Vanshaw Enterprises Ltd v Mayfield Investments Ltd, 2016 ABQB 619

Court of Queen’s Bench of Alberta Citation: Vanshaw Enterprises Ltd v Mayfield Investments Ltd, 2016 ABQB 619 Date: 20161104 Docket: 1501 00796 Registry: Calgary Between: Vanshaw Enterprises Ltd. Plaintiff/Defendant by Counterclaim - and - Mayfield Investments Ltd. Defendant/Plaintiff by Counterclaim _______________________________________________________ Memorandum of Decision of A. R. Robertson , Q.C., Master in Chambers _______________________________________________________ Overview [ 1 ] This

summary judgment application is brought by a hotel business for unpaid rent, claimed from a tenant that operates a casino within the hotel. The issues require a careful review of the lease as well as the relevant surrounding circumstances. [ 2 ] About four years after the casino opened, a dispute arose about what area was included within the leased premises. The tenant, Vanshaw Enterprises Ltd., sued looking for a determination that it had overpaid rent. The hotel company, Mayfield Investments Ltd., counterclaimed. [ 3 ] Mayfield operates the Medicine Hat Lodge.

Within the Lodge, Vanshaw operates the casino in a purpose-built location. It had previously operated the casino in other premises in the Lodge. A lease was signed for the new premises dated September 17, 2007, the casino was constructed, and there was a grand opening in May 2010. Within the casino operation there is a lounge – that is, the lounge is physically located within the casino “envelope”. The lounge was opened in December, 2010.

[ 4 ] The lease was amended by a Lease Amending Agreement dated September 4, 2014. The lease amending agreement did not change the obligation to pay rent. [ 5 ] About nine weeks after the lease amending agreement was signed, a dispute arose as to what rent was payable. [ 6 ] A determination of the issue of the rentable area will resolve both the claim and the counterclaim. [ 7 ] The landlord asks for

summary judgment dismissing the claim of the tenant that it has overpaid rent, and for judgment in favour of the landlord on its counterclaim for outstanding rent. [ 8 ] I have concluded that the landlord is entitled to

summary judgment for the outstanding rent it claims. The amount of the rent was fixed in the lease, and the reference in it to a square footage calculation had no application once the premises were completed. The Two Main Issues [ 9 ] There are two main related issues. The first issue is whether the lounge was intended to be included within the rentable area paid for by the tenant. It was always their collective intention that the lounge would be operated by the landlord. As originally signed, the lease provided that the landlord would pay the tenant 20% of the net profits from the lounge.

As a result of the lease amending agreement, in consideration for being released from a $100,000 debt to the landlord, the tenant agreed to surrender its claim for 20% of the net profits. [ 10 ] That led to an anomaly: if the lounge is included within the leased area, for which the tenant is paying rent, then the tenant is now paying rent for space entirely occupied by its landlord.

The landlord operates the lounge, takes any profit (and assumes any risk of loss) and charges the tenant rent for the space. [ 11 ] The landlord says this unusual result is simply what was negotiated, and it is what the parties agreed to. Although it may seem odd, there is a reason behind it. The Alberta Gaming and Liquor Commission (“AGLC”) requires a casino to provide food and beverage service to its patrons. That is why the lounge is there; it exists to satisfy the licensing requirements of the tenant casino.

The landlord argues that if the lounge were not actually within the area leased to the tenant, there would have been no reason to share the profits of the lounge with the tenant. It would not have been referenced in the lease at all. [ 12 ] The second issue is the meaning of the words in the lease that set out the promise to pay rent. There is a reference to a payment per square foot, a reference to an estimated total square footage, but then the rent is stated to be $732,000 per year, payable monthly at $61,000, plus GST.

If these words mean that rent is simply $61,000 per month, than the actual square footage calculation is not relevant now. It was relevant during construction, because the lease required that rent be pro-rated rent while the casino was under construction and only partly useable. However, if the words were intended to refer, after completion, to the square footage so that the actual rent is determined by a formula, then there must be a resolution of what the square footage is. [ 13 ] That takes the debate back to the first issue: was the lounge intended to be included in the leased area?

