441 Main Inc. v. Silver Date:, 2013 MBCA 70

Citation: 441 Main Inc. v. Silver Date: 20130718 Pawn Pictures Inc., 2013 MBCA 70 Docket: AI 12-30-07791 IN THE COURT OF APPEAL OF MANITOBA Coram: Madam Justice Freda M. Steel Madam Justice Barbara M. Hamilton Mr. Justice Marc M. Monnin BETWEEN: 441 MAIN INC. ) D. J. Nelko ) for the Appellant (Applicant) Appellant ) ) S. J.

Thliveris- and - ) for the Respondent ) SILVER PAWN PICTURES INC. also ) Appeal heard:known as SILVERPAWN PICTURES ) April 12, 2013INC. ) ) Judgment delivered: (Respondent) Respondent ) July 18, 2013 HAMILTON J.A. [1] This appeal is about whether an option to renew a commercial lease, for part of a building, was validly exercised inlight of two critical factors: 1) the notice to exercise the option included wording about the purchase of the building (the secondsentence); and 2) the option clause in the lease did not set out a date or conditions for the exercise of the option.

The second factor callsfor a consideration of the “Guardian principle,” which applies in circumstances when an option to renew does not set out a timeframe forexercising the option. See Guardian Realty Co. v. Stark (1922), (SCC), 64 S.C.R. 207. [2] The application judge concluded that the respondent (the tenant) had validly exercised its option to renew.

He foundthat: 1) the tenant’s notice to exercise its option was “not ambiguous or conditional” (at para. 25) because of the second sentence; and 2)in any event, the tenant had subsequently made it clear that it was exercising its option to renew before the end of the term of the lease. [3] For the reasons that follow, I agree with the appellant (the landlord) that these findings cannot be sustained and Iwould allow the appeal.

Background [4] Throughout their dealings, the landlord’s representative was Gil Rossong and the tenant’s representative was AaronGoldman. [5] The parties entered into a written lease dated December 14, 2010, for a lease term expiring on December 31, 2011. The lease contained an option to renew for a period of three or five years, to be exercised in writing by the tenant. The clause read asfollows: 13. That the Lessor shall have the option to renew this lease after the 13 month lease term and defined as follows: The lease (term) has 2options, that would include a 3 year renewal or a 5 year renewal term.

[ 6 ] The lease also included an overholding clause, which read in part, as follows: 16.

That the Lessee will, at the termination of this lease by lapse of time, yield up immediate possession to the Lessor, and failing so to do the Lessee will pay for each day such possession is withheld an amount equal to 125% of the amount of the rent hereby reserved … in the event of the Lessee remaining occupation of the demised premises after the expiration of the said term, the Lessor may accept such holding over as constituting the Lesee tenant from month to month of the Lessor, but otherwise subject to the terms and conditions of this lease; and in this case such holding over shall not in the absence of some further and other agreement in writing between the parties hereto apart from this lease, constitute the Lessee tenant for an additional year of the Lessor. [ 7 ] The lease did not contain any clause about the purchase of the building. [ 8 ] During the tenancy, the tenant continually asserted that it had a right to purchase the building.

Correspondence between Rossong and Goldman demonstrates that the landlord did not accept the tenant’s position that the landlord provided the tenant with an option to purchase, or right of first refusal to purchase, the building at the time that the lease was negotiated. In its September 8, 2011 email to the tenant, the landlord stated this explicitly. It also referred to a 60-day timeframe for the tenant to exercise its option to renew.

This email states in part: ... [Y]ou continue to revisit in your emails from time to time this notion that there was an agreement or undertaking that the building would be sold to you. This is simply not true. No agreement was entered into and no undertaking given. [The tenant] signed the lease agreement which has options and the option should be defined within 60 days prior to the expiration of year one. [ 9 ] The tenant responded on September 8, 2011: Your assertion that no undertaking to sell the building was given in order to induce me to enter into the lease agreement is false. . . . . .

Counsel has been contacted, you may expect to receive a claim in due course. [ 10 ] The tenant did not file a claim. [ 11 ] On October 31, 2011, being 60 days before the expiry of the lease term, the tenant sent the following notice (the October 31 notice) to the landlord: Subject : Notice regarding of extension of lease for full five year term WITHOUT PREJUDICE : As required under the lease, herein is our notice that we have elected to proceed with the 5-year lease option outlined in the lease.

