2013 NBCA 54, 2013 NBCA 54

COURT OF APPEAL OF COUR D’APPEL DU NEW BRUNSWICK NOUVEAU-BRUNSWICK 15-13-CA NORTHWEST PLAZA LTD. APPELLANT NORTHWEST PLAZA LTD. APPELANTE - and - - et - ZELLERS INC. and TARGET CANADA CO. RESPONDENTS ZELLERS INC. et TARGET CANADA CO. INTIMÉES Northwest Plaza Ltd. v. Zellers Inc. and Target Canada Co., 2013 NBCA 54 Northwest Plaza Ltd. c.

Zellers Inc. et Target Canada Co., 2013 NBCA 54 CORAM: The Honourable Justice Larlee The Honourable Justice Robertson The Honourable Justice Quigg CORAM : L’honorable juge Larlee L’honorable juge Robertson L’honorable juge Quigg Appeal from a decision of the Court of Queen’s Bench: January 3, 2013 Appel d’une décision de la Cour du Banc de la Reine : Le 3 janvier 2013 History of Case: Historique de la cause : Decision under appeal: Unreported Décision frappée d’appel : Inédite Preliminary or incidental proceedings: N/A Procédures préliminaires ou accessoires : s.o.

Appeal heard: May 29, 2013 Appel entendu : Le 29 mai 2013 Judgment rendered: September 5, 2013 Jugement rendu : Le 5 septembre 2013

Reasons for judgment by: The Honourable Justice Robertson Motifs de jugement : L’honorable juge Robertson Concurred in by: The Honourable Justice Larlee The Honourable Justice Quigg Souscrivent aux motifs : L’honorable juge Larlee L’honorable juge Quigg Counsel at hearing: For the appellant: David Duncan Young For the respondents: Edwin Ehrhardt, Q.C. Avocats à l’audience : Pour l’appelante : David Duncan Young Pour les intimées : Edwin Ehrhardt, c.r. THE COURT The appeal is dismissed with costs of $3,500. LA COUR Déboute l’appelante et fixe les dépens à 3 500 $. The judgment of the Court was delivered by ROBERTSON, J.A. [ 1 ] This appeal involves the

interpretation of a shopping centre lease and a tenant’s obligation to pay its share of the property taxes as assessed against the landlord by the Province of New Brunswick. The lease was signed in 1972. At that time, and until 2005, the Province used the “cost approach” to assess the property’s fair market value. During that time frame, taxes were “apportioned” based on the tenant’s percentage share of the shopping centre’s total leasable area. But, in 2006, the Province moved to the “income approach”.

That approach requires the assessing authority to determine fair market value by reference to the total rent paid to the landlord. However, relying on historical assessment data, the landlord continued to apportion property taxes consistent with the cost approach. The tenant objected and insisted that taxes be apportioned in accordance with the percentage of rent it contributed to the landlord’s revenue stream.

As the lease was silent as to the method of apportionment, the parties took their differences of opinion to the Court of Queen’s Bench. [ 2 ] The interpretative issue placed before the trial judge is easily stated: Are property taxes to be apportioned in a manner consistent with the “cost” or “income” approach? Each party cited case law in support of their respective positions. After recognizing the existence of two competing lines of authority and finding that the

interpretation advanced by each party was “reasonable”, the trial judge ruled in favour of the tenant. I would dismiss the appeal. In my respectful view, the

interpretation which the landlord advances is neither “reasonable” nor “correct”.

[ 3 ] The truth of the matter is that the landlord has resisted the income approach to apportionment because the tenant entered into a long-term lease at a fixed rent. The landlord believes this state of affairs results in unfairness. As the yearly rent paid by the other tenants increases, so too does the property’s assessed value, and yet the tenant’s share of the tax bill never increases. The plea of unfairness has two flaws. First, the tenant with the fixed rent has done nothing to contribute to any increase in the property’s assessed value.

Second, the issue of fairness as between tenants remains a matter of speculation. The other tenants are not parties to the action and we have no knowledge of the terms of their leases. However, what is certain is that the Province uses rental income to determine the assessed value of a shopping centre. Accordingly, it is reasonable to infer that any apportionment of property taxes would be tied to the income approach, that is to say, the tenant’s contribution to the revenue stream. No argument has been advanced which displaces that inference/presumption. [ 4 ] The essential facts are as follows.

