Manufacturers Life Insurance Company v. Executive Centre at Manulife Place Inc., 2011 ABQB 189

Court of Queen ’ s Bench of Alberta Citation: Manufacturers Life Insurance Company v. Executive Centre at Manulife Place Inc., 2011 ABQB 189 Date: 20110321 Docket: 1003 17678 Registry: Edmonton Between: The Manufacturers Life Insurance Company Applicant - and - Executive Centre at Manulife Place Inc. Respondent _______________________________________________________ Memorandum of Decision of the Honourable Madam Justice J.B. Veit _______________________________________________________

Summary [ 1 ] Manulife asks the court for

summary judgment against Executive Centre in the following circumstances: Executive Centre defaulted under a lease entered into with Manulife, dated July 31, 2001 by failing to pay rent. The lease contained an entire agreement clause. Executive Centre alleges that Manulife owes it an implied duty to act in good faith which includes a duty to reasonably renegotiate payment of rent for the remaining year of the 10 year lease. Executive Centre also allesges that Manulife failed to mitigate its damages by failing to agree to Executive Centre’s proposal to pay a lower rent than stipulated in the lease. [ 2 ] Manulife’s application is allowed: it is granted

summary judgment in the amount of $602,612.85. [ 3 ] Canadian law is clear: Manulife does not owe Executive Centre a duty to act in good faith. No such duty can be implied in

[3] Canadian law is clear: Manulife does not owe Executive Centre a duty to act in good faith. No such duty can be implied inthe circumstances here. [4] While Manulife does have an obligation to mitigate its damages, and uncontradicted evidence has been provided by Manulifeon that issue, it is not required as an aspect of mitigation to renegotiate the rent with its existing tenant.

Without even having to engage inthe analysis of how Highway Properties applies in the circumstances here, it is possible to resolve this application on a much narrowerbasis: where, as here, the attempts to renegotiate the lease all occurred prior to Executive Centre’s default and the termination of thelease, Executive Centre cannot be described as having offered mitigation since mitigation only applies after a breach of a lease, notbefore. Cases and authority cited [5] By Manufacturers Life Insurance Company: Rule 7.3 of the Alberta Rules of Court; 732311 Alberta Ltd. v.

Paradise BaySpa & Tub Warehouse Inc., [2003] A.J. No. 1502 (ACA); Tucson Properties Ltd. v. Sentry Resources Ltd. (1982), (Master);Papaschase Indian Band No. 136 v. Canada (Attorney General), 2008 SCC 14 , [2008] 1 S.C.R. 372; Tottrup v. Clearwater(Municipal District) No. 99, 2006 ABCA 380 , 2006, CarswellAlta 1627 (ACA); Hanen v. Cartright (2007), CarswellAlta 372(AQB); TransAmerica Life Canada Inc. v. ING Canada Inc. (2003), CarswellON 4834 (OCA); Mesa Operating Ltd. v. AmocoCanada Resources Ltd., 1994 ABCA 94 , [1994] A.J. 201 (ACA); Coulombe v.

Sabatier (2006), ABQB 614 (AQB); GoodFaith and Contractual Performance: Recent Developments [1995] 74 Canadian Bar Review; Edmonton Airport Hotel Co. v. CreditFoncier Franco Canadien

(1964) CarswellAlta (ASCAD) 51; Unisys Canada Inc. v York Three Associates Inc.(ON CA), 150 O.A.C. 49, 2001 CarswellOnt 3301, S.M. Waddams, The Law of Damages, Canada Law Book, Looseleaf Ed., at pp. 15-11 to 15-14 [6] By Executive Centre: Meyers v Dunphy 2007 NLCA 1, [2007] N.J. No. 5; Unilever plc v The Procter & Camble Co.[2001] 1 All E.R. 783 (C.A.); Gateway Realty Ltd. v Arton Holdings Ltd. (NS SC), [1991] N.S.J. No. 362, affm’d1992 NSCA 70 , [1992] N.S.J. No. 175 (C.A.); Apex Corporation v Ceco Developments Ltd. 2008 ABCA 125; NashvilleContractors Ltd. v Middleton [1984] O.J.

