Simo Corporation v Keldo Holdings Ltd, 2017 ABQB 245

Court of Queen’s Bench of Alberta Citation: Simo Corporation v Keldo Holdings Ltd, 2017 ABQB 245 Date: 20170425 Docket: 1201 13831 Registry: Calgary Between: Simo Corporation Plaintiff/ Defendant by Counterclaim - and - Keldo Holdings Ltd. and Louis Kelemen Sr Defendant/ Plaintiff by Counterclaim _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice M. David Gates _______________________________________________________ Introduction [ 1 ] The parties to this dispute are landlord and tenant to a longstanding lease for an industrial building in Calgary.

After many years of harmony, changes in company ownership led to disagreements and, in 2011, a strict assertion of rights under the lease. The main disagreement between the parties is whether a mezzanine area in the leased building is included in the lease. An additional issue is whether the landlord can rely on the terms of the lease to charge a management fee to the tenant despite not doing so for over twenty years.

Background Facts [ 2 ] The history between the parties is somewhat complex, but the following overview of facts is generally not in dispute. [ 3 ] The building was built by the defendant Keldo Holdings Ltd. and its principal Louis Kelemen Sr. in 1979. Louis Kelemen Sr. had been in the office furniture manufacturing business for a few years at the time. He was a partner in Westwood Manufacturing, which was a major supplier to Simo-Dow Manufacturing. The two companies, Westwood and Simo-Dow, also shared some overlap in ownership. In 1978 Westwood and Simo-Dow decided to construct a building for their operations.

Keldo was incorporated to construct and own the building, with Louis Kelemen Sr. taking on a 50% interest in the company. [ 4 ] The building was constructed so that it had a main floor area of approximately 40,320 square feet and a second floor mezzanine space of approximately 8,500 square feet. The main floor had a small office space and showroom in the front of the building, however the majority of the main floor was a larger space meant for manufacturing.

The main floor was divided into three manufacturing spaces, with 15,000 square feet for Westwood, 17,000 square feet for Simo-Dow, and 8,000 square feet for expansion or to rent out. The second floor mezzanine space extended over the manufacturing space along the front of the building. The mezzanine space was undeveloped, but was partitioned into three spaces that roughly corresponded to the manufacturing spaces below. [ 5 ] When construction was completed, Westwood and Simo-Dow moved into their respective spaces in the building and shared the showroom and office space.

They each entered into leases with Keldo in 1979. The third space on the main floor was rented by Alpha Dairies, who used it for storage. The second-floor mezzanine was used for lunch and change rooms for Westwood and Simo-Dow employees, as well as storage and assembly at times, though there were also portions of the mezzanine that remained empty. [ 6 ] In 1985, Alpha Dairies ceased to be a tenant in the building and was replaced by a new tenant, Troll Woodcraft. [ 7 ] In 1987, Westwood, which by then was fully owned by Louise Kelemen Sr., entered into an agreement to acquire Simo- Dow.

In October 1987, Keldo and Westwood entered into a lease agreement to reflect this new arrangement using the 1979 leases as a precedent. [ 8 ] The 1987 lease is the focus of this dispute. The 1987 lease was extended a number of times, in 1992, 1997, 2002 and in 2006. The 2006 lease runs until June 30, 2017. [ 9 ] In 1993 a 3,600 square foot addition was made to the building, resulting in the square footage on the main floor rising to 43,920 square feet. This was reflected in an amendment to the 1992 lease and in subsequent lease extensions. The extension is not at issue in this lawsuit.

The Dispute [ 10 ] The dispute over the lease did not arise until 2011. By that point in time, Louis Kelemen Sr. was the sole shareholder in Keldo. He no longer had an ownership interest in Westwood, which had transitioned to his son Louis Kelemen Jr. in the early 2000’s, and now went by the name Simo Corporation (Simo). [ 11 ] A further ownership change occurred in 2008 when Gary Schitthelm joined Simo as President and 50% shareholder. Louis Kelemen Jr. continued on as a 50% shareholder and the Executive Vice-President and COO at the time.

Throughout this time, Louis Kelemen Sr. continued to provide advice and assistance to the company and maintained an office on the mezzanine level. [ 12 ] Over the next few years philosophical differences arose between Gary Schitthelm and Louis Kelemen Jr. regarding Simo’s operations. By October 2011, the two shareholders were accessing the “buy-sell” shotgun clause in their unanimous shareholders agreement, with Gary Schitthelm poised to purchase Louis Kelemen Jr.’s shares in Simo. This turn of events upset Louis Kelemen Sr., who wanted Simo to remain in the family. The share sale closed in May 2012 with Mr.

Schitthelm purchasing Louis Kelemen Jr.’s shares. Louis Kelemen Jr. stopped reporting to work at that time. There is ongoing separate litigation relating to the share sale. [ 13 ] On October 18, 2011, Keldo sent a letter to Simo. Keldo demanded rent for the mezzanine space for the first time in the parties’ history. Keldo advised Simo that it would be required to start paying rent the following month or would need to remove its property from the mezzanine. Keldo also advised that Simo would be required to pay a management fee from November 1, 2011 onwards.

Keldo was entitled under the lease to charge a management fee of 5% of gross rents, however the fee had never been charged or demanded prior to this time. [ 14 ] To date, Simo has taken the position that the mezzanine space is included in the lease and has refused to pay additional rent for the space. Simo has paid the management fee under protest. [ 15 ] In this action, Simo seeks a declaration that the leased premises include the mezzanine of the building.

