



COURT OF APPEAL FOR ONTARIO

CITATION: V Hazelton Limited v. Perfect Smile Dental Inc.,
    2019 ONCA 423

DATE: 20190523

DOCKET: C65696

Watt, Hourigan and Huscroft JJ.A.

BETWEEN

V Hazelton Limited

Applicant (Appellant)

and

Perfect
    Smile Dental Inc., Outhere by Marcus Chaves Corp.,

Outhere by Marcus Chavez and Marcus
    Chaves

Respondents (Respondents)

Michael G. McQuade, for the appellant

Robert W. Trifts, for the respondent Perfect Smile
    Dental Inc.

James S. Quigley, for the
    respondents Outhere by Marcus Chaves Corp., Outhere by Marcus Chavez, and
    Marcus Chaves

Heard: March 15, 2019

On appeal from the judgment of Justice Edward M. Morgan
    of the Superior Court of Justice, dated June 22, 2018, with reasons reported at
    2018 ONSC 3958.

Hourigan J.A.:

Part I: Overview

[1]

This appeal engages fundamental issues regarding the nature and
    operation of commercial tenancies and in particular the impact of a sublease on
    the relationship between landlord and tenant. It arises from a situation where
    the appellant, V Hazelton Ltd. (Hazelton), leased commercial premises from
    the respondent, Perfect Smile Dental Inc. (Perfect Smile). Pursuant to the
    lease, Hazelton had a right to renew for an additional five years on the expiry
    of the initial seven-year term. Hazelton proceeded to sublet the premises to a
    third party but did not reserve the last day of the head lease term to itself.

[2]

Hazelton attempted to exercise the option to renew the lease, but
    Perfect Smile maintained that it no longer had that option. On an application
    for relief brought by Hazelton, the principal issue to be decided was whether,
    by reason of its failure to reserve the last day of the head lease term,
    Hazelton had in effect made an assignment and forfeited its leasehold rights. The
    application judge failed to provide an answer to that question. Instead, he
    ruled that Hazelton had a claim for breach of contract against Perfect Smile,
    but that it had suffered no damages. He therefore dismissed the application.

[3]

In these reasons, after a brief factual review and a consideration of
    the decision below, I analyze the nature of commercial tenancies, the effect of
    Hazeltons failure to reserve the last day of the head lease, whether Hazelton
    breached the lease, and whether the application judge erred in his analysis of damages.
    Ultimately, I conclude that the appeal must be allowed and an order should go
    permitting Hazelton to renew the lease and providing other related relief.

Part II: Facts

[4]

Hazelton operated a retail clothing business at Hazelton Lanes in
    Toronto. Perfect Smile owns the premises at issue, which are located on Bay
    Street, as well as a dental practice nearby.

[5]

In September 2010, Hazelton entered into an agreement with Perfect Smile
    to lease the premises. The initial term of the agreement was seven years,
    commencing October 1, 2010 and expiring September 30, 2017. There was also a
    five-year renewal option for Hazelton in s. 9 of the agreement. Perfect Smile
    and Hazelton entered into a formal lease on October 1, 2012. The option to
    renew became s. 7 of the lease, which provides:

OPTION TO RENEW

Provided the Tenant is not in default under the lease as to the
    time of the notice and provided the Tenant gives the Landlord six (6) months
    prior written notice, the Tenant shall be given the option to renew for an
    additional term of Five (5) years on the same terms and conditions, save for
    any further options to renew and save and except for rent which will be
    mutually agreed upon by the Tenant and Landlord, both acting reasonably,
    failing which this option to renew shall go to arbitration under the
    Arbitration Act of Ontario.

[6]

Hazelton completed substantial renovation work on the premises,
    including the removal of a bathroom. Whether the removal of the bathroom was
    undertaken with the consent of Perfect Smile remains an issue between the
    parties. Hazelton contends that the renovations concluded in 2013 and that the
    total cost was about $280,000. Further, it says that it obtained a loan for the
    work, of which $70,000 remains owing, and submits that it would not have spent
    money to renovate without the benefit of the seven-year term and the additional
    five-year renewal term.

[7]

In August 2016, with Perfect Smiles consent, Hazelton entered into a
    sublease with a retail clothing store called Outhere by Marcus Chaves (Outhere),
    operated by the respondent Marcus Chaves. The term of the sublease was from September
    1, 2016 to September 30, 2017. The sublease did not reserve the last day of the
    head leases term to Hazelton; instead, the head lease and the sublease were
    set to expire on the same day.

[8]

In the sublease agreement, Hazelton expressly exempted and excluded the
    five-year renewal term, per section C of Schedule A, which reads as follows:

Sub-lease: notwithstanding that the head Lease contains a
    provision allowing the Tenant to renew the Lease for a further term as set out
    therein, there is no obligation by the Sub-Landlord to renew in favour of the
    Sub-Tenant and the Sub-Tenant acknowledges that they have no such right of
    renewal or extension of the Lease. The Sub-Lease is only for the term set out
    herein.

[9]

On March 2, 2017, Hazelton purported to exercise its right to renew the
    lease for a further five-year term. Hazelton and Perfect Smile began
    negotiating rent through email exchanges but could not agree on a new rental rate.

[10]

On
    September 28, 2017, counsel for Perfect Smile delivered a letter to Hazelton
    stating it had no right to exercise the five-year renewal option. The lease
    expired on September 30, 2017. Pursuant to an arrangement with Perfect Smile, Outhere
    remained in possession of the premises after the sublease ended. Outhere paid Perfect
    Smile the same rent it had previously paid under the sublease.

[11]

Hazelton
    commenced an application seeking various heads of relief, including:

·

A declaration that it had rightfully exercised its option to a
    five-year renewal of its lease starting October 1, 2017;

·

An order that Perfect Smile and Outhere deliver vacant possession
    of the premises; and

·

An order that, in accordance with the terms of the lease, an arbitrator
    be appointed to determine the rent payable during the five-year renewal period.