No. 99 (C.A.); Westland Investment Corp. v Carswell Collins Ltd. (ABKB), 179 A.R. 272, [1996] A.J. No. 21 (Q.B.) [7] By the court: Nareerux Import Co. v CIBC 2009 ONCA 764, 607190 Ontario Inc. v First Consolidated Holdings Corp. (1992) 26 R.P.R. (2nd) 298; J.W. Lem, The Landlord’s Duty to Mitigate Upon a Tenant’s Repudiation of a Commercial Lease: A commentary on 607190 Ontario Inc. (1992) 30 R.P.R. (2nd) 33; Payzu Limited v Saunders [1918] 2 K.B. 581; Velmore Estates Ltd. vRoseberry Homes Ltd. [2005] EWHC 3061 (Ch.); Julie Copley v Kenneth Lawn [2009] EWCA Civ 580.. 1.

Background [8] On July 30, 2001, Manulife and Executive Centre entered into a written lease agreement for a ten year term in respect of 21,809 square feet located on the 10th floor in Manulife Place, Edmonton. The lease contained an entire agreement clause. Over its tenancy, Executive Centre paid to Manulife in excess of $3.5 million in rent for the 10th floor. Since October 1, 2010, Executive Centrehas failed to make any payment in respect of its financial obligations due under the lease. On September 30, 2010, Executive Centrevacated the leased premises.

On October 8, 2010, Manulife served a notice of termination on Executive Centre. Since October 8,Manulife has attempted to re-let the leased premises, without success. As at September 30, 2010, Executive Centre owed Manulife thesum of $602,612.85. [9] Manulife has no objection to Executive Centre putting the following evidence about failed settlement negotiations before thecourt. Executive Centre approached Manulife in August 2010 to seek rent concessions.

Executive Centre proposed that it would consolidate its operation on the 11th floor of Manulife Place, it would vacate the 10th floor as of September 30, 2010, and, commencing in January 2011, it would pay additional rent under the 11th floor lease in an amount equivalent to the rent payable under the 10th floorlease. As part of these negotiations, Executive Centre provided Manulife with some financial information, but it declined to provide toManulife all of the financial disclosure which Manulife had requested.

Under Executive Centre’s proposal, Manulife would have lostapproximately $150,000.00 in lease payments. Manulife did not accept Executive Centre’s proposal dated August 16, 2010. [10] In 2004, when Executive Centre was “going through a tough time”, it sought lease concessions from Manulife. Manulife didnot agree to make any lease concessions. Executive thereafter continued to make the payments contemplated by the lease until 2010.

2. Test for granting

summary judgment [ 11 ] The parties agree that new Rule 7.3 has not amended the test developed in Alberta jurisprudence for

summary judgment under old rule 159. In the circumstances here, where there is no factual dispute Manulife having proved a breach of its lease agreement, the onus is on Executive Centre to establish that it has some arguable defence to Manulife’s claim: Paradise Bay Spa & Tub .

Where, as here, there is no factual dispute, there is no purpose to a trial: the respondent/defendant can advance its legal arguments as well in this special chambers hearing as it could at the conclusion of a trial; this is a clear case of a situation in which the rights of the parties can fairly be determined without a trial: Tottrup . 3.

Manulife does not owe Executive Centre a duty of good faith [ 12 ] Manulife does not owe Executive Centre a duty of good faith. [ 13 ] In coming to that conclusion, I have taken into account the fact that the weight of Canadian case law, and even academic opinion, is to the effect that there is no generalized duty, as Executive Centre puts it, no stand alone duty of good faith that is independent from the terms expressed in the contract or from the objectives that emerge from those positions: Nareerux Import Co. [ 14 ] It is true, of course, that there are situations in which terms, including an obligation of good faith, could be implied in a contract.

However, in the situation here, there is an entire clause term in the written contract for a commercial lease between sophisticated parties; therefore, no term can be implied beyond the written terms of the agreement.