Simo also seeks an order requiring Keldo to vacate the office it currently occupies on the mezzanine. [ 16 ] Simo also asks for a declaration that Keldo is estopped from charging Simo a management fee and seeks an order for reimbursement of the fees paid since October 2011. [ 17 ] Finally, Simo asks for damages for breach of contract in an amount commensurate with legal costs incurred, or in the alternative, costs to be assessed on a solicitor and own client basis. [ 18 ] For its part, Keldo seeks a declaration that the mezzanine is not included in Simo’s leased premises. It further asks for

damages to reflect the mezzanine rent owed from November 30, 2011 to present, at a fair market rental rate between $8,736 and $11,576per month, plus interest. Keldo also filed a counterclaim where it asserts that Simo’s occupation of the second floor mezzanine amountsto trespass. 1. Is the mezzanine part of the leased premises? [19] In order to determine whether the mezzanine was a part of the leased premises, I must consider which evidence from trial canbe used to interpret the 1987 lease between Keldo and Westwood (present day Simo). [20] The focus of contractual

interpretation is to discern the objective intention of the parties in coming to their agreement. Themodern approach to contractual

interpretation has moved away from an approach dominated by technical rules of construction to onewhich is more practical. One looks not only at the words of a contract, but also to the surrounding circumstances of the contract. TheSupreme Court has explained the process of contractual

interpretation as one in which the decision-maker reads “the contract as a whole,giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties atthe time of formation of the contract”: Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53, [2014] 2 SCR 633, at para 47. [21] Expanding on the rationale for considering the surrounding circumstances in contractual

interpretation the Court noted, atpara 47, that words are best understood in their factual context: ...Consideration of the surrounding circumstances recognizes that ascertaining contractual intention can be difficult when looking atwords on their own, because words alone do not have an immutable or absolute meaning: No contracts are made in a vacuum: there is always a setting in which they have to be placed... .

In a commercial contract it is certainlyright that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of thetransaction, the background, the context, the market in which the parties are operating. (Reardon Smith Line, at p. 574, per Lord Wilberforce) [Reardon Smith Line Ltd v Hansen-Tangen, [1976] 3 All ER.570 (H.L.)] [22] Although the surrounding circumstances are now considered an important interpretative tool, there are limits on the role ofthat evidence in decision making.

Surrounding circumstances must never be allowed to overwhelm the words of the agreement. A courtcannot use surrounding circumstances to deviate from the text to such a degree that the court is creating a new agreement. Instead, thesurrounding circumstances are examined to deepen the decision-maker’s understanding of the mutual and objective intentions of theparties as expressed in the written words of their contract: Sattva, at para 57. [23] There are also limits as to the nature of the evidence that can be considered.

Surrounding circumstances “consist only ofobjective evidence of the background facts at the time of the execution of the contract ... that is, knowledge that was or reasonably oughtto have been within the knowledge of both parties at or before the date of contracting”: Sattva at para 58. [24] The focus on objective evidence means that a court is not concerned with the parties’ subjective understanding of theiragreement, but rather what someone similarly situated would have reasonably understood: Sandu v MEC Place, 2015 ABQB 297, 17Alta LR (6th) 332, at paras 46-49.

This requires the court “to stand outside of [the parties’] minds, looking only to their words, factsknown to them, and sometimes their conduct. ... courts must prefer an

interpretation that, from the whole of the contract, promotes thetrue intention, objectively understood, when the contract was made, and an

interpretation that brings about a realistic, sensible result ...”Sandu at paras 49-50. [25] At the trial of this action, considerable evidence was led as to the conduct of the parties throughout the period of the variousleases, from 1979 to 2012. Evidence of post-contractual conduct can be considered as a further interpretive tool in the event that theinitial contractual

interpretation leads to ambiguity. Ambiguity exists when there are two or more reasonable

interpretations of thecontract: Energy Fundamentals Group Inc v Veresen Inc, 2015 ONSC 692, at para 46, aff’d 2015 ONCA 514, 388 DLR (4th) 672. [26] The way the parties acted after the contract was finalized can provide insight into the parties’ understanding of their contract.As the Ontario Court of Appeal explained in Montreal Trust Co. of Canada v Birmingham Lodge Ltd (1995), (ONCA), 24 OR (3d) 97, [1995] OJ No 1609, at para 21: ...Subsequent conduct may be used to interpret a written agreement because "it may be helpful in showing what meaning the partiesattached to the document after its execution, and this in turn may suggest that they took the same view at the earlier date": S.M.Waddams, The Law of Contracts, 3rd ed. (1993), at para. 323.

Often, as Thomson J. wrote in Bank of Montreal v. University ofSaskatchewan (1953), (SK KB), 9 W.W.R. (N.S.) 193 at p. 199 (Sask. Q.B.): "there is no better way of determiningwhat the parties intended than to look to what they did under it". [27] Thus the proper approach is to review the words in the lease as a whole, while considering the surrounding circumstancesknown to the parties at the time of contracting to ascertain their intentions. Surrounding circumstances must never be allowed tooverwhelm the words of the agreement. If at the end of this exercise there are two or more reasonable

interpretations of the contract, thecourt may then look to the subsequent conduct of the parties as an interpretive aid. The Leases [28] In this case the lease that is being interpreted is the 1987 lease between Keldo and Westwood. However, the 1979 leasesformed the precedent for the 1987 lease and, as such, provide background and context that must also be examined. 1979 Leases

[ 29 ] The 1979 lease agreements between Keldo and Westwood and Keldo and Simo-Dow are dated December 1, 1979. They are comprehensive 24 page documents which set out the lease provisions, followed by three schedules (A, B, and

C) which comprise another eight pages. As the leases are nearly identical, I will review the provisions for the Keldo/Westwood lease and the Keldo/Simo-Dow lease together, noting any relevant differences that exist. [ 30 ] The beginning of the lease is the

preamble, which states that the parties wish to enter into a lease for a certain portion of the landlord’s building: WHEREAS the Landlord is the registered owner of the Lands as hereinafter defined; AND WHEREAS a building is constructed on the Lands and the Landlord and Tenant wish to enter into a lease respecting a certain portion of that building; NOW THEREFORE this Agreement witnesseth and the parties covenant and agree with each other as follows: [ 31 ]

Article 1 of the lease contains “Certain Basic Lease Provisions”.

Article 1.1 sets out the address of the tenant, the gross leaseable area of the premises, the lands, the term, the rent and the security deposit. [ 32 ]

Article 1.1 of the Keldo/Westwood lease provides that the gross leaseable area is 15,000 square feet.

