2011 NBCA 29, 2011 NBCA 29

COURT OF APPEAL OF NEW BRUNSWICK 91-10-CA SHUNJING TRADING INC. (Plaintiff) APPELLANT SHUNJING TRADING INC. (demanderesse) APPELANTE - and - - et - E.B. ENGINEERED PANELS AND CONTROLS INC. and EDWARD BARNES (Defendants) RESPONDENTS E.B. ENGINEERED PANELS & CONTROLS INC. et EDWARD BARNES (défendeurs) INTIMÉS Shunjing Trading Inc. c. E.B. Engineered Panels and Controls Inc. and Barnes, 2011 NBCA 29 Shunjing Trading Inc. c. E.B.

Engineered Panels & Controls Inc. et Barnes, 2011 NBCA 29 CORAM: The Honourable Justice Robertson The Honourable Justice Richard The Honourable Justice Bell CORAM : L’honorable juge Robertson L’honorable juge Richard L’honorable juge Bell Appeal from a decision of the Court of Queen’s Bench: June 10, 2010 Appel d’une décision de la Cour du Banc de la Reine : Le 10 juin 2010 History of Case: Historique de la cause : Decision under appeal: 2010 NBQB 207 Décision frappée d’appel : 2010 NBBR 207 Preliminary or incidental proceedings: N/A Procédures préliminaires ou accessoires : S.O.

Appeal heard: February 11, 2011 Appel entendu : Le 11 février 2011 Judgment rendered: March 31, 2011 Jugement rendu : Le 31 mars 2011

Reasons for judgment by: The Honourable Justice Robertson Motifs de jugement : L’honorable juge Robertson Concurred in by: The Honourable Justice Richard The Honourable Justice Bell Souscrivent aux motifs : L’honorable juge Richard L’honorable juge Bell Counsel at hearing: For the appellant: Q. Ryan Hanna For the respondents: Martin S. Stoyanov Avocats à l’audience : Pour l’appelante : Q. Ryan Hanna Pour les intimés : Martin S. Stoyanov THE COURT The appeal is dismissed with costs of $5,000. LA COUR L’appel est rejeté avec dépens de 5 000 $.

The judgment of the Court was delivered by ROBERTSON, J.A. [ 1 ] We dismissed the appeal without hearing from the respondents and indicated reasons would follow. These are our reasons for judgment. The essential facts of this case are as follows. [ 2 ] On February 22, 2005, the appellant landlord entered into a written agreement for lease with the respondent corporation (hereinafter the “tenant”) with respect to Unit #11 in a recently constructed strip-mall. The respondent, Mr. Barnes, is the principal of the tenant corporation and was to act as “guarantor” for the corporation’s obligations and liabilities.

In accordance with the agreement, the tenant paid a deposit of $2,456.33, representing the first and last month’s rent. The term of the lease was for two years, commencing March 1, 2005. The annual rent was set at $12,800. The provision dealing with rent stated management fees and taxes were included, but all other charges and payments are “part of the additional rent and shall be the responsibility of the tenant”. The agreement for lease went on to provide that it was binding but subject to the signing of a formal lease and subject to the tenant’s solicitor’s “reasonable approval”.

The agreement also stated what work was to be undertaken by each party. The landlord was to undertake “nil” work. The tenant was to complete a bathroom and an office. [ 3 ] The tenant took possession of the premises on March 1, 2005, but without entering into a formal lease. That document was forwarded to the tenant around March 5, 2005. Clause 8(2) of the document stated the tenant was responsible to pay for the cost of installations and/or improvements that any governing authority, including a municipality, might require. By contrast, the

agreement for lease contained no express equivalent provision. On receipt of the formal lease, Mr. Barnes made inquiries, only to learnthe local Fire Department had indicated the right of occupancy would be subject to the installation of a fire alarm and sprinkler system.The cost of these improvements was estimated to exceed $10,000. Mr. Barnes advised the landlord of these facts. The landlord insistedthe cost of the work was the responsibility of the tenant under the term dealing with “additional rent”. The tenant resisted the signing ofthe formal lease and the parties pursued further discussions.

The tenant’s offer to pay an increased rent was rejected. At some point, thelandlord agreed to waive the payment of rent for the first three months. Ultimately, the landlord refused to negotiate any further. On July27, 2005, the landlord sent an email to Mr. Barnes stating he had until the end of July to sign the formal lease. The tenant “quit” thepremises on July 29, 2005, and the landlord sued for the remainder of the unpaid rent.

