Statoil Canada Ltd. v. Cadillac Fairview Corporation, 2012 ABQB 618

Court of Queen ’ s Bench of Alberta Citation: Statoil Canada Ltd. v. Cadillac Fairview Corporation, 2012 ABQB 618 Date: 20121022 Docket: 1101 17376 Registry: Calgary Between: Statoil Canada Ltd. Plaintiff - and - The Cadillac Fairview Corporation, Bos Solutions Ltd., Canadian Tubular Services Inc., Keywest Projects Ltd., MHI Fund Management Inc., Spt Group Canada Ltd. (formerly Neotechnology Consultants Ltd.), Premier Petroleum Corp., Tucker Wireline Services Canada Inc., Surge Energy Inc., Moe Hannah Mcneill LLP, Logan Completion Systems Inc. And Ce Franklin Ltd.

Defendants _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice C.A. Kent _______________________________________________________ [ 1 ] Statoil leased several floors of an office building in Calgary from Cadillac Fairview. Homburg Invest Inc., Cadillac and Statoil signed an assignment of lease agreement. Cadillac authorized Statoil to conditionally assign its rights under the head lease to Homburg. Homburg then signed subleases with several companies, the applicants in this application, collectively referred to as the subtenants.

Homburg, each of the subtenants for their particular space and Statoil signed a non-disturbance agreement. Each of the subtenants for their space, Homburg and Cadillac signed a consent to sublease. The relevant portions of each of the documents are attached as appendices to this judgment. They are:

- Appendix 1 Assignment Agreement amongst Cadillac, Statoil and Homburg - Appendix 2 The Sublease - Appendix 3 The Non Disturbance Agreement (NDA) - Appendix 4 Consent to Sublease [ 2 ] On September 9, 2011, the Quebec Superior court issued an initial order under the Companies' Creditors Arrangement Act , RSC 1985, c C-36 (the CCAA ). That order contained a clause allowing Homburg to disclaim or resiliate any of its agreements, either on terms agreed to between Homburg and the relevant party, or failing agreement to make provision in the Plan of Arrangement. Homberg was in default on rent payments.

On September 29, 2011 Homburg issued a Notice by Debtor to Disclaim or Resiliate an Agreement in relation to the lease. It also issued a Notice of Consequential Termination of Sublease to each of the subtenants. Cadillac filed a motion in the Quebec Court for a declaration that the disclaimer was null and void. Each of the subtenants filed a motion to have the sublease disclaimers declared null and void. Homburg filed a motion to have the subleases declared terminated and the NDAs confirmed. Statoil filed a contestation to the Homburg motion.

On December 5, 2011, the Quebec Superior Court dismissed Statoil's contestation and granted relief to Homburg on its motion. The court declared the subleases terminated and confirmed Statoil's obligation to comply with the NDAs.

The court said: [119] ...as of the date of this Order (the "Assignment date"), all rights and obligations of Statoil under the Head lease assigned to Hll [Homburg] pursuant to the Assignment are re-assigned to Statoil, and ORDERS Hll [Homburg] to surrender possession of the premises (as defined in the Assignment) to Statoil, as at the Assignment date; [120] ...in conformity wit the terms of the Head Lease and the Assignment, Statoil remains liable to remedy all monetary defaults under the Head Lease and the Assignment; [ 3 ] Statoil filed a motion for leave to appeal the order.

The motion for leave to appeal was denied. [ 4 ] Statoil commenced this action, claiming that Statoil and the subtenants are co-sureties, each having guaranteed Homburg's obligations to Cadillac. The claim is based upon the different rent rate that is contained in the head lease and the rent rate in the subleases to the subtenants. The head lease rate is $35 per square foot and the sublease rate is $14 per square foot.

Statoil seeks a declaration that the subtenants are co-sureties with Statoil and that each is liable for 1/12 of the Homburg obligations already paid to Cadillac, judgment in favour of Statoil for the amounts it alleges is due from the co-sureties and a declaration that the subtenants continue to be liable on the same basis, going forward. [ 5 ] This application is brought by the subtenants for

summary judgment, pursuant to Rules 7.2 and 7.3. Test for

Summary Judgment [ 6 ] There is no dispute that the test that the subtenants must meet is a high one; it must be plain and obvious that the action cannot succeed. Statoil argues that there needs to be a full hearing because the legal issues are not sufficiently clear. Statoil says that because of the number of documents that must be considered to determine the obligations of the parties, this is not an appropriate case for

summary judgment. I disagree. As will be seen below, this case is about the

interpretation of several documents. The facts required to set the context within which to interpret the contracts are not contentious. Issues

[7] The subtenants argue that there are five issues to decide, but that a decision on any one of them is fatal to the Statoil claim.They are: 1. Statoil never gave a guarantee under the head lease; 2. The subtenants did not grant guarantees under the subleases; 3. Any liability of Homburg no longer exists, even if the subtenants gave guarantees; 4. If Statoil and the subtenants are co-sureties, the NDA altered the contribution obligation of the parties such that Statoil'scontribution is 100%; 5.

