





CITATION:
1290079 Ontario
          Inc. v. Beltsos, 2011 ONCA 334





DATE:
          20110502



DOCKET: C52783



COURT OF APPEAL FOR ONTARIO



OConnor A.C.J.O., Laskin and MacPherson JJ.A.



BETWEEN



1290079 Ontario Inc.



Applicant (Appellant)



and



William Beltsos



Respondent (Respondent in appeal)



Leo Klug, for the appellant



Robert Trifts, for the respondent



Heard: April 1, 2011



On appeal from the judgment of Justice Thomas R. Lederer of
          the Superior Court of Justice dated September 10, 2010.



MacPherson J.A.:



A. INTRODUCTION

[1]

The
    appellant, 1290079 Ontario Inc., appeals from the judgment of Lederer J. dated
    September 10, 2010, dismissing its application for a declaration that it
    validly exercised its right to renew a commercial lease with William Beltsos,
    the respondent landlord.

B. FACTS

(1) The
    lease

[2]

In 1999, the appellant, through its principal Oleg
    Bourlatski, leased an old service station from the respondent.  The lease was for a period of about 11
    years.  Rider Clause 2 provided the appellant
    with an option to renew for an additional five years on the following terms:

Provided the Tenant is not during the initial Term
    in default under any of the provisions or covenants of this Lease and is not in
    default of payment of any of the rent or additional rent reserved, then the
    Tenant shall have the option to renew the Terms of this Lease for a further
    period of FIVE (5) years provided that written notice is given to the landlord
    at least SIX (6) months prior to the expiry of the initial term.

[3]

As part of its obligations under the lease, the
    appellant was responsible for insuring the property. This requirement was
    outlined in section 6(a) of the lease and read, in part:

The Tenant shall, during the entire Term hereof, at
    its sole cost and expense, take out and keep in full force and effect and in
    the names of the Tenant, the Landlord and the Landlord's Mortgagees, if any, as
    their respective interests may appear, the following insurance:

...

Property damage or public liability insurance
    including personal liability.

[4]

Paragraph 6(5) obliged the appellant to indemnify and
    save the landlord, Mr. Beltsos, harmless from and against any and all loss ...
    claims, actions, damages, liability and expense  arising out of any personal injury occurring
    on the property
.

(2) The parties
    and events

[5]

Upon commencement of the lease, the appellant undertook
    renovations of the property.  A donut bar
    was installed and the fuel pumps were updated.  The appellant operated the business for about eight months, then
    sub-leased the property to 1481230 Ontario Inc. (148) in 2001, pursuant to
    the terms of the head lease.  148 is not
    a party to these proceedings.

[6]

In the associates lease between the appellant and 148,
    the latter covenanted to perform all of the appellants obligations under the head
    lease:

The
    Sublessee hereby assumes and agrees to keep and perform each and every one of
    the covenants, agreements, and obligations to be performed by the Sublessor as
    Lessee in the Head Lease, and hereby covenants to save harmless and keep
    indemnified the Sublessor ... against all proceedings, damages, costs, claims
    and expenses arising from or incurred by reason of the Sublessees failure to
    perform promptly any of such covenants, agreements and obligations.

[7]

The appellant continued to maintain insurance on the
    property for at least a year.  Thereafter, 148 took out its own policy of insurance for the property.

[8]

Relations soured between the parties in late 2007.  Tom Beltsos (Mr. Beltsos son) and Aleksandr
    Bourlatski (Mr. Bourlatskis brother) exchanged sharp letters disputing the
    payment of a water bill, the timing of fuel deliveries, when and where to
    deliver rent cheques, the delivery of a copy of the sub-lease, and
    responsibility for a light pole that had fallen into disrepair.

[9]

During this period of acrimony, Tom Beltsos again
    requested copies of any insurance policies related to the property.  He did so in writing on four occasions in
    2007: August 24, September 1, September 11, and October 26.  The appellant did not respond.

[10]

Finally, on November 2, 2007, Aleksandr Bourlatski
    provided Tom Beltsos with a summary of 148s current insurance policy.  The policy was defective.  It did not list Mr. Beltsos as a named
    insured, as required by the lease.  The
    policy was accompanied by a letter from Mr. Bourlatski to the insurer, dated
    September 16, 2007, requesting changes that would remedy the defect.  There is no dispute that the insurance on the
    property was compliant with the lease as of September 16, 2007.

(3)
    Requests and refusals to renew the lease

[11]

Pursuant to the terms of the lease, appellants counsel
    attempted to renew the lease via letter dated June 17, 2009.  Respondents counsel rejected the request,
    citing various breaches of the Lease during the term of the tenancy,
    including failure to properly insure the premises in accordance with the
    provisions of the terms of the Lease.  Appellants counsel denied the validity of the default allegations via
    letter dated August 31, 2009.

[12]

Appellants counsel again attempted to renew the lease
    via letter dated February 19, 2010.  Respondents counsel responded on February 26, 2010, indicating that the
    respondent maintained his position that he was not required to honour the
    appellants request to renew the lease.