It is anticipated that the building will, as you committed in order to secure the lease from Silver Pawn Pictures, be sold to me prior to this extension running its course [the second sentence]. Please confirm your receipt of this notice in writing of our exercise of the five-year option, cc’d to our lawyer Curtis Knudson (who is

cc’d above). [emphasis added] [ 12 ] On November 10, 2011, counsel for the landlord sent correspondence to the tenant advising that the October 31 notice was “not a valid exercise of the notice [option] pursuant to the provisions of the lease agreement.” It reads, in part, as follows: ... The purpose of this letter is to place you on notice that your email of October 31, 2011, is not, in our view, a proper exercise of the option and therefore invalid and not binding on our client. In order for the option to be properly exercised, the notice must be clear, explicit, unambiguous and unequivocal.

Your email contains the following reference: “it is anticipated that the building, will, as you committed in order to secure the lease from Silver Pawn Pictures, be sold to me prior to this extension running its course.” Our client advises that no agreement, undertaking, or commitment was ever entered into or provided, whereby the building would be sold to “you[.]” It is our position that your effort to link this alleged commitment to sell, to the exercise of the option, attaches a condition to the notice rendering it invalid. [ 13 ] On November 10, 2011, Goldman responded stating, in part, that he would provide a new notice: ...

I anticipate responding by Wednesday of next week.

For further clarity, notwithstanding the valid notice already provided, I will provide a supplementary notice in the fashion you and your client seem to desire as soon as I am able to get to a post office. [ 14 ] On November 14, 2011, counsel for the landlord wrote to Goldman to advise that any notice would now be out of time (that is, beyond the 60 days before the expiry of the term) and that the landlord expected that the tenant would vacate the premises on or before December 31, 2011. [ 15 ] The tenant did not provide a supplementary notice to renew the lease. [ 16 ] On November 16, 2011, counsel for the tenant (not counsel who argued the appeal) wrote to counsel for the landlord setting out the tenant’s position that “proper notice has been provided for the lease to be renewed for a 5 year period” and attached a copy of the October 31 notice.

The November 16, 2011 correspondence states in part: ... [W]e say that proper notice has been provided for the lease to be renewed for a 5 year period. …. It is our position that the 60 day notice provision unilaterally imposed by your client as set out in the letter of September 8, 2011 is non- binding. . . . . .

d) the email [the October 31 notice] is umambiguous and clear as to the desire for the Lease to be renewed for a 5 year period.

This is supported by the reference to “Silver Pawn Pictures Inc.” in Paragraph 2 of the said email . [emphasis added] [ 17 ] The underlined reference to “Paragraph 2” is a reference to the second sentence. [ 18 ] The tenant continued in occupancy after December 31, 2011. [ 19 ] On December 28, 2011, the tenant filed an application in the Court of Queen’s Bench for, among other things, a declaration that the October 31 notice is “valid notice” and that the landlord’s notice to vacate, as set out in its lawyer’s correspondence dated November 14, 2011, was invalid. [ 20 ] On January 5, 2012, the landlord served the tenant with a demand for possession requiring it to “forthwith” vacate the premises. [ 21 ] On January 9, 2012, the landlord filed an application in the Court of Queen’s Bench for a writ of possession of the property. [ 22 ] The applications were consolidated and the affidavit evidence in each was applicable to both applications.

In addition to the affidavits of Goldman and Rossong, the judge heard viva voce evidence from both. [ 23 ] At the end of the appeal hearing, counsel informed the panel that the tenant had recently vacated the leased premises.

When questioned about whether this rendered the appeal moot, counsel acknowledged that the landlord’s application for a writ of possession was moot, but they requested that we decide the appeal because the parties had not settled their differences, including the issue of whether the tenant’s occupancy after December 31, 2011, was as an overholding tenant. [ 24 ] For that reason and because the issues raised in this appeal are not often before this court, the panel acceded to this request.

Furthermore, this appeal is an opportunity for this court to underscore the importance of carefully drafting any option to renew clause and any notice to exercise an option to renew. The Judge’s Decision [ 25 ] The judge described the relationship between the landlord and the tenant as “difficult, with numerous complaints by [the tenant] that [the landlord] was failing to fulfill its obligations under the Lease” (at para. 12).

He was skeptical about the tenant’s assertion that the landlord had committed to sell the building (at para. 13): For the reasons which follow, it is not necessary to determine in these proceedings whether [the landlord] induced [the tenant] to enter into the Lease on the basis of a representation that [the landlord] would sell the Building or whether [the landlord] made a legally binding commitment to sell the Building. Having said that, on the evidence before me, I would question whether there was any such representation or commitment.