Part III: Decision of the Application Judge

[12]

The
    application judge began his analysis by finding that Perfect Smile had initially
    accepted Hazeltons exercise of its renewal option under the lease and that it
    understood arbitration was the mandated manner under the lease to resolve an
    impasse over the new rental rate. He also found that Hazelton was not in
    default under the lease because Perfect Smile had never given Hazelton notice
    of the alleged default with respect to removal of the bathroom, despite knowing
    about the renovations by at least early 2017.

[13]

The
    application judge then stated that, generally speaking, where rights granted in
    a sublease are more restrictive than those contained in a head lease, the
    result is that the rights not granted to the subtenant are reserved to the
    tenant. In support of that proposition, he relied on
Letourneau
    Developments v. Red Fort Realty Ltd.
(1985)
, 40 Alta. L.R. (2d) 397 (C.A.), at p. 398. He found that
    this general principle applied in this case, as Hazelton had specifically
    reserved the renewal option in the sublease.

[14]

The
    application judge then commented that Perfect Smile relied on ancient common law
    for the proposition that where a tenant has sublet the tenancy but has not
    reserved the last day of the head lease term for itself, the sublease is deemed
    to be an assignment. He cited, among other cases,
Selby v. Robinson
(1865)
, 15 U.C.C.P. 370.

[15]

The
    application judge did not resolve the apparent conflict in the case law.
    Instead, he noted that while counsel for Perfect Smile may well be correct in
    his analysis of the estate aspect of a commercial Lease, there was also a
    contractual element to a commercial lease. He found that Perfect Smile breached
    its contractual duty of good faith, as enunciated in
Bhasin v. Hrynew
,
    2014 SCC 71, [2014] 3 SCR 494, by failing to negotiate or arbitrate the renewal
    in good faith.

[16]

According
    to the application judge, Hazelton could claim damages as a consequence of this
    contractual breach. However, the application judge found that Hazelton had not
    suffered any loss. He acknowledged that Hazleton could have sublet the premises
    again but considered it unclear whether the sublet would have been profitable
    because the rent was unknown. The application judge presumed, based on the
    circumstances of the case, that the current rent paid by Outhere reflected fair
    market value. Thus, Hazelton would have at best only broken even.

[17]

With
    respect to Mr. Chaves, the application judge concluded that he also breached a duty
    of good faith owed to Hazelton, as he knew about Hazeltons renewal option but
    deliberately engaged in conduct that undermined its rights. However, the application
    judge concluded that the breach caused no economic loss. Since Mr. Chaves had
    provided a $10,000 deposit to Hazelton, the application judge ordered that it should
    be returned to Mr. Chaves.

[18]

No
    party drew to the application judges attention s. 3 of the
Commercial
    Tenancies Act
, R.S.O. 1990, c. L. 7 (the 
CTA
), which is key to
    the disposition of this appeal.

[19]

The
    application judge did not award costs because there was mixed success on the
    application.

Part IV: Analysis

(i)

Jurisdiction of this Court

[20]

Perfect
    Smile raised a threshold issue about this courts jurisdiction to hear the
    appeal. It submitted that where a judge grants or refuses a writ of possession
    over leased premises, any appeal lies to the Divisional Court, pursuant to s.
    78 (1) of the
CTA
, which provides:

78. (1) An appeal
    lies to the Divisional Court from the order of the judge granting or refusing a
    writ of possession.

[21]

During
    oral argument this jurisdictional objection was dismissed with reasons to
    follow. It may be dealt with summarily.

[22]

The
    application judge refused an order for delivery of vacant possession, which is arguably
    captured by this section. However, he also refused declaratory relief and
    declined to order that an arbitrator be appointed. These aspects of the
    decision are beyond the ambit of s. 78.

[23]

Pursuant
    to s. 6(2) of the
Courts of Justice Act
, R.S.O. 1990, c. C. 43, this
    court retains the discretion to combine and hear all the issues raised on this
    appeal. I would exercise that discretion, given the interconnected nature of
    the issues and the resultant risk of inconsistent judgments.

(ii)

Right of Renewal

[24]

I
    start from the premise that the application judge was obliged to resolve the
    apparent discrepancy between the lines of authority relied on by the parties.
    One line of cases suggests that a sublessor must reserve the last day of the
    term of the head lease in the sublease. The other stands for the proposition
    that where the rights granted in a sublease are more restricted than those
    contained in the head lease, the rights not granted are reserved to the
    sublessor. That tension was the principal issue raised on the application.

[25]

Further,
    as will be discussed in more detail below, Hazelton was not seeking to enforce
    its contractual rights to sue for damages. Rather, it was attempting to take
    possession of the leased premises. Thus, the application judge had to resolve
    the issue argued before him, because resort to Hazeltons contractual rights to
    damages could not result in obtaining the relief sought.

[26]

In
    this section of my reasons, I will consider: the nature of a commercial lease,
    the common law rule regarding the failure to reserve the last day of a
    sublease, case law that has expanded the notion of a reversionary interest, s.
    3 of the
CTA
, and how s. 3 impacts the common law. I will then apply
    the legal principles to the facts of this case.

(a)

Nature of a Commercial Lease

[27]

Professor
    Anne Warner La Forest describes the nature of a landlord and tenant
    relationship at common law and some of the relevant terminology in
Anger
    & Honsberger Law of Real Property
, vol. 1, 3d ed. loose-leaf
    (consulted on 7 May, 2019) (Toronto: Canada Law Book, 2006) at §7:10:

The relationship of landlord and tenant is an interest in land
    created by a contract, express or implied, by which one person who is possessed
    of an interest in real property, and who is called the landlord or lessor,
    confers on another person, called the tenant or lessee, the right to
    exclusive possession of the real property or some part of it for a period of
    time which is definite or can be made definite by either party, usually in
    consideration for a periodic payment of rent in either money or its
    equivalent.
The interest in the property remaining in the landlord, being
    the interest which is not disposed, is called the reversion. The interest or
    estate which the tenant has in the land is known as the term
. [Citations
    omitted; emphasis added.]

