



COURT OF APPEAL FOR ONTARIO

CITATION:  Starrcoll Inc. v. 2281927 Ontario Ltd., 2016 ONCA
    275

DATE: 20160420

DOCKET: C60689

Doherty, Epstein and Miller JJ.A.

BETWEEN

Starrcoll Inc.

Applicant (Respondent on Appeal)

and

2281927 Ontario Ltd.

Respondent (Appellant)

David C. Moore and Diana M. Soos, for the appellant

Kevin W. Fisher, for the respondent

Heard:  February 1, 2016

On appeal from the judgment of Justice D.L. Corbett of
    the Superior Court of Justice, dated June 9, 2015, reported at 2015 ONSC 3719.

Doherty J.A.:


I



overview

[1]

The respondent, Starrcoll Inc. (Starrcoll) agreed to sell three
    apartment buildings to Mr. Ken Lu.  Eventually, the appellant 2281927 Ontario
    Ltd. (228), Mr. Lus company, became the purchaser.

[2]

The parties agreed to a total purchase price of $11,860,000.  The
    parties also agreed that $300,000 of the purchase price would be held by
    Starrcolls lawyer for three years (the Escrow Provision).  At the end of the
    three years, some, none or all of the $300,000 would be paid to Starrcoll
    depending on the rents generated from the units in the buildings.  If gross annual
    rentals were $960,000 or more, Starrcoll would get the entire $300,000.  If
    gross rentals were less, 228 was entitled to a return of some or all of the
    $300,000 as calculated using the formula in the Escrow Provision.  Under that
    formula, if gross annual rents were less than $900,000, 228 would be entitled
    to the return of the entire $300,000.

[3]

The parties agreed that the Escrow Provision was designed to allow for
    an adjustment of the purchase price three years after closing, depending on the
    income generated by the rental units.  The parties, however, disagreed over the
    interpretation of the Escrow Provision, and specifically the manner in which
    gross rentals were to be measured when determining whether the $960,000 threshold
    had been met.  Starrcoll brought an application seeking an interpretation of
    the Escrow Provision.

[4]

The application judge found that the $960,000 threshold was met if rents
    for any month in the three-year period reached $960,000, when annualized.  On that
    interpretation, Starrcoll was entitled to the entire $300,000 as gross rents
    for the month beginning April 1, 2014 exceeded $960,000, when annualized.  The
    application judge made an order declaring that Starrcoll was entitled to full
    payment of the escrow amount.  228 appeals from that order.

[5]

Counsel for 228 submits that the threshold requirement in the Escrow
    Provision is met only if gross rents for any 12-month period during the
    three-year period amounted to $960,000 or more.  On this approach, 228 was
    entitled to a return of at least part of the $300,000.

[6]

Starrcoll, without abandoning entirely the application judges
    interpretation of the Escrow Provision, argued in this court that the $960,000
    threshold was met if the monthly rent at the end of the three-year Performance
    Period (May 1, 2014) reached or exceeded $960,000, when annualized.  Starrcoll
    argued that the rent for the period beginning May 1, 2014, when annualized, did
    exceed $960,000, meaning that Starrcoll was entitled to the entire $300,000 and
    that the order made by the application judge should stand.

[7]

I would dismiss the appeal for the reasons that follow.


II



facts

[8]

Dr. Daniel Perlitz, for Starrcoll, and Mr. Lu, for 228, negotiated the
    Agreement of Purchase and Sale.  Mr. Harold Green, a real estate agent retained
    by Starrcoll, had some involvement in the discussions between Mr. Lu and Dr.
    Perlitz.  He acted as Starrcolls and 228s agent on the purchase.  All three
    filed affidavits on the application as did Mr. Paul Colvin, the president of
    Starrcoll.  None of the affiants were cross-examined.

[9]

During the negotiations, the parties discussed the rental income
    potential of the buildings.  Dr. Perlitz anticipated that rents for the units
    would go up in the ensuing two or three years as existing leases expired, and units
    were renovated and subsequently re-rented at higher rates.

[10]

Mr. Lu was given a rent roll for each of the three properties for the
    month of February 2011.  A rent roll is a document that identifies each tenant
    and sets out the rent being paid for each occupied unit as at the beginning of
    the month.  According to the rent rolls, the three buildings generated total
    rents of just under $70,000 for February 2011.  Based on the February 2011 rent
    rolls, the annualized rent for the three buildings was about $840,000.

