



COURT OF APPEAL FOR ONTARIO

CITATION: Smiles First Corporation v. 2377087 Ontario Limited
    (International Union of Painters), 2018 ONCA 524

DATE: 20180608

DOCKET: C64082

Epstein, van Rensburg and Brown JJ.A.

BETWEEN

Smiles First Corporation and Union Health and
    Dental Centre Inc.

Applicants (Appellants)

and

2377087 Ontario Limited o/a International
    Union of Painters and Allied Trades District Council No. 46
, Joe Russo,
    2445855 Ontario Inc. and Frank Cundari

Respondents (
Respondent
)

Tanya Walker, for the appellants

Arleen Huggins, for the respondent

Heard: March 5, 2018

On appeal from the order of Justice Peter J. Cavanagh of
    the Superior Court of Justice, dated July 13, 2017, with reasons reported at
    2017 ONSC 4306, 87 R.P.R. (5th) 144, and reasons for costs reported at 2017
    ONSC 5081.


BROWN J.A.:

I.

OVERVIEW

[1]

The appellants, Smiles First Corporation and Union Health and Dental
    Centre Inc. (collectively Smiles First), appeal from the dismissal of their
    application under s. 21 of the
Commercial Tenancies

Act
,
    R.S.O. 1990, c. L.7 (the 
CTA
), and s. 98 of the
Courts of
    Justice Act
, R.S.O. 1990, c. C.43 (the 
CJA
). They also seek leave
    to appeal the costs order.

[2]

The respondent, 2377087 Ontario Limited (the Landlord), entered into a
    head lease for premises at 130 Toro Road, Toronto (the Premises) with 2445855
    Ontario Inc. (244). In turn, on or about February 1, 2015, 244 subleased the
    Premises to Smiles First by letter of intent (the Sublease). On March 21,
    2017 the Landlord gave Smiles First notice that its tenancy would end on April
    30, 2017 (the Notice of Termination).

[3]

This appeal raises two main issues:

(i)       244
    purported to assign its head lease with the Landlord to Smiles First by an
    assignment dated October 31, 2016. Did the application judge err in concluding
    the Landlord was not bound by that assignment?

(ii)      Did
    the application judge err in refusing to grant Smiles First relief from
    forfeiture of its tenancy?

[4]

For the reasons set out below, I would allow the appeal and grant a
    declaration that Smiles First is entitled to possession of the Premises until
    the end of the term of the Sublease, on the terms and conditions set out therein,
    including the amount of rent payable.


II.

FIRST ISSUE: THE EFFECT OF THE OCTOBER 31, 2016 ASSIGNMENT OF THE HEAD LEASE

The evidence

[5]

The first issue turns on: (i) the language of the assignment of the Head
    Lease; (ii) the effect of certain correspondence between the parties counsel
    in October and November 2016; and (iii) the acceptance by the Landlord of rent
    from Smiles First after November 2016.

[6]

244 initially had leased the Premises from the Landlord under a head lease
    dated January 12, 2015, for a term of 5.5 years, commencing on February 1,
    2015. 244 subleased the Premises to Smiles First for a similar term by way of the
    Sublease. 244 subleased the Premises to Smiles First at a significantly higher
    rent than it was required to pay the Landlord under the head lease.

[7]

The Landlord and 244 subsequently entered into an amended head lease
    dated July 31, 2015 (the Head Lease), with the 5.5 year term commencing on August
    14, 2015.

[8]

In mid-2016, disputes arose under both the Head Lease and the Sublease.
    On October 6, 2016, Smiles First and 244 advised the Landlord that they had
    entered into a tentative agreement to resolve their disputes. However, their
    agreement was contingent on [the Landlords] approval of assigning 244s [Head
    Lease] to [Smiles First] and/or the [Landlord] entering into a new head lease
    with [Smiles First].

[9]

Two events then occurred.

[10]

First,
    244 executed an October 31, 2016 assignment of the Head Lease to Smiles First
    (the Head Lease Assignment). By its terms, the Head Lease Assignment required
    receiving the Landlords Consent, following which 244 would transfer and
    assign to Smiles First all of its rights under the Head Lease. As matters
    transpired, neither Smiles First nor 244 ever asked the Landlord for its
    consent to the assignment.