Moreover, the breach here is one of payment of rent, not of some obligation to act in a way which may require good faith, as was the case in Gateway . [ 15 ] Indeed, the very notion advanced by Executive Centre of an obligation to renegotiate clear terms in a lease can be judged by the anticipated reaction of Executive Centre to an attempt by a landlord, in a climate of increasing rent levels, to increase the rent. 4.

Manulife’s duty to mitigate its damages; however, that duty does not extend to requiring it to accept its tenant’s proposal to pay less rent [ 16 ] Manulife does have a duty to mitigate its damages; however, that duty does not extend to requiring it to accept its tenant’s proposal to pay less rent. [ 17 ] The uncontradicted evidence before the court is that Manulife did attempt to mitigate its damages by attempting to re-let the premises. These efforts were made after Manulife terminated the lease. Executive Centre does not fault Manulife with respect to those efforts.

However, it states that Manulife’s obligation to mitigate required Manulife to accept Executive Centre’s proposal to pay less rent than the lease required. [ 18 ] The nature of a landlord’s obligation to mitigate vis-a-vis its tenant was usefully explored by the Ontario Court of Appeal in Unisys Canada Inc. Perhaps even more helpful was Mr. Lem’s commentary on that decision as found in the both the Real Estate Reporter and CarswellOnt reports of the decision. For those who do not have access to that commentary, I repeat portions of it.

The emphasis is in the original: At trial in Unisys , it was held that a landlord had a duty to mitigate its damages, not only by terminating and seeking a replacement tenant, but by actually renegotiating with the repudiating tenant itself! . . . This startling ratio did seem, however, somewhat susceptible to scrutiny (see, e.g., this annotator’s comments on the trial decision at 39 R.P.R. (3d) 221 ). The Ontario Court of Appeal drilled the coffin shut on the trial court’s reasoning by concluding, somewhat unceremoniously . . . [that there was no such duty].

Mr. Lem, who is the editor of the Real Property Reporter has been commenting on decisions in this area for a very long time (see the citation provided at the outset) and his comments provide a contextual handle on the mitigation discussion. One of the comments he made on the trial level decision in Unisys is that an attempt at renegotiation while the lease has not yet terminated cannot properly be described as mitigation since mitigation occurs after a breach. Here, as in Unisys , Executive Centre’s negotiations with Manulife occurred prior to termination. Mr.

Lem also notes the “untoward” nature of the concept of being bound by the offer of a defaulter; however, that is an issue of reasonableness, which is different from the issue of whether must accept a proposal from its own tenant to accept lower rent. In this, he echoes the words of Lord Macmillan in Banco de Portugal who stated that the conduct of the innocent party should not be “weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty”.

In other words, if I were wrong in rejecting Executive Centre’s argument in relation to mitigation, then Manulife would be able, at trial, to argue that, in the circumstances, including Executive Centre’s refusal to provide full financial disclosure, it was not unreasonable for Manulife to reject Executive Centre’s offer. [ 19 ] In narrow terms, the Unisys principle can be applied in the circumstances here as follows: while the lease is still in effect, a failure to renegotiate a lease with a tenant cannot properly be described as a failure of mitigation since the lease is still in effect and mitigation is not therefore required. [ 20 ] Dealing with the matter in the way described above, which is what some might characterize as overly technical, does, however, have the added value of helping to clarify the issue of whether the landlord would have to give up his right to sue the tenant.

We see in some of the wrongful dismissal cases that continued employment in another capacity is universally considered an unreasonable type of mitigation where the employee purports to accept the alternate employment but continues her suit against the employer. Here, Executive Centre states that Manulife would not have had to give up its rights to sue Executive Centre for the default on the lease in order to accept Executive Centre’s proposal.

With respect, I am of the view that that is not a realistic view of the situation, if only because if Manulife thought it could successfully sue Executive Centre, it would also expect Executive Centre to have paid the contractual rent. [ 21 ] Executive Centre relies on the comment in Apex Corporation : There is no rule that the innocent party’s mitigation cannot come from dealings with the guilty party. Indeed, that is often done, even sometimes in wrongful dismissal suits. . . . So long as the mitigation is not unreasonable, the innocent party can take any opportunity to mitigate.

