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Corporate & Commercial Law

Should Commercial Tenants be Excused From Rental Payments During COVID-19 Lockdowns?

COVID-19 introduced many new challenges for both individuals and businesses across the country. For many businesses, the need to close operations in accordance with pandemic restrictions came with many unknowns, many related to finances and the future of the business. For business owners who conducted operations out of a commercial rental property, it was unclear exactly what rights and obligations tenants and landlords had during such unprecedented times, and these issues continue to be disputed years later. 

In a recent decision from the Court of Appeal for Ontario, a commercial tenant argued that they should not be required to pay commercial rent during the period in which the pandemic restrictions prevented them from accessing the premises they were renting. 

Commercial tenant locked out of building during pandemic

In Niagara Falls Shopping Centre Inc. v. LAF Canada Company, the respondent landlord, owned a shopping centre outside of Toronto, Ontario. The appellant was a shopping centre tenant who operated fitness centres across Canada. The tenant entered into a commercial lease in April 2013 which stated that the tenant paid a monthly amount which combined rent and the tenant’s portion of operating expenses, which exceeded $101,000. 

The Ontario government declared a provincial state of emergency due to the COVID-19 pandemic on March 17, 2020. One week later, the government had mandated the closure of all non-essential workplaces, including gyms and fitness facilities. While the tenant’s business was eventually able to re-open, there were several months of operating interruptions due to surges in the pandemic. In most instances, when the tenant could re-open, it often had to limit and monitor its capacity limits. 

Parties enter into rent deferral agreement 

In May 2020, the tenant and landlord entered into a rent deferral agreement that provided limited rent relief from April to June 2020. This agreement provided that 50% of the base rent was forgiven and 25% was deferred. 

Once the agreement expired, the tenant subsequently paid rent until the end of 2020, despite being open with limited capacity. 

Tenant refuses to pay rent during lockdown

The Ontario government implemented another lockdown on December 26, 2020, at which point the tenant refused to continue to pay rent. The landlord responded to this by bringing an action against the tenant for unpaid rent and other charges. 

The appellant argued that it had no obligation to pay rent during government-mandated closures, relying on the doctrines of frustration and unjust enrichment, and pointing to the Force Majeure Clause (the “Clause”) in the lease. The tenant further counterclaimed for damages exceeding $618,824 and a declaration that:

  1. it was relieved of its obligation to pay rent during periods of government-mandated losures; and
  2. its obligation to pay rent would be reduced proportionately during periods of government-mandated capacity requirements.

Tenant is unsuccessful in defence of position

The landlord moved for a summary judgment, while the tenant did the same. By the time the matter was before the Court in November 2021, the tenant’s business had been closed for approximately nine months.

The motion judge rejected the tenant’s position and accepted the landlord’s argument that the government’s lockdowns constituted “restrictive laws” within the meaning of the Clause. This meant that the landlord was exempt from having to provide the tenant with the use of the rented premises. 

The motion judge also rejected the tenant’s position that the Clause required the lease to be extended for a period equal to the closures, calling the notion “commercially absurd.” Further, the motion judge found that the Clause did not relieve the tenant of its obligation to pay rent.

Tenant Appealed Motion Judge’s Findings

The tenant appealed the decision and asked the Court of Appeal to find that the motion judge erred in their interpretation of the Clause. 

The tenant sought a finding that either both parties should have been delayed from performing their obligations and, therefore, an extension to the lease should be granted. In the alternative, if the tenant was required to pay rent, they sought a lease extension equivalent to the months during which they paid rent for but could not access the premises. 

Court of Appeal Orders Lease Extension

The Court agreed with the tenant that the motion judge had made extricable errors. The Court found that the closure of the premises constituted a force majeure event, thus triggering the Clause. Furthermore, the Court agreed that the lockdown was a “restrictive law.” However, the Court found errors in the motion judge’s decisions following those points of agreement, particularly their comment that the tenant’s position was “commercially absurd.” 

The Court wrote that the motion judge made an error in interpreting the word “excuse” to me “exempted,” in reference to the finding that the respondent was not obligated to provide the appellant with access to the building. Instead, the Court of Appeal held that the obligation could be excused, but that the respondent then had an obligation to extend the rental period for a specific period of time after the lease expired. 