Article 1.1 of the Keldo/Simo-Dow lease is identical except that the gross leaseable area is 17,000 square feet, and the rent is accordingly higher. [ 33 ]

Article 1.2 of the lease states that three schedules are annexed to and form part of the lease:

Schedule A –

Definitions;

Schedule B – Site and Location Plan, and

Schedule C – Amendments and Additions to Lease. [ 34 ] The rest of the lease document sets out various terms and provisions relating to the lease including provisions relating to: the payment of rent, accepted and prohibited uses of the premises, repairs and maintenance, alterations, termination, taxes, operating costs, utilities; and remedies for default. The Keldo/Westwood lease provides that Westwood is responsible for 37.5 % of operating costs whereas the Keldo/Simo-Dow lease provides that Simo-Dow is responsible for 42.5% of operating costs. [ 35 ]

Schedule A of the lease contains the

definitions of the terms under the lease. The following

definitions are relevant for our purposes, with bolding added for emphasis: In this Lease, including this schedule, the Landlord and Tenant agree that unless there is something in the context inconsistent therewith: ... (d) “Gross Leaseable Area” means in respect of any rentable premises, (

i) the area in square feet (as determined by the Landlord’s architect or independent surveyor) of all floor space, including any mezzanine space, measured from the exterior face of all exterior walls, doors and windows (whether temporary or permanent, moveable or immoveable) comprising the boundaries of such premises, ...

In calculating Gross Leasable Area, no deductions shall be made for columns and projections necessary to the Building but the area of stairs and elevator shafts supplied by the Landlord for use by tenants in common, flues, stacks, pipe shafts and vertical ducts, the area of the main lobby on the main floor, and the area of the basement shall be excluded. ...

The Gross Leaseable Area of the Leased premises is agreed to be as set forth in subclause 1.2 (2) unless and until the Leased Premises shall be enlarged or diminished by any further alteration thereof ... ... (h) “Leased Premises” means the rentable premises in the Building which are demised to the Tenant by this Lease and are shown outlined in red on

Schedule “B”. (i) “Operating Costs” means all of the Landlord’s costs and expenses which are properly attributable , in accordance with generally accepted accounting principles, without any duplication, to the maintenance, repair, management, operation, supervision and administration of the Lands including Common Facilities. … [ 36 ]

Schedule B to the lease is an architectural drawing depicting the main floor and grounds of the building.

Schedule B shows the main floor divided into three sections from the north to the south of the building, starting with Alpha Dairies at the north end, Simo- Dow in the middle, and Westwood at the south end. There is a box outlining the common showroom at the front of the building and a box showing common washrooms between the Simo-Dow and Westwood spaces. The mezzanine is not shown on the drawings. [ 37 ] One

Schedule B to the Keldo/Westwood lease and two different

Schedule B’s to the Keldo/Simo-Dow lease from 1979 were tendered at trial. The

Schedule B for Keldo/Westwood has square footages written in for each of the three tenants showing 8,000 square feet for Alpha Dairies, 17,000 square feet for Simo-Dow, and 15,000 square feet for Westwood. These numbers, when combined, total 40,000 square feet, which is close to the full square footage of the main floor. The first

Schedule B to the Keldo/Simo-Dow lease is identical to the Keldo/Westwood

Schedule B (other than its title). [ 38 ] The second

Schedule B for the Keldo-Simo-Dow lease is based on the same architectural drawing, but has various numbers written in the space of the three tenants and the square footage has been scratched out and replaced with different numbers. The Alpha Dairies figure of 8,000 remains, however the Simo-Dow square footage of 17,000 square feet has been scratched out and substituted with a figure of 22,184 square feet. Additionally, the Westwood square footage of 15,000 square feet has been scratched out and a figure of 17,416 square feet has been substituted.

The total amount of the square footages for the three spaces, including the substituted figures, amounts to 47,600 square feet. This figure is much larger than the square footage on the main floor of 40,320 and suggests that much of the mezzanine is included, as the total square footage for the whole building was 48,820 square feet at the time. [ 39 ] Unfortunately, at trial the discrepancy between the two

Schedule B documents to the Keldo-Simo-Dow lease was not raised as

an issue. In fact, the discrepancy was glossed over by counsel for Keldo. Counsel introduced the documents through the evidence of Louis Kelemen Sr., with counsel stating that the

Schedule “B”s for all the 1979 leases were essentially the same. This was inaccurate. Counsel for Simo made no submissions regarding the two

Schedule “B”s to the Simo-Dow lease. [ 40 ]

Schedule C to the lease is the same for both leases and is entitled “Amendments and Additions to Lease”. It provided additional Articles to the lease which are not relevant in this trial. [ 41 ] Between 1979 and 1987 there were amendments and extensions to the 1979 leases, including increases in rent, however there were no substantive changes to the leases themselves. 1987 Lease [ 42 ] The 1987 lease between Keldo and Westwood was entered into at a time when Louis Kelemen Sr. was arranging for Westwood to purchase Simo-Dow. The 1987 lease was therefore made conditional on Westwood becoming the owner of Simo-Dow. [ 43 ] The

preamble to the lease remains the same as that of the 1979 lease, and mentions that the lease is of a “certain portion” of the building. The gross leaseable area has changed to 40,320 square feet. [ 44 ]

Article 1.2 refers to the schedules that form part of the lease, but only refers to one

schedule -

Schedule A (Definitions) - as being appended. [ 45 ] The 1987 lease makes Westwood responsible for 100% of the Operating Costs. [ 46 ] The bulk of the remaining provisions are essentially identical to the 1979 lease, other than the addition of a right of renewal and parking provisions at the end of the lease, and the removal of a security deposit. [ 47 ]

Schedule A to the lease is also largely identical to the

Schedule A in the 1979 leases. The definition of “Gross Leaseable Area” which references mezzanine space remains the same. [ 48 ] The definition for “Leased Premises” also remains the same as the definition in the 1979 leases. The definition includes a reference to

Schedule B. As noted,

Article 1.2 only refers to

Schedule A being annexed to the lease, so this is an apparent anomaly: (h) “Leased Premises” means the rentable premises in the Building which are demised to the Tenant by this Lease and are shown outlined in red on

Schedule “B”. [ 49 ] At trial, there was disagreement between the parties regarding whether there was a

Schedule B to the 1987 lease. This issue is addressed later in my reasons. Surrounding Circumstances [ 50 ] Turning now to the surrounding circumstances, I find that the following objective facts were known to the parties at the time they entered into the 1987 lease and provide context to the lease.

These facts are largely uncontentious and are based on evidence provided by Louis Kelemen Sr., Louis Kelemen Jr., and a long-time employee John Heaslip. [ 51 ] The building was constructed specifically for the two businesses that were the main tenants, Westwood and Simo-Dow, and was owned by principals of those companies.

The floor plan was created to provide separate manufacturing spaces for the two companies on the main floor and the third space on the main floor was added to allow for expansion or a tenant. [ 52 ] The mezzanine space was built with a load-bearing floor so that it could accommodate manufacturing or be developed in the future. It was built to full height with interior beams extending to the ceiling. The mezzanine was divided by two walls into three spaces that roughly corresponded to the three spaces on the main floor area.