[11]

Second,
    the Landlord, 244, and Smiles First embarked on negotiations to revise the
    leasing arrangements for the Premises. The Landlord wanted to enter into a new
    head lease directly with Smiles First, and 244 wanted nothing more to do with
    the Premises. The Landlord circulated draft Minutes of Settlement and a new
    form of head lease with Smiles First in November 2016. Smiles First and 244 did
    not sign the Minutes at that time.

[12]

That
    led the Landlord, in February 2017, to remind Smiles First and 244 that they
    had not yet returned signed Minutes of Settlement or a new head lease. 244 thereupon
    provided the Landlord with signed Minutes, which stated that 244 had abandoned
    the Head Lease as of November 1, 2016. In the Minutes, 244 also agreed to pay
    the Landlord all outstanding rent accrued from September 14, 2016 to November
    1, 2016.

[13]

Smiles
    First refused to sign the Minutes, taking the position that it was an official
    tenant pursuant to the Head Lease Assignment. The Landlord responded that it
    had not consented to the Assignment and expected Smiles First to sign a new
    head lease directly with it. The Landlord took the position that Smiles First
    now occupied the Premises as an occupant subject to a month to month term.

[14]

By
    the March 21, 2017 Notice of Termination, the Landlord notified Smiles First that
    it was terminating its tenancy of the Premises effective April 30, 2017.

Analysis

[15]

The
    application judge held that the Head Lease Assignment did not operate to assign
    244s interest in the Head Lease to Smiles First and was not effective as
    against the Landlord for several reasons:

(i)        Neither
    Smiles First nor 244 had sought or obtained the Landlords consent to the Head
    Lease Assignment, as required by the specific terms of that assignment. As a
    result, they failed to fulfill a condition precedent to the assignment of the
    Head Lease from 244 to Smiles First;

(ii)        244
    was not entitled to assign the Head Lease without the Landlords consent.
    Section 7 of the Head Lease stated 244 could assign the Head Lease [s]o long
    as the Tenant is not in default under the terms of the [Head Lease]. The
    application judge held that when 244 purported to assign the Head Lease to
    Smiles First, it was in default of the payment of rent to the Landlord; and

(iii)     the
    correspondence amongst the parties in October 2016 did not constitute actual or
    constructive notice to the Landlord of the Head Lease Assignment.

[16]

Those
    findings were based on a reasonable interpretation by the application judge of
    the terms of the Head Lease Assignment and Head Lease, informed by an
    appropriate consideration of the factual matrix, and they were open to the
    application judge to make based on the record before him:
Sattva Capital
    Corp. v. Creston Moly Corp.
, 2014 SCC 53, [2014] 2 S.C.R. 633. I see no
    basis upon which to interfere with them.

[17]

The
    application judge further held that the Landlords acceptance of rent from Smiles
    First after November 2016 did not: (i) amount to its recognition of an
    equitable assignment of the Head Lease; (ii) constitute a waiver of its rights;
    or (iii) estop the Landlord from asserting those rights. At paras. 71, 75 and
    76 of his reasons, the application judge wrote, in part:

I do not agree that Smiles First
    has shown that, by accepting rent and allowing Smiles First to remain in
    possession of the Leased premises, the Landlord intended that the assignment of
    the Head Lease to Smiles First was valid and effective. I do not agree that
    accepting the Assignment of Lease as an equitable assignment would give effect
    to the intentions of the parties. I decline to treat the Assignment of Lease as
    a valid assignment in equity.



The onus is on Smiles First to show, through evidence, that
    acceptance by the Landlord of rent paid by Smiles First reflected the
    Landlords intention to treat the Assignment of Lease as [] valid and
    effective. Smiles First has failed to discharge its onus of proving that the
    Landlord, by accepting payment of rent, intended to accept the validity of the
    assignment of the Head Lease to Smiles First.

The acceptance of rent by the Landlord during the period when
    the parties were engaged in settlement negotiations does not, in these
    circumstances, represent an implicit assertion by the Landlord that Smiles
    First is in possession of the Leased Premises as an assignee of the Head Lease
    from 244.

[18]

I
    see no reversible error in that analysis. The evidence showed that the
    Landlords acceptance of the rent was done during a period of time when it had
    made clear that Smiles First needed to enter into a new head lease directly
    with it. Smiles First was not prepared to do so on terms acceptable to the
    Landlord. In those circumstances, it was open to the application judge to find
    that the Landlords acceptance of rent while Smiles First continued to occupy
    the Premises did not amount to the recognition of an equitable assignment of
    the Head Lease or a waiver of its rights, or estop it from asserting its
    rights.