At trial, it was revealed that the landlord had beenadvised by its contractor, on June 6, 2002, of the likelihood that each unit in the strip mall would require a fire alarm and sprinkler systemand that the purchasers of each unit would be required to undertake and pay the cost of the necessary work. [4] The trial judge framed the threshold issue in terms of whether the agreement for lease was a binding contract.To address that question, the trial judge posed another.

Did the parties fail to agree on a material term of the lease; namely, who wasresponsible for the cost of installing the fire alarm and sprinkler system? The trial judge held the matter was not covered under theclause providing for “additional rent”. He reasoned that rental expenses are in the nature of recurring costs, such as water and hydro, andnot a capital improvement to property.

Finally, the trial judge reasoned if the installation of the fire alarm and sprinkler system had beenin the contemplation of the parties, at the time they signed the agreement for lease, it would have been included as part of either thetenant’s or the landlord’s work and it was included under neither. All of this led the trial judge to conclude the following: […] I find that the cost of installing the fire alarm and sprinkler system, a material term of the contract, was not included in the Offer tolease [agreement]. In other words, the parties were not ad idem in respect to this essential term.

It follows, then, and I find that the Offerto lease is not a binding contract.

I further find that because there was no binding contract the tenant was entitled to vacate the premises when the landlord set a deadlinefor completing the lease and I dismiss the landlord’s claim for rent. [paras. 32 & 33] [5] The trial judge went on to dismiss the landlord’s claim for unpaid rent for the balance of the two-year term($23,306.73), but allowed a claim for unpaid hydro ($612.92) during the time the tenant was in possession (see 2010 NBQB 207). [6] On appeal, the landlord advanced three arguments in support of its claim to the unpaid rent. First, there is noambiguity in the agreement for lease.

The tenant is clearly responsible for the installation and cost of the fire alarm and sprinkler system.Second, the essential term identified by the trial judge was not an essential term because, at law, it is the tenant’s obligation to ensurethat premises are fit for the purpose intended and, correlatively, to pay for the cost for any work necessitated by municipal or provinciallegislation.

Third, the landlord points out this is a case in which the tenant took possession and paid rent, and yet the trial judge ignoredthese facts in concluding the parties had not entered into a binding agreement for lease. [7] The landlord’s first argument lacks merit. The trial judge was correct when he held that the clause in theagreement for lease setting out the tenant’s obligation to pay additional rent could not include an expense relating to a capitalimprovement. By logic and inference, the notion of a rental charge requires the expenditure to be of a recurring nature.

It follows that aone-time expenditure with respect to an improvement of a capital nature does not qualify. [8] The landlord’s second argument requires more attention. The landlord cites the well-known commercial caseof Canada Square Corp.et al. v. VS Services Ltd. et al., (ON CA), [1981] O.J. No. 3125 (C.A.) (QL), where it washeld that the essential terms of an agreement for lease are those which: (1) identify the parties; (2) describe the premises; (3) provide forthe commencement and duration of the term; and (4) specify the rent.

Generally, if any one of these matters has not been agreed to, therecan be no binding agreement. The requirement of certainty has not been met. Nevertheless, even if the necessary essential terms havebeen agreed to, there still remains the possibility of other material terms for which the parties may have been unable to reach aconsensus.

Hence, to be valid an agreement for lease must also disclose all material terms of the contract, which are not incident to therelationship of landlord and tenant, including conditions, exceptions or reservations: Williams and Rhodes, Canadian Law of Landlord and Tenant, 6th ed., Vol. 1, looseleaf (Toronto: Carswell, 2003) at 3-3. [9] Against this background, the landlord maintains the trial judge erred in concluding the parties had failed toreach an agreement on an essential term of the lease: namely, who was responsible for the installation of the fire alarm and sprinklersystem.

The landlord argues there was no need for the parties to reach an agreement with respect to this matter, as the obligation fell onthe tenant under the common law principles governing landlord and tenant law. The law is clear. There is no implied warranty orcovenant on the part of the landlord that leased premises are fit for the purpose intended. The onus is on the tenant to ensure that the

rented premises are fit for the purpose intended (see generally Crescent Motor Company Ltd. and Pike v. North-West Tent & Awning Co.Ltd., [1970] A.J. No. 95 (D.C.) (QL), and Milne v. Delta Foods Ltd., [1996] P.E.I.J. No. 17 (S.C.T.D.) (QL)). Building upon theseprinciples, the landlord maintains it is the tenant’s obligation to ensure all occupancy requirements imposed by municipal authorities aremet before signing the agreement for lease. Thus, according to the landlord, there can be no ambiguity in the agreement for lease.