Louis Kelemen Sr. confirmed that the idea was for each tenant to use a portion of the mezzanine space. [ 53 ] The mezzanine spaces corresponding to the Westwood and Simo-Dow spaces consisted of approximately 6,500 square feet. These spaces were largely undeveloped, but two lunchrooms were built to provide Westwood and Simo-Dow employees with a place to eat on the mezzanine level as there was no space for lunchrooms on the main level. The lunchrooms were above the respective manufacturing spaces of the companies.

The rest of the mezzanine space was used for storage and change rooms, though portions of the areas remained empty at times. There were also times were the mezzanine was used for assembly and production as needed. Employees had unrestricted access to the mezzanine. [ 54 ] An additional area of approximately 2000 square feet was separated from the rest of the mezzanine by a staircase and was above the Alpha Dairies (later Troll Woodcraft) space. This area was referred to as the northwest corner.

Alpha Dairies and Troll Woodcroft did not use the northwest corner space on the mezzanine and it remained undeveloped and unused . [ 55 ] By 1987 Westwood and Simo-Dow were in the process of amalgamating into one company. Westwood would now be the primary tenant of the building. Positions of the Parties [ 56 ] Keldo contends that Simo only leases the square footage on the main floor of the building and that neither Simo nor its predecessors ever had a lease for the second floor mezzanine space.

Keldo’s position is that it allowed Simo and its predecessors to use some of the mezzanine space from time to time in light of the fact that Louis Kelemen Sr. was the owner of both Keldo and Simo (and its

predecessors) for a long period of time, and due to the family connection that existed when Louis Kelemen Jr. took ownership and control of Simo in 2002. However, due to the share sale agreement in 2011 which removed Louis Kelemen Jr. from the company, Keldo determined that the relationship between landlord and tenant was now purely a business relationship. As such, Keldo decided that Simo would either have to pay rent for the 6,000 square feet of mezzanine space it was using or vacate the space. [ 57 ] Keldo’s position is based on the wording of the 1987 lease and on the drawing set out in

Schedule B. Keldo notes that the

preamble to the 1987 lease states it is for only a “certain portion of the building” and says this refers to the main floor of the building. Keldo notes certain provisions in the lease refer to tenants of the building, which means that the lease did not pertain to the entire building and contemplated other tenants. Regarding the mezzanine, Keldo points to the definition of “Gross Leaseable Area” in

Schedule A which specifically references mezzanine space being included in the calculation of the floor space of any rentable premises. This means that the mezzanine space could be leased and would, if included, be set out in the Gross Leaseable Area in

Article 1.1(2). [ 58 ] In terms of

Schedule B, Keldo notes that the 1979 leases are nearly identical to the 1987 lease and that the

Schedule “B”s attached to the 1979 leases depicted only the area on the main floor. The mezzanine was not depicted in

Schedule B. Keldo argues the reason the mezzanine was not depicted was because it was not leased to any tenant in 1979; it was retained by Keldo as owner of the building. [ 59 ] Keldo further takes the position that there was a

Schedule B to the 1987 lease. It submits that Mr. Schitthelm admitted this at Questioning. At Questioning, Mr. Schitthelm was asked if

Schedule B to the 1987 lease was a document from Simo’s production. The document presented to him was a version of

Schedule B with a date stamp of September 1979, but was not labelled as being attached to a particular lease. Mr. Schitthelm responded “I think so”. Keldo therefore submits that this is the

Schedule B to the 1987 lease which is referred to in the definition of “Leased Premises” in the 1987 lease. As

Schedule B does not depict the mezzanine, the mezzanine was not included in the leased premises. [ 60 ] Keldo submits that there is no ambiguity in the lease. Common-sense and surrounding circumstances dictate that the 40,320 square feet demised to Westwood in 1987 consisted of the rentable area on the main floor. The addition to the building of 3,600 square feet in 1993 resulted in the square footage on the main floor rising to 43,920 square feet, and subsequent amendments and extensions to the 1987 lease reflected this fact.

However, at all times the rentable area referred only to space on the main floor. [ 61 ] Additionally, Keldo refers to the conduct of the parties after 1987 as evidence of surrounding circumstances in its favour. However, earlier in Keldo’s argument it protested Simo’s emphasis on the parties’ conduct after1987, stating that the conduct of the parties during the lease does not inform the

interpretation of the lease . [ 62 ] For its part, Simo contends that in 1987 the parties intended the entire building to be the leased premises, including the mezzanine. It says the gross leaseable area of 40,320 is equivalent to the footprint for the building. It notes that the lease does not state that the leased premises are restricted to the main floor. [ 63 ] Simo submits that one cannot determine the parties’ intentions only by referring to the words of the lease itself.

Although it concedes the definition of “Gross Leaseable Area” in the lease includes “any mezzanine space” in its calculation, it states that this definition cannot be the sole determiner of whether the mezzanine is included in the lease or not. Simo notes that the definition of “Gross Leaseable Area” is problematic because it refers to calculations concerning an elevator shaft and basement, neither of which were ever planned or constructed.

It also points out that the “main lobby on the main floor” is to be excluded from the calculation, but if the lobby is excluded the square footage could not fit only on the main floor. This creates doubt as to whether the parties truly intended for this definition to set out which parts of the building were part of the leased premises. [ 64 ] Simo also submits that the wording in the

preamble of “a certain portion of the building” can be explained by the fact that the 1979 lease served as a precedent for the 1987 lease, and the

preamble made sense in that context as there were three tenants in 1979. The phrasing is therefore merely a “leftover” from the 1979 leases. [ 65 ] Additionally, Simo maintains that the surrounding circumstances show the context under which the parties created their agreement. These circumstances include the fact that each tenant was allocated a portion of the mezzanine in accordance with their rented space on the main floor. Keldo constructed lunchrooms for the two main tenants of the building on the mezzanine with no additional rent charged for the use of this space.