If not, then the rent has been significantly overpaid since the casino opened. Analysis [ 14 ] The facts here are not in dispute on any matter of substance. These important facts are clear: (

a) terms of the lease as to the words used, (

b) the fact that no

schedule “A” (a sketch of the leased premises) was attached, (

c) the terms of the lease amending agreement, and (

d) the history of how the agreements came into existence. [ 15 ] The dispute is over what the words mean, and whether the surrounding circumstances affect the practical common-sense reading of the words. There is a dispute between experts as to the precise square footage of the casino, but they are not dispositive of the issues if the precise calculation will not affect the outcome [ 16 ] The landlord argues that this is an appropriate case for

summary judgment, following the approach described in Hryniak v Mauldin , 2014 SCC 7 , [2014] 1 S.C.R. 87 and Windsor v Canadian Pacific Railway , 2014 ABCA 108 , 572 A.R. 317. As this is a dispute primarily over the

interpretation of a contract, it lends itself well to

summary judgment: Attila Dogan Construction and Installation Co v AMEC Americas Ltd , 2015 ABQB 120 at para. 52 , citing Tottrup v Clearwater (Municipal District) No 99 , 2006 ABCA 380 , 401 A.R. 88. I agree. [ 17 ] The analysis starts with the written words of the lease and lease amending agreement.

The intent is to determine the intent of the parties by following “a practical, common-sense approach not dominated by technical rules of construction”: Rohit Land Inc v Cambrian Strathcona Properties Corp , 2015 ABQB 375 , 2015 CarswellAlta 1069, para. 62 , quoting Creston Moly Corp v Sattva Capital Corp , 2014 SCC 53 , [2014] 2 S.C.R. 633 at para. 47 . [ 18 ] “A cardinal rule for interpreting any contract is to look at all its words, construe them as a whole, and try hard to make them all fit and work together”: Ledcor Construction Ltd v Northbridge Indemnity Insurance Co. , 2015 ABCA 121 , 2015 CarswellAlta 511, at para. 26 . [ 19 ] Although the surrounding circumstances are to be considered, “they must never be allowed to overwhelm the words of that agreement”: Rohit at para. 62 citing Creston Moly at para. 57.

[ 20 ] The parties signed an offer to lease accepted June 4, 2006.

The agreement as to payment of rent provided for a “minimum net annual rent”: The Tenant shall pay the Landlord for the Leased Premises, an annual minimum net rent, exclusive of G.S.T. of $24.40 per square foot per annum based on an estimated total square footage of 30,000 square feet for a total minimum net annual rent of $732,000.00 to be paid in 12 equal monthly instalments of $61,000.00 in advance on the first day of each month during the term of the lease and any renewal thereof. [ 21 ] The formal lease agreement dated September 17, 2007 set out the obligation to pay rent as follows: The Tenant promises to pay to the Landlord during the term, without any setoff or deduction of any description, rent as follows: (

a) Annual Minimum Base Rent during the first five (5) years of the Term in the sum of $24.40 per square foot per annum, plus Goods and Services Tax based on an estimated total square footage of 30,000 square feet for a total Annual Minimum Base Rent of $732,000.00 payable in advance in equal consecutive monthly instalments of $61,000.00 plus Goods and Services Tax on the 1st day of each month PROVIDED THAT during completion of the phases of construction of the Leased Premises, the Annual Minimum Base Rent shall be adjusted based on the usable area within the portion of the Leased Premises certified as ready for occupancy in accordance with

section 1.4 from time to time, measured in square feet multiplied by the Annual Minimum Base Rent per square foot[.] [ 22 ] Once again, the expression used is “ Minimum Base Rent” and that the amount is stated to be based upon an estimate of the total square footage. Although there is a specific passage that contemplates an adjustment based on usable area, that passage only applies “during completion of the phases of construction”. That provision has no application once construction is complete, and it is only the period of time post-completion that is under consideration. [ 23 ]