Atlaw, the tenant is responsible for the work. [10] In my view, this is not a case where the tenant is alleging a warranty or an implied covenant that the premisesare fit for the purpose intended. Nor is this a case where the landlord can validly maintain it is the tenant’s duty to make his or her owninquiries as to the legal and physical fitness of the premises. Specifically, this is not a case where the tenant’s proposed use of thepremises is contrary to the local zoning by-law. This is a case in which the premises are literally unfit for any purpose, let alone the oneintended.

The recently constructed premises cannot be legally occupied until such time as municipal/provincial safety standards are met.The trial judge made a finding of fact in concluding the City of Saint John Fire Department required the premises to be equipped with afire alarm and sprinkler system before those premises could be occupied. [11] In law, there should be no reasonable expectation that the tenant’s duty of due diligence embraces theobligation to determine whether the landlord or the landlord’s contractor had complied with provincial or municipal legislationregulating the construction of buildings in regard to matters of general public safety.

In circumstances where the landlord has fullknowledge and responsibility for regulatory requirements pertaining to safety matters applicable to new constructions, the law should notobligate tenants to make due diligence inquiries – or else pay the installation costs for what amounts to a capital improvement – prior toentering into an agreement for lease.

To the extent the law places an obligation on the landlord to provide the tenant with physicalpossession of the premises on the commencement date, so too should the landlord be required to provide the tenant with the legal right topossession, regardless of who is responsible for applying for any occupancy permit. If, on the other hand, the only impediment to thetenant’s legal occupation of the premises is an intended use which requires expenditures necessary to comply with municipal orprovincial codes, the landlord’s plea that the tenant is prima facie responsible for the attendant costs resonates with merit.

The facts ofthe present case do not fall within this exception. [12] This takes me to the landlord’s third argument. The trial judge ignored two key facts: the tenant had takenpossession and paid rent by way of deposit. According to the landlord, those facts clearly indicated an acceptance of the terms of theagreement for lease. Moreover, those two additional facts distinguish cases such as Bawitko Investments Ltd. v. Kernels Popcorn Ltd., (ON CA), [1991] O.J. No. 495 (C.A.) (QL).

In that case, the parties had entered into an oral franchise agreement, butwhen it came to signing a written agreement the parties could not agree on the precise terms. In response, the prospective franchisorterminated further dealings. The Ontario Court of Appeal held the parties’ subsequent conduct supported the conclusion that no finalagreement had been reached. The present case differs as the tenant took possession and paid rent. [13] Before turning to the landlord’s argument, a few general observations are in order, if only to clarify what issuesare not before this Court.

It has not escaped my attention that no one has argued that the agreement for lease was, in law, merely anunenforceable “agreement to agree”, because the document anticipated the signing of a formal lease and included a provision thatrequired the tenant to obtain the “reasonable approval” of its solicitor. I also recognize the trial judge did not interpret the agreement forlease as placing the onus on the landlord to undertake and pay for the capital improvement in question.

Undoubtedly, had the tenantremained in possession and the landlord refused to do the work, the tenant would have argued the parties entered into a bindingagreement in which it can be reasonably inferred or implied that it was the landlord who was responsible for the installation of the safetyimprovements. The tenant would have argued his obligation to make capital improvements to the premises was expressly limited to theconstruction of an office and bathroom.

Finally, no one argued that by taking possession and paying rent, the tenant entered into aperiodic tenancy with the landlord, irrespective of whether the parties had entered into a binding agreement for lease. This potentialargument requires explanation. [14] The impact of the tenant taking possession and paying rent for the premises under a non-binding orunenforceable agreement for lease is truly problematic, for we now enter into the realm of landlord and tenant law, unaddressed by eitherparty in this appeal.

As a general proposition, the law holds that a person who enters into possession of leased premises and pays rentpursuant to an unenforceable agreement, becomes a periodic tenant from month to month or year to year, depending on thecircumstances. One could argue that, as the tenant had agreed to a two-year tenancy, the periodic tenancy should be year to year whichcould be terminated on giving proper notice. This would mean that the tenant in the present case would be obligated to pay rent for atleast one year, but not two.