These lunchrooms were necessary as there was no area on the main floor that would be suitable for a lunch space. Further, Westwood and Simo-Dow paid operating costs for the building in proportion to the gross leaseable area set out in the 1979 leases. When Westwood (now Simo) took over the lease in 1987, it became responsible for 100% of the operating costs, including taxes and utilities. This suggests that the lease was for the whole of the building, including the mezzanine. [ 66 ] Simo admits that Mr. Schitthelm testified at Questioning that he believed

Schedule B to the 1987 lease was the same as the

Schedule B to the 1979 lease. However, as a specific

schedule to the 1987 lease, no

Schedule B document has been found or produced by either party. Simo submits that it was likely never appended to the 1987 lease and that Mr. Schitthelm confused it with

Schedule B to the 1979 leases. [ 67 ] Simo notes that at trial Mr. Schitthelm testified that he was unsure whether there was a

Schedule B to the 1987 lease. He recalled seeing a blueprint like

Schedule B attached to a lease when he first joined Simo. However, when the issue over the lease became contentious in 2011, he could not find the lease or blueprint he viewed initially in the files. He stated the lease was later found, but there was no longer a blueprint attached. He stated that there was a lot of confusion over the lease and

Schedule B at his Questioning. [ 68 ] Ultimately, Simo takes the position that the various inconsistences in the written lease mean that the words of the lease, on their own, are not conclusive as to the parties’ intentions for the mezzanine. Simo contends the inconsistences result in ambiguity, opening the door for consideration of the parties’ conduct from 1979 through to 2011. Analysis

[ 69 ] What was the intention of the parties when they entered into the 1987 lease? The answer to this question requires consideration of the written words of the agreement in the context of the surrounding circumstances at the time. The 1987 lease is the critical document as subsequent leases were extensions of the 1987 lease and contained only minor amendments which did not affect the space demised, other than the 1993 extension which is not at issue. After 1987, there was no evidence that the parties were negotiating any terms of the lease, other than with respect to price.

Therefore I find that unless the lease is ambiguous, the conduct of the parties after contracting in 1987 is not relevant to the

interpretation of the lease. [ 70 ] In my view, the 1987 lease is not ambiguous. I find that the space that was leased to Westwood (Simo) was the 40,320 square feet on the main floor of the building. [ 71 ] I am satisfied that the 1987 lease, like the 1979 leases before it, was premised on the landlord demising a square footage of space in the building to the tenant. The key provisions of the lease are outlined at the beginning of the lease under

Article 1.1 entitled “Certain Basic Lease Provisions”. This

Article sets out the most pertinent terms of the lease, including the address of the space demised, the amount of space demised, the permitted uses of the space, the term of the demise and the rent payable. [ 72 ] The amount of space demised is defined under

Article 1.1(2) as “Gross Leaseable Area of Leased Premises: 40,320 square feet”. The terms “Gross Leaseable Area” and “Leased Premises” are both defined terms under the lease. Gross Leaseable Area defines how to measure the space that can be rented to a tenant. In this case, the space is to be measured from the exterior face of all exterior walls and is the area in square feet of all floor space, including any mezzanine space. This clearly means that mezzanine space can be measured and included in the area rented to tenants. “Leased Premises” is defined to mean the rentable premises in the building which are demised to the tenant in the lease as shown on

Schedule “B”. [ 73 ] Admittedly some of the wording in the two

definitions is problematic. One problem is that the definition of Gross Leaseable Area refers to certain exclusions such as an elevator shaft and basement which have no application here. As well, as noted by Simo, the exclusion of the main lobby in the calculation means it would not be possible for the full 40,320 square footage to be located on the main floor alone. It is also problematic that the definition of “Leased Premises” refers to a

Schedule B whereas

Article 1.2 of the lease does not include

Schedule B on its list of schedules annexed to the lease. [ 74 ] However, when one considers the surrounding circumstances known to the parties at the time, including the 1979 leases and the way the parties had been operating under those early leases, it is clear that the square footage set out in

Article 1.1(2) was intended to be the square footage the tenant leased and paid rent on. In the 1979 leases the amounts in

Article 1.1(2) were 15,000 square feet for Westwood and 17,000 square feet for Simo-Dow, which were the square footages of space that were necessary for their respective manufacturing needs. Therefore, the intent of

Article 1.1(2) was to delineate the amount of space being leased to a tenant. The square footage leased to Westwood in 1987 was 40,320 square feet, which corresponds to the main floor of the building. A realistic and sensible

interpretation is therefore that the leased premises were the 40,320 square feet of the main floor. [ 75 ] Although the full 40,320 square feet does not fit into the main floor if one excludes the main lobby, I find the minor amount of space thereby excluded would not be anywhere near to the amount of the mezzanine space Simo contends is included in the lease. [ 76 ] Further, of critical importance is the fact that it would be contrary to the wording of the lease to find that Simo was renting the mezzanine space given the definition of Gross Leaseable Area.

Gross Leaseable Area includes the area in square feet of all floor space, including any mezzanine space. If the mezzanine space were included in the Gross Leaseable Area, the square footage would have been close to 49,000 square feet, not the 40,320 set out in the lease. [ 77 ] Finally, I am satisfied the

Schedule B documents to the 1979 leases support this

interpretation overall. [ 78 ] The version of

Schedule B that was altered to show square footages that could include the mezzanine did cause me some concern. Ultimately, I chose not to give it any weight as the parties made no submissions on the document. [ 79 ] The remaining two

Schedule B drawings were consistent in that they depict only the main floor and the grounds of the building. The areas outlining the tenants’ respective spaces were all on the main floor of the building. There was an architectural drawing in evidence which specifically showed the plans for the mezzanine when the building was designed, however this drawing was never appended to any of the leases. This suggests that the mezzanine was not part of the Leased Premises. [ 80 ] To clarify, the

Schedule B documents to the 1979 leases are only interpretive aids showing background facts known to the parties at the time they contracted in 1987. I am satisfied that there was never an attached

Schedule B to the 1987 lease. [ 81 ] Although the fact that Simo was paying for the whole of the operating costs is troubling, justification for those expenditures is explained by the analysis that follows regarding the mezzanine. What is the legal status of the mezzanine? [ 82 ] The question that remains is the legal status of the mezzanine. Keldo maintains that the mezzanine was not included in the leased premises and that it granted a licence to Westwood (Simo) from time to time due to the family connection that existed between the companies, all of which ended in October 2011.

Keldo says that if there was a license, it was informal and could be revoked. As a result, Keldo demands rent for the space currently occupied, which is approximately 6,000 square feet. Simo’s only position was that the mezzanine was part of the leased premises and that no rent is owed. [ 83 ] As the mezzanine was not a part of the leased premises, I must determine what arrangement the parties entered into with regards to the mezzanine. Unlike the lease, there is no written agreement between the parties regarding their arrangement.