Section 1.1 of the lease refers to a lease of “that portion of the Lodge Property being a maximum of 30,000 rentable square feet as outlined in red on the plan attached as

schedule “A” (the “Leased Premises”).” (The emphasis is mine). [ 24 ] Unfortunately, no

schedule “A” was ever attached to the lease agreement. Both parties signed with no

schedule attached – that is, with no sketch of the leased premises. “As-built” drawings have not been located. [ 25 ] The landlord argues forcefully that the missing

schedule is a red herring. The obligation to pay rent was not subject to

schedule “A”, and furthermore the tenant, through at least two different representatives, was on-site during the entire construction period. They knew what was being built. They had access to the construction plans. They saw the purpose-built casino as it was being constructed, because the casino was already operating in other premises within the Medicine Hat Lodge throughout construction. [ 26 ] The amendment to the lease in 2014 dealt with the lounge. It deleted a portion of

section 14.1, which provided that the lounge would be operated by the landlord, and a share of the profits would be paid to the tenant. The lease amendment agreement went on to specifically provide that the lease otherwise remained as it was. In particular,

section 2.1 of the Lease Amending Agreement said this: Any capitalized word or term not otherwise defined in this Agreement shall have the meaning given thereto in the Lease. [ 27 ] The “Minimum Base Rent” set out in the lease was, of course, capitalized. [ 28 ]

Section 14.1 of the lease, by itself, did not specifically clarify whether the lounge was to be part of the casino premises leased to the tenant.

Section 14.1 said this: The Tenant agrees that the Landlord shall have the exclusive right to provide or have provided all food and beverages goods and services to all of the Tenant’s patrons at the Lodge Property.

Except for the employees of the Tenant who may bring food and beverage items for their own personal consumption during the course of their employment duties while at the Leased Premises, in no case shall the Tenant cause or permit any outside provider of food and beverage goods and services to provide any food and beverage goods and services at the Lodge Property or permit any patron of the Tenant to bring in any food or beverage for consumption on the Lodge Property.

Provided always that the Tenant complies with its obligations pursuant to this section, the Landlord agrees that it shall account to the Tenant 20% of the net profit on a monthly basis on the last day of each month or as otherwise agreed by the parties. Net profit shall be determined by deducting a general and administrative cost allocation from net income earned from the sale of all food and beverage goods and services.

The general and administration cost allocation will be calculated by multiplying the total Lodge Property general and administrative costs by the percentage that food and beverage goods and services revenue comprises of total Lodge Property revenue.

A statement by the accountant for the Landlord as to the amount of net profit to be remitted to the Tenant shall be final and conclusive proof of such amount. [ 29 ] In looking at this passage alone, one would be left with the impression that the landlord could, and perhaps would, provide the food and beverage service from elsewhere in the hotel. [ 30 ] However, the lease as a whole clearly suggests that the lounge that the landlord was going to operate, and did operate, was located within the casino premises. Recitals (

d) and (

e) provide this (with my emphasis): (

d) The Tenant wishes to expand its business at the Lodge Property to include office space, casino, and a show/theatre and lounge and the Landlord has agreed to expand the Tenant’s premises. (

e) The Landlord and the Tenant desire that the Landlord provide all food and beverage goods and services to the tenant’s patrons while at the Lodge Property upon and subject to the terms hereinafter set forth. [ 31 ]

Section 6.1 sets out the tenant’s promises, and paragraph (

a) provides for use, among other things, as a lounge: [The tenant] will make use of the Leased Premises during the term of this Lease for the operation of a fully licensed casino, show

theatre/ lounge , entertainment complex, as well as office space. [ 32 ] The Alberta Court of Appeal’s “cardinal rule” mentioned in Ledcor requires taking into account these express references to the lounge in the lease. [ 33 ] It was not just for convenience of guests, or perhaps marketing, that the tenant wanted a lounge associated with the casino. It is required to provide food and beverage by the AGLC in order to hold its licence as a casino. [ 34 ] Accordingly, when reading the lease as it was originally drafted, including the

preamble and the promise as to use, it becomes clear that the lounge was part of the casino premises. [ 35 ] Accordingly, the surrounding circumstances suggest that to satisfy the AGLC requirements the tenant had simply “subcontracted” the operation of the lounge to someone else, and that party was the landlord. That would have made good business sense for the tenant, because the landlord operates food and beverage premises elsewhere in its hotel.