The Court allowed the appeal and declared that the landlord was excused from their performance under the lease to provide access to the premises during government-mandated closure periods. The Court also ordered that the lease was extended by the extension period, during which time the tenant is not required to pay rent. 

The Experienced Real Estate Lawyers at Baker & Company in Toronto Advise on Commercial Leasing Disputes

At Baker & Company, our experienced real estate lawyers work closely with each client to understand exactly what their needs are when dealing with commercial and residential real estate matters. We help clients manage a variety of real estate disputes and ensure that they receive comprehensive legal advice which will allow them to manage risk and make sound decisions throughout the dispute and resolution process. To arrange a consultation with a member of our real estate team, contact us online or call us at 416-777-0100.

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Residential Real Estate

Your Ontario Real Estate Law Questions, Answered

Whether you are buying or selling, many people have questions about real estate law in Ontario. Even frequent real estate buyers and sellers can encounter new topics and issues they have not previously dealt with.

This post will outline some of the most commonly asked Ontario real estate questions. If you have questions that are not answered below, or need assistance with a real estate transaction, you are encouraged to speak with our experienced real estate lawyers for further guidance.  

What Does a Real Estate Lawyer Do? 

Real estate lawyers help clients with the legal aspects of a real estate deal. Typically, a real estate lawyer becomes involved once a contract of purchase and sale has been signed. A lawyer will review the contract and title to the property to ensure there are no legal issues, help the client meet their obligations under the contract of purchase and sale, and navigate any issues that may arise before the closing date. When the closing date arrives, the lawyer will complete and submit the documentation required to transfer the property title from one party to another. 

The above is a fairly simplified explanation of what a real estate lawyer does, however, there are many moving parts in a real estate transaction and real estate lawyers are necessary to ensure the deal closes smoothly. Beyond transactional work, real estate lawyers can also help by reviewing a contract of purchase and sale before it is signed, negotiating with other parties on various issues, and providing representation should a property dispute require litigation. 

Differences Between Real Estate Lawyers and Agents

Real estate lawyers and real estate agents (or realtors) might seem similar, but they fill very different roles in a real estate transaction. While a real estate agent is typically involved in the “front-end” work of finding a property to buy or managing the sale of a property, the real estate lawyer handles the “back-end” legal aspects and documentation of the purchase and sale. 

Do the Buyer and Seller Need Separate Lawyers? 

The Law Society of Ontario’s Rules of Professional Conduct do not generally permit lawyers to represent both a buyer and a seller in a residential property purchase due to conflicts of interest. However, some exceptions may apply. 

When Should I Hire a Lawyer for a Real Estate Transaction? 

Buyers and sellers should hire a real estate lawyer as soon as possible into their real estate transaction. Ideally, it is best to hire a real estate lawyer before a contract of purchase and sale is signed to obtain a review and become aware of any problematic clauses that may require amendments. 

However, many buyers and sellers hire a real estate lawyer after signing the purchase and sale contract. When hiring a lawyer, it is important to be aware of the closing date and ensure that the real estate lawyer is afforded sufficient time to work on the file and complete all of the necessary steps. 

What Questions Should I Ask an Ontario Real Estate Lawyer Before Hiring Them? 

Before hiring a real estate lawyer, a client may want to ask some questions to make sure they are hiring the right person. Some common questions clients ask a real estate lawyer include, but are not limited to: 

  • What fees will be charged for the transaction? Understanding the legal fees involved is critical for budgeting purposes. 
  • How long have you been practicing real estate? At Baker & Company, our residential real estate lawyers have over 30 years of experience representing clients in real estate transactions.
  • Can I sign legal documents electronically? Real estate transactions often have tight turnaround times, so clients cannot always attend their lawyer’s office to sign documents in person. Law permitting, hiring a lawyer who can provide electronic registration and direct funds transfers can be extremely useful in some cases. 
  • Can you assist me if something goes wrong? If a real estate dispute arises, it is important to know that your lawyer will be able to help you. Our firm has a comprehensive litigation practice and can represent clients in real estate disputes. 

What Costs Are Associated with Real Estate Transactions? 