Given the apparent significance to [the tenant] of this alleged representation and/or commitment, it seems incredible that it was not referenced in the Lease and that until June 1, 2011 it was not mentioned in any written communications between the parties (of which there were many).

Even then, Goldman only says that he would “like to buy the building” but if [the landlord] would prefer, “we can discuss breaking the lease”. [ 26 ] In the context of addressing the impact of the second sentence, the judge reviewed applicable case law that states that the exercise of an option to renew must be “clear, explicit, unambiguous and unequivocal.” See Doria v. 66 Degrees Inc . (2000), 30 R.P.R. (3d) 287 at para. 8 (Ont. S.C.J.) ; and Royal City Shopping Centre Ltd. v. Canadian Direct Insurance Inc. , 2005 BCSC 1597 , 37 R.P.R. (4th) 286 .

He then wrote (at paras. 24-25): The first and third sentence in the October 31, 2011 e-mail clearly provide that [the tenant] has exercised its option to renew for a five- year term, and the second sentence itself refers to “this extension” of the Lease. In the second sentence Goldman says that he looks forward to [the landlord] fulfilling the commitment that the Building be sold to him prior to the end of the five-year extension. In my view, the second sentence does not expressly or by implication suggest that the exercise of the renewal is equivocal or conditional on a sale of the Building. . . . . .

.... A plain reading of the October 31, 2011 e-mail satisfies me that the only possible

interpretation and the

interpretation a reasonableperson reading the e-mail would arrive at is that [the tenant] was exercising the option to renew the Lease for a five- year term. Theexercise of the option in the October 31, 2011 e-mail was not ambiguous or conditional. [emphasis added] [27] The judge then turned his mind to the principle enunciated in Guardian Realty Co. and relied on the explanation of thatcase by Cromwell J.A. (as he then was) in Sobey Leased Properties Ltd. v. Gerstl (1997), 1998 NSCA 194 , 173 N.S.R. (2d)381 (C.A.).

More will be said about Guardian in due course. [28] The judge concluded that the tenant had until December 31, 2011, to exercise the option to renew and did not acceptthat the 60-day timeframe imposed by the landlord in its September 8, 2011 email had any effect. He then concluded that (at paras. 27-28): .... I am not aware of any basis for asserting that [the tenant] expressly or impliedly elected not to renew the Lease, and if [the landlord]was uncertain as to the meaning of the October 31, 2011 e-mail, that uncertainty was dispelled long before December 31, 2011.

On November 10, 2011 [the landlord’s] counsel took the position that [the tenant’s] “effort to link this alleged commitment to sell, to theexercise of the option, attaches a condition to the notice rendering it invalid.” [The tenant] responded the same day - “flatly rejected”that assertion - and said that: . . . . . For further clarity, notwithstanding the valid notice already provided, I will provide a supplementary notice in the fashion you and yourclient seem to desire as soon as I am able to get to a post office. . . . . .

Thereafter, but prior to December 31, 2011, [the tenant’s] counsel made it abundantly clear that [the tenant’s] had exercised the option torenew for five years and made no suggestion that there was a link between the renewal and any commitment or undertaking to sell theBuilding. There was no course of negotiation, nor was there any suggestion that a claim for privilege was being asserted in relation tothe notice. [emphasis added] [29] He found that the tenant “provided valid notice exercising the option to renew ... and that such notice was clear,unambiguous, unconditional and unqualified” (at para. 30).

He was also satisfied that there was “no ‘substantial reason’ for defeating[the tenant’s] exercise of the option” (ibid.). Positions of the Parties The Landlord [30] The landlord does not take issue with the law relied on by the judge. Rather, it takes issue with his findings of fact and

how he applied the law in light of what it submits are palpable and overriding errors. [31] To repeat, the landlord asserts that the judge erred when he concluded that the October 31 notice was neitherambiguous nor conditional, and when he concluded that any uncertainty in regard to the meaning of the October 31 notice was dispelledlong before December 31, 2011. [32] The landlord no longer argues that the tenant was required to exercise its option no later than 60 days before the expiryof the term, as indicated in the landlord’s September 8, 2011 letter.

Rather, it asserts that the second sentence was an attempt by thetenant to link the sale of the building to the renewal, and that this created a new condition that was never withdrawn before December 31,2011. It submits that the October 31 notice was a counter offer to the landlord’s unilateral offer to renew the lease. This, it says, deniedthe tenant any right provided by the Guardian principle to permit the tenant to renew the lease at any time up to the expiry of the term ofthe lease on December 31, 2011.

