Excelsior Properties Ltd. v. Cosentino Developments Inc., 2011 ABQB 666

Court of Queen ’ s Bench of Alberta Citation: Excelsior Properties Ltd. v. Cosentino Developments Inc., 2011 ABQB 666 Date: 20111103 Docket: 0803 06362 Registry: Edmonton Between: Excelsior Properties Ltd. Plaintiff/Respondent - and - Cosentino Developments Inc. Defendant/Respondent - and - 1089920 Alberta Ltd., Sandeep Athwal, Baljot Athwal and Jarnail Randhawa Defendants/Applicants _______________________________________________________ Memorandum of Decision of the Honourable Madam Justice J.M. Ross _______________________________________________________

1. Introduction [ 1 ] The Applicants 1089920 Alberta Ltd., Sandeep Athwal, Baljot Athwal, and Jarnail Randhawa (collectively, the “ Grinder Defendants ”) seek a

summary judgment dismissing the claim of the Plaintiff Excelsior Properties Ltd. (“ Excelsior ”) and the third-party claim of Cosentino Developments Inc. (“ Cosentino ”). The claims in question arise out of a fire that broke out on May 8, 2006 at the premises leased by the Grinder Defendants. 2. Facts [ 2 ] The Grinder Defendants operated a restaurant and bar called the “Grinder” at the premises they leased from Cosentino pursuant to a sub-lease agreement executed in 2004. [ 3 ] The head lease (“ Initial Lease ”) dates back to1987 and was executed between TIHC Share Holding Ltd. and Sunshine Company Saloons Ltd.

Since 1987, the lease has been extended and assigned to several new lessors and lessees. [ 4 ] The relevant terms and conditions of the Initial Lease were as follows: 6. THE LESSEE and Lessor acknowledge and agree that the Lessor shall pay and/or be responsible for the following: (

a) Fire and extended perils insurance premiums ; (

d) Structural and non-structural building maintenance and repair; 7. THE LESSEE COVENANTS AND AGREES WITH THE LESSOR: (b) ... To leave the demised premises in a condition at least equivalent to the state of the demised premises at the commencement of the term ... save an except for damage by fire , lightning, and tempest and reasonable wear and tear; (

h) To keep the Lessor indemnified against all claims and demands whatsoever by any person, and whether in respect of damage to person or property arising out of or occasioned by the use or occupancy of the demised premises, or the sub-letting or assignment of the same ... save and expect such claims ... as may or shall arise ... out of any neglect of the Lessor... (

q) The Lessee shall maintain in force during the term hereof property damage and public liability insurance ... 8. THE LESSOR HEREBY COVENANTS WITH THE LESSEE (

b) That the Lessor shall insure the building of which the demised premises forms part against loss by fire... [ Emphasis added. Spelling and grammar in the original. ]

[ 5 ] In 2001, Grand Fortune Investments Ltd. (as the Lessor) and Cosentino (as the Lessee) executed a two page document (“ Final Lease ”) that extended the lease for a further ten years and included, inter alia , the following terms and conditions: 4) Preparation of Demised Premises - The Tenant is to take the space on an “As is” condition.

All renovation & construction works will be carry out the sole costs & expenses of the tenant. 8) Insurance - The tenant has to carry 2 million dollars liability and property damages insurance including Break-in, Vandalism, & Store-front plate glass coverage. [ Emphasis added. Spelling and grammar in the original. ] [ 6 ] All terms and conditions not mentioned in the Final Lease were incorporated by reference from the Initial Lease. [ 7 ] The Plaintiff Excelsior was eventually assigned the lease and became the new landlord. [ 8 ] On March 1, 2004, Cosentino subleased the premises to the Grinder Defendants.

Under the Sublease Agreement, the Grinder Defendants assumed all of Cosentino’s obligations under the Initial and Final Leases from March 1, 2004 onwards. [ 9 ] In addition to subletting the premises, Cosentino sold some assets required to run the Grinder restaurant and bar to the Grinder Defendants. The “Sale of Specified Assets Agreement”, which governed that transaction, provided, inter alia , that:

(15) The Purchaser ... agrees to fully indemnify and protect the Vendor from any claims relating to the Business which arise from and including March 1 st , 2004 (save and except for any default by the Vendor or breach of this Agreement by the Vendor. [ Spelling, grammar, and punctuation in the original. ] [ 10 ] On May 8, 2006, a fire occurred at the leased premises, damaging the building and the leasehold improvements inside. [ 11 ] Excelsior brought this action against Cosentino and the Grinder Defendants, alleging that the Defendants breached their contractual obligations to compensate Excelsior for loss of the improvements damaged by the fire. [ 12 ] Cosentino subsequently issued a Third Party Notice against the Grinder Defendants, seeking indemnification pursuant to the Sale of Specified Assets Agreement. 3.