Beyond the cost of purchasing a residential property, a party to a real estate transaction must be aware of additional costs including taxes and other closing fees. 

When buying a house in Ontario, a purchaser will need to pay the Land Transfer Tax. Depending on the location and type of property, they may also need to pay Harmonized Sales Tax and Additional Land Transfer Tax. 

Beyond property-related charges, it is also important to consider the lawyer’s fees, which can vary.

What Happens if I Cannot Complete My Purchase or Sale? 

Assuming the parties have already signed a contract of purchase and sale, different things might happen if one party is no longer able to complete their contractual obligations.  

When a buyer purchases a property, they will provide a financial “deposit” when they sign the contract of purchase and sale. If they are later unable to proceed, or choose not to complete the contract, that deposit will often be forfeited to the buyer. 

If a seller is unable to proceed or chooses not to complete a contract, they may be sued by the buyer, as there is no deposit to forfeit. 

Does the Foreign Buyer Ban Affect Me? 

As of January 1, 2023, non-Canadians have been banned from buying residential property in Canada for two years (until January 1, 2025) to help cool off Canada’s housing market. 

However, this temporary ban comes with some exceptions. Individuals who are either a permanent resident of Canada, a temporary resident who satisfies prescribed conditions, a refugee, or a foreign individual who is purchasing residential real estate with their spouse or common-law partner who is a Canadian citizen or permanent resident, may still be eligible to purchase residential property. 

Contact the Real Estate Lawyers at Baker & Company in Toronto for Comprehensive Advice and Representation in Real Estate Matters

At Baker & Company, our trusted real estate lawyers ensure that residential and corporate real estate transactions run smoothly. If a dispute arises during the transaction, our lawyers are prepared to advocate on behalf of clients and obtain the best possible outcome. Our real estate team will review all documentation related to your file and will provide comprehensive advice throughout the transaction or dispute. Whether you are a Canadian or a non-resident looking to purchase property, or are a property owner looking to refinance, our real estate team is ready to assist. Contact us online or at 416-777-0100 to learn how we can help you.

Categories
Residential Real Estate

What Sellers Need to Know About Breach of Real Estate Contracts

Real estate breach of contract is becoming increasingly common as the market heats up. As a seller, it is important to know what happens if you choose – or are unable – to complete a contract. 

This blog post will review what sellers need to know about real estate contracts and what happens if they fail to comply with a signed contract. Sellers need to keep in mind that different real estate contracts will have different terms and subject clauses, and therefore, different complications may arise depending on the specific contract. If you have questions regarding a real estate contract, consult with an experienced real estate lawyer. 

What is a Breach of Contract in Real Estate? 

Real estate breach of contract refers to a situation where one or both of the parties to a real estate contract fail to complete a term of their contract and are unable to carry out the agreement. 

For buyers, common examples of a breach include:

  • failing to secure financing,
  • failing to transfer funds,
  • failing to complete legal documentation, or
  • Cchoosing to breach the contract. 

Common examples of real estate breach of contract for sellers will be outlined below.   

Real Estate Breach of Contract and Subject Clauses

Subject clauses are often included in real estate contracts allowing the buyer to escape the contract if something goes wrong before the subject removal date. These clauses make the contract conditional (“subject to”) certain things being done. 

Some common examples of subject clauses in real estate contracts include the contract being subject to the buyer obtaining financing, selling another property, or obtaining a satisfactory home inspection. 

While subject clauses aren’t normally used to protect sellers, sellers must understand the subject clauses in their real estate contracts. It’s also important to note which subject clauses are not in the contract. For example, if the contract does not contain a “subject to financing” clause and the buyers cannot complete the deal because they cannot obtain financing, the deal will collapse, and the buyer will breach the contract. 

Common Examples of Real Estate Breach of Contract 

There are a variety of reasons why a seller may ultimately breach the terms of their real estate contract, such as: 

  • Choosing to breach the contract: sellers often breach a real estate contract by choice. For example, the seller may get a better offer on the property after signing a contract with the buyer, or a change in circumstances may otherwise motivate them not to proceed with the deal. Depending on the circumstances, it may be worthwhile for the seller to breach the existing contract. 

