and the other subtenants for hundreds of thousands of dollars. Empire submitted that this was not a scheme to overcharge but, rather “a reasonable method to allocate costs and risk in a triple net lease context.”

A triple net lease allows a landlord to earn a guaranteed rent while requiring the tenant to bear all operational expenses of ownership. Having failed to prepare the building for separate subtenant metering, all the circumstances in evidence pointed to an obvious workaround for maintaining the parties’ expectations under such leases by calculating the allocations monthly based on the Alectra invoice. If Empire was a low consumer of electricity, this, too, could be part of the calculation, provided it paid something, and the sum of the subtenants’ payments did not exceed the balance. The only way to ensure transparency and honest performance would have been to share the Alectra bills with the subtenants.

I reject Empire’s argument that it renegotiated the sublease provisions for utilities charges and that the rates replaced the subtenants’ obligation under s. 3(1) to pay no more and no less than its consumption. The communications between Empire and AZZ personnel all exhibited an intention to estimate a faithful approximation of individual metering and a willingness to participate in periodic reconciliations and reassessments based on increase in factory shifts. Nowhere in the evidence could I find AZZ’s acceptance of a right on the part of Empire to overcharge for hydro as a hedge against the risk of undercharging. The November 22-25, 2013, exchange of emails setting $1.50 per square foot as a flat rate was not binding on Empire, who reserved the right “to review and reassess”. The provisional nature of the agreed rate was more consistent with s. 3(3) of the sublease, allowing Empire to estimate the amounts to be paid in s. 3(1) and allowing readjustment as provided in the head lease. Section 5.5 of the head lease with Siemens provided for an annual accounting and adjustment.

As will be discussed in the next section, Empire intended to stonewall AZZ on the Alectra bills and decided to review the TMI charges to engineer a deficit to offset its likely liability on the hydro overcharging. In that review, Empire manipulated the charge to AZZ for maintenance staff on Empire’s payroll to demonstrate that Empire had been undercharging for TMI.

The $30,057 I previously mentioned as charged to three subtenants based on square footage did not include $2.00 per square foot charged to Alstom Canada Inc., a minor tenant renting 7,800 square feet during the first year, from April 2013 to March 2014. This would have increased the total monthly collection to $31,357 plus HST for that period.

The most representative period for comparison during the period before IBT moved in would have been 2014 and 2015. This accounts for Chapel Steel’s expansion and eliminates Alstom’s tenure, while not counting the time AZZ’s premises were vacant. During that two-year interval, Empire’s electric bill totalled $434,529, compared to $721,368 charged to the subtenants – a markup of one third (34%), not including the fact that Empire paid nothing for electricity. This does not include the additionally disproportionate amounts charged during IBT’s occupancy.

During IBT’s tenure and hydro bill strike, Empire’s invoices to AZZ escalated significantly and out of proportion to the additional consumption after IBT moved in. This assessment does not ignore the fact that the Alectra bills did increase by between $5,000 and $10,000 per month after August 2016. Assuming, as the evidence supported, that AZZ was already overpaying for electricity, IBT’s estimate of $16,000 per month of hydro consumption seemed very fair and honest. Since the purpose of IBT’s relocation to the premises was to scale down production, Mr. Khalifa’s fears of IBT using over $30,000 per month of hydro, based on his uncle’s warning, turned out to be wholly unfounded.

The court heard from two expert valuators, Stella Chen on behalf of AZZ and Scott Paulin on behalf of Empire.

Ms. Chen calculated hydro overcharges incurred by AZZ between $701,000 and $793,000. Her calculations were based on instructions to apply a proportion based on square footage. The low range represented AZZ’s 78,154 square foot portion as 23.4% of a 333,800 square foot complex. Her high range used the same footprint as a 15.6% portion of a 500,000 square foot facility. She accounted for absent Alectra bills by extrapolating from those supplied. Essentially, AZZ’s claim went up, if it could propose a larger footprint for the whole complex.

Empire’s valuator, Scott Paulin, conceded there had been an overcharge, but said it consisted mainly of the additional amounts charged during IBT’s tenure, because of the increase from $1.50 to $2.70 per square foot. Mr. Paulin was instructed to assume that $1.50 was the agreed rate for one shift, to be charged to AZZ. This resulted in an overcharge of $398,216. However, after considering IBT’s extra shifts, he reduced the magnitude of the overcharge to $147,417.

