Ontario – court denies tenant relief from forfeiture where tenant disregards arbitration – #376

In Hunt’s Transport Limited v. Eagle Street Industrial GP Inc., 2020 ONSC 5768, Mr. Justice David A. Broad refused to exercise his discretion to grant a commercial tenant relief from forfeiture given tenant’s refusal to abide by its obligation to continue performance during arbitration of its disputes with the landlord.  Broad J. held that tenant’s conduct qualified as “wilful” self-help and justified the court in holding tenant to its obligations pending resolution of issues exclusively reserved for arbitration.  Tenant’s unilateral decision to withhold payments, prior to their determination exclusively reserved in the lease to the arbitrator, played a key role in Broad J.’s reasons.

Hunt’s Transport Limited (“Tenant”) and Eagle Street Industrial GP Inc. (“Landlord”) disputed obligations under a January 1, 2018 lease (“Lease”) for commercial premises located in Ontario.  Tenant used the premises as a warehouse and distribution centre for its commercial transport and logistic services.

The Lease provided for base rent, increased annually by predetermined adjustments plus an additional rent reflecting Tenant’s proportionate share of common expenses.  The Lease provided for:

(i) a “no deduction” clause by which Tenant agreed to pay the rent and additional rent without deduction, set-off or abatement;

(ii) a “continued performance” obligation by which Tenant and Landlord undertook to continue performing their respective obligations under the Lease without prejudice to their right to contest, dispute and challenge disputed matters.

(iii) an agreement to arbitrate as well as a set of rules governing the arbitration, attached as a schedule to the Lease.

In January 2019, Landlord provided Tenant with an estimate of the additional rent for 2019.  Despite disagreement over the amount, Tenant paid the additional rent pending the eventual reconciliation expected over or by the end of the lease year.  Following receipt of Landlord’s statement reconciliating the increase, Tenant objected.  The dispute progressed with each party exercising rights under the Lease.  Tenant sought more information and Landlord required payment pending arbitration. Tenant refused to pay the increase and Landlord issued a notice of default demanding payment.  Parallel to the dispute over payment of the additional rent, Tenant sought to exercise a right to sublease which Landlord disputed in light of the alleged default.

Tenant applied July 10, 2020 to the court for interim relief (“Application”) seeking:

(a) an interim order for relief from forfeiture pursuant to section 20 of the under the Commercial Tenancies Act, RSO 1990, c L.7 (“CTA”);

(b) an order for relief from forfeiture pending determination by arbitration to determine the square footage of the premises, calculation of actual additional rent, any over/under payment of additional rent and arrears owing for utility charges, and any set-off;

In its Application, Tenant also applied for an order:

– appointing an arbitrator;

– in the alternative, authorizing Tenant’s deposit of disputed monies in trust/into court pending determination in the arbitration;

– declaring that Tenant is entitled to market the premises to assign/sublease;

– prohibiting Landlord withholding consent to sublease of the premises on basis of matters related to issues arbitrated.

Tenant also served a notice of arbitration (“Notice of Arbitration”) the next day submitting a number of issues to arbitration including determination of the square footage of the premises, amounts owing or to be credited and set-offs.  The full list appears at para. 23 of Broad J’s reasons.

Broad J. noted that portions of the relief sought by Tenant is its application and the Notice of Arbitration were duplicative.  Despite arguments in Landlord’s factum seeking relief suitable to Landlord’s position, Broad J. observed that Landlord had brought no application of its own and therefore disregarded that relief in his determination of the Application.

The issues before Broad J. were narrow: is Tenant in breach of the Lease and, if so, should Tenant be relieved from forfeiture under the CTA pending the outcome of the arbitration?

Considering the law respecting declaratory orders set out in Harrison v. Antonopoulos, 2002 CanLII 28725 (ON SC), [2002] O.J. No. 4890 (S.C.J.), Broad J. declined to exercise his discretion to grant the declaratory relief sought by Tenant.  Respectful of the jurisdiction agreed to by the parties to the Lease, Broad J. held that his authority to issue certain prohibitive or injunctive relief sought in the Application depended on determinations reserved for arbitration.

[34] The dispute between the parties on whether the Tenant may market the Premises for sub-lease under the circumstances and whether the Landlord may refuse consent to a sub-lease, pending the arbitration of the dispute respecting Additional Rent, is squarely within the jurisdiction of the arbitrator by reason of the Notice of Arbitration delivered by the Tenant”.

Issuing the declaratory relief would pre-empt the determinations in arbitration and Broad J. elected to appoint the arbitrator.  When doing so, he confirmed his understanding that the parties had selected an arbitrator.