This Application [ 13 ] The Grinder Defendants seek a

summary judgment dismissing Excelsior’s claim and Cosentino’s third party claim against them. [ 14 ] In their written brief, the Applicants advanced two primary grounds in support of their argument that there is no triable issue with respect to Excelsior’s claim for damage to the improvements:

a. Excelsior had no proprietary interest in any of the damaged improvements; and b. The Grinder Defendants did not owe a contractual duty under the lease to reimburse Excelsior for any interest it had in thedamaged improvements. [15] At the hearing before me, the Applicants conceded that there was a triable issue with respect to the first ground. [16] The Applicants argued, however, that the first ground made no difference, as the Plaintiff’s claim was based entirely incontract.

Unless the Applicants owed a contractual duty to indemnify the Plaintiff for the value of the improvements, the issue ofwhether the damaged improvements belonged to the Plaintiff was irrelevant. 4. Issue [17] I am therefore left with only one issue to determine: 1. Is there a triable issue with respect to the tenant’s obligation to indemnify the landlord for loss of the leasehold improvementsdamaged by the fire? [18] The third-party claim is contingent on the tenant’s obligation to indemnify the landlord and does not need to be dealt withseparately. I will return to it at the end of my decision. 5.

The Positions of the Parties 1. The Grinder Defendants’ Position (Applicant for

Summary Judgment) [19] The Grinder Defendants submit that there is no triable issue with respect to their duty to indemnify Excelsior because neitherthe Initial Lease nor the Final Lease imposed this duty on the tenant. They argue that, on the contrary, the Initial Lease explicitly madethe Landlord responsible for carrying fire insurance. [20] The Grinder Defendants admit that the Initial Lease required them to carry property damage and public liability insurance.However, they submit that property insurance is separate and distinct from fire insurance.

In support of their argument, the GrinderDefendants rely on the Classes of Insurance Regulation, Alta. Reg. 121/2001, which sets out separate classes of insurance for “fireinsurance” and “property damage insurance.” [21] The Grinder Defendants also rely on the Supreme Court of Canada decision in Smith v. T. Eaton Co., [1978] 2 S.C.R. 749, [Eaton], where the court held that a landlord’s covenant to provide fire insurance protects a tenant against a claim fordamages, even where the fire is caused by the tenant’s own negligence. [22] Finally, the Grinder Defendants argue that paragraph 7(

b) of the Initial Lease explicitly provided that they would not beresponsible for fire damage. They also rely on the landlord’s covenant to repair structural and non-structural damage to the building insupport of their

interpretation of the agreement.

[ 23 ] The Grinder Defendants submit that the Final Lease did not substantially alter the obligations the parties had under the Initial Lease. 2. Excelsior’s Position (Respondent in

Summary Judgment Application) [ 24 ] Excelsior submits that the Final Lease obliged the tenant to carry “property damages insurance”, which included the obligation to insure leasehold improvements against damage by fire. [ 25 ] Excelsior further submits that the

definitions set out in the Classes of Insurance Regulation have no bearing on the

interpretation of the lease. Instead, the lease should be interpreted according to its terms and the intention of the parties. [ 26 ] Counsel for Excelsior referred to a number of clauses in the Initial Lease as indications of the parties’ intention to place the responsibility for insuring leasehold improvements against damage by fire on the tenant. [ 27 ] First, paragraph 8(

b) of the Initial Lease, contains Excelsior’s obligation to insure the “building” against loss by fire. Excelsior submits that the term “building” covers the building shell only and does not extend to leasehold improvements, which are the subject of its claim. [ 28 ] Second, in response to the Grinder Defendants’ argument that paragraph 7(

b) of the Initial Lease explicitly absolves the tenant from liability for fire damage, Excelsior points out that paragraph 7(

b) refers to the “demised premises”, which extends only to the building itself, not the improvements inside. [ 29 ] Finally, Excelsior relies the indemnity clause found in paragraph 7(

h) of the Initial Lease. Excelsior submits that the tenant’s obligation to “keep the Lessor indemnified against all claims and demands ... by any person ... in respect of damage to ... property” imposes on the tenant an explicit obligation to compensate the landlord for damage to leasehold improvements caused by a fire. 6. Analysis 1. The Test for

Summary Judgment [ 30 ] This Application is brought under Alberta Rules of Court , Alta. Reg. 124/2010, rule 7.3: 7.3(1) A party may apply to the Court for

summary judgment in respect of all or part of a claim on one or more of the following grounds: (

a) there is no defence to a claim or part of it; (

b) there is no merit to a claim or part of it; (

c) the only real issue is the amount to be awarded.