The flaw in Ms. Chen’s methodology, as instructed by counsel, was that s. 3(1) contemplated actual consumption for utilities, and square footage of the unit in comparison to the whole complex for TMI. It would also not be fair to Empire, whose operations were in the trading of materials and not manufacturing, to pay based on square footage.

The corresponding logical flaw in Mr. Paulin’s approach, again as instructed, was the assumption of $1.50 as an amendment of the lease instead of an attempt to measure the value of energy consumption after Empire decided not to incur the cost of wiring alterations to make separate metering work. In other words, his method simply reflects Empire’s concession in the litigation that the increase to $2.70 per square foot was a blatant mistake.

The fairest method of calculating AZZ’s consumption, in accordance with s. 3(1), must start with the premise that the value of the electricity consumed by Empire and its subtenants should be 100% of the Alectra charges. Mr. Khalifa’s evidence that Empire did not have significant process usage for electricity went unchallenged. Empire was the sole occupant without industrial manufacturing equipment, because its business traded steel made by other companies. Its consumption consisted of lighting and office equipment. I would attribute its non-manufacturing use as approximately 5% of Empire’s total electrical bill of $1,174,882, as representing a low-volume use.

After deducting for Alstrom’s use, consumption by the three major subtenants would approximate $1,100,000. The task then is to determine AZZ’s share. The only evidence approximating an estimate of energy consumption were the rates per square foot that Mr. Khalifa set for Chapel Steel, Triple Crown and AZZ (before IBT). These, indeed, turned out similar for each of the subtenants. Consequently, a fair percentage would be 35%, based on AZZ’s 78,154 out of 222,514 of the manufacturers’ square footage. I appreciate this appears to adopt Ms. Chen’s methodology to some extent, but removing Empire’s unused space and non-manufacturing activities should bring the calculation closer to what is provided for in s. 3(1).

The two valuators agreed that Empire charged AZZ a total of $976,376 between 2013 and 2018, or 83% of Empire’s total hydro expense of $1,174,882. This percentage was undoubtedly driven up by charging AZZ almost double the rate for hydro during IBT’s tenancy. It does put into stark focus the extent to which AZZ was being overcharged.

Based on the 35% rate, AZZ’s consumption without the boost during IBT’s tenure would amount to $385,000. This does not, however, consider the reality that IBT did consume more electricity than AZZ, based on the increase in Empire’s Alectra bills after IBT started operations at the site. Without pretending the calculations can be precise at this stage in the analysis, the observed increase in Alectra charges can be accounted for by crediting Empire the amount of $7,500 per month, as a rough estimate of IBT’s additional use less some overcharging to AZZ, during IBT’s sub-subtenancy. Adding back $172,500 for the 23 months of IBT’s occupation, the amount that Empire should have charged AZZ for the entire period is about $557,500.

The two valuators agreed that Empire charged AZZ a total of $976,376 between 2013 and 2018. Subtracting $557,500 from this results in a hydro overcharge to AZZ of $418,876.

3. EMPIRE’S LIMITATIONS DEFENCE

Empire pleaded the two-year limitation period under the Limitations Act, 2002, S.O. 2002, c. 24, Sch. B. It says AZZ’s claim was discoverable under s. 5 and relied on notice of its assertion of sharing of expenses based on 302,281 square feet in 2014. In codifying the former common-law discoverability doctrine, the Act reflected the legislature’s preference for the word “claim” instead of the words “cause of action”. It also added facts-based considerations of injury, loss, damage, and legal remedy. In short, discoverability in Ontario limitation entails a more holistic appreciation of the facts leading to the lawsuit than a mere awareness of a legal basis to sue: Kaynes v. BP p.l.c., 2021 ONCA 36, 456 D.L.R. (4th) 247, at paras. 41-58.

According to Empire’s pleading, any claim based on a larger denominator for AZZ’s proportion of hydro or TMI should be barred. Since I have concluded that nothing in this case turns on this issue, there is no claim to bar, insofar as the proportion of AZZ’s space in relation to the whole premises is a cause of action.

Even without focusing on the characterization of the claim as based on relative square footage, AZZ’s claim at its core relies on breach of the sublandlord’s agreement under s. 3(1) of the lease to pass on a portion of the charges. The calculation of the remedy is secondary to the breach. Until the lawsuit, the overcharging was based on the arbitrary increase of hydro rates after IBT moved in. Only after court-ordered disclosure of the Alectra bills did AZZ find out that Empire was collecting from subtenants more than it was paying the electric company – from the very outset. Until the production of these bills, AZZ had no reasonable basis to claim damages for the historical overcharging breaches. I therefore find that the limitation defence has no application.