By virtue of the Quebec decisions, the claims made by Statoil are barred by the doctrines of res judicata and issue estoppel. [8] I have addressed all of the issues, in the event that I am wrong on any of the others. 1. Statoil never gave a guarantee under the head lease [9] The subtenants say that Statoil is not a guarantor, but rather is a principal debtor under the head lease. It is important todetermine the status of Statoil because a principal debtor cannot claim contribution from a guarantor of that debt: see Royal Bank v. Fox (NS CA), 6 NSR (2d) 684, aff'd [1976] SCR 2 at paras 30 and 31 and Garner v. W.R.

Kirk Holdings Ltd. 2000ABQB 1 , 256 AR 139. [10] Statoil argues that the guarantee exists because of two documents. First, there is the assignment. Statoil refers to AlbertaFinancial Consultants and Ramco Development v. Cuthbert and Little Bob's Sausage House, [184] A.J. No. 918 (Alta QB). Theplaintiffs sued the original lessees for unpaid rent in circumstances where there was an assignment to a party who became bankrupt. Oneargument was that the assignment was within the statutory definition of a guarantee and the assignment did not satisfy the requirementsof the Guarantees Acknowledgement Act.

The Court cited the law which formed the basis of the decisions referred to above, but alsoWarnford Investments Ltd. v. Duckworth, [1979] Ch. 127 which said: The original lessee's continuing liability for rent is based on privity of contract.

Where, instead of merely assigning his estate in demisedpremises under hand or by deed, a lessee arranged that the landlord should be party to the contract of assignment, the lessee can berelieved of the ongoing obligation to pay rent (citations omitted). [11] On the basis of that statement, Veit, J said that the very act of having the landlord sign the assignment had the effect ofchanging the assignee's obligation from that of primary debtor to guarantor. [12] There are contrary authorities. In Transco Mills Ltd. v. Percan Enterprises Ltd., (BC CA), 76 BCLR (2d)129, (BCCA), an assignee of a lease went bankrupt.

The court found that the assignment did not change the nature of the contractualrelationship between the head lessor and the assignors. The assignors, that is the original lessees, remained primarily and directly liableto the landlord. They did not become guarantors. That is also the conclusion of Master Funduk in Athan Holdings v. Merchant HoldingsLtd. 1982 CarswellAlta 437 where he noted that an assignment of a lease destroys the privity of estate between the assignor and thelandlord, but does not destroy the privity of contract.

In Transco, the landlord was a party to the assignment; in Athan it is not clearwhether the landlord was a party to the assignment. In 235049 Alberta Ltd. v. 1102440 Alberta Ltd. 2011 ABQB 720, amidst a numberof issues in a complex fact situation, one issue was the obligation of a lessee to pay rent once there had been an assignment. The courtapplied Athan. [13] The second document that Statoil argues creates a guarantee is the NDA. Statoil says that clause 2 superceded the obligationof Statoil under the assignment agreement to remain liable to pay the head lease rent.

Clause 2 made Statoil a conditional guarantor, thecondition being the default of Homburg. The subtenants argue that nothing in the wording of clause 2 creates a guarantee. [14] Moreover, they say, clause 5 of the NDA provides that nothing in the agreement derogates from the rights and remedies ofStatoil under the assignment.

[15] The relevant document is the assignment. Applying the convention of judicial comity, I follow Veit, J. in Alberta FinancialConsultants. The facts are similar - an assignment where the head lessor signed the assignment. Veit, J. considered English case law tofind that the obligation of the assignee changed. I agree with the analysis contained in Warnford Investment which she cites. There is adifference between an assignment to which the landlord is a party and one where the landlord is not. The very act of being a party has aneffect on the relationship amongst all parties to the assignment.