[ 31 ] The test for

summary judgment under this rule was discussed by Kent J. in Encana Corp. v. ARC Resources Ltd. , 2011 ABQB 431 : [7] The test for

summary judgment under new rule 7.3 is the same as under the old rules: Manufacturers Life Insurance Co. v. Executive Centre at Manulife Place Inc. , 2011 ABQB 189 at para. 11 ; BA Capital Inc. v. Stream Oil & Gas Ltd. , 2011 ABQB 91 (Master) at paras. 3-4 . [8] An expression of this rule was given by the Alberta Court of Appeal in Tottrup et al. v. Clearwater No. 99 (Municipal District) , 2006 ABCA 380 , 401 A.R. 88.

The Court noted at paras. 11-12 that "trials are primarily to determine questions of fact" and that a trial is therefore not required if the facts are not in dispute and the legal issues involved are sufficiently settled that they can be "fairly decided on the record before the court". [9] The Court of Appeal in Tottrup noted that different types of cases call for different approaches. For an application based simply on the factual merits of the case courts apply a two-stage test. First, the moving party must prove on a balance of probabilities that there is no genuine issue for trial.

This being done, the evidentiary burden then shifts to the respondent to show that there is a genuine issue for trial. In the end, for

summary judgment to be granted, "[i]t must be beyond doubt that no genuine issue for trial exists": Tottrup at para. 10 citing Pioneer Exploration Inc. Estate (Bankrupt) v. Euro-Am Pacific Enterprises Ltd. 2003 ABCA 298 , 339 A.R. 165 at para. 19 . Similarly, in the context of an application for

summary dismissal of an action, "it must be 'plain and obvious', or 'clear' or 'beyond real doubt' that the action should be summarily disposed of": Tottrup at para. 10 . ...[I]f a chambers judge must assess the quality and weight of the evidence to arrive at

summary judgment, the "beyond doubt" standard has not been satisfied: Liu v. Tangirala , 2004 ABCA 171 at para. 2 ; De Shazo v. Nations Energy Co. , 2005 ABCA 241 , 367 A.R. 267 at para. 17 . [10] On the other hand, the Court of Appeal in Tottrup notes there are other types of

summary judgment applications: [11] ... In some cases the facts are clear and undisputed. The ultimate outcome of the case may depend on the

interpretation of some statute or document, or on some other issue of law that arises from undisputed facts. In such cases the test for

summary judgment is not whether the issue of law is "beyond doubt", but whether the issue of law can fairly be decided on the record before the court . If the legal issue is unsettled or complex or intertwined with the facts , it is sometimes necessary to have a full trial to provide a proper foundation for the decision. In other cases it is possible to decide the question of law summarily[.] ... [12] The Supreme Court of Canada has said that the bar on a motion for

summary judgment is high. "It is essential to the proper operation of the justice system and beneficial to the parties that claims that have no chance of success be weeded out at an early stage. Conversely, it is essential to justice that claims disclosing real issues that may be successful proceed to trial.": Canada (Attorney General) v. Lameman , 2008 SCC 14 , [2008] 1 S.C.R. 372 at paras. 10-11 . [ Emphasis added. ] [ 32 ] Despite the new Rules ’ focus on avoiding costly litigation, the test for

summary judgment remains the same and continues to carry a “stringent and high threshold” for the moving party: Kwan v. Superfly Inc. , 2011 ABQB 343 at para. 20 ; Woronuk v. Woronuk , 2009 ABQB 306 at para. 27 . In order to defeat a

summary judgment application, the Respondent needs to adduce only “some evidence” tending to establish a claim: Woronuk at para. 26 . No plaintiff should be denied his or her day in court if there is an arguable claim that can be put forward: Krook v. Cold Lake (City) , 2010 ABQB 2 at para. 3 . 2. Is this an Issue of Law or Fact? [ 33 ] The central issue in this action is whether the Grinder Defendants have an obligation to indemnify Excelsior for fire damage to Excelsior’s leasehold improvements. The parties have agreed that their relationship is governed exclusively by the three lease

agreements. All that is required to decide this issue is to interpret these agreements. [34] Contractual

interpretation is a question of law: Rahall v. Tait, 2007 ABCA 221 at para. 15, 412 A.R. 56. Therefore, perTottrup, the appropriate test for a

summary judgment is whether the issue of law can fairly be decided on the record before the court. 3. Can the Issue be Resolved on the Basis of the Record? [35] I find that the Initial Lease contains a number of ambiguous elements. I will briefly discuss each of them in turn. The “Building” [36] Under the Initial Lease, the Lessor covenanted to insure “the building of which the demised premises forms part” against lossby fire.

