Recent Case Law Developments

Indigo Books & Music Inc. v. Manufacturers Life Insurance Co. [2009] O.J. No. 1121 (Ontario Superior Court of Justice, March 18, 2009, T.R. Lederer J.)

This case involved the reliability of using working papers created by the assessment authority in determining the tenant’s contribution to realty taxes. The landlord and tenant entered into a lease a few days after business taxes and separate assessments for premises in multi-tenant commercial buildings were legislatively eliminated. The lease stated that the landlord would allocate taxes to the tenant’s premises on the basis of a separate assessment. However, if no such separate assessment was available or if no “other information deemed sufficient by the landlord” was available to make the calculations, then the tenant’s contribution would be the tenant’s proportionate share of the landlord’s taxes.

The landlord calculated the tenant’s contribution to realty taxes based on its proportionate share. The tenant claimed that the landlord did not properly adhere to the hierarchy set out in the lease. The tenant maintained that there was “other information” (found in the assessor’s working papers prepared for the building) which should have been deemed sufficient by the landlord to make the calculations. In the tenant’s view, the landlord should not have used its proportionate share for the calculations.
In determining whether the “other information” found in the working papers was reliable, the Court referred to previous case law dealing with this issue. In prior decisions, courts have noted that the calculations made in working papers are informal and discretionary and are not governed by legislation. The assessments found in the working papers are not apportioned on a tenant-by-tenant basis. Working papers are not intended to apply to individual premises; rather they demonstrate a value for the entire property. Accordingly, the calculations are not considered reliable on an individual basis. The Court also noted that disagreements between property owners and assessment authorities regarding the assessed value of a property are usually resolved through discussion, negotiation and settlement but assessors do not always adjust their working papers to reflect these settlements.

The Court held that working papers could not be considered accurate or reliable and concluded that it was within the landlord’s discretion to deem the information in the working papers insufficient to complete the calculations of additional rent under the lease.

Tradedge Inc. (c.o.b. Shoeless Joe’s) v. Tri-Novo Group Inc. [2009] O.J. No. 1857 (Ontario Superior Court of Justice, May 4, 2009, p. Lauwers J)

The tenant leased space from the landlord to operate a “Shoeless Joe’s” restaurant. The tenant’s business began to suffer and the landlord was aware of the tenant’s financial difficulties. The tenant and a proposed assignee entered into a sale agreement, which was conditional upon an assignment of the lease. Under the lease, the tenant could not assign without the prior written consent of the landlord, which could not be unreasonably withheld.

The landlord was concerned about the proposed assignee’s financial condition and refused to consent to the assignment unless the proposed assignee agreed to pay an increased rent and inducements. The landlord and the proposed assignee entered into negotiations for the new terms, including increased rent. The proposed assignee agreed to the increased rent and to enter into an assignment and amending agreement with the landlord. When the landlord delivered the agreement to the proposed assignee, it contained additional terms that the proposed assignee had not agreed to. Many of the amendments in the agreement had nothing to do with the proposed assignee’s financial condition. The proposed assignee refused to agree to the additional terms.

The proposed assignee offered to post security by way of a letter of credit in the amount of $100,000.00. In addition, the proposed assignee provided the landlord with a letter from its bank confirming that it had been approved for a $250,000.00 loan, including $150,000.00 for renovations to the premises. The proposed assignee and the landlord continued to negotiate and eventually agreed on the financial terms of the assignment: the proposed assignee would pay the increased rent and a deposit towards the landlord’s legal costs for the assignment agreement.

Despite the agreement between the landlord and the proposed assignee, the landlord did not provide its consent and the lease was not assigned. The tenant vacated the premises and the landlord leased the space directly to the proposed assignee, requiring it to pay $175,000.00 as an inducement to signing the lease. The tenant brought an application for a determination as to whether the landlord unreasonably withheld its consent to the proposed assignment.

