Hermanos Holdings Ltd v Catherine M. Christensen Professional Corporation (Valour Law), 2022 ABKB 667

Court of King’s Bench of Alberta Citation: Hermanos Holdings Ltd v Catherine M. Christensen Professional Corporation (Valour Law), 2022 ABKB 667 Date: 20221006 Docket: 2003 03757 Registry: Edmonton Between: Hermanos Holdings Ltd Plaintiff Defendant by Counterclaim - and - Catherine M. Christensen Professional Corporation operating as Valour Law and Catherine M. Christensen Defendants Plaintiffs by Counterclaim - and - Bryers Contracting Ltd and Paul Whitman Third Party _______________________________________________________ Reasons for Decision of the Honourable Applications Judge W.S.

Schlosser _______________________________________________________ [ 1 ] This is a determination of damages for breach of a commercial lease. The facts are not in dispute. The tenant left on January

26, 2020; a little over a year and a half into a renewable five-year term. The landlord obtained

Summary Judgment on December 1, 2021in an amount to be determined. My decision about the points in issue follows. 1. Basic Rent [2] Basic rent is $84,607.95 per annum or, $7,050.66 per month for the first five-year term of the lease. 2. Accelerated Demand [3] Clause 12.1(

b) provides that a sum equivalent to three months rent is an accelerated claim on default. It is not a pre-estimateof damages. It does not cap the landlord’s claim. The lease permits accelerated rent, re-entry, a claim for expenses, and future rent. It isnot inconsistent with Highway Properties Ltd v Kelly Douglas and Co Ltd, (SCC), [1971] SCR 562. 3. Management Fees [4] The lease is a ‘carefree’ triple net lease. It permits charging ‘additional rent’ (1.1(a)), including operating costs as defined ins 1.1(dd), and an administrative fee. The administrative fee is defined in para 1.1(

c) as 15% of the aggregate amount of the operatingcosts. [5] Management fees, by contrast, are not defined by the lease and are only mentioned (but excluded) in the definition ofoperating costs. [6] The landlord, on the advice of their accountant, incorporated two limited companies, which, in turn, charged a managementfee to the landlord in the amount of $24,000.00.

These charges were divided and the landlord purported to charge it to the tenants. [7] There were then two tenants in the building: one was the landlord’s, insurance adjustment business, the other was thedefendant. [8] The landlord argues that $1,000.00 per month charged to each tenant as a management fee is not unreasonable. [9] The management fee is not obviously unreasonable. However, it is not expressly mentioned anywhere in the lease, except tobe excluded from the definition of operating costs in clause 1.1(dd), as above. It is not a payment to an arms-length third party as acontracted service.

It was not expressly agreed to by the tenant, not known until it was charged, and, from the tenant’s perspective, notobvious there would be such a charge. [10] The management fee had the effect of increasing operating costs from $9.50 to $11.37 per square foot in the first term. It was,in this case, the event that prompted the tenant’s departure.

Many of the issues between the landlord and tenant had to do with thelandlord's management of the premises, which the tenant claimed to be unsatisfactory. [11] Beyond the issue of whether the amount of the management fee is sufficiently proved: or whether the charge is appropriate,or within the going rates, is the issue of the duty to disclose this charge up front and then to justify it; particularly when it is beingcharged by non arms-length companies. It seems to me, that the duty of good faith and fair dealing requires that this type of charge bedisclosed up front.

If there is an intent to charge it, there is an obligation on the part of the landlord to be transparent about it beingcharged and how it would be calculated, just as the other charges under the lease are. [12] The management fee is disallowed. 4. Mitigation [13] The tenant left without warning on January 26, 2020. The landlord engaged an experienced commercial realtor (NAI) rightaway. The evidence is unclear about when exactly the listing started.

The evidence suggests April, but the landlord said it was earlier.The premises were listed at $15.00 per square foot, significantly less than the $19.00 basic rent charged under the original lease. [14] A new lease was signed in May for the balance of the term at the following rates: year one, $10.00 per square foot; year two,$11.00 per square foot; year three, $12.00 per square foot (basic rent). [15] The tenant submitted an expert report in response, essentially in Form 25.

The report considered asking rates and achievedleases as comparables, finding that the effective rates ranged between $12.00 and $22.00 per square foot. The comparables were adjustedto reflect age, condition, and overall utility of the improved space.