[28]

At
    common law, a lease has long been viewed as creating a property relationship
    between the lessor and lessee once the lessee goes into possession. A lease
    does not simply create a licence to occupy property; rather, it conveys a legal
    interest in the property: Jason Brock & Jim Phillips, 
The Commercial Lease: Property or Contract?
(2001), 38 Alta. L. Rev. 989, at p. 990.

[29]

Despite
    the property origins of leases, it is important to understand that a commercial
    lease also has contractual elements. The leading case on the dual nature of a
    commercial lease is the judgment of Justice Bora Laskin in
Highway
    Properties Ltd. v. Kelly, Douglas and Co. Ltd.
, [1971] S.C.R. 562. Justice
    Laskin considered the issue of the availability of contractual remedies in a
    commercial lease. He took a practical approach to the issue, finding it no
    longer sensible to pretend that a commercial lease  is simply a conveyance and
    not also a contract:
Highway Properties
, at p. 576.

(b)

Assignment

[30]

In
    this part of my reasons, I will consider the impact of failing to reserve the
    last day of a head lease term on a sublessors property rights under the head lease.

[31]

Critical
    to the analysis in this case is the distinction between an assignment of a
    lease and a sublease. When a lease is assigned to a third party, the
    third-party assignee becomes the tenant of the landlord and a privity of estate
    is established between the two. When the lease is assigned, the landlords
    privity of estate with the original tenant comes to an end, but the privity of
    contract remains:
Crystalline Investments Ltd. v. Domgroup Ltd.
, 2004
    SCC 3, [2004] 1 S.C.R. 60, at para. 29. In contrast, a sublease creates no
    direct relationship between the subtenant and the landlord  there is neither
    privity of estate nor privity of contract between them. Rather, the head tenant
    stands in the position of landlord vis-à-vis the subtenant, while retaining its
    position as tenant vis-à-vis the original landlord.

[32]

There
    is a long line of case law dating back hundreds of years that holds that a
    sublease of the entire term of the head lease operates as an assignment because
    there is no reversionary interest in the original tenant to support a tenurial
    relationship: see, for e.g.,
Hicks v. Downing (alias Smith v. Baker)
(1696), 1 Ld. Raym. 99, 91 E.R. 962;
Selby; Jameson v. London and Canadian
    Loan and Agency Co.
(1897), 27 S.C.R.
    435; and
Mount Citadel Ltd. v. Ibar Developments Ltd.
(1976), 73 D.L.R. (3d) 584 (Ont. H.C.). Thus, as a matter of law, the head
    lease is assigned unless the sublessor retains a reversionary interest by
    reserving for itself the last day or some other time period at the end of the
    term. This was the line of the authority relied on by Perfect Smile on the
    application.

[33]

In
    a seminal article on leasehold interests, Professor Ralph Scane summarized the
    common laws view of leasehold interests: The Relationship of Landlord and
    Tenant in
Special Lectures of the Law Society of Upper Canada 1965: The
    Lease in Modern Business
(Toronto: Richard De Boo Ltd., 1965). He
    described the common law position as follows, at p. 3:

The common laws view of a non-freehold estate, or a leasehold
    estate, is that it is a grant of exclusive possession of land for a determinate
    period of time, which is an interest less in quantity than the grantor himself
    possesses. The definition requires a determinate period of time because if the
    estate granted is limited to last for an uncertain period of time, you would be
    granting an estate of freehold. Also, at common law, the estate granted by the
    landlord must be a lesser estate than the landlord himself has. In other words,
    there must be a reversion in the landlord if, at common law, there is to be a landlord-tenant
    relationship. The landlords estate can be either freehold or leasehold, so
    long as it is greater than the estate granted to the tenant.

[34]

Current
    practice and more recent case law are consistent with this ancient common
    law. For example, in
Sussex Square Apartments v. R.
, [1999] 2 C.T.C.
    2143, (Tax. Ct.), at para. 31, affd [2000] 4 C.T.C. 203 (F.C.A.), the court
    noted, It is trite law that there is a fundamental legal difference between an
    assignment of a lease, where the assignor retains no reversion, and a sublease
    where the lessee sublets a portion of the term to a sublessee and retains a
    reversionary interest. Similar comments were made by this court in
Goldman
    v. 682980 Ontario Ltd.
(2002), 62 O.R. (3d) 21 (C.A.), where the court
    noted, at para. 3, that 
the leasehold interest
    must be supported by privity of estate and thus the assignor must reserve the
    last day in order to preserve the original landlord tenant relationship. (See
    also

Dental Co. of Canada v. Sperry Canada Ltd.
, [1971] S.C.R.
    266;
Canada Safeway Ltd. v. Surrey (City)
, 2004 BCCA 499, 35 B.C.L.R.
    (4th) 73, leave to appeal refused [2004] S.C.C.A. No. 577;
Bengro Holdings
    Inc. v. Tax to Go Inc.
(1996), 7 O.T.C. 283 (Gen. Div.); and

Damack
    Holdings Ltd. v. Saanich Peninsula Savings Credit Union
(1982), 19
    B.L.R. 46 (B.C. S.C.).)

[35]

Consistent
    with this well established view, an experienced commercial leasing lawyer in
    Ontario, writing on the topic of assignments and subleases, has said that he
    could not recall any transfer in which he had been involved that was for the
    balance of the term that was not intended to be a full assignment: Darrell M.
    Gold, Assignment v. Sublease  Reserving the Last Day in
The Six-Minute
    Commercial Leasing Lawyer 2008
(Toronto: Law Society of Upper Canada,
    2008), at pp. 22-7.