At paras 37-60, Broad J. considered whether Tenant was in breach of the Lease.  His analysis rested on the role of arbitration and the parties’ agreement to continued performance.  The parties had undertaken to continue performance of the Lease despite and while disputes were to be submitted to and resolved by arbitration and that issues relating to determination of sums owing or not were subject to determination.  As a result, Broad J. held that Tenant was in breach of the Lease.

[58] In light of the arbitration clause in the Lease, by which the parties expressly agreed to submit disputes to binding arbitration, it is not the role of the court to determine the propriety of the Landlord’s estimate. The parties agreed to leave that determination to the arbitration process. The parties also agreed that the Landlord’s estimate of 2020 Additional Rent is required to be paid without set-off, deduction or abatement pending completion of arbitration of the dispute. The Tenant is therefore in breach of its obligation under the Lease to pay Rent by withholding the portion of the estimate in excess of $2.50 per sq. ft.

Broad J. endorsed prior case law which objected to a tenant’s “self-help” of withholding rent and occupying premises pending resolution of disputes by arbitration. See Old Colony Properties Inc. v. Ontario (Management Board of Cabinet), 2002 CarswellOnt 2372.

Having determined that Tenant was in breach of the Lease, Broad J. then turned to determining whether Tenant was entitled to relief from forfeiture.  Broad J. referred to the Supreme Court of Canada’s description in Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., 1994 CanLII 100 (SCC), [1994] 2 SCR 490 of the remedy relief from forfeiture as equitable in nature and purely discretionary. The Supreme Court listed three (3) factors relevant to the court’s exercise of its discretion: the conduct of the applicant; the gravity of the breaches; and the disparity between the value of the property forfeited and the damage caused by the breach.  See also Ontario (Attorney General) v. McDougall, 2011 ONCA 363 paras 86-87.

[63] The Court of Appeal in Ontario (Attorney General) v. McDougall, 2011 ONCA 363 at paras. 86-87 confirmed that the power to grant relief from forfeiture is discretionary and fact specific and is based on the existence of circumstances in which enforcing a contractual right of forfeiture, although consistent with the terms of the contract, visits an inequitable consequence on the party in breach. Relief from forfeiture is granted sparingly and the party seeking the relief bears the onus of making the case for it”.

In 147777 Ontario Inc. v. Leon’s Furniture Ltd., (2003) 2003 CanLII 50106 (ON CA), 67 O.R. (3d) 206 (C.A.) para. 72, Ontario’s Court of Appeal has held that, when considering a tenant’s conduct, the courts should consider whether tenant’s conduct is “wilful”.

Broad J. held that the Tenant ought not to benefit from its wilful conduct which ignored the terms of the Lease, including the continued performance obligation pending arbitration. To refuse exercising his discretion, Broad J. determined that ignoring the party’s agreement to arbitrate qualified Tenant’s conduct as willful.

[69] In my view the conduct of the Tenant in the case at bar can be characterized as “wilful.” The Concise Oxford English Dictionary (11th ed.) defines “wilful” as “intentional” or “deliberate.” In addition to invoking the remedy of arbitration for resolution of its disputes specifically provided by the Lease, the Tenant deliberately chose to utilize self-help by withholding Rent pending determination of the disputes by arbitration – a remedy not contemplated in the Lease. In doing so the Tenant acted in an unreasonable manner”.

He disagreed with Tenant’s arguments in favour of relief from forfeiture, focusing on the fact that disagreements would be determined by the arbitration and not by self-help.  “The determination of the amount owing by the Tenant for Additional Rent is within the exclusive purview of the arbitrator”.  This exclusivity played a key role in refusing the relief sought. Broad J. dismissed key arguments made by Tenant to justify its withholding of performance.

[79] The Tenant goes on to argue in its Factum that it is “merely trying to conserve financial resources so it may preserve its operations while asserting its rights to pay only those sums which it is obligated to pay under the Lease.” This submission ignores the fact that it is for the arbitrator to adjudicate on the disputes respecting the correct amount of Additional Rent and that, pending that determination, the Lease obligates the Tenant to pay the Landlord’s reconciled amount for 2019 and its estimated amount for 2020”.

Despite refusing the relief from forfeiture, Broad J. ordered temporary relief for twenty (20) days from the date of the release of his reasons to allow Tenant to cure its default by paying all arrears.

urbitral notes – First, the reasons combine a number of key ways in which courts support arbitration.  By his reasons and order, Broad J. declined to interfere with the agreement to arbitrate disputes under the Lease and exercised his jurisdiction to decline relief which would assist the party ignoring its obligations during arbitration. 

The Application did not require that Broad J. refer the parties to arbitration but, rather, raised issues which impacted on the efficacy of arbitrating if one party did not abide by what was to be done under the Lease during arbitration.  Non-payment of the sums disputed in arbitration was effectively part of the agreement to arbitrate and in refusing to grant Tenant relief from forfeiture, Broad J. preserved the parties’ bargain as set out in the Lease.