North York Family Physicians Holdings Inc. v. 1482241 Ontario Ltd.

North York Family Physicians Holdings Inc., Applicant and 1482241 Ontario Limited, Respondent

Ontario Superior Court of Justice

Corrick J.

Heard: November 2, 2010

Judgment: March 22, 2011

Docket: CV-10-403067

 

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Counsel: Mr. David Preger, Mr. Ahmed Shafey, for Applicant

Mr. Larry Keown, Ms Flora Poon, for Respondent

Subject: Property

Real property.

Corrick J.:

1        This is an application by a tenant seeking relief from forfeiture and a determination of its rights under a lease. The Applicant (“the tenant”) is a holding company that was created for the purpose of holding the lease that is at issue in this application. The Respondent (“the landlord”) is the owner of a multi-storey office building and parking facilities at 240 Duncan Mill Road in Toronto.

2        David Kaplan is the president of the tenant company, and is also a director of the North York Family Health Team Inc., which is a party to a separate, unrelated lease with the landlord for office space on the 7th floor of the same building.

3        On March 2, 2009, the tenant and landlord entered into a lease agreement for suite #103 in the building at 240 Duncan Mill Road, and for 181 parking spaces on the property. With the knowledge and approval of the landlord, the tenant entered into a sublease with Shoppers Drug Mart for the purpose of opening and operating a pharmacy in the suite.

4        The landlord and the tenant are sophisticated business people. There is no evidence of an inequality of bargaining power between the two parties.

5        On March 17, 2010, the landlord served the tenant with a letter terminating the lease immediately.

6        On June 9, 2010, E. MacDonald J. granted an interim order allowing the tenant to continue using the premises and parking pending the hearing of the application.

7        On August 13, 2010, Jennings J. adjourned the hearing of the application on condition that the tenant pay certain monies into court, and continue to pay rent, which could be accepted by the landlord without prejudice to its position that the lease has been terminated. Prior to the hearing before Jennings J., the landlord refused to accept rent cheques from the tenant.

8        There are four issues to be decided in this case:

a. the lease commencement date,

b. the parking rent commencement date,

c. payment of the leasehold improvement allowance, and

d. the tenant’s right to set off amounts against parking rent.

Lease Commencement Date

9        The landlord submits that the lease commenced on March 1, 2009, and the tenant’s obligation to pay rent commenced on April 1, 2009, following a one-month rent-free period during which the tenant could make its leasehold improvements. The tenant submits that the date on which it was obligated to pay rent was a function of the date the landlord’s work was completed to deliver the premises in base building condition plus a one-moth rent-free period, which was June 22, 2009.

10        The landlord relies on section 4.01 of the lease, which it submits is clear and unambiguous. It reads as follows:

4.01 To have and to hold the Premises for and during the Term of Nine (9) years and Seven (7) months, to be computed from and inclusive of the first (1st) day of March 2009 and ending on the thirty-first (31st) day of October 2018.

The Tenant will be provided a one (1) month rent free period commencing March 1, 2009 (the “Fixturing Commencement Period”) for the purposes of installing the Tenant’s leasehold improvements, furniture and fixtures in the Premises. … Subject to the completion of the Landlord’s Work at section 5.06 and payment of the Leasehold Improvement Allowance at section 5.07 hereof the Landlord hereby acknowledges that the tenant and its subtenant shall complete the construction and completion of the premises without its further involvement.

The Commencement Date shall be immediately next following the end of the Fixturing Commencement Period which is therefore understood by the parties to be April 1, 2009.

11        The tenant’s position is that the landlord was required to deliver the premises in base building condition by March 10, 2009. It failed to do so, which prevented the tenant from commencing its leasehold improvements. According to David Kaplan’s affidavit, filed on behalf of the tenant, the landlord completed its work, and Shoppers Drug Mart immediately took possession of the space, on June 22, 2009.

12        Notwithstanding the tenant’s position that the term of the lease did not commence until June 22 2009, it paid base and additional rent of $3,970.31 for each of the months of April, May and June as a good faith gesture. It seeks a credit of that amount against future rent payable.