(c)

Alternative Approach

[36]

Notwithstanding
    the foregoing, cases from other jurisdictions demonstrate that some courts have
    interpreted the notion of a reversionary interest more expansively. In these
    cases, courts have found that there was a reversionary interest even where the
    last day was not reserved.

[37]

Letourneau
was such a case and, as noted above, it was cited by Hazelton to the
    application judge. In
Letourneau
, the tenant sublet the premises to a
    third party for the balance of the term of the lease but with a more limited
    option to renew than that contained in the head lease. In brief reasons, the
    Court of Appeal agreed with the trial judge that the sublease did not amount to
    an assignment. At p. 398, Belzil J.A. stated:

It is evident from the fact that the trial judge awarded
    judgment against the original lessee Red Fort that he did not consider the
    sublease to be an assignment of the lease, and indeed in that he was correct
    because the option to renew was more restricted in the sublease than that
    contained in the head lease and it could not be said that the sublessor had
    assigned its full reversionary interest. The appellant did not argue that the
    lease had been fully assigned.

It is clear that the sublessor remained tenant under the head
    lease and no privity between the sublessee and the appellant as head lessor was
    created by the sublease.

[38]

This
    case suggests that a tenants full reversionary interest is not assigned even
    where premises are sublet for the balance of the term of the lease, where the
    sublease provides for a more restricted option to renew than the head lease.

[39]

Another
    Alberta case has similarly applied a broad notion of a reversionary interest:
Anthem Heritage Hill Ltd. v. Just One Stop Ltd.
:
2006
    ABQB 113
, 389 A.R. 1, affd
2006 ABCA 72
,
    384 A.R. 231. The case involved a lease between Anthem, the landlord, and
    Crafters Marketplace, the head tenant. Crafters retained a portion of the
    premises and sublet a portion to Just One Stop Ltd. The issue was whether Just
    One Stop had a right to renew the sublease.

[40]

The
    head lease contained a renewal option. The sublease also included a renewal
    option. However, the sublease expressly noted that if Crafters elected not

to
    exercise the renewal option, the sublease would terminate on the lease expiry
    date.

[41]

Crafters
    surrendered the lease to Anthem before the lease expired. Just One Stop tried
    to renew the lease, but Anthem sought a declaration that the subtenant could
    not do so because renewal was contingent on Crafters renewal of the head
    lease. Just One Stop argued that the sublease was an assignment because
    Crafters did not retain a reversionary interest in the head lease, as it
    failed to reserve the last day of the head leases term. It further argued that
    it had the same right to renew as Crafters under the head lease, albeit in
    respect of the sublet premises only.

[42]

The
    application judge agreed that on the grant of a sublease the sublessor must
    retain a reversion (i.e., an interest in the lease). Rooke J. noted that
    [a]lmost without exception, the authorities define the requisite reversionary
    interest as a term-related one:
Anthem
,

at para. 26. He also noted
    that the last day of the term of a headlease is an undoubted, and perhaps the
    most common, term-related reversionary interest, but added that there were
    others: at para. 26. He was satisfied that Crafters had retained a
    reversionary interest in the head lease based on the language of the renewal
    option in the sublease. At para. 27, Rooke J. explained:

Just Ones right to renew the sublease was not absolute but
    expressly contingent on Crafters Marketplaces renewal of the Headlease. Thus,
    while, on the grant of the Sublease, Crafters Marketplace did not retain a
    reversionary interest in the nature of the last day of the term of the Headlease,
    Crafters Marketplace did retain a term-related reversionary interest in the
    Headlease in order to preserve the relationship between itself and Anthem under
    the Headlease in respect of the Sublease premises, that being its right to
    renew the Headlease.

[43]

Anthems
    application was granted. The Alberta Court of Appeal dismissed an appeal from
    Rooke J.s decision but did not deal with the question of whether there was a
    sublease or an assignment because Just One Stop abandoned its argument that the
    sublease was an assignment.

[44]

Similarly,
Chater v. Elia
, 1998 NSCA 39, 167 N.S.R. (2d) 166, involved a lease
    between the landlord and the tenant, Mr. Al-Farkh. Mr. Al-Farkh, in turn,
    entered into a sublease with Ms. Elia. It was argued that the subtenancy was
    really an assignment because Mr. Al-Farkh did not retain a reversionary
    interest in the premises. Cromwell J.A. rejected this argument at para. 14:

In my opinion, Elias submission on this point cannot succeed.
    As I understand the principle involved, it is this: if a tenant gives up his or
    her whole interest under a head lease by a purported subtenancy, the
    transaction is in law an assignment. In other words, there can be no sublease
    when there remains no tenancy to which the undertenancy is subordinated.
In this case, the subtenancy related only
    to a portion of the premises demised under the head lease. Thus, the tenant did
    not, and did not intend, to give over to the subtenant his whole interest
    under the head lease. Therefore, there was in law no assignment: see
Mount
    Citadel Ltd. v. Ibar Developments

(1976), 73 D.L.R. (3d) 584
(Ont.
    H. Ct.) at 589. I conclude therefore that prior to Al-Farkhs bankruptcy, there
    was, as the trial judge held, a subtenancy between Al-Farkh and Elia to which
    the landlord consented.

[45]

These
    three cases from other provinces, which are outliers in Canadian law, broaden
    the notion of a reversionary interest beyond temporal reservations.