The term “building” was not defined in the lease. [37] The Applicant and the Respondent differ as to whether the term “building”was meant to extend to leasehold improvementsinside the building. One of Excelsior’s officers, Mr. Frederick Nim Mui Mok, stated in cross-examination on his affidavit that heunderstood the fire insurance clause to exclude items inside the building: p. 14, line 24. [38] A brief review of jurisprudence in this area suggests that landlords and tenants routinely treat the building and the leaseholdimprovements as separate objects of insurance coverage: Business Development Bank of Canada v.

Dominion of Canada GeneralInsurance Co., 1998 ABQB 437 at paras. 44-48, 61 Alta. L.R. (3d) 232; Weldwood of Canada Ltd. v. Gisborne Construction (Alberta)Ltd. (1995), (AB KB), 171 A.R. 45 at para. 5, 30 Alta. L.R. (3d) 99 (Q.B.); Newfoundland and Labrador HousingCorp. v. KFCK Enterprises Inc., 2001 NFCA 62 at paras. 3, 46, 2001 NFCA 62 , 207 Nfld. & P.E.I.R. 239; Okanagan PrimeProducts Inc. v. Henderson, at para. 12, 28 B.C.L.R. (3d) 137 (C.A.); Melfort Distributors Ltd. v. SGI Canada(1994), (SK KB), 126 Sask.

R. 241 at paras. 3, 7, 51 A.C.W.S. (3d) 526 (Q.B.). [39] Thus, the “building” may be distinct from leasehold improvements. As the lease lacks a definition, the term is ambiguous. “Property Damage and Public Liability Insurance” [40] Under both the Initial Lease and the Final Lease, the Lessee covenanted to obtain “property damage and public liabilityinsurance.” This clause is central to the Applicants’ argument. The Grinder Defendants submit that this obligation does not include anobligation to obtain fire insurance.

The Respondent Excelsior disagrees. [41] I am of the opinion that the term “property damage insurance” is sufficiently broad that it may include damage by fire. I agreewith the Respondent Excelsior that the

definitions set out in the Classes of Insurance Regulation have no bearing on the

interpretation ofboth leases. The Supreme Court of Canada has held that covenant modifications of the relations between landlord and tenant must bedetermined on the basis of the lease and not by reference to insurance policy considerations: Ross Southward Tire v. Pyrotech Products,[1976] 2 S.C.R. 35 at 41, . This is consistent with the general principle that the rights and obligations as between landlordand tenant are to be determined on the basis of their intentions as expressed in the lease: Matthews v. Andrew, (B.C.S.C.) at para. 26. “Demised Premises” [42] As discussed above, the Grinder Defendants submit that paragraph 7(

b) of the Initial Lease explicitly absolves them fromliability for fire damage to leasehold improvements. Excelsior submits that paragraph 7(

b) does not relieve the Applicants from liability,as it only extends to the “demised premises.”

[43] Again, there is room for argument with respect to what the parties meant by the “demised premises.” The Initial Lease definesthis term in paragraph 1 by reference to Appendices A and B, which contain the legal description of the land and a plot of the building.While not definitive, this tends to suggest that the term “demised premises” is only used to describe the structure itself, excepting anyleasehold improvements. “To keep the Lessor indemnified against ... damage to person or property” [44] The Plaintiff relies on this indemnity clause in advancing its claim.

It is unclear whether the parties intended this clause tocover only third party claims or whether it made the tenant liable to compensate the landlord for any damage to property. The Applicantsand the Respondent Excelsior advance competing

interpretations. [45] An indemnity clause can, in some circumstances, protect a party against direct loss. As stated by the Ontario Superior Court ofJustice in TransCanada Pipelines Ltd. v. Potter Station Power Ltd. Partnership, (Ont. Sup. Ct. J.) at para. 34, the case law does not establish a general principle that wherever words of indemnity are found, the obligation created is confined toresponding to claims made against the indemnitee by third parties.

