In allowing the appeal of a commercial tenant faced with eviction when the landlord wanted to renovate the building, the Ontario Court of Appeal emphasized that the lower court judge erred by “focussing too narrowly on the definition of the leased premises and the results of the proposed renovations.”
In Meridian CC Intl Inc. v. 2745206 Ontario Inc. 2022 ONCA 12, the court noted that paragraph 11(1) of the commercial lease permitted “the landlord to terminate the tenancy upon giving 180 clear days’ written notice where the landlord desires to remodel or demolish any part of the rented premises ‘to an extent that renders continued possession by the tenant impracticable.’ ”
According to court documents, the landlord gave the tenant “180 days’ written notice to terminate under para. 11(1) of the lease so that it could remodel the premises.” The remodelling plan, the court noted, “proposed the demolition of the garage, the remodelling of the main floor into two separate units, the replacement of windows, wiring and plumbing throughout the premises, and the use of part of the basement for building services and utilities.”
The appellants (the tenant and its principal), the court explained, “resisted the termination” of the respondent landlord.
“They asserted, among other things, that the termination was in bad faith because the respondent had sought to terminate the lease, which had been in existence since 2013, shortly after purchasing the building in which the leased premises were located,” the court added, noting that the appellants claimed that “the proposed remodelling would not interfere with the operation of the tenant’s business.”
According to court documents, the retail part “occupied only one half of the main floor of the building, such that the remodelling would not render the tenant’s continued possession ‘impracticable.’ ”
At the lower court, the respondent landlord “moved for summary judgment seeking to enforce the termination.”
The motion judge, Justice Frederick Myers of the Superior Court of Justice, determined that the “renovations were bona fide and that the premises as described under the lease would cease to exist because of the planned renovations.”
“As a result,” the court noted, Justice Myers determined that “continued possession by the tenant was impracticable.”
Justice Myers “rejected as irrelevant” issues regarding the development of the landlord’s plans and “whether the tenant could possibly remain in part of the premises during renovations” as he found “the proposed remodeling and demolition deprive the tenant of substantial portions of the ‘Premises’ defined under the lease.”
Justice Myers concluded that the landlord “properly gave notice to terminate the lease in accordance with the parties’ bargain” and “dismissed the appellants’ action and allowed the respondent’s counterclaim to terminate the lease.” Costs of $75,000 went to the respondent.
On appeal, the Court of Appeal noted that “it is necessary to resolve only the issue of whether the motion judge erred in construing para. 11(1) of the lease too narrowly and in isolation from the other provisions of the lease.”
In a unanimous decision released Jan. 12, Justices Paul Rouleau, Katherine van Rensburg and Lois Roberts, determined that Justice Myers made “reversible errors of law in his interpretation of the lease” and they allowed the appeal.
The court emphasized that an “extricable question of law includes a legal error made in the course of contractual interpretation such as the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor.”
“Moreover,” the court added, “a failure to consider the contract as a whole, by focussing on one provision without giving proper consideration to other relevant provisions, can also be an error of law.”
The judges noted that in Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205, the Court of Appeal “emphasized that a commercial contract should be interpreted ‘as a whole, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective.’ ”
“In our view, the motion judge made these errors of law in his analysis of the lease,” the judges explained.
The Court of Appeal found that Justice Myers was “required to consider whether it was ‘impracticable’ in this case for the landlord to carry out the proposed remodelling while the tenant continued in possession.”
“This was a fact-specific exercise for the motion judge to undertake based on his interpretation of the particular lease and the evidence in the record before him,” the court added, noting, however, that Justice Myers erred by “focussing too narrowly on the definition of the leased premises and the results of the proposed renovations.”
“This was a flawed approach,” the court stressed.
The court explained that instead of “giving effect to para. 11(1) in its entirety, the motion judge’s approach would give rise to the unintended and commercially unreasonable result that any change which reduces the area of the leased premises would allow the landlord to terminate the lease.”
Justice Myers’ approach, the court determined, “further caused him to interpret para. 11(1) of the lease in a manner that was inconsistent with the whole of the parties’ agreement.”
“Most notably,” the judges added, Justice Myers’ “narrow interpretation would untenably permit the landlord to terminate the lease in order to make alterations, such as partitioning the main floor, and lease parts of the leased premises to other tenants when, with the approval of the landlord, the tenant is permitted to carry out the same kinds of alterations and sublet parts of the premises under paras. 4 and 7 of the lease.”
The court found that, as a result of these errors, Justice Myers “failed to determine the principal question that he had to decide, namely, the question of whether the proposed renovations rendered continued possession by the tenant impracticable.”
“Accordingly, whether the tenant could remain in possession and continue its operation in part of the premises during the renovations were relevant questions, among others, that the motion judge should have determined,” the court added.
Gina Rhodes, Owens Wright LLP
Gina Rhodes, an associate at Owens Wright LLP and counsel for the appellants with Robert Choi, said “this decision is important because general issue remodelling clauses, such as the one that was the subject of the appeal, are not uncommon in commercial leases, and it really could be a dangerous clause for a commercial tenant because terminating the lease could lead to the termination of a small business, which was the case here. We represent a small business owner.”
“The main question in this appeal was whether the landlord could make any changes to the premises or any demolition that would necessarily lead to the result that the lease was terminated and what the Ontario Court of Appeal may have been concerned about is if the tenant could maintain possession, which is a complex issue in and of itself, then a landlord could abuse a provision like this by making a simple change to the premises that had no effect on her business,” she added.
Robert Choi, Owens Wright LLP
He said it was “particularly important” to advance the clients’ cause “because of the access to justice issues.”
“I care about history and philosophy, and there are concepts out there that say the law develops in a manner that favours the wealthy because the wealthy are able to get better lawyers, and they win, that becomes the case law, it becomes a self-fulfilling and circular prophecy,” he said, stressing that it’s “incumbent upon the legal profession to take on important cases and give it the due attention it deserves so that the law is balanced, the law develops in the correct way, and that access to justice issues are resolved.”
Choi also stressed the collaborative approach the firm takes on every case, the benefit of which is having a mix of associates, partners and articling students working on a matter. He noted that Rhodes made submissions at the Court of Appeal and “that’s what the court wants to see.”
“They don’t want to see senior counsel hogging the stage light,” he said, emphasizing that the court wants to see “the passing on of the torch, so to speak, and the sharing of that stage light, so that there can be a continuity of the skill set that are passed from one generation to another.”
Counsel for the respondent did not reply to request for comment.
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