It would also have made good business sense for the landlord because it would, to a very great extent, not be competing with its tenant for hotel customers looking for food and beverages. [ 36 ] The anomaly that we see now arose only when the landlord and tenant agreed to amend the lease by deleting the last part of

section 14.1, commencing with the words, “Provided always…”. The terms of that amending agreement expressly did not change the lease generally. If the lounge was part of the casino premises at the outset, the amending agreement did not change that fact. [ 37 ] In argument, counsel for the tenant explained that the amending agreement was attractive because of the questionable accounting used by the landlord. The 20% net profit the tenant received was modest, and the tenant questioned the landlord’s accounting of profits, so the tenant was willing to give it up in exchange for being released from its $100,000 debt.

That was probably a good business call for the tenant, but the amendment did not change the leased area, and it was not done without consideration: the landlord gave up a claim of $100,000. [ 38 ] If the lease amending agreement was intended to remove the lounge from the leased premises, it would have said that. The affirmation that the lease continued without change other than the deletion of part of

section 14.1 had the effect of confirming that the lounge remained part of the leased premises. [ 39 ] Accordingly, it is clear that the lounge was intended to be part of the leased premises, and the unusual circumstance that we have now, where the tenant is paying for premises in which the landlord is carrying on a business, is simply the anomalous result from the sequence of events described above and the licensing requirements for a casino. [ 40 ] The surrounding circumstances give the business explanation for the anomaly.

It is not clearly to the disadvantage of the tenant to have the landlord operating a lounge within the casino. Its licence requires the lounge, and by virtue of the lease and the lease amending agreement, it has made what appear to be appropriate arrangements. [ 41 ] This conclusion very substantially resolves the debate over the square footage occupied by the tenant, but the actual area, as compared to the estimate of the square footage set out in the lease, is also part of the debate. [ 42 ] There are various arguments put forward as to what the precise square footage actually is. Each side has hired experts.

They do not agree. The tenant criticizes the landlord’s expert because he measures from outside walls instead of the middle of the walls, but the tenant’s expert does not include the kitchen and the lounge, and only attributes one half of shared areas (such as washrooms). The casino area, with the washrooms, the mezzanine, the kitchen and the lounge areas all added to it, is 29,057.4 square feet according to the tenant’s expert.

The total arrived at by the expert retained by the landlord is 30,164.03 square feet, but the terms of the lease cap the number at 30,000, which is important if the square footage formula is to be used. [ 43 ] The determining factor is what the lease says. The lease specifically provides that the square footage is estimated to be 30,000 square feet. After including the lounge and not deducting for half the washrooms, the calculations of the competing experts are remarkably close, and both may be said to be approximately 30,000 square feet.

The discrepancy is very small. [ 44 ] The minimum annual rent is not stated in the lease to be based upon the actual square footage; the price per square foot appears to have been referenced only for the pro-rating of rent during the construction phase. [ 45 ] If the calculation based on the rent per square foot were materially incorrect, it might fairly be argued that the stated amount payable for rent was a mutual mistake (particularly because of the missing

Schedule “A”, which would open up the potential for the argument), but there is no proper basis for that argument here. [ 46 ] A factor that supports this conclusion of the parties’ intention is an estoppel certificate signed on behalf of the tenant on June 9, 2011, which specifically said, “The demised premises actually comprise an area of 30,000 square feet.” [ 47 ] A more significant factor in support of the conclusion is that from the time the premises opened until only a matter of weeks after signing the lease amending agreement, the tenant paid $61,000 per month in rent.

The actions of the parties suggest that the tenant knew the rent was $61,000 per month. In examination, Vanshaw’s witness admitted that he thought that the square footage was 300,000 when the casino opened, including the lounge. There is no evidence that that had been a request for an adjustment of the rent once the premises had been completed. [ 48 ] The tenant apparently accepted that the rent that was payable was as stated in the lease until it was suggested by the tenant’s auditor that the tenant was being taken advantage of.

