



COURT OF APPEAL FOR ONTARIO

CITATION: 1079268 Ontario Inc. v. GoodLife Fitness Centres
    Inc.,

2017 ONCA 12

DATE: 20170110

DOCKET: C61367

Cronk, Rouleau and Huscroft JJ.A.

BETWEEN

1079268 Ontario Inc.

Applicant (Respondent)

and

GoodLife Fitness Centres Inc.

Respondent (Appellant)

John K. Downing and Brian Whitwham, for the appellant
    GoodLife Fitness Centres Inc.

Kevin D. Sherkin, Elizabeth Barrass and Carmine Scalzi,
    for the respondent 1079268 Ontario Inc.

Heard:  September 19, 2016

On appeal from the order of Justice Ruth E. Mesbur of the
    Superior Court of Justice, dated October 5, 2015, with reasons reported at 2015
    ONSC 6772.

Huscroft J.A.:

[1]

The issue in this appeal is ostensibly a simple one: does the appellant GoodLife
    Fitness Centres Inc.s (GoodLife) lease with the respondent 1079268 Ontario
    Inc. (107) of 635 Danforth Avenue, in Toronto, include the basement of the
    premises?

[2]

One would expect the matter to be resolved by the provisions of the
    lease, but, as counsel acknowledged, the lease in this case is not a model of
    clarity. It includes inconsistent and contradictory provisions.

[3]

The application judge held that the lease does not include the basement,
    which GoodLife has been using since its tenancy began. She declined 107s
    request to rectify the lease, but ordered GoodLife to pay occupation rent for its
    past use of the basement.

[4]

GoodLife appeals from this order.

[5]

I would allow the appeal. In my view, although the application judge acknowledged
    the need to consider the circumstances surrounding the negotiation in
    interpreting the lease, she erred in law in failing to consider all the
    relevant circumstances. Considered as a whole, the surrounding circumstances
    demonstrate that the lease includes the basement.

Background

The lease

[6]

The lease in question was executed by 107 with GoodLifes predecessor, Extreme
    Fitness (Extreme), on October 30, 2006, following lengthy negotiations
    between their lawyers and the exchange of several draft leases.

[7]

The lease included the following provisions:

1.1     Basic terms



(c) Property: the development situate on the Lands legally
    described as Part Lot 7 to 8, Plan 200 Toronto and Part Lot 24 -27, Plan 306E
    Toronto as in CT782043, City of Toronto (being PIN 21062-0414 LT) and
    municipally known as 635 Danforth Avenue, Toronto, Ontario M4K 1R2.

(d) Premises: the entire property. The premises consist of
    three floors plus mezzanine, and the floors have the following areas: ground
    floor 11,461 square feet, second-floor 5,526 square feet, third floor 1,026
    square feet, a platform area of 1,654 square feet, and a mezzanine of 4,443
    square feet, which floors are shown on the plans annexed as Schedule A.

(e) Rentable Area of Premises: approximately 24,110 square
    feet, subject to Section 2.2.

...

(g) Basic Rent (Section 4.1):

Period                   Per Sq. Ft./Year    Per Year                Per
    Month

Term 1-2               $24.786                 $597,600.00 $49,800.00

Renewal 1: 3-5      $24.786                 $597,600.00 $49,800.00

Renewal 2: 6-10     $25.881                 $624,000.00 $52,000.00

Renewal 3: 11-15   $26.768                 $648,000.00 $54,000.00



2.2 Measurement

[Intentionally Deleted]

...

5.4 Operating Costs

[Intentionally Deleted]

...

6.1 Payment for Utilities

The tenant shall pay promptly when due all charges, costs,
    accounts and any other sums payable by reason of the supply of the utilities
    and services to the Premises. The Landlord shall prior to the commencement date
    at the Landlord's cost, install a separate meter to measure consumption of hydro,
    washer and gas for the Premises and the Tenant shall contract with and pay the
    supplier directly.

6.2 Above-normal Utilization

[Intentionally deleted]

The use of the basement by Extreme

[8]

107 removed kitchen equipment it owned from the basement of the premises
    shortly following execution of the lease. In 2007, Extreme made alterations to
    the premises, including the basement. 107 alleged that these renovations were
    made in breach of the lease, but the dispute was settled with Extremes
    agreement to exercise its first two renewal options and extend the term of the
    lease.

[9]

A second dispute arose in 2008. On April 4, 2008, 107s lawyer, Mr. Singer,
    wrote to Extreme claiming that it had made extensive renovations to the
    basement level as well as the ground, second, third floors and mezzanine of the
    building. He stated that Extreme had converted the basement from a storage area
    to a functional area for use by Extremes fitness club business and that the
    alterations had increased the usable rental area of the building by approximately
    4,600 square feet.