[46]

Some
    U.S. courts have also taken a more flexible view of what amounts to a
    reversionary interest. Andrew R. Berman, writing in

Friedman on Leases
,
    6th ed. vol. 1 (New York: Practising Law Institute, 2017) explains the split in
    U.S. law, at pp. 7-92 - 7-93:

If a tenant sublets for the balance of his term there is,
a
    priori
, no intervening time between the scheduled expiration of the prime
    lease and that of the sublease. If a reservation is to be found, it must be of
    something other than time. Courts have seized on a tenants right of reentry
    for breach by the subtenant, or of a rent or of covenants that differ from
    those in the prime lease, or a combination of these items. Some cases have held
    that a subtenants covenant to surrender possession on the last day of the term
    of the prime lease leaves a fragmentary reversion. These have not escaped the
    obvious criticism that the coterminous periods permit a simultaneous expiration
    with no temporal gap. There is a split of American authority on what
    constitutes a reversion for the purpose of making a transaction a sublease
    rather an assignment. This might suggest the existence of some clear
    distinctions. Instead, there is an inconsistent and bewildering group of cases
    seizing upon some item as, or as not, a reversionary interest, and with little
    consistency within at least several states. [Citations omitted.]

[47]

As
    Professor Berman indicates, the desire to stretch the bounds of the common law
    in some states has given rise to inconsistent and bewildering case law. Other
    states still apply the traditional common law approach and the practice for
    creating a sublease in those states is to make sure the term expires at least
    one full day before the stated expiration of the prime or head lease: at p. 7-96.

[48]

These
    cases reflect an effort by some courts to avoid characterizing a putative
    sublease as an assignment by expanding the notion of a revisionary interest
    beyond temporal limits. Arguably, such judicial efforts are unnecessary in
    Ontario by reason of s. 3 of the
CTA
. I turn next to a consideration
    of that section.

(d)

Section 3 of the
CTA

[49]

Neither
    party referred the application judge to of s. 3 of the
CTA
, which
    provides:

3.

The relation of landlord and tenant does not depend on
    tenure, and a reversion in the lessor is not necessary in order to create the
    relation of landlord and tenant, or to make applicable the incidents by law
    belonging to that relation; nor is it necessary, in order to give a landlord
    the right of distress, that there is an agreement for that purpose between the
    parties.

[50]

On
    its face, s. 3 stipulates four negatives:

(1)

The relation of landlord and
    tenant does not depend on tenure;

(2)

A reversion in the lessor is
    not necessary in order to create the relation of landlord and tenant;

(3)

A reversion in the lessor is
    not necessary in order to make applicable the incidents by law belonging to the
    landlord-tenant relation; and

(4)

An agreement is not
    necessary in order to give a landlord a right of distress.

[51]

This
    provision has been part of Ontario law in some form since 1895: Ontario Law
    Reform Commission,
Report on Landlord and Tenant Law
(Toronto:
    Ministry of the Attorney General, 1976), at p. 5;
An Act respecting the
    relations of Landlord and Tenant
, (1895) 58 Vic. c. 26, s. 4. When first
    introduced, it read as follows:

The relation of landlord and tenant shall be deemed to be
    founded in the express or implied contract of the parties, and not upon tenure
    or service, and a reversion shall not be necessary to such relation, which
    shall be deemed to subsist in all cases where there shall be an agreement to
    hold land from or under another in consideration of any rent. And nothing in
    this Act shall affect any pending litigation.

[52]

A
    year after the relevant provision was first introduced, it was amended:
An
    Act respecting the Law of Landlord and Tenant
, (1869) 59 Vic. c. 42, s. 3.
    The new section read as follows:

(1) The relation of landlord and tenant is not hereafter to
    depend on tenure, and a reversion or remainder in the lessor shall not be
    necessary in order to create the relation of landlord and tenant; or to make
    applicable the incidents by law belonging to that relation nor shall any
    agreement between the parties be necessary to give the landlord the right of
    distress.

(2) It is hereby declared that the said section was intended to
    express the same meaning as this section and no other.

[53]

Justice
    Rose described the amended provision in

Kennedy v. Agricultural
    Development Board
(1926), 59 O.L.R. 374 (H.C.), which is the leading
    case on s. 3. In
Kennedy
, there was a question whether an owner in fee
    simple could also be a tenant under an attornment clause in a mortgage
    agreement even if there was no reversion in the chargee. The attornment clause
    stated that [t]he mortgagor hereby attorns to the Board and becomes tenant of
    the said lands during the term of this mortgage. Rose J. concluded that in
    Ontario the basis for holding that the attornment clause is ineffective as
    against persons other than the parties and their privies [was] swept away by s.
    3: at p. 376.

[54]

Rose
    J. went on to discuss
the effect of s. 3 at p. 378:

The relation cannot depend on the
    landlords tenure, but, apart from the statute, it does depend upon the
    tenants tenure from the landlord. Therefore, in my opinion, the statutes of
    1896 and 1914 must mean that a man can be tenant although he does not hold from
    the landlord; and, as I have said, if he can be tenant without holding from the
    landlord, I do not see what is to prevent his being at one and the same time
    holder in fee simple and tenant to the landlord.

[55]

There
    have been only a few cases since
Kennedy
that discuss the interpretation
    of s. 3 or even mention it. In
Wotherspoon v. Canadian Pacific Ltd.
(1979), 22 O.R. (2d) 385 (H.C.), Hughes J. commented on s. 3, at p. 523:

I should append a note about one aspect of a lease which I
    suggested earlier must be for a term less than the life of the interest of the
    lessor. Such was the invariable principle observed by the common law, but by
    1896 (Ont.), c. 42, s. 3, the substance of the provision which is still s. 3 of
    the
Landlord and Tenant Act
, R.S.O. 1970, c. 236, was introduced into
    the law of Ontario

So in Ontario at least the distinction between a lease and an
    assignment was obliterated and the term of a lease could be coterminous with
    the extent of the interest of the lessor.