Even where a provision is, in the words of Laskin J.A., in PowellEquipment Co., supra, “couched in language suggestive of indemnity, [it may be] more properly characterized as an exculpatory term ofthe overall transport agreement…”. Thus, the presence of words of indemnity is not decisive, they must still be construed in context. Ifsuch a clause may in one context be an exculpatory term, there is no reason why, given the proper words, it may not also in anothercontext include liability for direct loss.

The principle exemplified by every case cited is that the obligation is governed by the wordschosen, when placed and read in their context. [Emphasis added.] [46] Thus, there is an argument that the indemnity clause in the Initial Lease entitles Excelsior to compensation for damage toleasehold improvements. The clause is ambiguous and requires

interpretation. 7. Decision [47] As the discussion above demonstrates, both the Initial Lease and the Final Lease contain a number of ambiguous clauses thathave given rise to conflicting

interpretations. In this regard, I find the following language from Woronuk at para. 27 particularlyinstructive: If there is discrepancy in the

interpretation of the language used by the parties to describe, for example, the obligation to insure, suchdetermination should only occur after the parties provide their evidence at trial as to what was meant by the language used, especiallywhen the document was client-drafted. [Emphasis added.] [48] The case at bar falls within this rule. Accordingly, I find that I cannot rely on the language of the Agreements alone. The Initialand the Final Lease did not provide

definitions for many critical terms, such as “building” and “property damage insurance.” The FinalLease was drafted by non-lawyers. Given the ambiguities, the drafting parties could have equally had either of the conflictinginterpretations in mind at the time they entered into these two agreements. To properly ascertain the meaning of contractual terms, I mustlook to the intention of the parties.

[49] Intention is a question of fact. Therefore, the legal issue that is at the centre of in this case is intertwined with the facts. Underthe test in Tottrup at para. 11, if a question of law is intertwined with the facts, a

summary judgment would not be appropriate. [50] The Applicants submit, however, that the leases can be interpreted without trial by invoking the contra proferentem rule. Idisagree. The Supreme Court of Canada has held that the cardinal rule for the

interpretation of a contract is that the intention of theparties must prevail, and that it is only where all the rules of construction have failed in assisting in the discovery of the true intention ofthe parties, that the court is entitled to resort to the contra proferentem rule: Metropolitan Life Insurance Co. v. Frenette, (SCC), [1992] 1 S.C.R. 647 at 667-68, 89 D.L.R. (4th) 653; see also McDonald Crawford v.

Morrow, 2004 ABCA 150 at para. 64,348 A.R. 118, where Côté J.A. held that the contra proferenetem rule should be applied last, if at all. [51] Even if I am wrong in concluding that the question of law in this action is intertwined with the facts, I find it sufficientlyunsettled to warrant a trial under the test in Tottrup. The Applicants submit that the authority in Eaton is dispositive of the issue. Withrespect, I cannot agree. The claim in Eaton appears to have been solely with respect to damage to the building.

In the case at bar, thePlaintiff is not seeking recovery for damage to the building, only to the leasehold improvements. The law on the narrow issue raised bythis case remains unsettled. I have found no authority discussing whether the landlord’s covenant to provide fire insurance for thebuilding precludes a claim against the tenant for damage to the leasehold improvements. [52] In the end, I conclude that this issue cannot fairly be decided on the basis of the present record. A full trial is required. 5.

The Third Party Claim [53] The last issue to consider is Cosentino’s third party claim against the Grinder Defendants for indemnity. Paragraph 15 of theSale of Specified Assets Agreement between Cosentino and the Grinder Defendants imposes a clear duty on the Grinder Defendants to indemnify Cosentino for any claims related to the Grinder restaurant that arise after March 1st, 2004. [54] This claim arose on May 8th, 2006 when the fire occurred.

Therefore, to the extent that Cosentino may be liable tocompensate Excelsior, there is at least an arguable claim that Cosentino is entitled to be indemnified by the Grinder Defendants. TheGrinder Defendants’ Application for

summary judgment against Cosentino is dismissed. 8. Conclusion [55] The Application is dismissed. If the parties are unable to agree on costs, they can return the matter before me. Heard on the 18th day of October, 2011. Dated at the City of Edmonton, Alberta this 2nd day of November, 2011.

J.M. Ross J.C.Q.B.A. Appearances: Richard G. Ferguson Lynass, Ferguson & Shoctor LLP for the Respondent Excelsior Properties Ltd. Christopher J. Skrobot Jomha Skrobot LLP for the Respondent Cosentino Developments Inc. Robert S. Joseph Prowse Chowne LLP for the Applicants