One also has to appreciate that, under the governing principles of landlord and tenant, if the landlord is inbreach of a material obligation the tenant does not possess the right to terminate the lease. The respective obligations are said to beindependent of one another. Thus, the landlord who is under an obligation to make a capital improvement to the leased premises incompliance with municipal safety requirements, and refuses to do so, is clearly in breach of a material obligation, yet the tenant does notretain the unilateral right to terminate the contract of lease and walk away without incurring liability.

These legal realities arise under thecommon law principles governing landlord and tenant law and, obviously, do not conform with the general principles of contract law,where contractual obligations are held to be interdependent. Admittedly, the Residential Tenancies Act, S.N.B. 1975, c. R.-10.2, broughtabout needed reforms with respect to the more arcane aspects of landlord and tenant law, including the independence of covenants(obligations) and the doctrine of frustration. But those reform measures do not apply in the commercial context.

See Law ReformDivision, Department of Justice, New Brunswick, Survey of Landlord and Tenant Law – A working report (Fredericton: Law ReformDivision, Department of Justice, New Brunswick, 1973).

[ 15 ] The above analysis might lead one to reflect on whether the parties entered into a periodic tenancy such that the tenant remained obligated to pay the rent for the first year of the two-year term (see Wylie v. Bird’s Eye Cove Marina Ltd. , 2010 BCSC 789 , [2010] B.C.J. No. 1063 (QL)). We also know that even if the landlord was obligated to install and pay for the installation of the fire alarm and sprinkler system, and had the landlord breached that obligation, the tenant would not be entitled to unilaterally terminate the lease and avoid the obligation to pay rent.

But those issues are not before us. [ 16 ] I am left with the question of whether the taking of possession and payment of rent are sufficient facts on which to conclude the parties entered into a binding contract. In my view, the answer is no. First, the parties continued to negotiate over the entire period the tenant was in possession of the premises. This is a case where the tenant’s conduct does not amount to an acceptance of the landlord’s

interpretation of the agreement for lease. It was simply a matter of time before the tenant’s occupation would have been declared unsafe and illegal, and the parties would be back to square one as to which of them was responsible for the safety-related capital improvements. Second, it was the landlord who provided the tenant with the ultimatum: sign the formal lease or else. In these circumstances, it must be presumed the tenant had the right to “quit” the premises once Mr. Barnes refused to sign the lease in both his corporate and personal capacity and, hence, to pay for the capital improvement.

It was the landlord who left open this small door. The tenant took advantage of the opportunity. Although the parties thought they had a binding agreement, when it came to signing the formal contract, it was evident they had not reached a consensus with respect to the installation of a fire alarm and sprinkler system. [ 17 ] Frankly, it should come as no surprise that courts would resist the application of some of the more arcane features of landlord and tenant law.

After all, the principle that there is no implied covenant or warranty on the part of the landlord, that premises are fit for the purpose intended, was drafted at a time in history when no landlord was expected to provide the tenant with arable lands capable of yielding an abundance of crops.

Textbooks in the field of property law are too often regarded as offering unassailable statements of black letter law, even though the precedents cited in support may be of marginal relevance and reflect principles developed in socio-economic times quite different from the commercial realities of the twenty-first century. [ 18 ] What cannot be forgotten is that this is a case in which the evidence establishes that the landlord was fully aware of the need for the capital improvements relating to matters of safety, and yet waited until the formal lease was drafted to insert a general provision obligating the tenant to pay for all safety improvements required by a municipal authority.

As the law presently stands, there is no generalized pre-contractual duty to bargain in good faith. This does not mean, however, that the law is going to turn a blind eye in cases where there has been non-disclosure of material facts. The common law principles governing contract formation and

interpretation still provide the courts with a legitimate means of achieving a just result. [ 19 ] This case was pursued within a narrow framework. A finding that the parties failed to reach a consensus with respect to a material term and, therefore, failed to enter into a binding contract, is one option. Did the parties reach an agreement with respect to a material term of the contract? The trial judge answered “no” and held the tenant had the right to “quit” the premises without incurring a legal liability to the landlord, except with respect to the unpaid hydro bill.

It is a decision with which I agree. [ 20 ] It is for the foregoing reasons that we dismissed the appeal. The respondents are entitled to one set of costs of $5,000. ____________________________________ J.T. ROBERTSON, J.A. WE CONCUR: _____________________________________ J.C. MARC RICHARD, J.A.

_____________________________________ B. RICHARD BELL, J.A.