The lease in question is dated April 21, 1972. The demised premises embrace a portion of the Northwest Shopping Centre located on Mountain Road in the City of Moncton. Place Rounda Inc. was the original landlord. The appellant, Northwest Plaza Ltd. (“Plaza”), is a successor in title having acquired the shopping centre in 2003. The respondent, Zellers Inc. (“Zellers”), is the original tenant. It assigned its interest in the lease to the respondent, Target Canada Co., which intends to make substantial renovations to the premises and carry on the same business which Zellers has operated since 1972.

The provisions of the lease dealing with the payment of property taxes read as follows:

ARTICLE III – Taxes

Section 1.

The Tenant covenants and agrees to pay and discharge all taxes, including realty, property and school taxes and tax for local improvement, rates duties and assessments whatsoever including all installments falling due during the term of this lease of all special or other taxes heretofore imposed and which are payable over a period of years, and any taxes levied in lieu of a realty tax that may be levied, imposed or assessed on or against the demised premises or any part of parts thereof, or against the Landlord as the owner thereof or against any property on the demised premises owned or brought thereon by the Tenant, and every tax and license fee in respect of every business carried on thereon or in respect of the occupancy of the demised premises by the Tenant, whether such taxes, rates, duties, assessments and license fees are imposed by any municipal, parliamentary or other body during the term.

Section 2. The parties agree that if the Shopping Centre in which the demised premises are located is assessed en bloc, the Tenant shall be entitled to apply for apportionment and shall, in any event, pay or reimburse the Landlord only for that portion of the taxes referred to above in

Section 1 apportioned in respect of the demised premises.

Section 8. In addition to the taxes referred to above in

Section 1 of this

Article III the Tenant shall pay to the Landlord, as additional rent within thirty (30) days of the receipt of a statement, its proportionate share (as defined in

Article XX,

Section 4 hereof) of realty taxes levied, imposed or assessed against the area described in

Schedule “B” other than those outlined in blue and yellow on

Schedule “C” and also its proportional share of the realty taxes imposed or assessed against the area outlined in yellow on

Schedule “C”. [ 5 ] In brief, the lease provides that if the Province provides the landlord or the tenant with a separate assessment in regard to the leased premises, the tenant promises to pay the property taxes or reimburse Plaza for any amount it has paid on the tenant’s behalf. Alternatively, if the Province assesses the shopping centre “en bloc”, the tenant promises to pay its proportionate share of the taxes. Finally, the lease also requires that the tenant pay its proportionate share of any assessment made in regard to specified common areas of the shopping centre.

This obligation stems from the fact that the “cost approach” requires two separate valuations: one for the buildings and one for the lands. [ 6 ] Generally, there are three commonly used methods or approaches for assessing property: (1) the cost approach; (2) the income approach; and (3) and the direct comparison approach. Only the first two are relevant to this appeal. The cost approach involves an estimation of the replacement cost of the buildings together with an estimation of depreciation. Basically, the assessors assign a dollar value for each square foot of space being leased by each tenant.

That dollar value represents the cost of replication. A separate valuation is undertaken with respect to the land. The two valuations are combined to form the property’s assessed value. By contrast, the income approach is based on the revenue generated by an income producing property. The assessors calculate the gross lease income of the entire shopping centre by multiplying each tenant’s rent per square foot, times the area of each tenant’s premises. However, if rents are fixed for long periods, the assessor may use a higher figure that is reflective of market rates.

From total income is subtracted an allowance for vacancies and rental losses and the non-recoverable expenses. Finally, a capitalization rate (investment rate of return) is applied to the net income to arrive at an estimated value of the shopping centre. It is important to note that, under the income approach, the value of land is “captured”. Hence, there is no separate valuation for the land. [ 7 ] The Province’s method for assessing commercial properties and collecting taxes has varied over the years. From 1972 until 2006, the Province used the cost approach.