The Court found that the landlord had a collateral agenda, which was to increase the rent. The landlord saw the assignment as an opportunity to increase rent. The Court noted that the increased rent would not have had the effect of increasing the landlord’s security, but rather would have increased the landlord’s risk that the proposed assignee would fail. In the Court’s view, the landlord would not have been worse off by consenting to the assignment; in fact, considering the tenant’s failing business, the landlord may have been better off by consenting in light of the fact that the proposed assignee was better funded and planned to improve the premises. The Court held that it was not legitimate for a landlord to insist on increased rent to compensate for the perceived financial weakness of a proposed assignee, and ruled that the landlord unreasonably withheld its consent to the assignment.

Linens ‘N Things Canada Corp. (Re) [2009] O.J. No. 2091 (Ontario Superior Court of Justice In Bankruptcy and Insolvency, May 22, 2009, Registrar S.W. Nettie)

The landlord and tenant entered into a lease for a 10½ year term. The premises was a standalone structure in which the landlord had invested significant amounts for construction, improvements and a tenant’s allowance. On October 31, 2008, the tenant made an assignment into bankruptcy. The trustee in bankruptcy occupied the tenant’s premises until December 29, 2008 and disclaimed the lease on January 16, 2009. The trustee allowed the landlord’s claim for arrears of rent but disallowed the landlord’s claim for damages in the amount of $3,693,984.00 for its expenses. The landlord appealed to the Court.
The landlord maintained that it built an expensive building for the tenant in a less than valuable location, paid substantial amounts for the tenant’s allowance and commission on the lease and expected to recover these costs over the term of the lease. Although the landlord agreed that it could only claim three months arrears of rent and three months accelerated rent as provided for in the Commercial Tenancies Act and the Bankruptcy and Insolvency Act, it sought to characterize its claim as one for damages for breach of contract, rather than as rent. The landlord relied on the case Highway Properties Ltd. v. Kelly, Douglas and Co. for the proposition that a landlord could have recourse not only to its right as a landlord but for contractual damages as well.

The Court distinguished Highway Properties because in that case the tenant repudiated the lease – there was no insolvency and the BIA or CTA were not applicable. The Court noted that the trustee in bankruptcy had the right to surrender or disclaim a lease and if it elected to do so, the effect was as if the parties consensually ended the lease. The Court held that the governing statutes did not provide for the type of claim advanced by the landlord. On the basis that the trustee’s disclaimer caused the lease to be at an end and no claim for damages could be founded; the Court concluded that the trustee properly disallowed the landlord’s claim.

ClubLink Corp. v. Pro-Hedge Funds Inc. [2009] O.J. No. 2660 (Ontario Superior Court of Justice, June 11, 2009, G.R. Strathy J.)

The tenant leased space in an office building located on golf course grounds owned by the landlord. Under the lease, the tenant had a right of first refusal over certain additional premises and 16 reserved parking spaces in front of the premises. The first dispute between the parties arose when the landlord offered the additional premises to the tenant. The tenant notified the landlord that it wished to lease the additional premises, but would not pay rent until certain work was completed by the landlord. The landlord insisted that the tenant commence paying rent at an earlier date. The landlord notified the tenant that it intended to lease the additional premises to another party.

The second dispute arose during the 2008 Canadian Open golf tournament, when the Royal Canadian Golf Association (RCGA) controlled the landlord’s golf course for the week-long event. All tenants were notified that there would be no direct access to the office building during the tournament and all employees would require passes. In addition, the tenant was advised that it would not have access to its parking spaces as these were required for use by the RCGA. A shuttle bus was set up to transport tenants and their employees from off-site parking spaces. The off-site parking was muddy as a result of heavy rain and the tenant became irritated with the parking situation. The tenant’s president insisted that he had the right to park in front of the premises and refused to move his car. The landlord terminated the lease, alleging that the tenant’s conduct had jeopardized the landlord’s relationship with RCGA.

The landlord sought a declaration that the lease was validly terminated. The landlord also claimed that it was entitled to terminate the lease on the basis that there were unauthorized transfers when the tenant changed its corporate name and permitted a sister company to use a portion of the premises.