13        The tenant bases its position on a number of different provisions of the lease.

2.01 In consideration of the Rents, covenants and agreements contained in this Lease to be paid, observed and performed by the Tenant, the Landlord has demised and leased and by this indenture demises and leases the Premises, being Suite 103 having a Gross Leasable Area of Fifteen Hundred (1,500) square feet, to be confirmed by Architects drawings ….

Schedule A “Premises” means the portion of the Building demised to the Tenant, which is described in Section 2.01 and shown outlined in red on the plan of the Building annexed as Schedule “C”, leased to the Tenant, including the floor and ceiling slabs, interior walls separating such premises from adjacent premises, the inside surface of the walls, ceilings and floors of such premises, exterior and interior doors and the interior surfaces of windows, all mechanical and electrical and water. … .

5.06 The Landlord shall remove and dispose of all existing walls, flooring, and other leasehold improvements, and shall deliver the Premises to the Tenant in base building condition, clean and ready for construction of the Tenant’s and Subtenant’s Work by March 10, 2009 (the “Turnover Date”).

5.01 … If the Term does not commence on the first day of a calendar month, Base Rent for the broken part of a calendar month at the commencement or end of the Term shall be pro-rated …

14        When the lease was signed, suite #103 was not separated from the vacant adjacent premises by walls. Rather, the landlord had demised suite #103 by laying green tape on the ground where two interior demising walls were to be built. The tenant submits that delivery of a taped area was not delivery of the premises in base building condition in accordance with s. 5.06 of the lease or the definition of “premises” in schedule A. Shoppers Drug Mart ultimately built the walls on behalf of the landlord in June, and took possession on June 22, 2009. The tenant submits that the lease contemplated that the commencement date was a moving target in s. 5.01, which provides for the pro-rating of the rent if the term does not commence on the first day of a calendar month.

15        The landlord argues that “base building condition” is not defined in the lease and that there is no authority for the proposition that it includes interior walls. The landlord submits that it was obligated under s. 5.06 to demolish what was in the space and to deliver it vacant to allow the tenant to build its leasehold improvements. The building of the walls required a building permit. To interpret the lease as requiring the landlord to obtain a building permit to construct two walls is not a commercially reasonable interpretation, according to the landlord.

16        Based on the definition of premises contained in Schedule A, I find that at the time of entering into the lease, the parties intended that the landlord would deliver suite #103 by March 10, 2009 in base building condition, which included interior walls separating it from the adjacent premises. Contrary to the landlord’s submission, interpreting the lease in a way that permits the landlord to lease premises that are demised by tape on the floor is not an interpretation that promotes a sensible commercial result. It is difficult to imagine how a tenant could make interior leasehold improvements without all of the walls demising the space.

17        The language used to define the commencement date in s. 4.01 is, in my view, consistent with the understanding of the parties that the date may change.

18        Although it is unnecessary to go beyond the four corners of the lease to reach this conclusion, I note that it is consistent with the manner in which the parties conducted themselves. Throughout April, May and June, Shoppers Drug Mart began negotiating directly with the landlord regarding the demising walls. A series of emails between Shoppers Drug Mart and the landlord indicates that the parties agreed on April 9, 2009 that Shoppers Drug Mart would build the walls on the landlord’s behalf and at the landlord’s expense. On June 1, 2009 at 11:17 a.m., the landlord changed its position and indicated that it would build the walls. On the same day at 4:17 p.m., the landlord changed its position again and agreed to have Shoppers Drug Mart build the walls for $8,000.00. This is consistent with the finding that the building of the demising walls was the responsibility of the landlord.

19        The landlord submits that it is not responsible for the delay between April 1 and June 22, 2009. The tenant did nothing between March 1 and April 2, 2009, which was the fixturing period according to the lease. The landlord submits that it first heard of problems with the condition of the premises by email on April 2, 2009, and by April 9 the parties had agreed that Shoppers Drug Mart would build the demising walls on behalf of the landlord. The rest of the delay was due to the difficulties the tenant had obtaining a building permit.