From 1972 to 1982, it was not difficult for the parties to isolate Zellers’ share of the tax bill as the Province provided each tenant with a separate assessment showing the property taxes owing as

a “business occupancy tax”. This tax was in addition to the property taxes being paid by the landlord. Apparently, the occupancy tax was based on the tenant’s proportionate share of the space occupied in the shopping centre and was tied directly to the assessed value of the shopping centre. And that is why it was not difficult to determine the tenant’s share of the landlord’s tax bill. However, in 1983, the Province did away with the occupancy tax and began issuing “en bloc” assessments to landlords. This change, however, was not problematic.

The landlord had only to examine the assessor’s file and see how the Province arrived at the assessed value for the shopping centre. As the cost approach assigned a dollar value for each square foot of space being leased, the tax bill could be apportioned accordingly. As the Province continued to provide a separate valuation for the lands, it was not difficult to make an apportionment based on each tenant’s share of the gross leasable area in the shopping centre. In Zellers’ case, it occupied approximately 59 percent of the leasable area for most of the assessment years in question.

Therefore, 59 percent of the assessed value of the lands could be attributed to Zellers. [ 8 ] By statute, the Province does not have to undertake fresh assessments each year before issuing an assessment notice. A “market adjustment factor” may be applied in any one year (a percentage increase or decrease over the previous year’s assessment). In the present case, the Province performed a fresh assessment for the 2002 taxation year using the cost approach, even though the Province calculated, for comparative purposes only, what the assessment would be if the income approach were adopted.

Curiously, there was no substantive difference (within $30 of each other). For the years 2003, 2004, and 2005, the Province simply applied a market adjustment factor to the preceding year’s assessment. However, in 2006, the Province switched to the income approach for determining the assessed value of the shopping centre. For the assessment years 2007 and 2008, a market adjustment factor was applied. In 2009, the Province undertook a fresh valuation using the income approach. It also valued the property’s fair market value using the cost approach, but for comparative purposes only.

This time the cost approach yielded a higher valuation than the income approach ($14.7 million v. $12.9 million). In 2010 and 2011, the Province adjusted the assessment for the shopping centre using a market adjustment factor. [ 9 ] Despite the Province’s change in assessment methodology, Plaza did not apportion the 2006 tax bill by reference to the percentage of rent Zellers had paid in relation to the total rent collected.

Instead, Plaza sent Zellers an invoice that reflected an apportionment with respect to both the demised premises and the shopping centre lands based on the assessed value found in the 2003 assessment which, in turn, was based on the 2002 assessment. Let me explain. In 2002 the Province made a fresh assessment of the shopping centre (lands and buildings) based on the cost approach. The combined assessed value was $9.8 million. There was no change in the assessed value for 2003. Of the $9.8 million, $4.3 million was attributable to the premises which Zellers occupied.

Based on a tax rate of $4.70 per $100, Zellers paid Plaza taxes of $203,000. The land for the entire shopping centre was valued at $2.1 million, resulting in taxes of $101,000. As Zellers occupied 59 percent of the leased space in the shopping centre, it paid its proportionate share: $60,000. In 2004, a market adjustment factor of 1.0199 was applied, and, as a result, the assessed value of the entire property (land and buildings) went from $9.8 million to $10 million.

In response, Plaza adjusted the assessed value of Zellers’ premises by a corresponding amount and the same adjustment was made to the assessed value of the lands. Plaza used the same methodology in future years and invoiced Zellers accordingly, even though the Province had abandoned the cost approach in 2006. That was the first year that Zellers paid the apportioned amount under protest. [ 10 ] In brief, for 2006 and subsequent taxation years, Plaza has been apportioning property taxes by reference to the 2002/03 assessment which had been arrived at using the cost approach.

For the 2004 and following assessment years, Plaza simply increased the amount payable by reference to the percentage increase over the previous year’s assessment. Moreover, Plaza’s apportionment methodology continued to recognize that lands were being valued separately from buildings. But, as explained earlier, there is no separate valuation for land when using the income approach. That value has been captured. [ 11 ] Zellers objected to Plaza’s method of apportionment for a practical reason. Zellers pays less property taxes using the income approach.