[11]

Mr. Lu wanted some protection against the possibility that rental income
    would not increase as Dr. Perlitz expected it would.  The Escrow Provision in
    Article 3.2(c) of the Agreement of Purchase and Sale gave that protection:

(c)  payment by the Purchaser of the sum of $300,000.00 payable
    to the Vendors solicitors and to be held in an interest bearing escrow account
    with a Canadian chartered bank (the Escrow Amount) to secure the performance
    of the Property for the three year term commencing at closing (the Performance
    Period).  At the end of the Performance Period, to the extent the rent roll of
    the Buildings, (in the same format as set out in Schedule C hereto) reveals
    gross rental of no less than $960,000.00 (the Gross Rental Threshold), and
    upon being presented with a Statutory Declaration of the Purchaser or an
    authorized agent of the Purchaser, or a representative of the Manager, the
    Vendors Solicitors in trust shall pay the Escrow Amount to the Vendor and the
    Vendors solicitors shall require no further direction to pay out the Escrow
    Amount.  To the extent that at the end of the Performance Period, the Gross
    Rental Threshold has not been achieved, on the evidence of a Statutory
    Declaration of the Purchaser or an authorized agent of the Purchaser, or a
    representative of the Manager, the Vendors Solicitors, without the need of a
    further written direction, shall pay from the Escrow Amount the Purchaser the
    sum of $5.00 for every dollar that the Rent Roll of the Buildings is less than
    the Gross Rental Threshold (the Capitalization Payment) and pay to the Vendor
    any balance remaining after making the Capitalization Payment.  Interest on the
    Escrow Amount shall be paid to the Vendor as earned.

[12]

The Escrow Provision provided that if gross rents reached $960,000,
    Starrcoll would get the entire $300,000 being held in escrow.  If gross rents were
    below $960,000, 228 would be entitled to the return of some or all of the
    $300,000 being held in escrow.  The $960,000 figure was about $125,000 above the
    annualized rental income from the buildings based on the February 2011 rent
    roll given to Mr. Lu before closing.

[13]

Schedule C, referred to in the Escrow Provision, was a blank page with
    the heading Rent Roll.  As indicated above, a rent roll is a document that
    sets out monthly rents paid for each rented unit as at the start of any given
    month.  It may also reflect certain small additional revenues, e.g. parking fees. 
    According to Mr. Green, rent rolls are commonly used in the purchase and sale
    of rental income buildings when assessing rental income potential, going
    forward.

[14]

The transaction closed on May 2, 2011.  The three-year Performance
    Period referred to in the Escrow Provision ran from May 2, 2011 to May 2,
    2014.  The Rent Rolls for each month during that period showed variable gross
    rents.  Rents for the first year (May 2011-April 2012) totalled $860,956.01.  In
    the second year (May 2012-April 2013) the gross rents rose to $915,686.00.  In
    the third year (May 2013-April 2014) gross rents amounted to $904,362.90.  The
    final rent rolls for the month commencing May 1, 2014 showed a total monthly
    rent for the three buildings of $81,327.72.  This was slightly below the
    monthly rate for April 2014 ($82,880.85).  April and May 2014 were the only two
    months in which the income shown on the rent rolls exceeded $80,000.  $80,000 is
    the minimum monthly rent needed to achieve an annualized rent of $960,000.

[15]

Under the terms of the Agreement of Purchase and Sale, Linwood
    Management Corporation, a company controlled by Dr. Perlitz, managed the
    properties after the sale.  At the end of the three-year Performance Period, Dr.
    Perlitz, in his capacity as property manager, provided the statutory
    declaration contemplated in the Escrow Provision.  Schedule A to Dr.
    Perlitzs statutory declaration had two parts.  The first part identified the
    monthly rental income generated by each of the three buildings as of May 1,
    2014.  It also identified the total amount ($81,327.72) and the annualized
    amount ($975,932.64).  The annualized amount was simply the monthly total
    multiplied by 12.  The second part of Schedule A consisted of the actual rent
    rolls for each building identifying the tenant, the unit and the rent paid as
    of May 1, 2014.


III



the reasons

[16]

The application judge described the applicable principles of contractual
    interpretation as follows:

[9]
Where there is no ambiguity in a
    written contract, it should be given its literal meaning.
Words should
    be construed in their plain and ordinary sense unless to do so would result in
    a commercial absurdity.  In construing particular words and provisions, they
    should be placed within the context of the entire contract, construed as a
    whole, to the extent that is possible.



[11]
The court may consider objective
    evidence of the factual matrix underlying the negotiation of the contract to
    resolve any ambiguity in the contract.
However, where a party claims
    that the literal, plain-meaning reading of the contract leads to a commercial
    absurdity, the court may look at objective extrinsic evidence to assess the
    commercial reasonableness of the plain meaning. [Emphasis added. Footnotes
    omitted.]

[17]

The application judge erred in law in his approach to contractual
    interpretation.  The words of an agreement, and the context in which those
    words are used, cannot be separated and approached at different stages of the
    interpretative process.  Words in an agreement have no meaning without
    context.  The contemporary approach to contractual interpretation is set out in
Sattva Capital Corp. v. Creston Moly Corp.
, 2014 SCC 53, [2014] 2
    S.C.R. 633, at paras. 47-48:

[
A] decision-maker 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 the
    formation of the contract.
Consideration of the surrounding
    circumstances recognizes that ascertaining contractual intention can be
    difficult when looking at words on their own, because words alone do not have
    an immutable or absolute meaning.

The meaning of words is often derived
    from a number of contextual factors, including the purpose of the agreement and
    the nature of the relationship created by the agreement.
[Emphasis added.
    Citations omitted.]