[56]

The
    appeal from Hughes J.s decision was allowed, although this court did not
    comment on s. 3. The matter went to the Supreme Court, which dismissed the
    appeal and allowed the cross-appeal: [1987] 1 S.C.R. 952. The Supreme Court
    affirmed the ancient common law but noted the existence of what became s. 3
    of the
CTA,
at p. 1016:

An underlease of the whole term of a
    lease operates as an assignment in law Furthermore, if a lessee for a term of
    years makes a lease for a term greater than his own, this second lease operates
    as an assignment but see
Anger and Honsberger Law of Real Property
(2nd
    ed. 1985), vol. 1, pp. 259-64, for a comment on a possible interpretation of s.
    3 of the
Landlord and Tenant Act
, R.S.O. 1980, c. 232 on this point.

[57]

In
Goldman
,

this
    court considered the impact of s. 3 of the
CTA

on the common
    law rule requiring a reservation of the last day of the head lease term. In
    that case,
the parties executed a commercial
    lease for two units in a shopping centre. The lease contained an option to
    purchase and a right of first refusal to purchase the entire shopping centre.
    During the term of the lease, with the consent of the landlord, the tenant
    entered into a sublease. The sublease was for the entirety of the leasehold
    term but did not include the option or the right of first refusal.
    Subsequently, the tenant gave notice of the exercise of the option. However,
    the landlord took the position that the tenant could not exercise the option
    due to its failure to reserve the last day of the head lease term. The landlord
    then brought a successful application for a declaration supporting its position,
    and the tenant appealed.

[58]

This
    courts analysis of the impact of s. 3 of the
CTA
was as follows:

[4] [The application judge] would not adopt the appellants
    argument that s. 3 of the
Commercial Tenancies Act
, R.S.O. 1990, c. L.7
    supersedes the common law. That section provides in part, [t]he relation of
    landlord and tenant does not depend on tenure and a reversion in the lessor is
    not necessary in order to create the relation of landlord and tenant . . . .

[5] The appellant traces this provision, unique to Ontario and,
    at one time, Ireland, through various statutes back to 1860 in Ireland. In the
    only Ontario case dealing with the section,
Harpelle v. Carroll

(1896),
27 O.R. 240
    (Q.B.)
and in a context of permitting distress, Meredith C.J. had
    this to say at p. 246 O.R.:

It is highly probable that if the framer of the Ontario Act,
    had had before him the caustic criticism which the Irish Act as a whole, and
    its several parts, including section 3, -- as would appear from the reports of
    the cases to which I shall afterwards refer, -- received from the Judges of the
    Courts of that country during the short time the Act was in force there, he
    would have chosen different language to express the idea which he probably had,
    that of doing away with the necessity of the having of the immediate reversion
    to entitle to distrain one who had let lands to another.

[6] I would not be so dismissive of the legislative intent but
    do sidestep consideration of its application to the present facts. In my view,
    the motions judge erred in another respect, which is sufficient to dispose of
    the appeal, and I leave resolution of any conflict between the statute and the
    common law for another day when the broader ramifications of altering the
    course of landlord and tenant law in Ontario alone can be adequately canvassed.

[59]

Given
    the dearth of jurisprudence, academic commentary on this section is helpful. In
    the 1985 version
of Anger & Honsberger
,
[1]
at p. 260, the authors note:

The plain language of this section would lead me to assume that
    a tenant could create a sublease notwithstanding his failure to reserve to
    himself some residue of the original term.

[60]

In
    discussing s. 3 of the
CTA
, these authors refer to comments by Edward
    Douglas Armour, Q.C., in
A Treatise on the Law of Real Property
,

1st ed. (Toronto: Canada Law
    Book, 1901). Like others, Mr. Armour expressed surprise and uncertainty about
    the 1895 and 1896 legislation, at p. 135:

It will be noticed that the present enactment contains no
    affirmative declaration that the relationship is to depend on contract, but
    contains simply four negatives, of which one is that the relationship of landlord
    and tenant is not to depend on tenure. The notion of an estate in land being
    inseparable from tenure, it may be that the consequence of the abolition of
    tenure in this connection reduces the relationship of landlord and tenant to a
    contract of hiring of land, and that there is no such thing, properly speaking,
    as an estate for years in land arising from the making of a lease. It was held
    in
Harpelle v. Carroll
, however, that the first enactment did not
    abolish the relationship of landlord and tenant and make the bargain a mere
    contract, but merely altered the mode of creating the ancient relationship. If
    this be the effect of the enactment, then it worked no change in the law,
    except that the relationship may probably now exist where the so-called landlord
    parts with his whole interest in the land, retaining no reversion, thus
    extending the whole law of landlord and tenant to such a case. [Citations
    omitted.]

[61]

The
    current edition of
Anger & Honsberger
, cited above,
reiterates what was said about s. 3 in the
    earlier edition of the text: at §7:10. The only case it cites is
Kennedy
.
    It also references Professor Scanes article. In that article, he says that
    [t]he effects of [the] section are obscure and describes s. 3 as curious
    and mysterious: at pp.3-5. He muses about the section as follows, at pp. 4-5:

As I sat preparing this lecture, wondering why such a curious
    section should be in the Ontario Act ̶ a section which politely thumbs its
    nose at several centuries of accumulated law, and yet sits in dusty obscurity,
    unnoticed by most of flipping through the Act on our way to Part III ̶ I
    began to wonder whether we are not missing a bet in Ontario, and whether it
    might not be time to drag this section into the light and have a good look at
    it.



The section also poses another interesting problem. Anywhere
    but in Ontario, or other jurisdictions, if any, having a similar section, a
    tenant who assigns the whole of the remaining term of his lease creates an
    assignment, not a sub-lease. If you desire a sub-lease, you must reserve part
    of the term to the original tenant. Is it possible under the Ontario statute to
    create a sub-lease of the entire balance of the term? On a literal reading, it
    would seem so.