This is because the rent which Zellers pays under the lease is fixed. For example, in 2006, the total rent collected for the shopping centre was approximately $1.6 million; Zellers’ rent was $580,000. By 2009, the total of all rents equaled $1.84 million; Zellers’ stood still at $580,000. The difference in methodology translates into approximately $100,000 per year. As the parties had entered into a long-term lease, they were sufficiently motivated to pursue the issue before the Court of Queen’s Bench. [ 12 ] The trial judge’s reasons set out the parties’ respective arguments and relevant case law.

He discusses the two lines of authority that support the parties’ respective positions. At one point, the trial judge observes that both offered what he considered “reasonable positions”. In the end, he concluded: “It is simply because the Court was more persuaded by the Plaintiff’s case that this Court’s ruling will be in the Plaintiff’s favour.” As the issue before us involves a question of law tied to the

interpretation of a contract, the proper standard of review is correctness. Hence, this Court need not be preoccupied with the adequacy of the trial judge’s reasons or embark upon an inquiry aimed at identifying error on his part. [ 13 ] The interpretative issue at hand is limited to the consideration of three interrelated provisions that deal with the tenant’s obligation to pay property taxes tied to, and necessarily incidental to, the use of the premises demised to the tenant.

The first of the three provisions simply requires the tenant to pay or discharge all taxes assessed against the demised premises by a third party. The ambit of the provision is that the third party will be making a separate assessment in regard to the demised premises and, thus, it makes no difference whether the landlord or the tenant receives the assessment. The tenant’s obligation is to pay the

Province or reimburse the landlord if it has already effected payment. The second of the three provisions anticipates the possibility thatthe third party may decide against issuing individual assessments and instead decide to assess the landlord’s premises “en bloc”. If thatoccurs, the tenant is “entitled to apply” to the landlord for an apportionment in respect of the demised premises.

The third provision ofthe lease deals with the obligation of the tenant to pay its proportionate share of any taxes that are assessed against those parts of theshopping centre that do not fall within the category of “demised premises”. This would include, for example, the lands on whichbuildings rest. [14] The interpretative issue at hand is easily stated: Are property taxes to be apportioned in amanner consistent with the “cost” or “income” approach?

According to classical contract theory, the interpretive issue involves a searchfor the intention of the parties as viewed by a disinterested bystander having regard to the circumstances in which the parties foundthemselves at the time they entered into the lease: see generally Robichaud, Williamson, Theriault and Johnstone v. PharmacieAcadienne de Beresford Ltée, 2008 NBCA 12, 328 N.B.R. (2d) 205, at para. 18. Or as Brooke J.A. stated in Leading Investments Ltd. v.New Forest Investments Ltd. et al.; H.W. Liebig & Co. Ltd. v. Leading Investments Ltd., [1981] O.J.

No. 3112 (C.A.) (QL) at paragraph24, aff’d (SCC), [1986] 1 S.C.R. 70, [1986] S.C.J. No. 6 (QL): “… the court should look for and be guided by thereasonable expectation of the parties so long as it is compatible with their written contract.” What makes this case anomalous orproblematic is the realization that the interpretative issue involves a matter that the original parties did not expressly contemplate:namely, that the Province would move from one method of assessing fair market value to another.

Some might argue that it is impossibleto say whether the parties contemplated the possibility of a change in assessment methodology at the time they entered into the lease.Most likely, they did not. After all, it took the Province nearly 35 years after the lease was signed to move from the cost to incomeapproach. In fact, the only change the original parties to the lease contemplated was the possibility that the Province might move to theissuance of an “en bloc” assessment for the entire shopping center. As a matter of fact, that change materialized in 1983.

What we areleft with are the provisions of the lease and the task of articulating persuasive reasons why one method of apportionment should prevailover the other. [15] The interpretative issue at hand is not novel. Strangely enough, many of the pertinent cases findZellers as a party to the action. Plaza cites three decisions which are consistent with its position. Zellers cites an equal number in supportof its.

Regrettably, the precedential significance of some cases is diluted by differences with respect to the terms of the lease and thelegislative regimes that exist in each province with respect to the taxation of real property. As well, the legal arguments pursued in somecases do not mirror those advanced in this Court. Bearing those limitations in mind, my analysis seeks to identify general facts andpropositions of law that assist in resolving the interpretative issue at hand. In that regard, the decision of Verville J. in Dicorp PropertiesLtd. v. Zellers Inc., 2005 ABQB 399, [1986] A.J. No. 686 (QL) is helpful.