Instead the parties’ intentions must be determined based on the evidence heard at trial. As this is an oral agreement, there is more flexibility in the nature of the evidence that can be considered: De Cotiis v Viam Holdings Ltd , 2010 BCCA 368 , 93 RPR (4th) 193, at para 21 .

[ 84 ] The evidence relating to the mezzanine up until 1987 has been reviewed previously. After 1987, I find the mezzanine space was used as follows. After amalgamation into Westwood (Simo), the lunchroom areas were changed so that there was only one lunchroom for employees on the mezzanine. The mezzanine space was also partially used for storage of furniture and for production of parts or assembly of furniture as needed.

Although Westwood (Simo) could access the northwest corner of the mezzanine it remained unused. [ 85 ] At some point in the 1990’s, the space in the northwest corner was used for the first time by Simo. Simo constructed offices in this space for use on a special contract which required Simo engineers to work on Computer Aided Design (CAD) software. Simo also built a kitchen and washroom in the northwest corner space for the CAD operators. A set of stairs was built from the north end of the manufacturing floor to the northwest corner of the mezzanine for easier access to that area.

The northwest corner offices were used for the CAD operators for a few years, and then left empty. [ 86 ] At some point in time, a conveyor belt was built from the main floor to the mezzanine to move inventory. [ 87 ] In 2002, after Louis Kelemen Sr. transitioned out of an ownership role in Westwood (Simo), he began using one of the CAD offices in the northwest corner of the mezzanine and renovated the space for his use. He continued to offer guidance and assistance to Simo. [ 88 ] In 2004, a design company called Valadar Design moved into one of the other offices in the northwest corner.

The principal of Valadar, Verna Leask, provided consulting services to Simo for their showroom in exchange for the office space. She also provided design consultation to Louis Kelemen Jr. and Louis Kelemen Sr. at their homes as a part of the arrangement. She made the arrangement with Louis Kelemen Jr., but understood that he would need to check with Louis Kelemen Sr. about the arrangement and whether she could bring her dog to the office. Ms. Leask believed that Simo owned the building at the time the arrangement was made and that her arrangement was with Simo. However, after being there for well over a year, Ms.

Leask was informed that Keldo was the landlord and that once the exchange of services was over she would be required to pay Keldo rent for the office. Ms. Leask commenced paying rent to Keldo in June 2006 and remained in the office until March 2009. [ 89 ] In 2009, Simo moved its seating manufacturing from an off-site location onto the mezzanine because the off-site lease was expiring. Simo was encountering financial difficulties at the time and did not want to pay for another off-site lease.

Louis Kelemen Jr. and Gary Schitthelm consulted with Louis Kelemen Sr. about moving the seating manufacturing operations and he agreed it was an appropriate move at the time. Both Louis Kelemen Jr. and Louis Kelemen Sr. testified that the arrangement was meant to be temporary. The seating manufacturing operation required approximately 6,000 square footage of space in the main portion of the mezzanine. [ 90 ] In 2010, Louis Kelemen Sr. was helping with the design components for Simo’s Interactive Media Technology (IMT) monitors.

He allowed Simo to store the expensive and fragile monitors in an area of the northwest corner. Around this time, Simo employees also attempted to store other items in this area, however Louis Kelemen Jr. told them in an email that “the upstairs offices at the north end of the office do not belong to Simo and we should not be using it as a storage area without Louis Senior’s approval... the ONLY thing we have approval for at this time is the storage of the IMT monitors”.

The employees were asked to remove the products being stored from that area and find another place for them. [ 91 ] From 1987 onwards, Westwood (Simo) paid all operating costs for the entire building, including property taxes, utilities, maintenance and landscaping. This was done pursuant to the 1987 lease and its various renewals. [ 92 ] As noted previously, from 1979 to the time of the dispute, no rent was ever demanded for any of the mezzanine space. [ 93 ] Simo also tendered expert evidence on how mezzanine space in industrial buildings was typically treated over this time period in Calgary.

Harvey Aronovich was qualified as an expert in the area of industrial leasing in Calgary. He has been an industrial/commercial real estate broker in Calgary since 1983 and is licensed as such. Mr. Aronovich has extensive experience acting as a broker for landlords and tenants relating to industrial leases for buildings with mezzanines such as the one in this case. He provided a written report as well as evidence at trial. [ 94 ] Mr. Aronovich testified that the building in question was typical of industrial buildings constructed at the time.

He was asked to give his opinion on whether parties to an industrial lease in 1987 typically expected undeveloped mezzanines of the type in this case to be included or excluded from the leased premises. Mr. Aronovich’s opinion was that undeveloped mezzanine space of this type was always included as a bonus or throw-in to the tenant. The mezzanine spaces were included as a part of the leased premises and rent was not charged separately for them. In his experience, he had never seen a landlord charge for undeveloped mezzanine space. Mr.

Aronovich stated that when mezzanines are developed into office space they may be rented out separately, however the lease agreement would be clear in setting that out. Therefore Mr. Aronovich’s opinion was that in this case the mezzanine space was part of the leased premises in 1987 as a bonus area for the tenant.

Analysis [ 95 ] Considering the evidence on the mezzanine as a whole, I find that although Keldo did not grant Westwood (Simo) a lease for the mezzanine space, it did grant Westwood (Simo) a licence to use the space concurrent to the lease. [ 96 ] This finding is based on the fact that the building was constructed by Keldo for Westwood and Simo-Dow based on their needs at the time. The spaces on the main floor for manufacturing were constructed and divided with this in mind. The mezzanine space, though largely undeveloped, was divided into areas that corresponded with the areas below.

Louis Kelemen Sr. admitted that the intention was that each tenant would use a portion of the mezzanine space. It was anticipated that the mezzanine space would be needed for the tenants’ operations. There was no room for lunchrooms on the main floor and lunchrooms were built shortly after construction for the employees. As more space was needed for operations Westwood (Simo) was able to use more of the mezzanine, including for storage of inventory, for assembly and production, for CAD offices in the 1990’s and for seating manufacturing in 2009.