The better view is that Statoil became a guarantor of Hamburg. [16] I will address the effect to the NDA below. 2. The subtenants did not grant guarantees under the subleases [17] The important clauses to consider are clauses 3(

a) and 4(

a) of the consent to sublease and clause 16 of the sublease. It shouldbe noted that the Surge clause 4(

a) is different, a difference which Statoil says is important. Clause 3(

a) expressly covenants to pay thesublease rent and to perform the covenants, conditions and agreements on the part of the tenant contained in the lease in relation to thesubleased premises. Except for Surge, 4(

a) says that the subtenant and Homburg are jointly and severally liable to observe and performHomburg's obligations in the lease with respect to the subleased premises. The Surge clause adds that the landlord acknowledges thatSurge covenanted to pay $14.00 per square foot. Clause 16 of the sublease, entitled Application of the Head Lease, provides that thesubtenants will abide by the provisions of the head lease except for the amount of rent and some other exceptions not relevant to thisissue. [18] The subtenants make two arguments regarding these provisions.

First, while the subtenants have covenanted to pay thesublease rent, nowhere are the usual wording and exceptions that are contained in guarantees. Clauses 3(

a) and 4(

a) would beinconsistent if it was found that the subtenants were liable for subtenant rent ($14.00) in one and then liable for the head lease rate($35.00) in the other. Second, because the payment of the head lease rate of rent is excluded from clause 16 of the sublease, all theconsent did was confirm the provisions of the sublease, including clause 16. In the result, the subtenants did not agree to be liable for allof Homburg's liabilities under the head lease; the rate of rent was expressly excluded. [19] In response, Statoil says that clause 4(

a) is clear. The subtenants guaranteed Homburg's obligations. The subtenants couldhave limited their liability but chose not to. [20] I agree with the subtenants. The consent to sublease and the sublease must be read together and must be read in the context ofcommercial reasonableness. Why would subtenants negotiate a rent of $14.00 per square foot but then guarantee a higher rate? That isnot sensible. Moreover, when the consent to sublease is read in conjunction with the sublease, the correct

interpretation is that clause4(

a) in the consent excludes the Homburg rent rate. 3. Any liability of Homburg no longer exists, even if the subtenants gave guarantees [21] The subtenants say Homburg has no liability so that if the subtenants are guarantors, when Homburg's liability disappeared,so did the guarantees. In First National Mortgage Co. v. L.J.V.

Holdings Ltd., 1989 ABCA 88 , 95 A.R. 237 (Alta C.A.), thecourt cites McGuiness in The Law of Guarantee (1986) at p. 291 where it says "[w]here the principal is released from liability byoperation of law, the surety will usually also be released" and at p. 287 where it says that the rationale is " . . . so much to protect theprincipal as to protect the surety, for if the creditor were able to call upon the surety despite the release of the principal, the surety mightthen look to the principal for indemnification." In this case, Homburg's liability was extinguished by operation of the assignmentagreement whereby liability under the head lease was transferred back to Statoil when Homburg defaulted.

Once that happened, therewas nothing left for the subtenants to guarantee. [22] Statoil argues that this case is different than First National. First National dealt with a mortgage foreclosure where theprincipal debtor had been discharged by the creditor. That is different than here where there was a default by Homburg. [23] The rationale in First National does not apply here. No recourse can be had against Homburg because of the CCAA

proceedings. There is no reason for any guarantee given by the subtenants not to continue and the potential of Homburg's insolvency isthe commercially reasonable basis for demanding a guarantee from the subtenants. 4. If Statoil and the subtenants are co-sureties, the NDA clause altered the contribution obligation of the parties such thatStatoil's contribution is 100% [24] The subtenants cite Rawlings v. Galibert (SCC), 59 S.C.R. 611 and Bater Estate v.

Kare, (SCC), [1964] S.C.R. 206 for the proposition that co-sureties " . . . are free to agree as to the proportions in which as between themselvesthey shall contribute or that one of them shall pay the whole amount." (Para 19 of Bater). On the basis of this principle, if the subtenantsare found to be co-sureties by virtue of other documents, they argue that by virtue of the non-disturbance agreement, Statoil agreed totake on all of obligation.

The NDA provides in clause 2 that if Homburg defaults and fails to remedy its default, Statoil shall rectify thedefault, accept the reassignment of and assume all the rights and privileges of and fulfill and perform all of the covenants, duties andobligations of the tenant under the head lease (Statoil) and honour the rights of the subtenant. The result of those provisions is that ifHomburg defaulted, Statoil would become the head tenant and pay the head lease rent. [25] This is an appropriate place to step back to look at the relationship amongst the parties on a broader basis.

