



COURT OF APPEAL FOR ONTARIO

CITATION: 2405416 Ontario Inc. v. 2405490 Ontario Limited,
    2016 ONCA 696 DATE: 20160923

DOCKET: C62401 and C62402

Gillese, Rouleau and Brown JJ.A.

BETWEEN

2405416 Ontario Inc.

Applicant
    (Appellant)

and

2405490 Ontario Limited

Respondent
    (Respondent in Appeal)

AND BETWEEN

2405490 Ontario Limited

Applicant by Counter
    Application (Respondent/Appellant by Cross-Appeal)

and

2405416 Ontario Inc. and Enza Badali

Respondents to
    the Counter Application  (Appellants/Respondents by Cross-Appeal)

Claudio Aiello, for the appellants

James Renihan, for the respondent

Heard: September 16, 2016

On appeal from the judgment of Justice Robert F.
    Goldstein of the Superior Court of Justice, dated June 14, 2016, with reasons
    reported at 2016 ONSC 3893.

ENDORSEMENT

Overview

[1]

This appeal and cross-appeal involve two related
    issues concerning a sub-lease for commercial premises located on Dufferin St.,
    Toronto. The appellant landlord, 2405416 Ontario Inc. (416), submits the
    application judge erred in finding the tenant, 2405490 Ontario Limited (490),
    was entitled to exercise an option contained in the sub-lease to purchase the
    property on which the premises are located. 490 cross-appeals arguing the
    application judge erred in denying it damages for rent it was required to pay
    the landlord after the date on which its purchase of the property should have
    closed.

Background facts

[2]

Enza Badali owns the Dufferin Street property.
    As found by the application judge, her son, Salvatore Badali, operated an adult
    entertainment body rub business from the premises under the name Blue Pearl.

[3]

On January 6, 2014, 1785535 Ontario Inc.,
    operating as Blue Pearl (Blue Pearl), entered into an Asset Purchase
    Agreement (ASA) with Elliott Stone to sell Blue Pearls business. Stone
    subsequently incorporated 490 to assume the rights and obligations of the
    purchaser under the ASA.

[4]

The ASA contained a condition precedent to
    closing, for the exclusive benefit of the purchaser, that the purchaser enter
    into a lease of the building with the property owner. It was to be a term of
    the lease that in the first two years of the purchasers occupancy of the
    property it would have an option to purchase the property for $800,000.

[5]

On February 1, 2014 two documents were executed
    to give effect to this provision of the ASA. First, Enza Badali leased the
    building to the appellant, 2405416 Ontario Inc. (416), a related company. Second,
    416 sub-leased the building to the purchaser, 490 (the Sub-Lease).

[6]

Section 3.01 of the Sub-Lease deals with the
    term of the lease. It states:

To have and to hold the Premises for and
    during the Term of five (5) years to be computed from and inclusive of the 1
st
day of April, 2014 (hereinafter referred to as the Commencement Date) and
    expiring on March 31, 2019. The parties hereto agree that the demise under this
    lease and the duty to pay rent hereunder is conditional upon the successful
    completion of the Asset Purchase Agreement between the Tenant and 1785535
    Ontario Inc. (the ASA) and that should the ASA fail to be completed the
    Tenant and Landlord shall be relieved of their obligations hereunder.

[7]

The closing date in the ASA was defined to mean
    the day and date on which the Toronto Licensing Tribunal approves the sale of
    the Business to the Purchaser but in any event no later than March 31, 2014 or
    such other date as mutually agreed upon between the parties As matters
    transpired, the Toronto Licensing Tribunal did not approve the sale of the Blue
    Pearl until June 19, 2014. The ASA closed that day.

[8]

About one year later, on June 22, 2015, the
    purchaser/tenant, 490, served notice under the Sub-Lease that it wished to
    exercise its option to purchase the property. Section 4.03 of the Sub-Lease
    gave 490 the option to purchase provided that no uncured event of default
    under this lease exists at the time of exercise of the option to purchase
    hereunder.

[9]

416 and Enza Badali took the position that 490 was
    not entitled to exercise the option to purchase because it was in default under
    the Sub-Lease. Although they identified three grounds of default, in this
    litigation they relied primarily on 490s failure to pay rent when due and
    owing. They took the position that 490 was obligated under the Sub-Lease to
    start paying rent on April 1, 2014, the date s. 3.01 of the Sub-Lease described
    as the Commencement Date.  Since 490 did not start paying rent until July,
    2014, they contended 490 was in default.

[10]

490 took the position that s. 3.01 did not
    require it to start paying rent until the successful completion of the Asset
    Purchase Agreement between the Tenant and 1785535 Ontario Inc., which did not
    occur until June 19, 2014. As well, 490 contended that 416, through its
    counsel, had agreed that the first month of occupancy would be rent-free, so
    rent was not due and payable until July, 2014. As a result, 490 argued it was
    not in default under the Sub-Lease and was entitled to exercise its option to
    purchase.

[11]

416 commenced an application to terminate the
    Sub-Lease and purchase 490s business, as the Sub-Lease entitled it to do in
    the event base rent remained outstanding for over 45 days. 490 commenced a
    counter-application seeking a declaration that it was entitled to purchase the
    property pursuant to the option. In addition, 490 sought damages equal to the
    monthly rent it paid from August, 2015  the date it said the purchase of the
    property should have closed  until the actual closing of the property
    purchase.

[12]

The application judge accepted the
    interpretation of s. 3.01 of the Sub-Lease advanced by 490. He dismissed 416s
    application. In the 490 application, he granted a declaration that 416 and Enza
    were required to sell the property to 490 under the option, but he dismissed
    490s claim for damages.