[97] This conduct shows that the intention of the parties was for Westwood (Simo) to be able to use the mezzanine space tosupport its operations. The use of the mezzanine space by Simo involved expenditures and structural changes, such as the funding andconstruction an office area complete with washrooms and a kitchen, the addition of a set of stairs in the building, and the addition of aconveyer belt. The relocation of the seating manufacturing was also a major undertaking.

I find that Simo would not have engaged inthese activities on the mezzanine, and Keldo would not have allowed them, unless both parties’ intended for Simo to have the use of themezzanine during the occupancy of its lease. [98] Another factor that supports this finding is the fact that Westwood (Simo) was required by the terms of the lease to pay 100%of the operating costs for the building from 1987 onwards. This suggests that the mezzanine was not retained by Keldo. [99] There is some evidence that is difficult to reconcile with this finding.

First is Louis Kelemen Sr.’s use of one of the CADoffices after his retirement and that in later years employees were told the northwest office area was his and not Simo’s. Second is therental arrangement with Valadar Design in which rent was paid to Keldo. [100] The fact that Louis Kelemen Sr. had been the head of Westwood (Simo) for over 20 years when he passed on ownership to hisson, and the fact that he continued to be involved in Simo operations after this time, helps to explain why it was acceptable for him tostart using an empty office in 2002.

Louis Kelemen Sr. characterized his actions after 2002 as being done on behalf of Keldo, however Ibelieve that he continued to act as he had previously, which was to wear his Simo hat and Keldo hat at the same time when makingdecisions relating to the building. He was candid in admitting that he made the decisions that were best for Simo, as it had been hiscompany and he wanted it to continue to succeed even after he had passed on ownership to his son. I therefore find that when he wasconsulted he was continuing to act as a senior advisor to Simo and was not acting on behalf of Keldo’s interests.

His use of the office isunderstandable in this light. [101] In terms of Valadar, I find that because of Louis Kelemen Sr.’s position no one questioned the arrangement. There was nosignificant reason to question or oppose these arrangements, as they were not interfering with or impacting Simo’s operations. The rentthat Valadar paid was minimal.

Although this arrangement is somewhat anomalous to the finding that Simo held a license for themezzanine, it does not alter my opinion overall. [102] The finding that Simo was given a license to the mezzanine as a part of the leasing arrangement is supported by the opiniongiven by Harvey Aronovich. He provided insightful evidence on the typical leasing arrangements for mezzanine spaces in industrialbuildings of this type in Calgary. A mezzanine was considered a bonus space given to tenants and was not considered rentable space.

The“bonus” nature of the mezzanine holds weight in this case when one looks at the conduct of the parties over the years. I find the legalarrangement for the mezzanine, as a bonus space, is akin to a contractual licence that accompanied the lease. [103] A licence is a personal right between a licensor and a licensee that gives the licensee permission to do what would otherwise bea trespass. There are generally three accepted types of licences, each which differ in regards to how the licence is created and how it can be revoked.

The following excerpt from Megarry & Wade’s The Law of Real Property, 8th ed, (London: Sweet & Maxwell 2012), at p1439-1440, provides a helpful overview: 1. Bare Licence. This is the simplest form of licence. A bare licence is a licence which is not supported by any contract, and includes agratuitous permission to enter a house or to cross a field. Such a licence may be expressly given or it may be implied. ...

A bare licencecan be revoked at any time on reasonable notice without rendering the licensor liable in damages, but the licensee will not be a trespasseruntil he has had a reasonable time to withdraw. ... 2. Contractual Licence. A licence will often be granted under the terms of some contract which restricts the licensor’s right to revokeit. The contract is normally express but it may be implied. ... Contractual licences are subject to the same rules which govern all contracts... 3. Licence coupled with an interest.

The one form of licence which caused no problems at common law was a licence coupled with arecognised interest in property.

A right to enter another man’s land to hunt and take away the deer killed, or to enter and cut down a treeand take it way, involves two things, namely a licence to enter the land and the grant of an interest (a profit à prendre) in the deer or tree.At common law such a licence is both irrevocable and assignable, but only as an adjunct of the interest with which it is coupled. [104] In this case a contractual licence was created whereby the tenant of the building was granted a licence to use the mezzaninespace to support its operations. [105] In terms of revocation, Megarry & Wade explain that whether or not a contractual licence is revocable is a question ofconstruction of the contract.

Where the contract makes no express provision for termination, “the court will imply a term that isappropriate in the circumstances” at 1442. The term should accord with the intention of the parties, which will be determined on a caseby case basis: Imperial Oil Ltd v Young (1998), (NL CA), 21 RPR (3d) 65, [1998] NJ No. 248 (Nfld CA), at para51. [106] Here the parties’ contractual arrangement was for the licence to accompany the lease.

As noted, Simo would not have used themezzanine space as it did over the years, and Keldo would not have allowed such use, unless both parties intended for Simo to have theuse of the mezzanine during the occupancy of its lease. Therefore, the licence terminates at the same time as the lease, whether due to theexpiry of the term of the lease or due to any provisions relating to termination under the lease.

The 2006 lease terminates on June 30,2017. [107] In the result, Keldo is not entitled to rent for the mezzanine space, nor was Simo a trespasser. [108] In terms of Simo’s request that Keldo vacate the northwest corner office, I am not certain that Simo, as licensee, is in a legalposition to make such a demand on the licensor. The parties did not make any submissions on this point as their arguments focused onwhether the mezzanine was included in the leased premises.

I decline to make such an order considering that only a few months remainin the current lease, after which the parties are free to make new arrangements.

2. Is Keldo estopped from charging Simo a management fee ? [ 109 ] On October 18, 2011, Keldo sent a letter to Simo demanding payment of a management fee and operating costs under the 1987 lease effective November 30, 2011. It also hired a property manager to manage the property starting in January 2012. [ 110 ] Simo concedes that under the 1987 lease, Keldo has the right to charge Simo a management fee and operating costs, pursuant to

Article 8.1 of the lease, which requires the tenant to pay 100% of operating costs. The definition of “Operating Costs” is on

Schedule “A” to the lease, and includes: (

x) a management fee, whether actually paid or not paid because Landlord manages the Lands itself, deemed to be, whether paid or not, equal to 5% of all gross rents received by the Landlord relating to its ownership of the Lands; ... [ 111 ] Simo maintains that the parties conduct over 24 years, whereby Keldo did not charge or ask for management fees, gives rise to estoppel by convention, such that it would be unjust and unfair for Keldo to depart from this arrangement. [ 112 ] Simo alleges that Keldo began to charge the management fee for the same reason it demanded rent for the mezzanine, namely that Louis Kelemen Sr. wished to exert pressure on Gary Schitthelm to sell his shares so that Simo would remain in the hands of Louis Kelemen Jr.