4. EMPIRE’S COUNTERCLAIM AGAINST AZZ FOR TMI UNDERCHARGING/AZZ’S CLAIM AGAINST EMPIRE FOR TMI OVERCHARGING

Subsection 3(3) of the sublease provided for estimates by Empire and adjustment in accordance with the head lease. The parties agreed to this general understanding of s. 3(3), because the only available version of the sublease was so badly reproduced that no one could clearly read this provision.

The head lease provided for an annual reconciliation. Empire’s decision to initiate the first review of the TMI charges in early 2018, during IBT’s protest over the hydro charges, made it obviously suspect. Paragraph 5 of the trial affidavit of Mr. Rehman, Empire’s external accountant, stated:

In early 2018, I was told that Empire needed to conduct a comprehensive reconciliation of the operating costs, realty taxes, and other additional rent (hereinafter referred to as "Additional Rent") from the commencement of the sublease of one of its tenants, AZZ Galvanizing Canada Ltd. (hereby "AZZ") until the end of 2017 (the "Reconciliation Period").

The ensuing reports stated the following additional instruction: “We were also asked to calculate AZZ's share according to the space that they occupy.” Evidently, the absence of a legal dispute with the other subtenants meant Empire did not wish to incur additional accounting fees to recalculate the TMI charges to the other subtenants. Had this been a good faith effort to balance historical undercharging, why didn’t Empire instruct Mr. Rehman to calculate the TMI adjustments for all the subtenants?

Unlike the estimates for the hydro charges, TMI would not have been difficult as a bookkeeping exercise. Empire’s office used QuickBooks accounting software. The reviewer, an accountant named Faizan Rehman, simply downloaded the data from the QuickBooks account. For reasons Empire never explained, it treated payroll as an off-book expense for which neither Mr. Rehman nor the court ever saw the records.

Under Empire’s instruction, Mr. Rehman prepared three reports, an “Initial Report”, a “March Report”, and a “Correction Report.”

AZZ contested the veracity of the report on several points. Chief among them related to the professional charges and payroll allocations, as well as property maintenance and snow removal. On cross-examination, Mr. Rehman testified that he did not extract these amounts from QuickBooks but was, rather, instructed by Mr. Khalifa to insert them. He did not review payroll records. The evidence generally established that Empire employed one employee as a general maintenance person for the whole complex, including Empire’s portion. He was hardly ever observed clearing snow, and there was no dedicated outside snow removal service.

Although it was not her role to prepare the reports, the general manager Ms. Cadete also had difficulty identifying the source of the figures for the TMI reconciliation. She did come across as competent and knowledgeable about the business operations of Empire. When combining my general assessment of her and Mr. Khalifa’s operation of the business, I formed the distinct impression that they were always careful to avoid business risks and keep track of costs. It was therefore improbable and lacking in credibility that Empire would suffer between $125,324 and $207,022 in undercharged TMI to AZZ. Extrapolating this to the other tenants, this would have resulted in deficits of between $375,000 to $600,000 during the five-year period. The suggestions that Empire discovered the TMI deficit in its operations as a landlord only during a payment dispute between AZZ and IBT and that it instructed the accountant only to calculate it for AZZ defied credibility and was undermined by Ms. Cadete’s evident competence.

As Empire’s counsel forcefully argued, the whole point of TMI in any kind of net lease – certainly a “triple net” lease – is to ensure the landlord is not exposed to the costs of ownership. The more “net” the lease is, the more the landlord transfers the risk of expense fluctuations to tenants. Here, despite the language of the subleases, the fact that Empire occupied part of the premises and leased from Siemens buildings that were not in use complicated Empire’s ability to insulate itself from costs. Nevertheless, it appeared that Empire posted outside expenses to QuickBooks and did not post internal expenses such as payroll. Whatever the rationale or the legality of this practice, I fail to understand how Empire could have underestimated the TMI expenses year after year, without realizing the problem until 2018.

I also observed during the cross-examinations of Ms. Cadete and Mr. Rehman that Empire conducted no review of the electrical charges. The timing of the TMI reconciliation reports, as well as the three attempts to influence Mr. Rehman’s conclusions, tend to support the conclusion that the reports were intended to deflect or mitigate the obvious conclusion that Empire would be found liable to AZZ for having overcharged for electricity.