The Tenant [33] The tenant relies on the October 31 notice, as well as the principles articulated in Guardian. [34] It rejects that the second sentence creates a new condition intended to modify the lease.

It asserts that the secondsentence is clearly separate from the option to renew, as found by the judge. [35] The tenant says that the judge made no palpable and overriding errors, as alleged by the landlord, and his findings areentitled to deference. [36] The tenant also argues that if the October 31 notice is not a valid renewal, the Guardian principle applies, and it haduntil the end of the lease to renew, which it did.

It argues that this was evident from Goldman’s communication of November 10, 2011,when he stated that he would provide a supplementary notice, its lawyer’s communication of November 16, 2011, and its application tothe court. [37] The tenant says that it is inconceivable that any reasonable person could say, in light of all of the evidence, that thelandlord did not know that the tenant was exercising its option to renew.

Therefore, it says that the judge correctly found that the tenanthad not expressly or impliedly elected not to renew the lease, and prior to December 31, 2011, the tenant had made it abundantly clearthat the tenant had exercised its option to renew. Analysis and Decision [38] As noted already, the landlord does not take issue with the law cited by the judge in his reasons. The landlord arguesthat the judge committed two palpable and overriding errors. The questions on appeal are: 1. Did the judge err in finding that the October 31 notice was “not ambiguous or conditional”? 2.

Did the judge err in finding that the tenant had subsequently made it clear that it was exercising its option to renew before the endof the term of the lease? [39] The first question is a question of mixed fact and law and the second is a question of fact. Both call for the standard ofreview of palpable and overriding error. In other words, the error must be plainly seen and it must have affected the result.

See H.L. v.Canada (Attorney General), 2005 SCC 25 at para. 55, [2005] 1 S.C.R. 401. [40] An option to renew a lease must be exercised in a manner that is “clear, explicit, unambiguous and unequivocal.” SeeDoria in which Low J. wrote that “[i]t is not sufficient that the parties engage in a dance with each other; it is necessary that the optioneedeclare his intentions” (at para. 8). An option to renew is, in law, a unilateral offer giving a tenant the right to renew on the termsspecifically set out in the option.

Anything more renders the notice a counter offer, as opposed to an acceptance, and does not bind thelandlord unless the counter offer is accepted. See Zacharopoulos v. Sykiotis Enterprises Ltd. (1992), (MB CA), 76Man.R. (2d) 272 (C.A.), in which the court held that an option to renew clause is an offer to renew by the landlord on certain conditionsand is “in the nature of a unilateral contract which is subject to the rule of strict compliance” (at para. 15). Also see 120 Adelaide v.Oxford, [1991] O.J. No. 1507 (QL) (Ont. C.J. (Gen. Div.)) aff’d., [1993] O.J.

No. 2801 (QL) (C.A.). [41] In my view, given the second sentence, the judge made a palpable and overriding error when he found that the October31 notice was neither ambiguous nor conditional. By inserting the second sentence in the October 31 notice, the tenant was attempting toimpose a new term or condition into the landlord and tenant relationship that did not exist under the lease. In other words, as argued bythe landlord, he was attempting to establish a link between the lease and the purchase.

The effect of doing so was to make the October31 notice a counter offer and, as a result, it did not have the effect of exercising the option under the lease. [42] The judge found, alternatively, that the tenant made it “abundantly clear” (at para. 28) that the option had beenexercised after October 31, 2011, but before December 31, 2011. The difficulty with that finding is that it ignores the content of theNovember 16, 2011 email in which counsel for the tenant explicitly relies on the October 31 notice, without amendment, as evidencedby the attachment of the October 31 notice.

The tenant’s position never changed before the end of the term of the lease. Thus, theGuardian principle does not assist the tenant.

[43] Guardian concerned a lessee who made extensive renovations to its premises before the expiry of the term, with theapproval of the landlord, but did not give notice of its intention to exercise its right to renew until several days after the expiry of theterm, while still in possession. Six of the seven judges of the Supreme Court of Canada wrote separate reasons for upholding the lessee’sright to renew.