20        This submission is not borne out by the evidence. An email dated April 2, 2009 from Shoppers Drug Mart to the tenant and the landlord references a meeting held on March 24 between Shoppers Drug Mart and the landlord, and references “new drawings” the landlord requested, implying that there were previous drawings. It is apparent that discussions and negotiations were occurring throughout March, but that matters could not proceed until the demising walls were built.

21        I find that the date upon which rent monies were payable by the tenant was June 22, 2009, the date Shoppers Drug Mart took possession of the premises following completion of the landlord’s work.

Parking Rent Commencement Date

22        The tenant leased 181 parking spaces from the landlord. The landlord submits that the parking rent commencement date was April 1, 2009. The tenant submits that parking rent was not payable until August 1, 2009, when Shoppers Drug Mart opened for business. This is a significant issue for the parties as the parking rent was substantially higher than the base rent.

23        The provision in the lease dealing with parking provides, in part, as follows:

4.02 Throughout the Term, the Landlord shall provide subject to all municipal by-laws, and the Tenant shall have the right to use 181 organized parking spaces in the building’s parking areas at the initial monthly rates as allocated below for the term of the Lease:

Area A: 25 Unreserved Underground Spaces $95 per space gross per month plus all applicable taxes

Area B: 156 Unreserved Exclusive Surface Lot Spaces at $75 per space gross per month plus all applicable taxes (“Visitor Area Parking”), Commencement Date to match start of Tenant Business within the Premises

24        The landlord submits that this provision is clear. Parking rent was payable when the tenant (North York Family Physicians Holdings Inc.) commenced business. The landlord points to the evidence of David Kaplan that the business of North York Family Physicians Holdings Inc. was to hold the lease, and in holding the lease, the tenant was entitled to receive income for leasing suite #103 to Shoppers Drug Mart, and for leasing the 181 parking spaces. This business began on April 1, 2009, and thus parking rent became payable on that date.

25        The landlord also argues that s. 4.02 specifies the start of “tenant” business, not “subtenant” business. Other lease provisions refer specifically to the subtenant, and it is thus clear that the commencement date of parking rent was not matched to the commencement date of Shoppers Drug Mart’s business.

26        In support of its submission that the obligation to pay parking rent did not arise until Shoppers Drug Mart opened for business, the tenant relies on the language of s. 4.02, the definition of premises in Schedule A, the description of the premises in s. 2.01, and the use that can be made of the premises set out in s. 6.06 of the lease.

27        According to the tenant, it leased suite #103, which according to s. 6.06, “shall be used for general offices for a license to a pharmacy dispensary and a medical supply.” The words “tenant business within the premises” used in s. 4.02 can only refer to the pharmacy as no other business was being conducted within suite #103. Section 6.06 prohibited the conduct of any other business within suite #103.

28        In my view, s. 4.02 cannot be read as a stand-alone provision. It must be read within the context of the language of the entire agreement. The use of the word ‘tenant’ in s. 4.02 is not determinative of the issue, because the tenant was not conducting business within the premises. Other provisions in the lease use the word ‘tenant’ when the provision relates to Shoppers Drug Mart. For example, s. 6.06(b) provides that “the tenant shall occupy the Premises and commence its business operations in the Premises from and after the Commencement Date….” The tenant, as a holding company, was not occupying suite #103 nor was it commencing business operations in suite #103. It commenced business operations when it signed the lease.

29        Furthermore, ‘commencement date’ is a defined term in Schedule A of the lease and is also described in s. 4.01. If parking rent were payable on the commencement date of the lease, it would have been unnecessary to specify a different commencement date for parking rent in s. 4.02. When read in the context of the entire lease, I find that s. 4.02 is capable of more than one interpretation.

30        Although the Supreme Court of Canada in Eli Lilly & Co. v. Novapharm Ltd., [1998] 2 S.C.R. 129 held that courts ought not to consider extrinsic evidence when construing a written document, that rule does not apply when the document is unclear and ambiguous on its face: Hi-Tech Group Inc. v. Sears Canada Inc., (2001) 52 O.R. (3d) 97 (C.A.).