The decision offers a convenient

summary for each of thefollowing cases: Bentall Properties Ltd. v. Zellers Inc., [1985] B.C.J. No. 929 (Co.Ct.) (QL), aff'd [1986] B.C.J. No. 420 (C.A.) (QL);Sunnyside Shopping Plaza Ltd. v. Zeller’s (Nova Scotia) Ltd., (NS SC), [1987] N.S.J. No. 185 (S.C.(T.D)) (QL),JMSC Holdings Inc. (c.o.b. Clayton Park Co-Tenancy) v. Oshawa Group Ltd., [1995] N.S.J. No. 18 (C.A.) (QL), leave to appeal to SCCrefused, [1995] S.C.C.A. No. 190; Brian Higgins Holdings Ltd. v. Bentall Properties Ltd., (BC CA), [1998] B.C.J.No. 2305 (C.A.) (QL); Canpro Investments Ltd. v. Zellers Ltd., [1998] O.J. No. 2614 (Ct. J. (Gen.

Div.)) (QL), aff'd [1999] O.J. No.4128 (C.A.) (QL); Sherwood Park Mall Limited v. Zellers Inc., 2001 ABQB 565, [2001] A.J. No. 885 (Q.B.) (QL), and see also ZellersInc. v. Orlando Corp., (ON CA), [2003] O.J. No. 3328 (C.A.) (QL). [16] At trial and on appeal, Plaza cited three cases in support of its position. The key decision isBentall Properties Ltd. Therein, the lease provided that the tenant would pay all real property taxes assessed against the demisedpremises.

In addition, the tenant agreed to pay its proportionate share of property taxes relating to the shopping centre’s common areas.The lease also provided that the landlord “shall compute the amount payable by the tenant”. A dispute arose between the parties once theassessment authorities moved from the cost approach to the income approach for assessing fair market value. The landlord wanted tocontinue the apportionment based on the cost approach and claimed the right to do so, based on the wording of the lease.

The court heldthat a literal reading of the lease supported the understanding that the parties had agreed to allow the landlord to compute the apportionedamount in any way it saw fit. Reading the lease as whole, however, the court held the lease required the tenant to pay its share of theproperty taxes “as reasonably computed by the landlord”.

In turn, this led the court to hold the onus was on the tenant to show, on abalance of probabilities, that apportionment tied to the income approach was more reasonable than the one employed by the landlord.Ultimately, the court held that the tenant had failed to meet that onus for two reasons. First, the tenant failed to call expert evidence toshow why its method of apportionment using the income approach was more reasonable than the one employed by the landlord.

Second,the tenant failed to illustrate how the tenant’s method of apportionment applied fairly to the other shopping centre tenants such that thetotal taxes owing to the assessment authority from the landlord were paid by all the tenants in the manner contemplated by theirrespective leases. [17] The second decision Plaza cited is Brian Higgins Holdings Ltd. v. Bentall Properties Ltd. In thatcase, the lease provided that the tenant should pay all real property taxes assessed against the tenant’s demised premises and the landupon which it was situated.

The lease also provided that the tenant would pay its proportionate share of the taxes assessed against thecommon areas of the shopping centre, in accordance with a formula tied to the square footage of leasable space the tenant occupied.Finally, the lease stated that if the taxes payable by the tenant could not be determined as contemplated by the earlier contractualprovisions, the tenant was to pay its proportionate share of taxes using that formula. A dispute arose once the assessing authority movedfrom the cost to income approach and no longer provided shopping centre tenants with a separate assessment.

Applying the reasoning inBentall Properties Ltd., the court held that the tenant had failed to meet the burden of demonstrating that the tenant’s methodology ofapportionment was more reasonable than that of the landlord. What is important about the decision in Brian Higgins Holdings Ltd. is thatthe parties stipulated that in the event the assessing authority failed to provide the tenant with an assessment value for its demised

premises, the tax bill would be apportioned in accordance with the formula set out in the lease. That formula just happened to be consistent with the cost approach. [ 18 ] Finally, Plaza cited Dicorp Properties Ltd. v. Zellers Inc . In that case, one of the issues focused on whether the tenant had to pay its proportionate share of property taxes attributable to the common areas of the shopping centre (the parking lot) after the assessment authority moved from the cost to income approach.