Simo points to the following email from legal counsel to Louis Kelemen Jr. and Louis Kelemen Sr., sent two days before the demand letter to Simo, to support this position: Subject: Gary If Gary doesn’t get back to you in good time on Monday I think you need to confront him and ask him what’s up and if he doesn’t come clean then I think it’s time you become a bit miserable and bring senior back in. We could also send a letter from Keldo to Simo demanding payables under the lease. We have broken down who pays what under the lease and can send that and will send it Monday. ...

In other words Gary can’t be left to think it’s going to be a bed of roses if he becomes buyer... [ 113 ] Simo has been paying the management fees under protest since approximately March 2012 and asks that it be reimbursed for those fees. As of October 19, 2015, the fees paid since March 2012 totalled $41,312.25. [ 114 ] For its part, Keldo contends that the requirements for estoppel by convention are not met in this case. A crucial element of this type of estoppel is that the parties’ dealings were based on a shared assumption of fact at the material time.

In this case, Keldo maintains that there was no shared assumption as Keldo advised Simo in October 2011 that Simo would be charged a management fee. Keldo says that all that occurred in this case was a flexible arrangement of indulgences on Keldo’s part, without a manifest intention to alter the underlying legal relationship. Keldo maintains that Simo has suffered no detriment as it benefits from the improvements to the building provided by the new property manager. [ 115 ] Finally, Keldo submits that charging the management fee is not unfair or unjust.

It notes that Keldo was entitled to enforce its rights under the lease. Further, it points to Louis Kelemen Sr.’s evidence on his reasons for charging a management fee and hiring a property manager as justified. His reasons were that his wife’s health was deteriorating at the time, as was his own health, and he had less time to manage the building. Additionally, the familial connection between Keldo and Simo was about to be lost and Louis Kelemen Sr. started to view the relationship between the two companies as purely a business relationship.

It was natural that he no longer wished to offer a concession on the management fee. [ 116 ] The following criteria must be met in order to prove estoppel by convention: 1) The parties' dealings must have been based on a shared assumption of fact or law: estoppel requires manifest representation by statement or conduct creating a mutual assumption.

Nevertheless, estoppel can arise out of silence (impliedly). 2) A party must have conducted itself, i.e. acted, in reliance on such shared assumption, its actions resulting in a change of its legal position. 3) It must also be unjust or unfair to allow one of the parties to resile or depart from the common assumption. The party seeking to establish estoppel therefore has to prove that detriment will be suffered if the other party is allowed to resile from the assumption since there has been a change from the presumed position.

Ryan v Moore , 2005 SCC 38 , [2005] 2 SCR 53, at para 59 . [ 117 ] Each of these criteria is met in this case. The parties’ conduct over a twenty-four year period shows that they were operating under a shared assumption that a management fee would not be charged. The duties involved in managing the building were taken on by Louis Kelemen Sr. for many years, with Louis Kelemen Jr. taking over many of those responsibilities when he became President in 2002.

This shared assumption continued up until October 2011, when Keldo attempted to reassert its rights under the lease. [ 118 ] It is unfair of Keldo to characterize such a long-standing arrangement as simply an indulgence. Simo relied on this shared assumption in the conduct of its business operations for many years. Simo would have taken into consideration its rent and associated costs when deciding on the price of its products or how many employees it hired.

A sudden change to this amount would affect Simo’s bottom line to its detriment. [ 119 ] Additionally, Keldo’s departure from the shared assumption was unjust because of the motivation behind the change. Although Louis Kelemen Sr.’s health and personal circumstances were changing, his main motivation was to put pressure on Gary Schitthelm to pull out of the sale. The email preceding Keldo’s demand letter makes it clear that the demand for “payables under the lease” was meant to deliver a message to Gary that it would not be a “bed of roses” if he went ahead with the sale.

Charging the management fee was a tactic, not a bona fide business decision.

[120] Although the lease required any changes be in writing, Keldo’s actions in acquiescing to the change for so long precludes itfrom denying the variation: 1198816 Alberta Ltd v Bourbon Lounge Inc, 2008 ABQB 600, 458 AR 1, at paras 199-200. [121] However, as noted in Bourbon Lounge, a landlord is entitled to give reasonable notice to revive the original obligations in alease, at paras 206-207. Considering the length of time that the parties operated under a shared assumption that no management feewould be charged, I find a reasonable notice period to be one year.

One year would allow Simo to make any adjustments to its operationsin order to pay for the additional fee. Therefore, I find that as of November 1, 2012, Keldo was entitled to commence charging themanagement fee. I order Keldo to reimburse Simo for the fees charged and paid prior to that date. 3. Damages and Costs [122] In its submissions Simo sought damages in an amount commensurate with its legal costs incurred in this lawsuit, or alternativelycosts on a solicitor and client basis. It also sought punitive damages.

Keldo requested that submissions on costs be considered at a latertime. [123] As Simo has framed its damages claim in terms of costs, I do not award any damages at this time.

It would be premature tomake a decision on costs without further submissions from the parties. [124] Although I found Keldo’s actions were unfair and were motivated by Louis Kelemen Sr.’s desire to influence the share sale, I donot find the conduct reaches the threshold of being “malicious, oppressive and high-handed” such that it warrants an award of punitivedamages: Whiten v Pilot Insurance Co, 2002 SCC 18 , 2002 SCC18, [2002] 1 SCR 595, at para 36.

It was also problematic thatSimo did not plead punitive damages in its Statement of Claim and only raised this claim in its written submissions at the end of trial:Whiten, at paras 87-88. 4. Conclusion [125] It is unfortunate that the parties had to resort to litigation in this dispute, which was essentially spurred by difficulties intransitioning ownership of a family-owned business. I encourage the parties to respect their respective contractual positions as they moveforward. Dated at the City of Calgary, Alberta this 25th day of April, 2017. M. David Gates J.C.Q.B.A.

Appearances: Joseph Oppenheim for the Plaintiff/Defendant by Counterclaim Glenn Solomon QC/Ryan Phillips for the Defendants/Plaintiffs by Counterclaim