In these circumstances, the seller’s breach will result in the deal collapsing. It is important to remember that a seller can breach a real estate contract in ways that do not necessarily result in a collapsing deal. Some examples include the following: 

  • Removing fixtures: “fixtures” (any property that is permanently attached to the property, often including objects like chandeliers, ceiling fans, or other affixed items) are considered to be a part of the property unless the contract specifies otherwise. If a seller removes “fixtures” before providing possession to the buyer, they may have breached a term of the contract. 
  • Failing to provide vacant possession: standard real estate contracts will typically require the seller to remove all moveable objects (like furniture and waste) and to have all inhabitants vacate the property by a certain date. Failing to vacate or remove moveable objects may result in the seller breaching a term of the contract. 

What are the remedies for a breach of a real estate contract? 

Unlike a buyer breaching a real estate contract, there is no deposit for the buyer to collect. This means that if a seller breaches a real estate contract, the buyer may bring legal action against them for monetary damages, termination of the contract and return of the deposit, or specific performance requiring the seller to complete the terms of the agreement, depending on the circumstances. 

Given the various impacts of a seller’s breach of a real estate contract, the remedies available to the buyer may vary significantly. If you have concerns about the potential impact of a breach, consult with an experienced real estate lawyer for further information. 

Final Thoughts on Real Estate Breach of Contract in Ontario

Entering into a real estate contract is a big step, so it is critical to ensure that you are able to fulfill your obligations under the contract. 

Unfortunately, it is common for both buyers and sellers to move quickly in a competitive real estate market. However, quick decisions may cause a seller to regret their decision to sign a contract or, simply make errors when vacating the property, which can create a dispute with the buyer. 

As a seller, there are additional steps that you can take in an effort to mitigate potential breach of contract issues, such as: 

  • Taking your time: don’t jump into a real estate contract before critically considering whether you are ready to sell. While life can throw us unexpected curveballs, ensuring you are happy with the contract terms, and that your financial and personal situation aligns with selling your property and moving on, is essential.  
  • Not overlooking the small details: seemingly insignificant clauses can create disputes down the line if you don’t understand your obligations. Don’t hesitate to ask your realtor or real estate lawyer for clarification if you aren’t sure about what a particular clause covers (for example, what qualifies as a “fixture”), and to work with the buyer to ensure that everyone is on the same page. 
  • Retaining a lawyer as soon as possible: retaining an experienced real estate lawyer early is critical. They will be able to advise you on your obligations, gather documents, and get ahead of any issues or disputes that might arise before the closing date.  

Contact the Real Estate Lawyers at Baker & Company in Toronto for Advice on Residential and Commercial Real Estate Matters

The skilled real estate lawyers at Baker & Company work closely with clients to provide tailored, dynamic advice and legal solutions on various real estate disputes, such as residential real estate, real estate development and land title issues. With over 30 years of experience, our real estate team has successfully helped clients navigate and resolve complex property issues. Contact us at 416-777-0100 or contact us online to schedule a confidential consultation.

Categories
Residential Real Estate

New Prohibition Temporarily Prevents Non-Canadians From Purchasing Residential Property

The federal Prohibition on the Purchase of Residential Property by Non-Canadians Act (the “Act”) received royal assent on June 23, 2022, and came into force on January 1, 2023. 

What is the Prohibition on the Purchase of Residential Property by Non-Canadians Act? 

The federal Prohibition on the Purchase of Residential Property by Non-Canadians Act prohibits non-Canadian residents from purchasing any residential property in Canada for two years. This legislation aims to stabilize Canada’s housing market and make housing more affordable for Canadians. It is also important to note that this Act targets purchases in population centres rather than rural areas.

Once the two-year prohibition expires on December 31, 2024, the legislation and its accompanying regulations will be automatically repealed. 

What buyers does this prohibition apply to?

The Act applies to certain individuals, corporations, and entities. 

The Act applies to individuals who do not meet one of the following criteria:

  • Hold Canadian citizenship,
  • Have permanent residency status in Canada, or
  • Are registered under the Indian Act. 

The Act applies to corporations based in Canada that meet the following criteria:

  • Are privately held;
  • Not listed on a stock exchange in Canada; and
  • Are controlled by a non-Canadian.