31        In this case, the extrinsic evidence relevant to the parking rent demonstrates, in my view, that parking rent was not payable until August 1, 2009. In May 2009, the landlord invoiced the tenant for net rent, operating costs and parking rent. A revised invoice excluding parking rent was subsequently sent to the tenant. The tenant was not charged parking rent for the months of May, June or July. The landlord first invoiced the tenant for parking rent (other than in May) on August 1, 2009. In addition, the landlord collected parking revenues until August 1, 2009 from the parking spaces that were leased to the tenant.

32        There is conflicting evidence about whether the tenant had access to the parking spaces between April and August 2009. The landlord claims the tenant had full access to the parking spaces during this time. In an affidavit filed on behalf of the landlord, Alain Checroune, the president of the landlord, deposes that in March 2009 he took all of the necessary steps to deliver the 181 parking spaces to the tenant. He allocated new parking spaces in nearby properties and in the underground to Community Living, one of the tenants of the building. According to Mr. Checroune, the only reason the tenant was not collecting parking revenue was because it had not hired a parking management company.

33        The tenant claims that the parking lot was gated and that the landlord did not provide parking passes to enable entry to the parking lot until July 27, 2009. An e-mail filed on behalf of the tenant indicates that the landlord advised its parking management company on July 22, 2009 that it had leased the surface parking lot to the tenant. Contrary to Mr. Checroune’s statement that he allocated new parking spaces at other properties or underground to Community Living, an email he sent David Kaplan on June 28, 2009 attaching the parking list indicated that Community Living had fifteen parking spots. Finally, throughout this period, the landlord collected revenue from the parking spaces, a fact that was unknown to the tenant until Mr. Checroune produced statements from Precise Park Link (the landlord’s parking management company) showing revenue the landlord received from the parking spaces.

34        On the basis of the evidence before me, I find that the tenant was required under the lease to start paying parking rent on the date that Shoppers Drug Mart opened for business in Suite #103.

Lease Improvement Allowance

35        It is not disputed that the landlord was required to pay a leasehold improvement allowance in the amount of $37,500.00 plus applicable taxes forthwith after the leasehold improvements were completed. Nor is it disputed that the landlord has not paid the leasehold improvement allowance. The parties dispute who is to be paid the allowance — the tenant or Shoppers Drug Mart.

36        The dispute revolves around the wording of s. 5.07, which is as follows:

The Landlord shall pay to the Tenant a leasehold improvement allowance in an amount equivalent to Twenty-Five ($25.00) Dollars per square foot of the Gross Leasable Area plus all applicable taxes to be paid directly to the Subtenant Shoppers Drug Mart forthwith after the Leasehold Improvements are completed.

37        The landlord submits that the tenant has no standing to raise this issue with the court because the money is payable to Shoppers Drug Mart. The tenant submits that the landlord is required by s. 5.07 to pay the allowance to the tenant.

38        The lease is an agreement that binds the landlord and the tenant. Shoppers Drug Mart is not a party to this agreement. In light of this, I conclude that the landlord is required to pay the leasehold improvement allowance to the tenant.

Right of Set Off Against Parking Rent

39        As a result of the landlord’s refusal to pay the tenant the leasehold improvement allowance, the tenant reduced its monthly payments by $14,548.75 in each of October and November 2009. This was the amount due to the landlord for parking rent for October and November.

40        Section 6.01 of the lease provides that the tenant will pay all rent without any deduction or set-off whatsoever. The resolution of this issue turns on whether parking rent falls within the meaning of ‘rent’ in s. 6.01.

41        The definitions of many of the relevant terms are set out in Schedule A. “Rent” is defined as “including base rent and additional rent.” “Base Rent means the Rent referred to in Section 5.01.” “Additional Rent means all sums, however described, payable by the Tenant under this Lease, other than Base Rent, whether payable to the Landlord or others, and including, without limitation, Property Taxes and the Tenant’s Proportionate Share of all amounts payable under this Lease.”