III.

SECOND ISSUE: DID THE APPLICATION JUDGE ERR IN REFUSING TO GRANT SMILES
    FIRST RELIEF FROM FORFEITURE?

[19]

Smiles
    First advances several grounds of appeal from the application judges refusal
    to grant it relief from forfeiture either under s. 21 of the
CTA
[1]
or s. 98 of the
CJA
.
[2]

The application judges use of the Minutes of Settlement

[20]

In
    considering Smiles Firsts request for relief from forfeiture, the application
    judge proceeded on the basis that 244 had agreed to abandon the Head Lease as
    of November 1, 2016. Smiles First submits the application judge erred in so finding
    because he relied, improperly, on the draft Minutes of Settlement that were
    protected by settlement privilege, which Smiles First had not waived. The
    Minutes recited 244s abandonment of the Head Lease effective November 1, 2016.

[21]

I
    am not persuaded by this submission. As the application judge noted in his
    reasons, as part of its evidence on the application Smiles First filed the
    Minutes of Settlement. As a result, the application judge was entitled to
    consider that evidence.

The effect of the surrender of the Head Lease

[22]

Before
    the application judge, the Landlord took the position that upon 244s abandonment
    of the Head Lease, the Sublease came to an end. It contended that after the November
    1, 2016 effective date of abandonment, Smiles First occupied the premises on a
    monthly tenancy, which the Landlord properly terminated by the Notice of
    Termination.

[23]

The
    application judge appeared to accept the Landlords submission. At para. 85, he
    wrote: Smiles First does not take the position that it is currently a
    subtenant  At the time that the Notice of Termination was given on March 21,
    2017, Smiles First was no longer a subtenant. Nevertheless, the application
    judge went on to conclude that even if Smiles First was a subtenant, it would
    not be entitled to relief from forfeiture under s. 21 of the
CTA
or s.
    98 of the
CJA
because the Landlord was not attempting to enforce any
    right of re-entry or forfeiture under the Head Lease, which 244 had abandoned.
    As a result, Smiles First was not entitled to an order allowing it to remain in
    possession of the premises as a subtenant on the terms and conditions of the
    Head Lease: para. 86.

[24]

For
    the reasons that follow, I conclude that the application judge erred in not
    granting Smiles First a remedy from the Landlords attempt to enforce the
    Notice of Termination and evict Smiles First from the Premises. Smiles First is
    entitled to possession of the Premises until the end of the term of, and on the
    terms and conditions contained in, the Sublease.

[25]

I
    start my analysis by recognizing that the parties placed the application judge
    in a difficult position. The argument advanced below by Smiles First lacked
    precision. Although Smiles Firsts factums on the application below clearly show
    that it sought alternative relief pursuant to the Sublease, its focus on
    securing new terms for its subtenancy understandably could lead the application
    judge to conclude that Smiles First was taking the position it was not
    currently a subtenant on the terms of the Sublease. Further, the parties did
    not provide the application judge with assistance on the key legal question: What
    legal effect did 244s abandonment of the Head Lease have on Smiles Firsts Sublease
    of the Premises? Following the hearing of the appeal, the panel called for and
    received submissions from the parties on that issue.

[26]

Nevertheless,
    I conclude, with respect, that the application judge erred in holding that
    Smiles First was not entitled to continued possession of the Premises under the
    Sublease.

[27]

The
    application judge found that 244 abandoned the premises as part of its
    settlement with the Landlord. I see no reversible error in that finding. It
    follows that 244s abandonment amounted to a surrender of the Head Lease by the
    tenant:
Daulat Investments Inc. v. Cecis Home for Children
(1991), 85
    D.L.R. (4th) 248 (Ont. Gen. Div.), at para. 26.

[28]

Having
    found that 244 abandoned the Head Lease, the application judge erred by
    accepting the Landlords submission that the surrender of the Head Lease resulted
    in the termination of the Sublease. As a matter of law, it did not. Where the
    tenant surrenders a head lease to the landlord, the subleases created by the
    surrendering tenant survive until the end of their stated terms:
Kowalski
    and Shoota v. Gale
, [1947] 1 D.L.R. 354 (Ont. C.A.), at paras. 32-33;
Shapiro
    v. Handelman
, [1947] O.R. 223 (C.A.), at paras. 6-7 and 16;
Royal Bank
    v. Loeb Inc.
, [1995] O.J. No. 1702 (Gen. Div.), at paras. 12-13; and
CTA
,
    s. 17.
[3]

[29]

Accordingly,
    the application judge erred in finding that Smiles First was not a subtenant
    when the Landlord gave its Notice of Termination.