The landlord used historical data, generated under the cost approach and tied to the square footage occupied by the tenant, to calculate the tenant’s share of the taxes. Eventually, the tenant objected and argued that no taxes were payable with respect to the common areas as the income approach had captured its value. The municipal assessor testified that he “probably” took into account the lack of parking space when determining fair market value and that the rate he used as a market rental rate was “probably” lower than it would have been with adequate parking. An expert testified for each party.

Both agreed that the assessing authority no longer calculated a market value for common areas as a result of the change in assessment approach. Applying Bentall Properties Ltd. , the court held that the tenant had not demonstrated that the landlord’s method was unreasonable. [ 19 ] Relying on the three cases outlined above, Plaza continues to maintain that Zellers has not demonstrated that Plaza’s method of apportionment is unreasonable or that Zellers’ approach is “more rational”. This leads us to examine the precedents cited by Zellers. Three are of direct relevance to the case at hand.

The first is Sunnyside Shopping Plaza Ltd. v. Zellers (Nova Scotia) Ltd . The terms of that lease are nearly identical to those under consideration. From 1972 until 1982 the assessment authority had used the cost approach to determine the fair market value of the shopping centre and the separate occupancy tax being paid by each tenant. In 1982, the assessing authority moved to the income approach. The occupancy tax equaled one half of the property tax attributable to the tenant’s premises and for which the landlord was assessed.

However, the landlord argued that the use of the business occupancy assessment to determine the tenant’s share of the property taxes on the shopping centre was not reliable for two reasons. First, that assessment did not lend itself to a reasonable apportionment of assessments between the tenants.

Second, the income approach does not allow for the separate valuation of land. [ 20 ] The court in Sunnyside Shopping Plaza Ltd. found merit with the argument that the use of a single capitalization rate did not lend itself to a fair apportionment of the assessment between tenants and, hence, resulted in an inequitable distribution. Moreover, the court acknowledged that it may be fairer to apportion taxes based on square footage rather than the rent being paid by each tenant.

However, the court concluded that it was irrelevant whether the income approach was a reasonable method of assessment as it was the method chosen by the assessing authority. At the same time, the court reframed the issue in terms of whether the income approach was “so unreasonable that it should not form the basis of an apportionment of property taxes under the lease”. The court answered that question in the negative. Finally, the court concluded that as the assessment is made by the assessing authority then by inference so too should the apportionment be based on the method it had adopted.

The fact the land was no longer assessed separately was held to be of no moment. The pertinent provision of the lease was held to be “redundant”. That provision is identical to the one under consideration in this appeal. Bentall Properties Ltd. was distinguished on its facts. [ 21 ] Zellers also relied on Sherwood Park Mall Ltd. v. Zellers Inc . That case is relevant to the extent that it stands for the proposition that if a separate assessment is not available then any apportionment of taxes must be based on the methodology used by the assessing authority. Finally, in Canpro Investments Ltd. v.

Zellers Ltd. , the court held that as the income approach captured the value of lands embracing the common areas and parking spaces, the landlord could not charge or apportion taxes with respect to those areas, notwithstanding the terms of the lease which are nearly identical to those reproduced earlier in these reasons. In brief, once the assessment authority no longer placed a market value on common areas there was no basis for arguing that a property tax was imposed on those lands.

Accordingly, the provision in the lease regarding apportionment of taxes with respect to the common areas shared with the remaining tenants was rendered moot. [ 22 ] There are two other decisions relevant to the disposition of this appeal. Both were raised in the court below. The first is JMSC Holdings Inc. (c.o.b. Clayton Park Co-Tenancy) v. Oshawa Group Ltd. , where the court held, at paragraph 40: “The

interpretation of the lease between the landlord and tenant should not, in my opinion, be affected by considerations of what would be fair to other tenants, who are not before this court, with respect to lease terms of which we have no knowledge.” The second is Zellers Inc. v. Orlando Corp . Once again, this was a case in which the assessing authority moved from the cost to income approach for determining the fair market value of a shopping centre.