I therefore find that the reports by Mr. Rehman lacked credibility and were based on unreliable data. Any conclusion that Empire was undercharging for TMI is unfounded, and I will not allow any set-off or counterclaim based on this head of claim. The same credibility gap exists in the claims other than the dispute over the electrical charges: they have the air of strategic claims to deflect or spread liability.

5. EMPIRE’S CLAIM AGAINST AZZ OR BY CROSSCLAIM AGAINST IBT FOR: (A) THE VALUE OF IBT’S USE OF OUTDOOR STORAGE SPACE; (B) OVERHOLDING BEYOND THE SUBLEASE TERM; AND (C) THE COST OF CLEANING OUT AN ELECTRICAL SUBSTATION

Outdoor Storage

Empire claims that IBT moved pallets, equipment and antique cars to the outside yard, in areas that AZZ did not lease from Empire. In the litigation, it claims $53,471.60 as the fair value of this use. In one email of March 21, 2017, Mr. Khalifa complained to AZZ that the outside was looking like a scrap yard and that allowing IBT to store material there was a courtesy. Both AZZ and IBT seized on words in that email that “we are not even charging for that” as signifying a waiver of any occupation rent. They also pointed to the assistance of Empire’s maintenance personnel in moving the material from one part of the yard to another as evidence of condonation.

There was no dispute that IBT stored materials and some antique vehicles on the premises. In common law, a tenant has implied licence to bring chattels onto property outside the demised premises. This licence is temporary and must be ancillary to the tenancy. I accept Empire’s argument that the use by IBT constituted use beyond ancillary needs. IBT may have been a licensee, but it arose from the sub-subtenancy by AZZ. AZZ was responsible for IBT’s occupation of the demised unit. It therefore follows that AZZ, as the intermediary between Empire and IBT, should have negotiated any expansion of the sublease to include outdoor premises or to require IBT not to occupy that space.

Nevertheless, Empire submitted no evidence of the footprint of the storage use or of market value for it. I am unable to take judicial notice of the rental value of outdoor storage space in the industrial quarter of Hamilton. I therefore exercise my discretion to award damages for the extended licence to store the materials by assessing damages against AZZ (not against IBT) in the total amount of $20,000, a figure that may seem random or arbitrary but is my best estimate of parties’ expectations at the time based on the paucity of evidence.

Several Days’ Overholding

Empire claimed $40,092.78 against AZZ for IBT remaining on the property for ten days after the lease expiry date of July 31, 2018, based on a pro-rated calculation and the double-rent provision under s. 58 of the Commercial Tenancies Act, R.S.O. 1990, c. L.7. That section, redacted of unnecessary parts, reads:

58 Where a tenant … wilfully holds over the land … after the determination of the term, and after notice in writing given for delivering the possession … the tenant or other person so holding over shall … pay to such person or the person’s assigns at the rate of double the yearly value of the land so detained for so long as it is detained, to be recovered by action in any court of competent jurisdiction, against the recovering of which penalty there is no relief.

Empire’s claim is legally untenable as against IBT because there was no privity of contract between those parties. Any liability for IBT’s overholding would be as between Empire and AZZ and between AZZ and IBT.

There was no dispute that Empire locked IBT out of the premises for three or four days prior to the end of the sublease term. IBT contended that this prevented its forces from moving its equipment out of the unit. IBT also maintained that Empire expressed interest in IBT’s paint booth and wanted it left there. After the July 31, 2018, term expiry, IBT states that Empire changed its mind and asked for the removal of the booth. There was some evidence that IBT reattended during the ensuing week to remove the paint booth.

Empire’s evidence at its highest was that IBT left the paint booth onsite. There was no evidence that IBT had remained, to the exclusion of Empire. This does not amount to overholding of the land. Between Empire and IBT’s evidence about the paint booth, Empire has not established, on a balance of probabilities, that IBT wilfully left the paint booth behind. On the contrary, it made no sense that IBT dismantled and moved its equipment out, except for the paint booth. The crossclaim and counterclaim for overholding are therefore dismissed.

Electrical Substation Cleaning Costs

Empire claimed $15,198.50 for the cost of cleaning out an electrical substation located in the AZZ/IBT bays and thought to have been contaminated by particulates from IBT’s blasting activities. This occurred on June 3, 2018. Since Empire did not incur the expense of segregating the factory’s electrical grid among subtenants, the substation was part of the common facility.