[30]

That
    said, the application judge properly refused Smiles Firsts request for a
    declaration that pursuant to the Sublease it was entitled to remain in the Premises
    on the same terms and conditions as the Head Lease: para. 80. Smiles First
    was only entitled to remain in the Premises on the terms and conditions
    contained in its Sublease.

[31]

Nor
    was Smiles First entitled to relief under s. 21 of the
CTA
because the Landlord was not
proceeding
    to enforce a right of re-entry or forfeiture under any covenant, proviso or
    stipulation in the Head Lease, which 244 had surrendered:
Maverick
    Professional Services Inc. v. 592423 Ontario Inc.
(2001), 147 O.A.C. 209 (C.A.),
    at para. 4. Nor was this a case for relief from forfeiture under s. 98 of the
CJA
as the Landlord was not trying to enforce a right of re-entry or forfeiture by
    reason of Smiles Firsts breach of the Sublease.

[32]

However,
    Smiles First is entitled to relief against the Landlords attempt to terminate its
    possession of the Premises on the basis that it was merely a monthly tenant.
    When the Landlord delivered the Notice of Termination, Smiles First was
    entitled to possession of the premises under the terms of the Sublease. The
    Notice of Termination was of no effect. Consequently, pursuant to s. 134(1)(a)
    of the
CJA
,
[4]
I would grant Smiles First a declaration that it is entitled to possession of
    the Premises until the end of the term of, and on the terms and conditions set
    out in, the Sublease, including the amount of rent payable.

IV.

DISPOSITION

[33]

For
    the reasons set out above, I would allow the appeal, set aside the application
    judges order, and grant a declaration that Smiles First is entitled to
    possession of the Premises until the end of the term of the Sublease, on the
    terms and conditions set out therein, including the amount of rent payable.

[34]

Although,
    in the result, Smiles First has obtained relief on this appeal, it did not
    succeed on its main argument based on an assignment of the Head Lease and its
    alternative request for relief in respect of the Sublease was sufficiently
    imprecise as to necessitate calling for further submissions. In those
    circumstances, I would only award Smiles First costs of the appeal, including
    the stay motion, in the amount of $5,000, inclusive of disbursements and
    applicable taxes. I would order that no costs be awarded in respect of the proceeding
    below.

Released: GE Jun 8 2018

David Brown J.A.
I agree. Gloria Epstein J.A.
I agree. K van Rensburg J.A.





[1]
Section 21 provides:

Where a lessor is proceeding by action or
    otherwise to enforce a right of re-entry or forfeiture under any covenant,
    proviso or stipulation in a lease, the court, on motion by any person claiming
    as under-lessee any estate or interest in the property comprised in the lease
    or any part thereof, in the lessors action, if any, or in any action or
    application in the Superior Court of Justice brought by such person for that
    purpose, may make an order vesting for the whole term of the lease or any less
    term the property comprised in the lease, or any part thereof, in any person
    entitled as under-lessee to any estate or interest in such property upon such
    conditions as to execution of any deed or other document, payment of rents,
    costs, expenses, damages, compensation, giving security or otherwise as the
    court in the circumstances of each case thinks fit; but in no case is any such
    under-lessee entitled to require a lease to be granted to him, her or it for
    any longer term than the under-lessee had under the original sub-lease.



[2]
Section 98 provides: 
A court may grant relief against penalties and forfeitures, on such
    terms as to compensation or otherwise as are considered just.



[3]

Section
    17 states: Where the reversion expectant on a lease of land merges or is
    surrendered, the estate which for the time being confers as against the tenant
    under the lease the next vested right to the land shall, to the extent of and
    for preserving such incidents to and obligations on the reversion as but for
    the surrender or merger thereof would have subsisted, be deemed the reversion
    expectant on the lease.



[4]

Section
    134(1) states, in part: 
Unless
    otherwise provided, a court to which an appeal is taken may, (a) make any order
    or decision that ought to or could have been made by the court or tribunal
    appealed from.