[62]

It
    would appear that the time has come for this court to determine how s. 3 of the
CTA
impacts the common law requirement to reserve the last day of a
    head lease term in a sublease.

(e)

Impact of s. 3 of the
CTA
on the Common Law

[63]

Before
    turning to a consideration of the impact of s. 3 of the
CTA

on
    the common law, a word about the Canadian cases referred to above that expand
    the definition of a reversionary interest beyond a temporal reservation. Recall
    that Hazelton relied on one of these cases,
Letourneau
, in its
    submission to the application judge.

[64]

I
    would not import these cases into Ontario law for two reasons. First, they
    expand the notion of a reversionary interest in a manner that appears to be
    results-driven and without regard to hundreds of years of jurisprudence that
    makes clear that an assignment is made when no temporal reservation is made.
    Second, the decisions of the Alberta and Nova Scotia courts to expand the
    meaning of a reversionary interest at common law were made in a legal milieu
    where there was no equivalent to s. 3 of the
CTA
. That said, I make no
    comment on the result in
Elia
or
Anthem
,
    which dealt with subleases of only portions of the leased premises. The
    sublease in the case at bar was for the whole premises.

[65]

In
    assessing the impact of s. 3 of the
CTA
, it is important to focus on
    the breadth of the provision. The section makes clear that a reversion in the
    lessor is not necessary in order to create the relationship of landlord and
    tenant. What the section does not say is what, in fact, is necessary to create
    that legal relationship.

[66]

If
    we accept, based on the plain wording of s. 3, that a reversionary interest is
    not required, it is possible to conclude that there is no need to reserve the
    last day of the lease term for there to be a landlord and tenant relationship.
    In that case, it would be unnecessary to engage in the type of analysis
    undertaken in the three outlier cases cited above, where courts searched for a
    reversionary interest that went beyond temporal limits.

[67]

In
    my view, there is a danger in interpreting s. 3 to mean that a landlord and
    tenant relationship is always established between the purported sublessor and
    subtenant regardless of whether there is a reversionary interest. The danger is
    that the distinction between subleases and assignments would be lost. This would
    be contrary to the provisions of the
CTA
, which maintain such a distinction:
    see ss. 23(2) and 25. It could also have a disruptive effect on existing transfers
    where the last day of the head lease term has not been reserved. Recall that it
    was suggested by Mr. Gold that in those cases the failure to reserve the last
    day is usually deliberate in order to create an assignment.

[68]

Reading
    s. 3 in context, I interpret it to mean that there may be a sublease even if
    the last day in the head lease is not reserved, but only when there is sufficient
    evidence to show that the objective intention of the parties, as reflected in
    the sublease, was not to create an assignment. Recognizing that a commercial
    lease is not only a conveyance but also a contract, courts should be permitted
    to consider the objective intentions of the parties to a purported sublease in
    order to determine the nature of the impact on the subletting party vis-à-vis
    its rights under the head lease. In other words, a party may demonstrate that,
    notwithstanding a failure to reserve the last day of the head lease term, an
    assignment was not intended by the parties.

[69]

Interpreting
    s. 3 in such a way maintains the distinction between subleases and assignments,
    which is consistent with the scheme of the
CTA
. It is also consistent
    with the wording of s. 3.

[70]

Practically
    speaking, this interpretation does not have the effect of forcing parties to
    continue a legal relationship when they have no desire to do so. In addition, I
    do not anticipate that the impact of this approach will be far-ranging because I
    expect that most parties to a commercial sublease will follow the usual
    practice and simply reserve the last day in order to avoid an assignment.
    However, in the limited number of cases where that is not done and the tenant
    under the head lease wishes to maintain its rights under the head lease, it may
    be possible to prove that an assignment was not intended by examining the terms
    of the purported sublease.

(f)

Application to the Case at Bar

[71]

There
    is no question that Hazelton failed to reserve to itself the last day of the
    head lease term. In the absence of s. 3 of the
CTA
, the purported sublease
    would have operated as an assignment.

[72]

The
    question that remains is whether the sublease provides sufficient evidence to
    show an intention to maintain a landlord and tenant relationship between
    Hazelton and Perfect Smile. In my view, it does.

[73]

On
    the plain wording of section C of Schedule A in the sublease, it is clear
    that the parties turned their minds to the impact of the sublease on Hazeltons
    rights under s. 7 of the head lease. In section C, the parties agreed as
    follows:

Sub-lease: notwithstanding that the head Lease contains a
    provision allowing the tenant to renew the Lease for a further term as set out
    therein, there is no obligation by the Sub-Landlord to renew in favour of the
    Sub-Tenant and the Sub-Tenant acknowledges that they no such right of renewal
    or extension of the Lease. The Sub-Lease is only for the term set out herein.

[74]

This provision makes plain that Hazelton has a right to renew the lease
    but that it is not obliged to renew on behalf of Outhere. It further makes
    clear that Outhere has no right to renew and that its rights under the sublease
    expire at the end of the term.

[75]

In my view, despite the fact that Hazleton did not reserve to itself the
    last day of the head lease term, the sublease provides sufficient evidence that
    the parties did not intend an assignment. Accordingly, I would not treat the
    sublease as an assignment and would hold that Hazelton has the right to renew
    the lease provided that it exercises its renewal right in accordance with the
    terms of the lease. I will consider Perfect Smiles argument about compliance
    with the renewal term in the next section of my reasons.

(g)

Breach of Lease

[76]

In the alternative, Perfect Smile argues that Hazelton has no right to
    renew the lease because, at the time of the putative renewal, Hazelton had
    breached the lease. Specifically, Perfect Smile submits that Hazelton breached
    the lease by removing the bathroom from the premises without its permission.