Two comments must be made about that extract. The first is that it contains no language obliging the innocent party to deal with the guilty party; it merely recognizes that the innocent party may deal with the guilty party. More importantly, however, it does not deal with a landlord and tenant situation. A general principle of the law is that the specialized application over-rules the general; indeed, that is the very principle on which Executive Centre attempted to rely on its argument concerning an implied duty of faith.

In principle, it was correct that, if there had been a basis for imputing a duty of good faith to Manulife in the circumstances here, that implied duty would have over-ridden the general rule that there is no duty in Canadian law. Executive Centre’s failure in that area of argument arises because it could not establish an implied duty.

Although it is conceded that there is a generalized duty to mitigate, the law relating specifically to landlords and tenants imposes no such obligation. [ 22 ] Executive Centre relies on other authorities which depend upon the English Court of Appeal decision in Payzu, Limited : Nashville Contractors, Westland Investment Corp. Two comments must be made about that line of cases. First, it appears to me if I may say so with respect, that we are long past the day when English authority could and should be considered to be domestic authority.

Canadian courts and Canadian lawyers do not have the familiarity with English law that once was common. Today, it is quite expensive to attempt to note up English authorities. If a court, or a party, were to find a quote in an English case that ideally encapsulated its own view of the law, of course, there is no reason why that quotation may not be used; the danger is, however, that, as opposed to a quotation from a literary source, a reference to an English case may be misunderstood as being in some way authoritative, even if not binding.

In my view, we have reached a situation in which English law should be treated as foreign law. [ 23 ] In any event, just as in Canada, we can find decisions for almost any position. For example, in Velmore Estates , in concluding that a claimant in the case in which he was involved was entitled to insist upon the terms of the contract, Judge Rich cited with approval the 1975 decision of the English Court of Appeal in Strutt v Whitnall which distinguished the duty to mitigate from the question of whether the steps relied on fell within that duty. As stated above, a similar distinction may be necessary here.

In the latter case, Lawton LJ stated:” The problem seems to me to be this: if the law gives a man a remedy, can he be said to have acted unreasonably in relation to mitigation of damage if he elects to keep that remedy, rather than accept another remedy offered to him by the party in default?”. The decision in Strutt is itself criticized in other decisions. However, in Julie Copley , the Court of Appeal (Civil Division) re-

affirmed the position taken in Strutt : see particularly para. 28. These comments are offered only to demonstrate that it is exceedingly to determine what the final view of English law is on any given point which might also arise in Canada. [ 24 ] Second, and more important for the resolution of the matter before this court, the Court of Appeal in Payzu - which incidentally was not a landlord/tenant case - made it clear that, in its view, mitigation was a matter of fact, not a matter of law.

In Canada, when we are dealing with contracts between landlords and tenants, we are dealing both with property law and with contract law. Canadian courts are bound by the decision of the Supreme Court in Highway Properties ; that is a matter of law, not of fact. Therefore, when a Canadian court must determine an issue of mitigation in relation to a lease of property, it must follow the principles as articulated by the Supreme Court and subsequently explained in 607190 Ontario Inc. and Unisys . 4. Conclusion [ 25 ] The parties were agreed that, at a minimum, Manulife was entitled to

summary judgment for $150,000.00. The court has concluded that Executive Centre has not established that it has an arguable defence to Manulife’s total claim; therefore, the court awards Manulife

summary judgment in the amount of $602.612.85. 5. Costs [ 26 ] If the parties are not agreed on costs, I may be spoken to within 30 days of the release of this decision. Heard on the 15 th day of March, 2011. Dated at the City of Edmonton, Alberta this 18 th day of March, 2011. J.B. Veit J.C.Q.B.A.

Appearances: Richard J. Cotter, Q.C., Fraser Milner Casgrain LLP for The Manufacturers Life Insurance Company Françoise H. Belzil, Belzil Law Office for Executive Centre at Manulife Place Inc.