Subsequent jurisprudence appears to focus on the decisions of Anglin J. (with Mignault J. concurring) and Duff J. [44] Anglin J. repeatedly commented on the “sanction” of the lessor to the lessee’s continued possession. Duff J. held thatthe lessee’s option remained open and exercisable until the lessee had done something which concluded it and that a lessor can force alessee into making an election whether to renew. The following cases applied the “sanction” reasoning of Anglin J.: Gasner v. BellakBrothers Limited, (ON CA), [1945] O.R. 499 (C.A.) (reasons of Laidlaw J.A.); and Sheppard v.

Czechoslovak(Toronto) Credit Union (1988), 1 R.P.R. (2d) 290 (Ont. Div. Ct.). The following cases applied the reasoning of Duff J.: Gasner (reasonsof Roach J.A.); Pacific Hotels Corp. v. Van Raniga Jewelers and Designers Inc. (1995), 50 R.P.R. (2d) 28 (B.C.S.C.); and Oak HarbourI Management Ltd. v. Villanova (c.o.b. Classic Auto & Truck Service), [2000] O.J. No. 1476 (QL) (Sup.

Ct.). [45] To explain the Guardian principle, I can do no better than adopt, as did the judge, Cromwell J.A.’s explanation inGerstl (at paras. 42-44): The crux of this part of the appeal is how the principle enunciated by the Supreme Court of Canada in Guardian Realty, supra, appliesin this case. This principle applies where a tenant has an option to renew and there is no specific term governing the time or method ofexercising it. In these circumstances, the tenant may exercise its rights to renew as long as the tenant has not indicated that there will beno renewal.

This indication may be express or implied as, for example, from the tenant going out of possession at the end of the term. The lessor may require the tenant to say whether or not it exercises the right to renew. Absent an express or implied election not torenew or a failure to respond once put to the election by the landlord, the option to renew subsists and may be exercised. This principlehas been applied on many occasions since it was enunciated by the Supreme Court in Guardian in 1922 ....

Stated more broadly, the Guardian principle is based on the notion that an option to renew gives the lessee a present interest and, absentexpress conditions for its exercise, should not be defeated unless there are substantial reasons for doing so. .... .... It follows from this principle that the key considerations are whether the landlord has put the tenant to its option and, if not, whether thetenant has implicitly elected not to renew. While retaining possession may be strong evidence of an election to renew, it is simply that.

The important question is whether the tenant has done anything to preclude the exercise of the right to renew -- whether it has lost theright to renew by virtue of its conduct of which retaining or going out of possession may be an important aspect: see Brewer v. Conger(1900), 27 O.A.R. 10 (C.A.), at p. 15; Gasner v. Bellak Bros. Ltd., supra, at p. 369. .... [emphasis added by the judge in his reasons at para. 26] [46] Cromwell J.A. stressed a common sense approach that looks at the substance of what transpired (at paras. 46, 49-50): ….

The Guardian principle, however, demands that the substance of the situation and not simply its form must be examined. Thisfollows from the judicial attitude towards options to renew set out in Guardian: the right rests on a “substantial foundation”, not a “mereverbal formula”. … [W]here the right would otherwise subsist, it should not be extinguished unless giving effect to it has become impossible or for someother substantial reason. ….

Once again, the court’s attention is on the substance of the matter and whether the tenant is able to perform the substance of theobligation required by the option to renew. [47] When I apply this approach to the facts, it is apparent that the landlord never consented to the renewal of the leasebecause it expressly rejected the tenant’s condition (that is, the tenant’s counter offer, as explained above) that the building would besold to the tenant during the renewal term.

Because the October 31 notice, or at least the second sentence, was never retracted by thetenant, the October 31 notice remained the impediment to the renewal of the lease, not the means by which the tenant exercised it. [48] Because the landlord did not sanction the tenant’s possession beyond the end of the term and because the tenant choseto counter offer rather than exercise the option to renew, the lease concluded at the end of the term on December 31, 2011, and the tenanthad no right to occupy the premises beyond that date.

[ 49 ] Simply put, the tenant’s attempt to “engage in a dance” with the landlord with respect to the purchase of the building defeated its right to renew the lease. Conclusion [ 50 ] While the judge correctly cited the applicable legal principles, he made palpable and overriding errors when he found that the October 31 notice was not ambiguous or conditional and that, in any event, subsequently the tenant made it clear that it was exercising its option to renew under the lease.

These errors went to the heart of his decision and his finding that the tenant exercised its option to renew cannot be sustained. [ 51 ] I would allow the appeal and order costs in favour of the landlord on the appeal and in the Court of Queen’s Bench. J.A. I agree: J.A. I agree: J.A.