[13]

416 appeals the dismissal of its application;
    490 cross-appeals the dismissal of its claim for damages.

The interpretation of s. 3.10 of the
    Sub-Lease

[14]

416 submits that the correctness standard of
    review applies to the application judges interpretation of s. 3.01 of the
    Sub-Lease because he failed to interpret the contract as a whole, thereby
    committing an extricable legal error warranting appellate intervention:
Sattva
    Capital Corp. v. Creston Molly Corp.
, 2014 SCC 53, [2014] 2 S.C.R. 633, at
    para. 53. We do not agree. The application judge identified and applied the
    relevant principles of contractual interpretation set out in
Ventas Inc. v.
    Sunrise Senior Living Real Estate Investment Trust
(2007), 85 O.R. (3d)
    254 (C.A.), including the obligation to interpret the contract as a whole.

[15]

The key issue of interpretation concerned when
    490 was required to start paying rent. In considering that issue, the
    application judge interpreted s. 3.01 of the Sub-Lease as expressing the
    parties intention that 490s obligation to pay rent would not start until it
    obtained the transfer of the licence for the business it was purchasing under
    the ASA. That did not occur until June 19, 2014, when the Toronto Licensing
    Tribunal approved the sale and the ASA closed. The application judges
    conclusion was reasonable: it accorded with the specific language of 3.01 
    the duty to pay rent hereunder is conditional upon the successful completion
    of the [ASA]  which modified the general rent obligation contained in s.
    5.01.  As well, it was consistent with the structure and purpose of the overall
    commercial transaction between the parties as set out in the ASA and the
    Sub-Lease.

[16]

The appellant argues the application judge erred
    in his interpretation of s. 3.01 because he ignored the last phrase of the
    provision  that should the ASA fail to be completed the Tenant and the
    Landlord shall be relieved of their obligations hereunder. That provision, the
    appellant contends, shows that the Sub-Lease came into force on the
    Commencement Date, and not the date of regulatory approval of the licence
    transfer. We do not accept this submission.

[17]

First, the application judges reasons do not
    disclose that he treated the Sub-Lease as an agreement under which no
    obligation arose until the approval of the licence transfer.

[18]

Second, it is true the concluding language of s.
    3.01 shows the Sub-Lease came into effect before the licence transfer approval
    date. However, the immediately preceding language of s. 3.01 stipulates the
    obligation of 490 to pay rent did not start on the Commencement Date, but on
    the successful completion of the Asset Purchase Agreement. That portion of s.
    3.01 specifically addressed the issue of whether the tenant was required to pay
    rent during the transitional period between the Commencement Date and the
    closing of the ASA. Section 3.01 stated the tenant was not.

[19]

Finally, the appellant submits the application
    judge erred in taking into account evidence of the parties conduct after the
    execution of the Sub-Lease in order to interpret its terms. We do not agree.
    Para. 26 of the application judges reasons show he reached his conclusion
    about the interpretation of 3.01 before he considered the evidence of
    post-execution conduct. That evidence, in turn, was relevant to whether 416 had
    agreed to waive the first months rent under the Sub-Lease and therefore the
    application judge properly considered it.

[20]

Consequently, we see no basis to interfere with
    the application judges interpretation of s. 3.01 of the Sub-Lease and his
    conclusion that 490 was entitled to exercise the option to purchase.
    Accordingly, we dismiss 416s appeal.

490s cross-appeal regarding damages

[21]

On its cross-appeal, 490 submits the application
    judge erred by dismissing its claim for damages in the amount of the monthly
    rent it paid following the date on which its option to purchase should have
    closed. Section 4.03 of the Sub-Lease provides that within 10 days of the
    delivery of the Purchase Option Notice, the parties should negotiate a purchase
    agreement  transferring the premises no later than 30 days after execution.
    Given that 490 delivered its Purchase Option Notice on June 22, 2015, 490
    contends the property should have been transferred to it by August 1, 2015,
    after which it would have no obligation to pay rent.

[22]

The application judge dismissed 490s claim for
    damages stating: [i]f I were to give effect to that submission, it would
    amount to granting [490] a very long period of rent-free occupation. That would
    be unfair to the Landlord [416]. 490 submits the application judge erred in so
    concluding because, having found 490 was entitled to exercise the option to
    purchase, he had no discretion to refuse to award damages.

[23]

We do not agree. In seeking monetary relief on
    its application, 490 bore the burden of identifying for the application judge the
    correct legal principles governing its claim and adducing the evidence required
    to establish and quantify its claim. The record discloses 490 did neither.

[24]

490 argues the application judge erred by
    refusing its claim for damages for breach of contract, but the relief it seeks
    in its cross-application is more akin to specific performance coupled with
    equitable compensation for the delay in closing the transaction than to damages
    for breach of contract. We are not persuaded  that the application judge
    applied a wrong principle of law to 490s claim.

[25]

Further, 490 has not adduced evidence to justify
    interfering with the application judges finding regarding unfairness. It has
    not filed evidence that would enable a court to calculate the net loss it
    suffered by reason of the delayed closing or the off-setting opportunity cost
    to 416 of not receiving the purchase price at the time the property sale should
    have closed.

[26]

In those circumstances, we see no reason to
    interfere with the application judges dismissal of 490s claim for
    compensation, and we dismiss the cross-appeal.

Disposition

[27]

For the reasons set out above, we dismiss the
    appeal and cross-appeal.

[28]

Although each partys appeal is dismissed, the
    bills of cost the parties submitted disclose that they incurred the greater
    portion of their costs in relation to 416s appeal.  Accordingly, we award 490
    costs fixed in the amount of $4,000, inclusive of disbursements and HST.

Eileen E. Gillese J.A.

Paul Rouleau J.A.

David Brown J.A.