I note that no distinction was drawn between larger and smallerspaces. [16] The tenant’s expert concluded that $16.00 to $18.00 per square foot is what the landlord should have obtained in mitigation. [17] The landlord provided a letter from his commercial realtor, which purported to give evidence about market rates and suggeststhat it was reasonable to have accepted the lease mentioned in para 14 above, which, happened to be the first offer that came along. [18] The realtor’s opinion is essentially second-hand; being attached as an exhibit to an affidavit.

Moreover, the realtor has notbeen formally qualified to give opinion evidence. A listing realtor has an interest in the outcome, so, even if qualified, it would be

difficult for them to certify that they are unbiased in giving an opinion about value. [19] The landlord’s opinion evidence is inadmissible as presented. The tenant’s expert opinion is essentially uncontroverted. Butthe tenant’s expert report does not (and cannot) answer the operative question of what a reasonable person in the position of the landlordwould have done. [20] I acknowledge that the issue of mitigation is the most challenging part of this case.

A person suffering damages as a result ofharm caused by another does not actually have to generate any specified income during the period of mitigation but can only claimamounts over and above what it might have achieved: Asamara Oil v Sea Oil, [1979] 1 SCR 663 at 660-661. The burden of proving thefailure to mitigate is on the defendant: Red Deer College v Michaels, (SCC), [1976] 2 SCR 324, at para 30; and seeChristianson v North Hill News Inc, 1993 ABCA 232 at para 11; and Tangye v Calmonton Investments Ltd, 1988 ABCA 206. In thiscase, the landlord took the first offer that came along.

It was prompt and it was a bargain. [21] Timing is important. The expert concludes that a market exposure of six months would have achieved the rates indicated inthe report. However, and as noted, six months from the date of default, puts us into the teeth of the pandemic storm. [22] The tenant’s expert report is much like an appraisal, assessing the value of the premises by looking at other offered, orrecently leased spaces. Unlike an appraisal, however, that would only use actual sales and realized values as comparables, this reportincludes asking rates which are of limited value.

Common area costs, which the report notes, range from $4.70 to $18.00 per square foot,average in the $6.00 to $8.00 range. [23] I accept the expert's qualifications, which are unchallenged. I also accept six months as a reasonable exposure time. [24] The rate of $16-$18 per square foot seemed high, given the uncertainties generated by the pandemic [25] In the group of comparables listing achieved rates, the leases signed in 2020 support the range found by the expert. However,we do not know in what months these leases were signed in 2020, which, given the backdrop of the pandemic might have made adifference.

However, there was no cross-examination of the expert on this point. [26] In this context, it is difficult to determine what a reasonable businessperson in the position of the plaintiff should have done.The Court has no inherent expertise in this area that would allow it to choose a number other than what the expert has presented, but Iconclude that the lower end of the range is more fully supported by the evidence. I am satisfied that the tenant has discharged its burdenin respect to mitigation. The mitigation amount is set at $16 per square foot basic rent, after six months exposure. 5.

Miscellaneous Claims [27] Elevator servicing costs ($276.41) and locksmith costs ($204.79) have been admitted. Response to Lien claims [28] This is covered by clauses 6.5 and 12 of the lease. A bill for $8,714.15 was submitted. Of that $5,957.90 represented legalfees. Hermanos also included a ‘charge back’ for labour of $2,625.00. This was said to represent 15 hours at $175.00 per hour for theofficer of the Plaintiff to prepare for cross examination on an affidavit. [29] This claim is not sufficiently particularised or supported.

I fail to understand how it would take the deponent 15 hours toprepare for cross examination over and above the legal fees already paid. Two hours at $175.00 is allowed for this item, over and abovethe legal fees; which are not disputed. Drywall painting, cleaning and repairs [30] The evidence conflicts about the extent of any damage occasioned by the departing tenant and normal wear and tear. The onlyevidence supporting this head of claim is an invoice from ‘WinMar’ it is in the amount of $2,576.23 for “reconstruction”. No detail isprovided. No breakdown is provided.

We do not know what this charge is for, beyond the general description. There were no estimatestendered, or any qualified expert opinion to show that this is an appropriate charge. It is impossible to determine whether this expensewas reasonable or warranted. Accordingly, it is not proved. This expense, in the amount of $2,576.23, is disallowed. Fire door [31] An amount totalling $2,589.69 (WinMar invoice) is claimed for the installation of a fire door said to be necessary to bring thepremises up to code.