[77]

The application judge found that Perfect Smile 
knew of
    the renovation and the missing bathroom at least by early 2017, since its principal
    deposes in his affidavit that this is when he discovered the fact that the
    bathroom had been removed. The application judge noted that the respondent
    failed to give notice to Hazelton of any objections to the bathroom
    renovations.
He also found that Perfect Smiles complaint about the
    state of the Premises is a position adopted late in the day in order to justify
    its dealing directly with Chaves.

[78]

The application judge misstated Perfect Smiles principals evidence
    when he stated that the principal testified that he found out in early 2017
    about the removal of the bathroom. In fact, the principal stated that he found
    the information out at some unspecified date in 2017.

[79]

Despite this misstatement, I am of the view that it was open to the
    application judge to find that Perfect Smile knew about the removal of the
    bathroom and that it was using the removal to justify its dealing with Mr.
    Chaves. There was uncontested evidence that the principal of Perfect Smile knew
    generally about the renovations. In addition, as discussed above, the principal
    admitted that he knew specifically about the removal of the bathroom in 2017. Further,
    these findings are supported by the With Prejudice letter of September 28,
    2017 written by counsel for Perfect Smile, Robert W. Trifts. In that
    correspondence, Mr. Trifts cites the failure to reserve the last day of the
    head lease term and the allegedly vague wording of the right to renew as the
    reasons why Hazelton cannot renew the lease. The only reference to the bathroom
    comes at the very end of the letter and refers to a potential claim for
    damages. Mr. Trifts does not purport to support Perfect Smiles position that
    the lease could not be renewed on the basis of the bathroom renovation.

[80]

In summary, there is no basis to interfere with the application judges
    conclusion that Hazelton did not breach the lease.

(iii)

Damages

[81]

The application judge undertook a damages analysis. He remarked that he
    did not know what rent the arbitrator would have fixed. Nor did he know whether
    it would have been profitable for Hazelton to sublet the premises. However, he
    assumed that the rent paid by Outhere reflected fair market value. Based on
    that assumption, he concluded that Hazleton had suffered no damages because it
    could only have sublet the premises at the same rate it was paying Perfect
    Smile.

[82]

The notice of application did not seek damages. It sought declaratory
    and injunctive relief exclusively related to Hazletons right to reoccupy the
    premises and renew the lease. We expect litigants to limit the evidence they
    tender and the arguments they make to the issues raised within the four corners
    of their pleadings:
Louis Vuitton Malletier S.A. v. Wakilzada
, 2017
    ONSC 2409, 145 C.P.R. (4th) 253, at para. 15 (reiterating that pleadings
    establish a benchmark to determine the relevance of evidence).

[83]

The corollary to that proposition is that courts should limit their
    decisions to the relief sought by the parties:
Sobeski v. Mamo
, 2012
    ONCA 560, 112 O.R. (3d) 630;
Kalkinis (Litigation guardian of) v. Allstate
    Insurance Co. of Canada
(1998), 41 O.R. (3d) 528 (C.A.). This case
    illustrates the dangers of straying from what is actually in issue. The
    application judge commented that he had little evidence before him to determine
    the issue of damages. There was a reason for that: Hazleton was not seeking
    damages and did not therefore tender evidence in support of a damages claim.

[84]

The application judge erred in undertaking a damages analysis in these
    circumstances. His order finding that Hazelton suffered no damages must be set
    aside.

(iv)

Costs of the Application

[85]

Perfect Smile seeks leave to appeal the costs award made by the
    application judge, and requests an order for costs payable to it for the
    application. Given the disposition of the substantive issues on this appeal,
    leave is refused. Instead, I would order that Hazelton is entitled to an order
    for its costs of the application payable by Perfect Smile.

[86]

I would not interfere with the application judges order regarding costs
    for the Chaves respondents. Mr. Chaves was found to have breached his
    obligation to act in good faith and thus it is an equitable result that he
    should not be awarded his costs. He played a minor role on the application, so
    I would not order him to pay costs to Hazelton.

(v)

Mr. Chaves Deposit

[87]

The application judge ordered that the $10,000 deposit paid by Mr.
    Chaves be returned to him. That order was not challenged on appeal.

Part V: Disposition

[88]

I
    would allow the appeal and set aside the judgment of the application judge,
    save for the order for the return of Mr. Chaves deposit. Further, I would
    grant  an order:

(1)

Declaring that Hazelton has
    rightfully exercised its option to renew the lease for a five-year period
    starting October 1, 2017, and as a result has a right to lease the premises for
    that period;

(2)

Requiring Perfect Smile to
    give possession of the premises to Hazelton as soon as possible, subject to
    item (5) below, and restraining Perfect Smile from denying possession or
    purporting to lease the premises to any other party in contravention of Hazeltons
    leasehold rights;

(3)

Requiring Perfect Smile and Hazelton
    to submit to arbitration as contemplated under the lease to determine the rent;

(4)

Declaring that the Chaves
    respondents no longer have any leasehold interest in the premises, and that any
    agreement or arrangement with Perfect Smile to the contrary is void; and

(5)

Requiring the Chaves
    respondents to give possession of the premises to Hazelton as soon as possible,
    and at any rate within 30 days of the release of these reasons.

[89]

If
    Hazelton and Perfect Smile cannot agree on the costs of the application below,
    they may make written submissions to this court.

[90]

The
    Chaves respondents played a minor role on the appeal akin to interveners. In
    the circumstances, I would make no order for or against them for costs.
    Instead, I would order Perfect Smile to pay the costs of the appeal to Hazelton
    in the all-inclusive sum of $12,000.

Released: D.W. May 23, 2019

C.W. Hourigan J.A.

I agree. David Watt J.A.

I agree. Grant Huscroft J.A.





[1]
A.H. Oosterhoff & W.B. Rayner,
Anger & Honsberger Law of Real
    Property
,
vol. 1, 2d ed. (Aurora: Canada Law
    Book, 1985).