[10]

Extremes
    lawyer, Mr. Westwood, replied in an email dated April 22, 2008. He asserted
    that Extreme was not in breach of the lease because the lease included the
    basement and Extreme was under no obligation to pay additional rent for using it.

[11]

Extreme
    continued to pay the rent due under the lease and 107 took no further action.

[12]

Three
    years later, Extreme was in financial difficulty and as part of its banking
    arrangements required an estoppel certificate from 107. In May, 2011, 107
    signed a certificate stating that its lease with Extreme:

is in full force and effect; the Lease has not been amended or
    modified; no default exists under the Lease; and, to the best of its knowledge,
    all rent and other charges have been paid to the extent payable  .

Assignment of the lease from Extreme to GoodLife

[13]

Extreme
    attempted to restructure its business under the
Companies Creditors
    Arrangement Act
, R.S.C. 1985, c. C-36 (
CCAA
) in 2013. 107
    advanced a claim against Extreme while it was under
CCAA
protection,
    among other things, for back rent for Extremes use of the basement from
    2007-2013. In the course of the
CCAA
proceedings, and with knowledge
    of 107s claim, GoodLife entered into an asset purchase agreement pursuant to
    which it took an assignment of Extremes lease with 107.

[14]

The
    asset purchase agreement required court approval. 107 opposed the sale to
    GoodLife on the basis that Extreme was in breach of its obligations under the
    lease. 107 reiterated its earlier position that the lease did not include the
    basement and that Extreme owed back rent for its use of the basement. In
    addition, 107 asserted that the square footage had been understated in the
    lease and that the premises were significantly larger.

[15]

The
    asset purchase agreement was approved in a vesting order dated March 27, 2013.
    107s claims against Extreme were settled subsequently, and the court ordered
    that 107s claims against GoodLife (post-March 27, 2013) should be adjudicated by
    way of a separate application.

[16]

107
    then brought an application for rectification of its lease with GoodLife and a
    determination of the amount of back rent, if any, that GoodLife owed under the
    lease.

The application judges decision

[17]

On
    the main point  whether the lease included the basement  the application
    judge noted that the lease is internally inconsistent: it describes the
    property both in terms of the whole property and a portion of the property that
    includes specified elements. The application judge could not give meaning to
    all the terms of the lease because some terms contradicted others. Thus, she considered
    some of the features of the negotiations surrounding the formation of the lease
    in order to inform her interpretation of its terms.

[18]

The
    application judge noted that, although Extreme had required approximately
    30,000 square feet for its operations, the figure in the lease was only slightly
    more than 24,000 square feet and the lease referred only to the upper floors
    and mezzanine. The application judge noted, further, that 107 owned a building
    next door that had 6,000 square feet available to lease and that the parties had
    entered into a letter of intent for Extreme to lease that space (although no
    lease of this space was ultimately concluded).

[19]

The
    application judge concluded that the lease did not include the basement. She
    reasoned as follows, at paras. 49 -51:

When I look at the lease as a whole, the square footage
    referred to in it, and the description and schedules describing only the upper
    floors and mezzanine, I conclude the basement was not included in the leased
    premises.

I say this because the approximate square footage referred to
    in the lease is not nearly large enough to include the basement. The schedules
    setting out what is leased do not include the basement floor plan. The lease
    itself says the premises consist of three floors plus a mezzanine. It does not
    refer to the basement as being part of the leased premises. While I recognize
    parts of the lease refer to the whole property, and require the tenant to pay
    all the utilities rather than a proportionate share of them, I see the lease,
    taken as a whole, as excluding the basement.

Other factors support this conclusion as well, including the
    parties continued negotiations for Extreme to take additional space next door
    that would bring its premises to about 30,000 square feet. Those negotiations
    continued over a long period of time, with Extreme continually promising 107 it
    was going to go ahead and lease the additional space.

[20]

The
    application judge went on to conclude that 107 was not entitled to rectification
    of the lease and that 107s claim for rent arrears was not barred by the
    estoppel certificate or its delay in bringing the claim. She calculated rent
    GoodLife owed for its use of the basement based on the rate per square foot set
    out in the lease.

Issues

[21]

GoodLife
    submits that the application judge erred in five ways:

1. By finding that
    the lease was only for three floors plus a mezzanine, and did not include the
    basement;

2. By finding the rent was based on
    cost per square foot;

3. By finding that occupation rent is
    owed;

4. By failing to find that 107s claims
    were barred by estoppel and waiver; and

5. By drawing an adverse inference
    against it for failing to call evidence about what transpired prior to the
    proceedings under the
CCAA
involving Extreme and for failing to examine
    anyone from Extreme.