[13]

The appellant brought an application in the Superior
    Court of Justice on March 17, 2010, seeking a declaration that its renewal
    request was validly exercised.

(4) The
    accident

[14]

After the respondent refused to renew the lease and the
    appellant commenced this proceeding, the parties made an unhappy discovery.  On September 15, 2007the day before the
    insurance on the property was made gooda slip-and-fall injury was allegedly
    sustained on the property by one Robert Phillips.  Mr. Phillips filed a Statement of Claim on
    May 15, 2009 (the Phillips action) seeking, among other things, $1,000,000 in
    damages from the appellant, the respondent and 148.

[15]

The appellant deposed that he did not learn of the suit
    until April 21, 2010, when the respondents personal insurer forwarded the
    respondents Amended Statement of Defence in the Phillips action.

(5) The application judges decision

[16]

The
    application judge considered two issues:

1.

Was the
    appellants failure to properly insure the property on September 15, 2007, a
    breach such that the appellant lost its right to renew the lease?

2.

If the
    right to renew was forfeited, should the application judge exercise his
    equitable discretion to grant relief from forfeiture?


i.  Breach

[17]

As a condition of its renewal, the lease required that
    the appellant was not during the initial Term in default under any of the
    provisions or covenants of the Lease.  In the application judges view, the applicable case law, which
    considers similar but not identical wording, makes clear that a momentary or
    historical breach that has been rectified at the time a tenant seeks to
    exercise a right to renew is not a basis on which the landlord can refuse to
    renew.  The key question was whether the
    breachi.e. the lapse in insurancewas spent by the appellants rectification
    of the policy on September 16, 2007 combined with the appellants outstanding duty
    to indemnify, or whether the breach was subsisting at the renewal date
    because of the Phillips action.

[18]

The application judge found that the breach was not
    spent.  In his view, it subsisted at the
    renewal date because the Phillips action represented an ongoing issue
    surrounding the failure of the [appellant] to have insurance in place on
    September 15, 2007 which served to protect the respondent, as the lease
    required.  Despite the appellants duty
    pursuant to the lease to indemnify, it could not be said that the lease was
    effectively clear on the renewal date.  Therefore, the appellants breach of the lease was not spent and the
    option to renew was lost.

ii.  Relief from forfeiture

[19]

The application judge also found that he did not have
    the discretion to grant relief from forfeiture in these circumstances. He cited
    authority for the position that relief from forfeiture may save a tenant who
    diligently remedies a breach but stands to lose the remaining term of a
    lease.  However, the remedy is
    unavailable where the forfeiture is merely of a right of renewal predicated
    on the tenants performance of a condition precedent.  In the latter situation, equity would not intervene
    to permit a tenant who had breached a covenant to exercise a right of renewal.

[20]

Even if he maintained such discretion, the application
    judge would not have exercised it on behalf of the appellant.

C. ISSUE

[21]

The issue on the appeal is whether the application
    judge erred in concluding that the appellants 2007 breach of the insurance
    terms of the lease subsisted until the renewal dates in 2009 and 2010, and that
    the breach disentitled the appellant to renew the lease.

D. ANALYSIS

[22]

This court held in
Fingold v. Hunter
, [1944] 3 D.L.R. 43, that a lessee does not lose
    his rights because, at some point in the past, prior to his reliance on those
    rights, there was a default that was subsequently corrected.  Citing the
    Supreme Court of Canadas decision in
Loveless
    v. Fitzgerald
(1909), 42 S.C.R. 254, Robertson C.J.O. stated at p. 46, [i]t is, however, well settled that to show
    due performance the lessee need not necessarily show punctual performance.  It is enough to show that the
    covenants have been performed at the time when the lessor is required to
    observe or to perform his promise.

[23]

These authorities stand for the proposition that an
    historical breach of a lease covenant, once remedied, will not entitle a
    landlord to refuse an otherwise valid option to renew the lease. In the case
    law, this has become known as the doctrine of spent breach: see
Sail Labrador Ltd. v. Challenge One (The)
, [1999] 1 S.C.R. 265, at para. 58 (
Sail Labrador
) and
1383421 Ontario Inc. v. OLE Miss Place Inc.
(2003), 67 O.R. (3d)
    161 (C.A.), at para. 58.

[24]

The leading cases with respect to the doctrine of
    spent breach are the decision of the English Court of Appeal in
Bass Holdings Ltd. v. Morton Music Ltd.
,
    [1987] 2 All E.R. 1001 (
Bass Holdings
),
    and the Supreme Court of Canadas decision in
Sail Labrador
.