[18]

The court in
Sattva
quoted with approval Lord Hoffmann in
Investors
    Compensation Scheme Ltd. v. West Bromwich Building Society
, [1998] 1 All
    E.R. 98 (H.L.), at 115:

The meaning which a document (or any other utterance) would
    convey to a reasonable man is not the same thing as the meaning of its words. 
    The meaning of words is a matter of dictionaries and grammars;
the

meaning of the document is
    what the parties using those words against the relevant background would
    reasonably have been understood to mean
.  [Emphasis added.]

[19]

Although I am satisfied the application judge erred in law in his
    approach to the interpretation of the Escrow Provision, I would nonetheless
    dismiss the appeal.  In my view, on a proper interpretation of the provision,
    Starrcoll remains entitled to the entire $300,000.  The application judges
    order should therefore stand.

[20]

As explained in
Sattva
, contractual interpretation is a search
    for the objective intention of the parties as discerned from the language of the
    relevant provision considered in the context of the entirety of the agreement,
    the purpose of the provision, the nature of the relationship created by the
    agreement, and any other relevant surrounding circumstances.  An application of
    that approach to the Escrow Provision leads me to conclude that gross rental as
    at the end of the Performance Period (May 1, 2014) was to be determined by
    annualizing the amount of rental income shown on the rent rolls setting out the
    rents as of May 1, 2014.  On that interpretation, the $960,000 threshold was
    met and Starrcoll is entitled to the $300,000.

[21]

The purpose of a provision is an important contextual feature in
    contractual interpretation.  I begin with the purpose behind the Escrow
    Provision.  The value of the properties, to 228, at least in part, lay in the
    properties ability to produce rental income on an ongoing basis.  The parties
    were aware of the monthly income being generated at the time of purchase (about
    $70,000).  Dr. Perlitz had represented that the rental incomes would increase
    over time as leases expired, and the units were renovated and re-leased.  Given
    the variables that could impact on the increase in rental income, one could not
    predict exactly how or when increases would occur.  The Escrow Provision
    provided the means by which the agreed upon purchase price could be varied,
    albeit in a relatively minor amount (up to about 2.5 per cent of the purchase
    price), depending on the increase in income producing performance of the
    apartment buildings during the three-year Performance Period.

[22]

In the Escrow Provision, the parties agreed that the performance of the
    Property would be measured by testing rental income against a Gross Rental
    Threshold of $960,000.  Although the language in the Escrow Provision did not
    specifically identify $960,000 as annual rental income, the rents being earned
    on the properties at the time of the sale make it clear that $960,000 was a
    reference to gross annual rents earned by the properties.

[23]

The performance of the Property as reflected in rental incomes
    generated could be measured in a variety of commercially reasonable ways.  For
    example, counsel for the appellants submission that actual rental incomes for
    a 12-month period should be used, is certainly a commercially reasonable way in
    which to measure the performance of the Property.  The language of the Escrow
    Provision, however, provides the best insight into the method intended to be
    used in this particular agreement.

[24]

Two features of the language used in the Escrow Provision are
    important.  First, income was to be measured [a]t the end of the Performance
    Period.  May 1, 2014 marked the end of the Performance Period.  Second, income
    was to be determined at the end of the Performance Period by reference to gross
    rents set out in the rent roll.  A rent roll reflects rental income at a
    specific point in time and is a predictor of rental income going forward. 
    Under the terms of the Escrow Provision, the May 2014 rent roll was the rent
    roll applicable at the end of the Performance Period.

[25]

Accordingly, having regard to the language of the Escrow Provision, I
    conclude that the parties chose to measure income performance as at the end of
    the three-year Performance Period and not over a period of time during the
    Performance Period (e.g. one year).  I further conclude that the parties
    intended that performance would be measured by reference to the rent rolls for May
    2014.  The terms of the Escrow Provision considered as a whole can only reasonably
    be understood to mean that the determination of whether rental income met the
    $960,000 Gross Rental Threshold required an annualization of the amount
    reflected in the last rent roll (May 2014) for the Performance Period.  This interpretation
    achieves the purpose of the Escrow Provision by providing 228 with some
    security for Dr. Perlitzs representations that the income from the properties
    would increase over the Performance Period.

[26]

The rent roll provided evidence of the income potential of the
    properties going forward.  A forward looking assessment of income potential
    would be important to 228 as the new owner of the properties.  There is nothing
    commercially unreasonable in interpreting Escrow Provision to provide for the
    full payment of the $300,000 to Starrcoll, if at the end of the Performance
    Period, the rental properties were in fact performing up to the Gross Rental
    Threshold identified in the Escrow Provision.


IV



conclusion

[27]

I would dismiss the appeal.  Starrcoll is entitled to costs of the
    appeal in the amount of $15,000, inclusive of disbursements and relevant taxes.

Released:  DD  APR 20 2016

Doherty J.A.

I agree Gloria Epstein
    J.A.

I agree Bradley W.
    Miller J.A.