[22]

The
    first issue  whether the lease includes the basement  is key to the appeal.
    The remaining issues need to be determined only if the application judges
    conclusion that the lease does not include the basement is upheld.

Analysis

The standard of review

[23]

As
    the Supreme Court of Canada explained in
Sattva Capital Corp. v. Creston
    Moly Corp.
,

2014 SCC 53, [2014] 2 S.C.R. 633, contractual
    interpretation is properly characterized as a mixed question of fact and law
    and is subject to deferential review on appeal. Although the court has since
    held that standard form contracts are an exception to this rule and are subject
    to review on the standard of correctness, that exception does not apply here: see
Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co
., 2016
    SCC 37. The provisions of the lease in question were negotiated by the parties and
    their interpretation is subject to the
Sattva
principles.

[24]

Sattva
makes clear that the standard of review is palpable and overriding error, unless
    it is possible to identify an extricable question of law, in which case
    correctness review applies.
Sattva
emphasizes that questions of law are
    relatively rare; courts must be cautious in identifying extricable questions of
    law, lest contractual interpretation collapse into correctness review. Nevertheless,
    the Supreme Court identified three examples of legal errors that may be made in
    the course of contractual interpretation: the application of an incorrect
    principle, the failure to consider a required element of a legal test, or the
    failure to consider a relevant factor:
Sattva
, at para. 53 (citing
King
    v. Operating Engineers Training Institute of Manitoba Inc.
, 2011 MBCA 80,
    270 Man. R. (2d) 63,

at para. 21).

[25]

GoodLife
    submits that the application judge made a palpable and overriding error in
    overlooking critical evidence in the circumstances surrounding the negotiation
    of the lease. 107 submits that the application judges decision reveals no such
    error and that her decision is supported by her factual findings and is
    entitled to deference.

[26]

Although
    I agree with GoodLife that the application judge erred in overlooking critical
    evidence, I would characterize the error as an error of law. In my view, although
    the application judge referred to some of the circumstances surrounding the
    negotiation of the lease, she failed to interpret the lease having regard to
    the circumstances as a whole. The evidence, and in particular email
    correspondence between the parties lawyers, confirms that the parties intended
    to lease the entire premises, including the basement, on a lump sum basis.

The surrounding circumstances

[27]

As
    the Supreme Court explained in
Sattva
, the court must read the
    contract as a whole, giving the words used their ordinary and grammatical
    meaning, consistent with the surrounding circumstances known to the parties at
    the time of formation of the contract:
Sattva
, at

para. 47.

[28]

The
    circumstances surrounding the formation of the lease take on particular
    importance in a case such as this, given the inconsistent and contradictory
    provisions that were included in the lease in its final form.

[29]

The
    application judge referred to several of the draft leases exchanged by the
    parties during the negotiation process, but her consideration of the
    surrounding circumstances is incomplete. Although she refers to some of the
    email correspondence between the parties, she does not consider the key correspondence
    that took place early in the negotiations  correspondence that makes clear the
    parties intention to lease the entire premises, including the basement, on a
    lump sum basis.

[30]

On
    September 1, 2006 Mr. Westwood asked specifically whether the rent was an
    agreed amount or was based upon a cost per square foot, and whether the tenant
    was leasing the entire property. Mr. Singer replied in an email dated September
    18, 2006. His answer was categorical:

The Tenant will accept 635 Danforth on an as is basis and the
    rent will be the rent negotiated per year and
not based on actual square
    feet
.
The Tenant will lease the entire building
    (other than the kitchen area in the basement
which will be used by the Landlord for its
    storage area)
. [Emphasis added.]

[31]

Thus,
    early in the negotiation process, 107 acknowledged that the lease was not based
    on the actual square footage being rented. The entire building was being leased
    for a lump sum rent, albeit that 107 was to retain a portion of the basement
    that included a kitchen, for future purposes.

[32]

This
    understanding is also confirmed by evidence given by Mr. Singer on
    cross-examination on his affidavit

concerning
    his September 18, 2006 email:

Q: If I go on at paragraph number 3 in your e-mail message of
    September 18, you say right after the sentence weve reviewed, The Tenant will
    lease the entire building other than the kitchen area in the basement, which
    will be used by the landlord for its storage area.

A: Thats correct.

Q: And youre indicating to the tenant at [t]his time that the
    tenant is going to lease the entire building other than that kitchen area in
    the basement, fair?

A: Thats correct, thats what it says.