Without understanding the terms of the lease, the history leading up to its execution, the AGLC requirement, the amendment to the lease, and the history of the lounge’s operation, the auditor would not have known of the reason for the anomaly.

Other Issues [ 49 ] There are three other issues: a limitations argument, res judicata , and security for costs. [ 50 ] The landlord argues that the tenant’s claim of overpayment is statute barred, because the landlord paid $61,000 per month for several years before the claim was advanced, when documentary evidence indicates that the landlord was well aware of the complaints that it now advances.

Therefore, the landlord argues that it is too late to complain. [ 51 ] The critical evidence in support of the application to dismiss on the basis that the claim is statute barred is an affidavit sent by one employee of the landlord to another describing a conversation with the principal of the tenant some years ago. There is no affidavit from the person who sent the email and is said to have had the conversation. Since an application to dismiss its final relief, the applicant cannot rely on hearsay evidence: rule 13.18.

During argument, counsel for the landlord offered to get an affidavit from that witness, who was present in the courtroom, but it is not currently in the evidence. Arguably, the email is a business record which may be relied upon, at least to call upon the tenant to specifically address the conversation alleged in this charge of its obligation to put its best foot forward.

However, the “business record” argument was not put forward, and in light of my decision otherwise, I decline to rule on the limitations issue. [ 52 ] A further issue raised by the tenant is that there were interim orders granted by Master Mason directing the tenant to make some payments towards the rent during the course of a lawsuit. The tenant had initially simply stopped paying any rent, because it claimed it had so significantly overpaid rent for years. Following two applications to set interim rent payments, the issue of interim rent to be paid pending trial was decided.

The tenant has argued that the landlord is simply seeking a variation of the second order, because Master Mason had indicated after two appearances that she did not expect the parties to appear before her again to vary the amount. The tenant therefore argues that the issue is res judicata . [ 53 ] However, Master Mason was granting an interlocutory order pending trial. Rather than going to trial, the landlord now seeks a final resolution of the issues. The determination by Master Mason on an interim basis was not intended to be a predetermination of the final outcome.

The amount of rent payable had not been decided. The doctrine of res judicata does not apply. [ 54 ] The final issue relates to security for costs. In light of my decision, this issue is now moot, but I will make my comments on a provisional basis in the event of an appeal. The tenant is a single-purpose corporation, and if the action proceeds and it loses this lawsuit, and does not pay the arrears of rent promptly, the landlord will be in a position to simply terminate the lease. Then the tenant will have no income stream to pay costs.

Its only assets of note are the casino assets and there is no other income stream. [ 55 ] If the landlord is successful in this lawsuit, it would not be acting in its best interest to terminate the lease. The only realistic way that it could get paid the outstanding rent, let alone the costs, would be to come to some arrangements to allow the tenant to continue to operate, with an appropriate monetary “float” to allow it to function as a profitable economic unit.

I would not make an award for security for costs on the flawed assumption that the landlord will act precipitously so as to avoid getting paid for damages and costs owed to it if it is successful, or that the tenant will simply shut down its operations and completely devalue its assets effectively to zero to avoid paying the judgment. I assume that both parties will act in their self-interests and find a compromise that pays the past rent while leaving the casino functional as a business entity. Conclusion [ 56 ]

Summary judgment is granted in favour of the landlord for the rent outstanding. The claim by Vanshaw is dismissed. The amount of rent owing is constantly in flux, because of the accrual of rent and the interim payments. If counsel are not able to agree upon the amount of the judgment, they may contact the court for a specific ruling. [ 57 ]

Section 10.4 of the lease addresses the recovery of costs incurred in enforcing the lease, but no argument was made on the point. If counsel are not able to agree on costs, or there are other matters arising from my decision, they may arrange for an appearance in Calgary to resolve them, by contacting the Calgary Masters’ Chambers clerk. Heard in Medicine Hat on the 5 th day of October, 2016. Dated at the City of Calgary, Alberta this 4 th day of October, 2016. A. R. Robertson, Q.C. M.C.C.Q.B.A. Appearances: Edward R. Feehan Duncan Craig LLP

for the Applicant Kent Jesse McLennan Ross LLP for the Respondent