42        The tenant submits that parking rent is not additional rent, and it is therefore entitled to set off the amount of the leasehold improvement allowance against amounts owed for parking rent. The tenant argues that additional rent is charged by the square foot, and includes amounts such as operating costs. Parking rent is billed separately and charged on the basis of the number of parking spaces leased.

43        The landlord submits that the definition of ‘additional rent’ in Schedule A is clear and unambiguous and includes all sums, however described, payable by the tenant under the lease. Parking rent, in the landlord’s submission is a sum payable by the tenant under the lease and therefore falls within the definition of ‘additional rent.’

44        I agree that the definition of ‘additional rent’ in Schedule A is clear and unambiguous. It includes all sums payable by the tenant under the lease. Parking rent is such a sum. I therefore conclude that parking rent is additional rent, and the tenant was not entitled to set off the amount of the leasehold improvement allowance against it.

Relief from Forfeiture

45        Having found that the tenant breached the term of the lease prohibiting set off, the court must determine the effect of the breach. The landlord seeks a declaration that the lease is terminated due to the breach. The tenant seeks relief from forfeiture pursuant to s. 20(1) of the Commercial Tenancies Act, R.S.O. 1990, c. L.7. Relief from forfeiture is a discretionary remedy. Section 20 requires the court to consider the proceeding within which the application for relief is sought, the conduct of the parties, and all of the circumstances of the case in determining whether the case is appropriate for relief.

46        In Greenwin Construction Company Ltd. v. Stone & Webster Canada Ltd. (2001), 55 O.R. (3d) 345 (S.C.J.), Cameron J. set out the three criteria the court must consider before granting relief from forfeiture at para. 26:

1. the conduct of the applicant and gravity of the breaches;

2. whether the object of the right of forfeiture in the lease was essentially to secure the payment of money; and

3. the disparity or disproportion between the value of the property forfeited and the damage caused by the breach.

47        I have found that the tenant breached the lease by deducting $29,097.50 from the monies it owed the landlord on account of parking rent in October and November 2009. In determining whether to grant the tenant relief from forfeiture I have taken the following into account:

a. the landlord breached the terms of the lease by failing to pay the tenant the leasehold improvement allowance of $37,500.00 plus applicable taxes;

b. the tenant paid the sum of $10,719.76 to the landlord on account of rent for the months of April, May and June 2009 despite the fact that it disputed whether it was payable;

c. the tenant has paid the amount owing for parking rent for October and November 2009 into court pursuant to the order of Jennings J. dated August 13, 2010;

d. the amount owing the landlord for the breach is not substantial; and

e. the lease is only in the second year of a ten-year term.

48        I conclude that to refuse relief from forfeiture in this case would be disproportionate to the breach. The test set out by Cameron J. in Greenwin Construction Company Ltd. v. Stone & Webster Canada Ltd. has been satisfied, and the tenant will be granted relief from forfeiture.

Conclusion

49        For the foregoing reasons, I order as follows:

a. base and additional rent, not including parking rent, first became payable on June 22, 2009;

b. the amount of $10,719.76, representing the amount of base and additional rent the tenant paid the landlord for April, May and June (until the 22nd of June), 2009, shall stand as a credit against future base and additional rent payable by the tenant under the lease;

c. parking rent first became payable as part of additional rent on August 1, 2009;

d. the tenant is granted relief from forfeiture of the lease;

e. the landlord shall pay the tenant the leasehold improvement allowance of $39,375.00 as follows: the amount of money the tenant has paid into court pursuant to the order of Jennings J. dated August 13, 2010, shall be returned to the tenant, and the balance of the leasehold improvement allowance shall stand as a credit against future base and additional rent payable by the tenant under the lease;

50        I make no order regarding interest payable to the tenant on the rent that was paid in April, May and June 2009, or to the landlord for parking rent deducted in October and November 2009.

Costs

51        If the parties are unable to agree on costs, each party may make brief written submissions of no more than five pages in addition to the costs outline within 21 days of this order.

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