In addition to a claim of $420.49 for labour, there were two painters engaged for eight hours to prime and paint thedoors, also for $420.49. Parts and materials are listed to be $1,748.71. [32] Ms. Christensen’s affidavit refers to this at page 81, exhibit C, with an exchange of emails. [33] The only evidence appears to be that a fire door was installed. There is really no evidence from any source (that I could see)about the requirement for a fire door to bring the improved space up to code.

There is no evidence this expense was necessary,reasonable, or proper, at least from the perspective of the defaulting tenant. It is disallowed. Electrical inspection and repair

[ 34 ] The evidence indicates that the wiring of the improvements was done to code and approved on inspection. I acknowledge that Valor Law removed all the light fixtures and receptacles. Exhibit 5 indicates a repair as per a previous report. However, the previous report is not in evidence. There is a charge for materials of $243.62 and for a journeyman electrician for 11 hours totalling $935.00. There is also a sub invoice for ‘23 keyless light fixtures’ and ‘23 LED bulbs’ for a total cost of $224.95. I do not dispute that an electrician’s services might be necessary to install or replace missing light fixtures.

It is not necessary to retain an electrician to screw in light bulbs. The problem, and this goes to the Plaintiff’s burden of proof, is that the invoice provides no breakdown. The sub invoice totaling $414.70 for light bulbs and light fixtures is allowed but the balance of these charges have not been shown to be the result of the tenant’s default, or an appropriate division of labour. Elevator inspection [ 35 ] This expense consists of inspection ($184.80) and $120.50 to transfer the permit.

The transfer of an operation permit, at the conclusion of the lease would be the landlord’s responsibility, but they were forced to incur this expense early and so that the premises could be relet. This expense is allowed. Elevator mat [ 36 ] This expense for $354.90 has not been shown to be the defaulting tenant’s responsibility. It is not clear whether the mat might have been damaged by the landlord’s cleaners, or whether it was simply a matter of normal wear and tear. NAI Real Estate Commission [ 37 ] This expense is $8,694.38.

The tenant’s objection to this on the grounds that the mitigation lease went longer than the term of the original lease is unfounded. The mitigation lease is for the balance of the term of the original lease. The Real Estate Commission for finding the mitigation tenants is allowed in full. Rental Loss [ 38 ] I accept the reasonable exposure period (six months) found by the tenant’s expert. The tenant owed basic rent from January 26, 2020 to the mitigation date, which is July, 26, 2020; based on six months exposure as per the tenant’s expert report.

Basic rent was $7,050.66 per month, with operating costs of $3,525.33, for a total of $10,575.99 per month. [ 39 ] The tenant owed additional rent from December 2019 to the mitigation date. As above, additional rent consists of operating costs (etc) less the management fee, which were disallowed. [ 40 ] The mitigation lease took effect May 15, 2020. The defaulting tenant owed basic rent and additional rent for May, June and July. These amounts are set off by the mitigation lease at $10.00 basic rent per square foot from May 15 to July 26.

The mitigation tenant agreed to additional rent at an estimated value of $11.50 per square foot. The defaulting tenant was obliged to pay operating costs (less the management fee as set out above) plus basic rent from December 2019 to July 2020, which is offset by the operating costs paid by the mitigation tenant from May 15 to July 26. After July 26, 2020, the losses are the lease rate at $19 per square foot plus additional rent (without the management fee) to the end of the contracted term.

The defaulting tenant should receive a credit of $16.00 per square foot (basic rent), plus $11.50 additional rent, on the assumption that operating costs would not drop below the amount agreed by the mitigation tenant for the balance of the term. The certificate of title provided with the defendant’s expert report and the report itself indicates that the property was sold to a third party January 4, 2022. There is no evidence from any source that would permit the plaintiff to claim losses beyond that point. [ 41 ] A landlord is not ‘unjustly enriched’ by enjoying the tenant’s improvements after default.

I acknowledge that the improvements were said to be very costly. However, to put it in the language of unjust enrichment, the juristic reason that would stand in the way of that remedy is that it was negotiated in the lease in the form of a tenant’s improvement allowance. The tenant breached the lease, taking with it all those things that were movable (and some that weren't). This is not a proper basis for set off of the value of the improvements. [ 42 ] The parties may speak to costs. A formal offer disclosed in the brief, before a ruling on quantum, is of no effect. Heard on the 17 th day of May, 2022.

Dated at the City of Edmonton, Alberta this 6 th day of October, 2022. W.S. Schlosser A.J.C.K.B.A.

Appearances: Paul D. Anderson Ritzen Warshawski LLP for the Plaintiff/Applicant Abdul M. Zia Mintz Law for the Defendants