The lease provided that in the event the shopping centre was assessed “en bloc” the tenant was entitled to apply to the assessing authority for a separate or independent assessment. Failing that option, the lease provided that the tenant would be obligated to pay its share of the taxes having regard to its share of the “total leasable area” within the shopping centre. The court held that that provision of the lease prevailed. [ 23 ] While it is evident that the jurisprudence lacks consistency, it is not the role of this Court to sit on judgment on cases earlier decided in other jurisdictions.

Based on the above jurisprudence and in the context of the arguments advanced in this Court and having regard to the three contractual provisions that give rise to the interpretative issue at hand, I adopt the following analytical framework.

[ 24 ] The interpretative issue at hand does not require a determination as to whether the cost or income approach is a fairer method for assessing the fair market value of income producing properties: Sunnyside Shopping Plaza Ltd . The Province has already decided that issue. Nor are we concerned with the question of whether Zellers (Target) is paying its “fair share” of the property taxes. We know nothing of the terms of the other tenants’ leases and, in particular, with respect to a possible obligation to contribute to the payment of property taxes: JMSC Holdings Inc. (c.o.b. Clayton Park Co-Tenancy) . This case is about the

interpretation of three interrelated contractual provisions. In that regard, this lease does not provide a formula for apportioning property taxes in the event the assessing authority no longer provides the tenant with a separate assessment: see Zellers Inc. v. Orlando Corp.

Nor is this a case where the terms of the lease provide the landlord with the discretion to adopt a methodology for apportioning property taxes, as was held in Bentall Properties Ltd. [ 25 ] For greater certainty, one cannot attribute a contractual intention that Plaza would possess the right to select the method of apportionment should the Province issue an “en bloc” assessment. Admittedly, the 1972 lease provides that Zellers may apply to Plaza for an apportionment of taxes should the Province issue an assessment embracing the entire shopping centre. However, the relevant provision says more than that.

It goes on to provide that: “…the Tenant shall be entitled to apply for apportionment and shall, in any event pay or reimburse the Landlord only for the portion of the taxes … apportioned in respect of the demised premises.” In my view, the totality of these words cannot be construed as vesting the landlord with the discretion to fix the method of apportionment. Of course, if the lease did so, the law would impose limits on the exercise of that discretion.

It would have to be exercised reasonably, which brings us back to the task at hand. [ 26 ] I pause here to note my reluctance to subscribe to the general notion that this cases hinges on selecting one of two reasonable

interpretations, or of declaring that one

interpretation is “more reasonable” or “more rational” than the other, or that one of the parties bears the onus of demonstrating, on a balance of probabilities, that their method of apportionment is more reasonable that the other. Save for those cases where the lease vests the landlord with a discretion on how to apportion property taxes, I approach the issue at hand in terms of raising a question of law, that is to say, a question of contractual

interpretation. Our task is to identify fatal flaws in any interpretative argument, flaws that would move a possible

interpretation from the category of reasonableness to that of unreasonableness. [ 27 ] Having outlined what this case is not about, I begin with the inference/presumption that if the assessed value of a property is determined in accordance with the income approach, so too should property taxes be apportioned in accordance with that methodology: Sunnyside Shopping Plaza Ltd .

In other words, if the fair market value of a revenue producing property is based on the revenue stream that flows from the tenants to the landlord, it should follow that a tenant’s share of the property taxes would be based on the percentage of rent it contributes to the landlord’s revenue stream. The fact that the tenant has entered into a long term lease at a fixed rent remains irrelevant. [ 28 ] Admittedly, it is tempting to argue that it would be unfair to the other tenants to bear the entire tax burden should one of the tenants pay no or minimal rent.

The argument would be all the more compelling if that tenant occupied 59 percent of the leasable space in the shopping centre and yet contributed a relatively insignificant amount towards payment of the property taxes. But, as cautioned above, it is unwise to enter into a debate as to what is fair or equitable amongst the tenants when we have no knowledge of the pertinent provisions of their respective leases.