[25]

In
Bass Holdings
,
    Kerr L.J. referred to spent breaches and subsisting breaches and described
    the rationale for the doctrine of spent breach at p. 1005:

The upshot
    of these authorities is that spent breaches will not destroy the tenants right
    to exercise the option, but subsisting breaches will. ... [T]he reasoning is in effect as follows. 
    First, it must be accepted that absolute and precise compliance by the tenant
    with every single covenant throughout the period of the lease prior to the operative
    date is virtually impossible of attainment.  If this were required as a
    condition precedent, then the option would in practice be worthless or merely
    at the mercy of the landlord. Therefore the parties cannot have intended that
    the absence of spent breaches should be a condition precedent.  Secondly,
    however, it is natural and sensible that the landlord should require that the
    tenant not to be in breach of any covenant on the operative date and that
all
    outstanding claims for breach of covenant should have been previously
    satisfied, so that the lease is then effectively clear
.  The proviso
    is therefore to be construed as intended to apply to subsisting breaches, with
    the result that the relevant condition precedent is the absence of any
    subsisting breach. [Emphasis added.]

[26]

In
Sail Labrador
,

Bastarache J. described the doctrine of
    spent breach at para. 68:

One example of the flexibility courts have applied
    to performance in option contexts is the doctrine of spent breach. This
    doctrine mitigates against the severity of the application of the strict
    performance rule to options by preventing deficiently performed conditions
    precedent which have been remedied by the time the option is to be exercised
    from rendering the option void. For example, in
Bass Holdings Ltd. v. Morton Music Ltd.
, a lease contract included
    an option to renew provided the tenant was not in breach of any of the tenant's
    covenants contained in the lease. The tenant was at one time in breach of this
    condition because his rent was overdue. However, he had remedied that breach by
    the time he sought to exercise the option. In its interpretation of the contract,
    the court found that such spent breaches do not prevent the exercise of the
    option. The language here may be somewhat confusing. In reality, this doctrine
    simply provides that the option clause is interpreted to mean that conditions
    precedent are met providing that the positive covenants of the underlying
    contract have been performed at the time of the exercise of the option. There
    is, therefore, no breach, even though some payments were made late. Late
    payment can be remedied because this possibility is implied in the
    interpretation of the option clause. [Citation omitted.]

[27]

At para. 15, Bastarache J. also noted the trial judges
    reasoning in
Sail Labrador
, where
    Nadon J. cited
Bass Holdings
for the
    proposition that a breach is spent when it no longer gives rise to a
    subsisting cause of action at the time the optionee seeks to exercise the
    option.

[28]

The application judge referred to these cases and
    concluded that, because there was an existing cause of action by Mr. Phillips
    against the landlord, the appellants breach of the lease was a subsisting, not
    a spent, breach.  The application judge
    held at paras. 34-35:

The requirement that covenants in a lease shall
    have been duly observed and performed is satisfied if they have been so
    observed and performed that there is no existing right of action under those
    covenants at the time when the notice of renewal is given....

...

As I have already noted, in this case, there is a
    subsisting cause of action.  The individual, who suffered the personal
    injury on the property on September 15, 2007, has sued.  The action
    continues.  The applicant and the respondent are both defendants to the
    action.  Moreover, there is a crossclaim brought by the respondent against
    the applicant. [Citation omitted.]

[29]

I agree. An historical breach, once remedied, will not
    preclude a tenant from exercising an option to renew so long as the lease is
    effectively clear on the renewal date.  If a landlord has a subsisting cause of action against the tenant that
    is rooted in the breach, the lease is not effectively clear.

[30]

The Phillips claim was filed on May 15, 2009, and the
    respondent was one of the named defendants.  At the stipulated renewal date in the spring of 2010, the respondent had
    a cause of action against the appellant for failing to perform a term of the
    lease.  The appellant failed to provide
    insurance as required, and the respondent faced expense and uncertainty that
    would have been avoided if the appellant had not been in breach.  Therefore, the breach subsisted and the
    appellant forfeited its right to renew.

[31]

On the issue of indemnity, I note that both indemnity
    and insurance are important terms of commercial leases, but they are not the
    same.  There is a higher degree of
    certainty in insurance than in the promised indemnity of a numbered company
    with which one is already engaged in litigation.  While indemnity is valuable to its
    beneficiary, it does not negate a freestanding obligation to provide
    appropriate insurance.

[32]

On the issue of relief from forfeiture, the appellant
    was neither diligent in the performance of the covenant nor responsive in
    correcting it.  The application judge
    found that the premises had been improperly insured for some three years before
    the events of September 2007.  I would
    not interfere with the trial judges exercise of discretion in refusing to
    grant equitable relief.

[33]

Finally, I note that the appellant tendered fresh
    evidence about the ultimate resolution of the Phillips action. In my view,
    there is nothing in that evidence that would affect the disposition of this
    appeal.

E. DISPOSITION

[34]

I would dismiss the appeal.  The respondent is entitled to its costs of
    the appeal which I would fix, as agreed by counsel, at $11,000 inclusive of
    disbursements and HST.

RELEASED:  MAY 02 2011
    (D.R.O.)

J. C. MacPherson J.A.

I agree. D. OConnor A.C.J.O.

I agree. J. I. Laskin J.A.