The relationshipcrystallized when the documents were all signed. Homburg became the principal debtor to Cadillac, and Statoil guaranteed all ofHomburg's obligations. The subtenants took leases subject to an agreement that, except for rent, would ensure that Homburg's obligationsin relation to their respective premises were performed. By virtue of the NDA, Statoil assumed all of Hamburg's obligations. The NDAdid not impose any different or concurrent obligation on the tenants. The absence of any mention of the kind of obligation that Statoilnow says is on the subtenants is telling.

If such obligation existed, surely it would have been contained in clause 3 of the NDA. I agreewith the subtenants that Statoil took on 100% of Homburg's obligations. 5. By virtue of the Quebec decisions, the claims made by Statoil are barred by the doctrines of res judicata and issue estoppel [26] The subtenants say that res judicata and issue estoppel apply. They acknowledge that all of the issues raised above were notraised before the Quebec courts, but they could have been. The failure to do so bars Statoil from making this claim. I disagree. CCAAproceedings are

summary in nature and are focussed on the defaulting debtor. They are not intended to resolve all of the issues whichmay arise amongst and between other parties whose rights and obligations may be affected by the failure of the debtor who commencedthe CCAA proceedings. Conclusion [27] In the result and more particularly my findings on issues 2 and 4, the Statoil statement of claim is dismissed. Heard on the 25th day of September, 2012. Dated at the City of Calgary, Alberta this 22nd day of October, 2012.

C.A. Kent J.C.Q.B.A. Appearances: Frank R. Foran, Q.C. Matti Lemmens Borden Ladner Gervais LLP for Bos Solutions Inc., Canadian tubular Services Inc., Moe Hannah McMill LLP and Premier Petroleum Corp. Douglas S. Nishimura Burnet, Duckworth & Palmer LLP for CE Franklin Ltd., Keywest Projects Ltd., MHI Fund Management Inc., SPT Group Canada Ltd. and Logan Completion Systems Inc. Caireen E. Hanert Heenan Blake LLP for Surge Energy Jordan R. M. Deering Fraser Milner Casgrain LLP for Tucker Wireline Services Canada Inc. Alison Gray Peter Verschoote Bennett Jones LLP for Statoil Canada Ltd. APPENDIX Appendix 1 Assignment Agreement amongst Cadillac, Statoil and Homburg 7(

a) This consent does not in any way derogate from the rights of the Landlord under the Lease nor operate to release the Assignor from its obligation to pay all Rent from time to time becoming due under the Lease and from the non-observance or non-performance of all of the terms, covenants and conditions in the Lease on the part of the Tenant, therein to be observed and performed (and the Landlord’s rights and remedies arising as a result of any such non-observance or non-performance).

Notwithstanding the within assignment (or any disaffirmance or disclaimer of the within assignment), the Assignor shall remain liable during the balance of the Term of the Lease for the observance and performance of all of the terms, covenants and conditions contained in the Lease.

11. ASSIGNOR’S RIGHT TO CURE - If the Landlord intends to terminate the Lease, the Landlord agrees to deliver to the Assignor a copy of the notice of default which the Landlord delivers to the Assignee.

The Assignor shall have the same period of time to remedy the default as the Assignee plus an additional five (5) business days and upon the rectification of such default by the Assignor all rights of the Assignor under the Lease and all of the rights of the tenant under the Lease shall be reassigned to the Assignor without the requirement of any further documentation and the Assignee shall surrender up possession of the Premises to the Assignor forthwith.

Upon such reassignment the Assignor shall be entitled to all rights, title, estate, interest and benefits arising under the Lease, including without limitation the right to all rents and benefits arising under any subleases of the Premises. All the foregoing shall be without prejudice to all rights and remedies which the Assignor may have against the Assignee in respect of any breach of the Lease by the Assignee or which the Landlord may have against the Assignee or Assignor pursuant to the Lease or this Agreement. Appendix 2 The Sublease 16.