Q: You indicate to the tenant that because those were the
    instructions you were receiving from the landlord.

A: I would assume thats the case, yes.

Q: You were aware at that time that the kitchen area in the
    basement was only a portion of the basement, not all of it.

A: Thats correct.

Q: You were indicating to the tenant that the entire building would
    be leased including that portion of the basement that was not occupied by a
    kitchen, fair?

A: Correct.

Q: And that was your instructions from the landlord.

A: Correct.

[33]

Subsequent
    drafts of the lease confirm this understanding.

[34]

Extreme
    was concerned about the presence of a kitchen in the basement and the
    possibility that odours from the kitchen would adversely affect its fitness
    business, and further correspondence between the parties solicitors ensued. On
    September 20, 2006, Mr. Westwood wrote to Mr. Singer that he understood that
    107 no longer required the use of the kitchen, and that: This space will now
    become part of the Leased Premises.

[35]

Mr.
    Singer neither confirmed nor rejected Mr. Westwoods assertion concerning the
    kitchen in either his September 26 or 28 email correspondence. However, Mr.
    Singer deleted the provision excluding the kitchen from the leased space from
    the next draft of the lease he provided to Mr. Westwood on October 6, 2006, and
    the provision remained deleted from the lease as finally executed.

[36]

In
    the result, the only limitation on the scope of the leased premises set out in Mr.
    Singers September 18, 2006 email no longer applied: the entire premises,
    including the basement, were being leased by Extreme.

[37]

This
    understanding  that the lease was for the entire premises  was not altered by
    the parties subsequent negotiations. On the contrary, the deletion of several provisions
    from subsequent drafts of the lease confirms the conclusion that the lease was
    for the entire premises, including the basement. For example, the
    proportionate share provision, which required the tenant to pay only the
    utilities for the portion of the premises it was leasing, was deleted from the
    October 6, 2006 draft and, as a result, Extreme was required to pay the
    utilities for the entire premises. The above normal utilization clause, which
    would have permitted the landlord to charge additional rent for above-normal
    utility use, was deleted from the October 11, 2006 draft. The measurement
    clause, which would have permitted the landlord to measure the premises and
    adjust the rent if the stated measurements in the lease were inaccurate, was deleted
    from the October 23, 2006 draft.

[38]

In
    each case, these provisions were deleted in response to comments from Mr.
    Westwood on previous drafts of the lease indicating they were inconsistent with
    the understanding that the tenant was leasing the entire premises on a lump
    sump basis. Finally, the definition of premises in the October 27, 2006 draft
    was shortened to refer simply to the entire property.

[39]

Although
    the application judge acknowledged the deletion of these provisions, she did
    not consider their deletion in the context of the e-mail exchange setting out
    the agreement reached by the parties. She considered that other provisions in
    the lease  in particular, provisions referring to the square footage and the
    description of the premises as consisting of three floors plus a mezzanine 
    had the effect of excluding the basement.

[40]

With
    respect, that conclusion was negated by the evidence of the surrounding
    circumstances outlined above. The problem in this case is not that the
    application judge simply failed to refer to all the material evidence in the reasons
    for her decision; indeed, she was not required to do so. The problem is that
    the application judge failed to consider all the material evidence before
    reaching her decision. The result is an interpretation of the lease that was
    inconsistent with the intention of the parties.

[41]

Plainly,
    some inconsistent provisions remained in the lease. However, when the
    interpretation of the lease is informed by consideration of all the surrounding
    circumstances  and in particular, the email correspondence and the evidence of
    Mr. Singer  the parties intention that the entire premises, including the
    basement, were to be leased on a lump sum basis is clear and must be given
    effect. That some inconsistent provisions remained in the lease does not,
    without more, provide a basis for concluding otherwise.

[42]

The
    application judge considered it significant that 107 appears to have assumed
    that Extreme would agree to lease additional space in adjoining premises that
    it owned, but this did not come to pass. It may be that Extremes use of the
    basement  which was known to 107 for some time  rendered the leasing of additional
    premises unnecessary. Be that as it may, 107 is entitled only to the rent GoodLife
    is required to pay under the lease, and in my view the lease includes the
    basement.

[43]

This
    conclusion is determinative of this appeal, and as a result I do not reach the
    other issues raised by GoodLife.

Disposition

[44]

I
    would allow the appeal.

[45]

I
    would award GoodLife its costs on the appeal, fixed by agreement of the parties
    at $20,000, inclusive of taxes and disbursements. I would reverse the costs
    award on the application.

Grant Huscroft J.A.

I agree E.A. Cronk
    J.A.

I agree Paul Rouleau
    J.A.

Released: January 10, 2017