If the argument were relevant, it would have to take into account the fact that under the income approach the Province is entitled to attribute a higher rent than that being paid by a tenant in the case of long term leases at a fixed rent.

In other words, if the rent Zellers pays is below market rates, the Province is entitled to make the necessary adjustment. [ 29 ] It is patently evident that the apportionment of property taxes based on the percentage of rent that Zellers contributes to Plaza’s revenue stream is consistent with the income approach which the Province presently uses for assessing the fair market value of revenue producing properties. Moreover, the method of apportionment has an objective basis. One need only look at the assessor’s file to appreciate what portion of the tax bill is attributable to any one tenant.

Furthermore, the apportionment method is easy to apply, thereby promoting certainty as between the parties. These realities favour Zellers’

interpretation of the lease. [ 30 ] Accepting that there is an inference or presumption that any apportionment of property taxes would be based on the methodology employed by the assessing authority for computing a property’s fair market value, it remains to be determined whether there are compelling reasons for holding that the presumption has been displaced. Aside from the unsubstantiated plea of unfairness, Plaza has not been able to offer compelling reasons in support of its methodology for apportioning property taxes.

Indeed, the apportionment of property taxes based on Zellers’ share of the leasable area within the shopping centre is more than problematic for at least three reasons. Let me explain. [ 31 ] As the Province no longer uses the cost approach, Plaza has been relying on historical assessment data in order to place a value on both the lands and buildings (the 2002/2003 assessments). Thereafter, it has been applying an increase or multiplier to the taxes that Zellers paid the year before, all the while ignoring the fact that the subsequent assessment valuations were not tied to or dependent on the earlier assessments.

Moreover, Plaza has been ignoring the fact that the application of

the cost and income approaches can lead to different valuations. For example, in 2009, the Province applied the income approach while also calculating the property’s fair market value using the cost approach, but for comparative purposes only. While the cost approach yielded a value of $14.7 million, the income approach yielded a value of $12.9 million. The Province used the latter in fixing the shopping centre’s assessed value. Curiously, Plaza used that assessed value for purposes of apportionment while ignoring the assessed value fixed in accordance with the cost approach.

In brief, Plaza’s interpretative argument suffers from an internal inconsistency. Plaza insists on using historical data arrived at using the cost approach while ignoring more recent data that establishes a higher assessment value. [ 32 ] The

interpretation which Plaza places on the provisions of the lease is also flawed because it ignores the fact that the income approach eliminates the need to attribute a value to the lands. That value is captured within the income approach. And yet, Plaza insists that it has the contractual right to demand reimbursement of taxes with respect to property that the Province no longer taxes. In other words, as the Province no longer calculates a market value for lands when applying the income approach, the basis for arguing that a property tax has been levied, imposed or assessed against those lands ceases to exist. That explains why

Section 8 of

Article III of the lease must be deemed to be inoperative: see Sunnyside Shopping Plaza Ltd. and Canpro Investments Ltd. [ 33 ] Finally, the apportionment methodology which Plaza uses leads to an absurdity. If the assessed value increases in any one year because of an increase in revenue, then Zellers’ share of the taxes goes up accordingly even if Zeller’s rent remained constant. Nothing that Zellers has done has contributed to the increase in assessed value and yet Plaza insists that Zellers’ share of the tax burden should be increased. [ 34 ] Collectively, the flaws in Plaza’s argument reinforce, rather than rebut, the presumption. This leads me to conclude that the

interpretation which the trial judge placed on the provisions of the lease is the correct one. Surely, Plaza’s method of apportionment, based on the use of historical data, would not have been within the reasonable contemplation of the parties when the lease was signed in 1972. For greater certainty, I conclude that Plaza’s

interpretation of the lease in question falls outside the category of reasonableness. Its

interpretation is driven largely by an irrelevant consideration: namely, that Zellers entered into a long- term lease at a fixed rent. Accordingly I would dismiss the appeal with costs of $3,500. ____________________________________ J.T. ROBERTSON, J.A. WE CONCUR: ___________________________________ M.E.L. LARLEE, J.A. ____________________________________ KATHLEEN A. QUIGG, J.A.