APPLICATION OF HEAD LEASE - The Subtenant confirms that it has reviewed the Head Lease and covenants and agrees that to the extent amended herein, all of the terms and conditions contained in the Head Lease (save for the length of the term set forth therein, the amount of rent, any right of first refusal or first offer, any improvement allowance, any option to renew and any other rights which are personal in nature and have not been specifically granted to the Subtenant by the provisions hereof), shall apply to the use and occupation fo the Subleased Premises by the Subtenant ... 18(b) [The Defendants covenant that] except as same have been replaced by the provisions of this Sublease or amended in the attached copy of the Head Lease, it will perform all the terms, covenants and conditions on the part of the Sublandlord to be observed and performed under the provisions of the Head Lease as they relate to the Subleased Premises. 19(b) [The Sublandlord, as defined therein, covenants] that the Sublanlord will comply with, perform, discharge and observe all of the terms, agreements, obligations and covenants, as tenant, pursuant to the Head Lease, except to the extent where same are the responsibility and obligation of the Subtenant pursuant to the terms of this Sublease.

Appendix 3 The Non-Disturbance Agreement (NDA) 2. OBLIGATION OF STATOIL TO CURE If at any time prior to the expiration of the Sublease Agreement: (

a) The Landlord intends to terminate the Head Lease due to the default of Homburg; (

b) The Landlord delivers a notice of default (“the Notice of Default”) to Homburg; (

c) The Landlord provides Statoil with a copy of the Notice of Default; and (

d) Homburg fails to rectify the default (the “Default”) specified in the Notice of Default within the required time; then Statoil shall, without further notice or demand, exercise its rights contained in the Assignor’s Right to Cure. In particular and without limiting the generality of the foregoing Statoil shall: (

i) rectify the Default within the required time; (ii) accept the reassignment of and assume all of the rights and privileges of and fulfill and perform all of the covenants, duties and obligations of the Tenant under the Head Lease; and

(iii) honour the rights of the Subtenant pursuant to the New Sublease Agreement (as defined below). 3. TERMINATION OF SUBLEASE AGREEMENT AND ATTORNMENT Concurrent with Statoil again becoming Tenant under the Head Lease as provided in paragraph 2 above, the Sublease Agreement and all rights of the Subtenant and Homburg as Sublanlord thereunder shall simultaneously terminate.

Statoil and the Subtenant agree that the Subtenant shall then immediately be deemed to have attorned to Statoil as subtenant under a new sublease and to have entered in a new sublease agreement (the “New Sublease Agreement”) for the remainder of the term of the Sublease Agreement (the “Remainder Term”). The New Sublease Agreement and such attornment shall be upon all of the same terms and conditions as the Sublease Agreement as applicable only to the Subleased Premises, except that: (

i) the Sublanlord shall be Statoil; (ii) the term of the New Sublease Agreement shall be the Remainder Term; (iii) notices to be provided to the Sublanlord shall be redirected to Statoil at the address indicated in paragraph 5 of this Agreement; and (iv) no credit shall be given for any security deposits or prepaid rent paid by the Subtenant under the Sublease Agreement, which has not, as such, been transferred to Statoil. 5.

RIGHTS OF STATOIL The agreements of Statoil contained herein do not in any way derogate (except as specifically provided herein) from the rights and remedies of Statoil under the Assignment nor do such agreements in any way release Homburg from any of its obligations or liabilities under the Assignment or any other agreement with Statoil. Without limiting the foregoing, this Agreement is made without prejudice to the rights and remedies of Statoil whether arising under the Assignment, any other agreement, or in equity or at law.

This Agreement does not constitute a waiver or modification of any of Statoil’s rights granted by the Assignment or any other agreement entered into between Statoil and Homburg. The parties hereto agree that Statoil shall not be bound by any amendments or modifications to the Sublease Agreement nor by any prepayments of rent nor shall Statoil be subject to any defences, counterclaims or rights of offset in favour of the Subtenant pursuant to the Sublease Agreement. Appendix 4 Consent to Sublease 3(

a) Covenants of Tenant The Sub-Tenant covenants to pay the rent reserved in the Sublease and to observe and perform the covenants, conditions and agreements on the part of the Tenant contained in the Lease insofar as they are applicable to the Subleased Premises. [emphasis added] 4(

a) Conditions The Sub-Tenant shall be jointly and severally liable with the Tenant to observe and perform the Tenant’s obligations in the Lease with respect to the Subleased Premises.

Consent to Sublease of Surge With respect to the Sub-Tenant’s payment of Net Rent in respect of the Subleased Premises, the Landlord acknowledges the Sub-Tenant covenants to pay FOURTEEN DOLLARS ($14.00) per square of the Rentable Area of the Subleased Premises.