Ontario – court rebuffs critique of commonplace, frequently enforced, understandable arbitration clause – #095

In V Hazelton Limited v. Perfect Smile Dental Inc., 2018 ONSC 3958, Mr. Justice Edward M. Morgan dismissed a landlord’s objection to an arbitration clause, stating that the wording was clear enough to those familiar with commercial leases.  Morgan J.’s comments can lend themselves to other types of contracts, tipping the balance if need be in favour of enforcing clauses that, while falling short of ideal wording, are commonplace, frequently enforced and likely to be understood without trouble by an experienced arbitrator. 

The dispute involved commercial lease renewal rights between V Hazelton Limited, tenant (“Applicant”) and Perfect Smile Dental Inc., landlord (“Landlord”).  The lease, dated October 1, 2012 (“Lease”), terminated on September 31, 2017, with an option to renew for a further five (5) year term.  In 2016, with Landlord’s knowledge, Applicant sub-let the premises to Mr. Marcus Chaves but reserved the renewal option to itself.

Despite negotiations, Applicant and Landlord failed to agree to terms for a renewal.  Landlord entered into a new lease with Mr. Chaves.

Applicant’s Lease with Landlord contained an arbitration clause in the event the parties disagreed over exercise of the renewal option and the rent.  In exchanges prior to litigation, the Landlord itself advised that it would send its proposed rent amount to the arbitrator for determination.

Despite the arbitration clause in the Lease and despite an initial intention to undertake arbitration, Landlord resisted arbitration.  The parties eventually found their way to court for an action in damages due to breach of the Lease’s renewal option.

Morgan J. commented on Landlord’s objection to the arbitration clause and dismissed it, stating that it was clear enough to those familiar with commercial leases.  His reasons did not include the text of the arbitration clause and one must assume that there was something lacking in the text to trigger Landlord’s eventual objection.  Morgan J.’s comments could apply in other types of nominate contracts which use less-than-perfect arbitration wording but which share the same three characteristics of the Lease’s arbitration clause: commonplace, frequently enforced and likely to be understood without trouble by an experienced arbitrator

[12] The Landlord also takes the position that the renewal clause in the Lease is void for uncertainty since it does not set out a specific renewal rent. Counsel for the Landlord also contends that the reference to arbitration of the renewal rent is not well drafted, and does not give the arbitrator sufficient guidance to be an enforceable arbitration clause.

 [13] This type of clause, however, is a commonplace one, and has frequently been enforced. I do not have any trouble understanding it, and would assume that an experienced arbitrator would likewise have no such trouble. The arbitrator is to fix the rent for the 5 year renewal of the tenancy, and in the ordinary course that rent is to be fair market value. The Landlord himself acknowledged that in correspondence with the Applicant in September 2017.

 [14] An agreement to renew at a rent to be agreed upon, failing which the parties shall submit to arbitration to determine fair market value rent, is not unduly vague; the arbitration process is a well-known and acceptable mechanism for making a renewal clause enforceable: Re Tsiribis and Panopoulos, [1981] OJ No 713, at para 9. This clause does not constitute a mere ‘agreement to agree’, where there is “no agreement on the price or on any method by which the price was to be calculated”: Courtney and Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd, [1975] ADR. L.R. 00/00 (per Lord Denning). A provision in which parties agree to submit a rental value to arbitration is one which is specifically enforceable: Re Calford Properties Ltd and Kelly’s Billiards Ltd., 1973 CanLII 215 (AB QB), [1973] AJ No 161, at paras 22-23.

Despite declaring that the arbitration clause was valid and clear, Morgan J. proceeded to resolve the dispute.  He began by acknowledging that he did not know what an arbitrator would have set as a rent but used the lease Mr. Chaves had with Landlord as a proxy for a fair market value.

The reasons do include helpful commentary on commercial leasing and the damages, if any, stemming from a landlord’s decision to rent the leased premises to another tenant.  For example, Morgan J. identified the competing rights at issue in the application before him.  He held that Landlord had legally exercised its property rights by re-taking the premises at the termination but, at the same time, had breached Applicant’s Lease rights by failing to negotiate or arbitrate the renewal in good faith.

Based on the particular facts in the case, including a new tenant earlier located by Applicant itself and the absence of any damages to Applicant, Morgan J. determined that Applicant suffered no losses and dismissed Applicant’s application.