The tenant sought to enforce its right of first refusal for the additional space and its right of uninterrupted access to the parking spaces in front of the premises and claimed damages for the landlord’s wrongful termination of the lease.
The Court held that the landlord was not entitled to terminate the lease. The tenant’s conduct was annoying to the landlord, but was not sufficiently reprehensible to warrant termination. The tenant’s behavior did not amount to a nuisance in the legal sense. The Court found that there was no evidence that the tenant’s conduct had a negative impact on the landlord’s relationship with RCGA and ruled that it could not terminate on this basis. The Court also found that nothing in the lease permitted the landlord to suspend the tenant’s use of the parking spaces and concluded that the tenant was entitled to the 16 parking spaces located in front of the premises.

The tenant’s change of corporate name, did not, in the Court’s view, constitute a transfer of the lease because it did not create a new corporate identity nor did it affect the tenant’s covenant. The Court also rejected the landlord’s claim that by permitting its sister company to temporarily use the space the tenant had transferred the lease. The Court was satisfied that no right of use or occupancy had been conferred upon the sister company. Rather, the tenant simply granted temporary permission to the sister company, which could have been revoked at any time.

Regarding the right of first refusal, the Court held that the tenant properly exercised this right. Having been informed that the tenant wished to lease the additional premises, the landlord had a duty to negotiate in good faith to resolve any outstanding issues, including necessary leasehold improvements. The Court ruled that the tenant was entitled to lease the additional premises.

Norwood Plaza Inc. v. 2050146 Ontario Inc. (c.o.b. Original Marines Family Clothing Store) [2009] O.J. No. 1961 (Ontario Superior Court of Justice, May 14, 2009, F.N. Marrocco J.)

In 2004, the landlord entered into a lease with a numbered company and an individual as the indemnifier. In 2006, the tenant and the indemnifier were given notice of certain defaults, which they did not remedy. The landlord took possession of the premises and eventually re-leased the unit in 2008. The landlord brought a claim against the tenant and the indemnifier for damages.

The indemnifier, an owner of a construction company and part owner of two real estate properties, claimed that he was not represented when he signed the lease and was unaware of his personal liability. The indemnifier maintained that he was under the belief that the numbered company which he had incorporated for the purpose of entering into the lease was the only entity that was responsible for the payment of rent.

The Court did not accept the indemnifier’s evidence and found that he was an intelligent person with 23 years of business experience. The indemnifier agreed that he had access to legal counsel but denied receiving any advice regarding the lease transaction. The fact that the indemnifier had extensive experience (his own properties were leased to tenants), led the Court to conclude that he would have been careful about signing in his personal capacity and knew he was agreeing to be liable for the tenant’s defaults.

997484 Ontario Inc. v. Extreme Properties Inc. [2009] O.J. No. 1787 (Ontario Court of Appeal, May 4, 2009, W.K. Winkler C.J.O., J.C. MacPherson and J.L. MacFarland JJ.A.)

The subtenant leased space from the sublandlord. The sublease was set to expire on May 30, 2006. On February 27, 2006, the subtenant vacated the premises without notice to either the sublandlord or the head landlord. The head landlord changed the locks and retook possession of the premises. The head landlord’s notice, which was dated February 28, 2006 and received by the sublandlord on March 2, 2006, stated that it was treating the subtenant’s departure as a repudiation and termination of its lease agreement with the sublandlord. The sublandlord was prepared to pay rent on March 1, 2006, but the head landlord had already taken possession of the premises. The head landlord brought a claim for damages against the subtenant and the sublandlord for breach of lease. The sublandlord brought a motion to dismiss the head landlord’s claim.

The lower Court held that the departure of the subtenant did not constitute a breach of the provisions of the lease. At the time it vacated the premises, rent was fully paid and there was no default as the lease contained no covenant to operate. The lower Court ruled that the head landlord acted too soon and by terminating the lease, the head landlord fundamentally breached the lease. The lower Court concluded that the sublandlord was entitled to treat the agreement as at end. The head landlord appealed this decision.

The Court of Appeal upheld the lower court decision. The Court of Appeal noted that the result may have been different had the head landlord waited to see if the rent for March 1, 2006 was in arrears before repossessing the premises. The Court of Appeal concluded that the head landlord’s actions amounted to a fundamental breach of the lease.