The court received no cogent evidence of the substation, its construction, and how it could have been affected by IBT’s activities. Given that the factory premises were subleased to manufacturing companies, undoubtedly some of the building’s common elements would be affected by industrial work. There was no evidence or legal basis in the sublease to AZZ that would segregate this maintenance or repair cost from the other operating expenses for which all subtenants and Empire ought to have paid through their monthly TMI allocations.

The counterclaim and crossclaim for this cleaning expense are therefore dismissed.

6. IBT’S CLAIM, BY WAY OF SET-OFF AGAINST EMPIRE AND ANY CLAIM OVER BY AZZ, FOR THE ECONOMIC VALUE OF VARIOUS DEFICIENCIES IT HAD TO REPAIR OR WHICH IMPACTED ITS MANUFACTURING PROCESS

IBT sought set-off for various deficiencies that Empire never corrected. These include non-functional toilets and raccoon infestations. Since I have disallowed any claims by Empire against IBT, I need not determine the liability of Empire for these deficiencies.

In the event my disallowance of the claims by Empire against IBT is set aside, my ruling in the above paragraph still stands. Any claim for abatement by IBT should be against AZZ, since the privity of contract is between those parties. IBT’s claim for deficiencies therefore cannot offset any liability on the part of IBT to Empire in respect of IBT’s occupation of outdoor space or overholding.

7. PREJUDGMENT INTEREST RATE

Both AZZ and Empire took positions on the rate of interest on amounts owed to them.

Empire contended that any amounts owed to them bore 18% annual interest. Under s. 5.5, Empire also took the position that any overpayment by AZZ bore no interest. AZZ contended that the 18% rate applied to the overpayment of electrical charges.

The 18% interest rate appeared in s. 3.4 of the head lease. The parties agreed that the head lease from Siemens operated by step-down application to the subtenancy. Section 12 of the sublease to AZZ appears to be the general provision, but the copy in evidence was too blurry to consider beyond the court taking counsel’s word for it. The 18% applied to any “Rent” past due. By specific definition, “Rent” meant basic rent and additional rent (utilities and TMI).

Section 5.5 of the head lease, as stepped down to the subtenancy, allowed the landlord to repay overpayments after annual review of additional rent, without interest. Since there were no annual reviews, Empire cannot take advantage of this no-interest provision. Rather, the amounts owed by Empire to AZZ arise from the breach of the covenant under s. 3(1) to pass on utility costs based on consumption and not on any regular accounting under s. 5.5.

The liabilities in the case did not attract application of any special contractual interest.

AZZ’s claim for overpayment of electricity charges cannot attract contractual interest, because the contractual provision does not apply. There is no legal support for the imposition of such liability by analogy to past due rent.

Aside from the court’s rejection of the TMI underpayment claim, Empire could not perform a retroactive increase in TMI and claim for 18% on underpayments. Section 3.4 expressly applies to unpaid rent after it is “due and payable”. Empire cannot claim interest on retroactive increases, since AZZ paid the rent, either basic or additional, in the amount invoiced.

The interest liability must therefore be calculated at the rate prescribed under the Courts of Justice Act, R.S.O. 1990, c. C.43, s. 127. Since the statement of claim was issued in the third quarter of 2018, the prejudgment interest rate is 1.5%.

Conclusion

My review of the evidence and legal analysis lead to the conclusion that Empire is liable to AZZ in breach of contract on the main issue of hydro overcharging, in the amount of $418,876. Empire is entitled to an offset of $20,000 for the outdoor storage of AZZ’s sub-subtenant, resulting in a net liability of $398,876.

Since the overcharging accrued for five years of the lease, from 2013 to 2018, the effective prejudgment interest rate during that period is 0.75%, and 1.5% thereafter. Since there is no justification for a forensic accounting of the PJI, for the fluctuations during the first five years and for daily interest between August 2018 and the date of judgment, I exercise my discretion to calculate the PJI in a back-of-the-envelope manner. A more precise per diem calculation is a pointless exercise, because the inputs are discretionary estimates. The PJI during the first five years is therefore $14,957, and $39,887 to the date of judgment, for a total of $54,844.

I expect counsel to settle the costs of the action, counterclaim, and crossclaims, in a business-like manner. If they are unable to do so, counsel for AZZ may contact my judicial assistant for a schedule for exchanging bills of costs and written submissions.

Edward Akazaki
Released: April 25, 2025