The Act applies to entities formed under Canadian law or provincial law, that are controlled by a non-Canadian, and entities formed under non-Canadian law.

The definition of control is used to determine whether a privately held corporation or entity is controlled by a non-Canadian. The Regulations define “control” as:

  • The non-Canadian has direct or indirect ownership of shares or ownership interest in the corporation or entity representing 3% or more of the value of equity in it, or carrying 3% or more of its voting rights, or
  • Control in fact of the corporation or entity, directly or indirectly, through ownership, agreement, or otherwise.

Are there exceptions to the prohibition? 

There are limited exceptions to the application of the Act, which include:

  • International students. An individual must be enrolled in a program of authorized study at a “designed learning institution” under the Immigration and Refugee Protection Regulations; have filed income tax returns for all of the 5 taxation years before the purchase is made; have been physically present in Canada for a minimum of 244 days in each of the 5 calendar years preceding the year of the purchase; have not previously purchased residential property in Canada during the prohibition; and purchase property for a price that does not exceed $500,000;
  • Temporary residents working in Canada that hold a work permit or are work permit exempt. To be exempt, a temporary resident working in Canada must hold a valid work permit or be authorized to work in Canada; have worked in Canada for at least 3 of the last 4 years before the purchase; have filed income tax returns for 3 of the last 4 taxation years before the purchase; have not previously made a purchase of residential property in Canada during the prohibition;
  • Refugees. To be exempt, a refugee must have been given refugee protection or be a protected person under the Immigration and Refugee Protection Act. Refugee claimants are also exempt if they have made a claim for refugee protection and their claim has been eligible and referred to the Refugee Protection Division, or the refugee claimant has received temporary resident status based on humanitarian public policy considerations;
  • Accredited members of foreign missions in Canada. To be exempt, an accredited member of a foreign mission must hold a passport that has a valid diplomatic, consular, official, or special representative acceptance issued by the Chief Protocol of Canada; and
  • Non-Canadian spouses and common-law partners. To be exempt, a non-Canadian spouse or common law partner must purchase residential property in Canada with their spouse or common-law partner who is: a Canadian citizen, a person registered under the Indian Act, a permanent resident, or a non-Canadian who is exempt from the prohibition. 

What is considered a “residential property” for the purposes of the purchase prohibition? 

“Residential property” is defined in the Act as including real or immovable property in Canada of up to three dwelling units and parts of such property, such as a condominium unit or semi-detached house. 

The Regulations clarify that the purchase prohibition applies to vacant land that does not contain a habitable dwelling, however, is zoned for residential use or mixed-use and that is located within a Census Metropolitan Area or a Census Agglomeration.

What kinds of properties are not considered “residential properties” for the purposes of the purchase prohibition?

The Act does not apply to multi-unit buildings of more than three dwelling units.

Further, residential properties located outside of Census Metropolitan Areas or Census Agglomeration areas are exempt. A Census Metropolitan Area or Census Agglomeration is one or more adjacent municipalities which are centred on a population core. A Census Metropolitan Area must have a total population of at least 100,000 of which 50,000 or more must live within the core. A Census Agglomeration requires a core population of at least 10,000.

Census Metropolitan Areas and Census Agglomeration are identified in Statistic Canada’s Standard Geographical Classifications 2021, which has reference maps online. Statistics Canada also has an interactive mapping tool, also available online. 

What kinds of purchases are barred by the Prohibition on the Purchase of Residential Property by Non-Canadians Act?

The Act bars both direct and indirect purchases of residential property. Therefore, it prohibits purchases through partnerships, trusts, or other kinds of entities. There are certain exceptions to this prohibition, enumerated in the Regulations, which account for situations where:

  • The person’s interest in the property is acquired because of divorce, gift, separation or death,
  • The rental of a dwelling unit to a tenant for the purpose of its occupation by a tenant,
  • A transfer under the terms of a trust that was created prior to the Act’s effective date (which was January 1 ,2023), or
  • When the person acquires the interest as a result of a secured right by a secured creditor or the exercise of a security interest.

What are the penalties for violating the Prohibition on the Purchase of Residential Property by Non-Canadians Act?

A violation of the Act is a criminal offence. The fine associated with a violation by a non-Canadian, or any person who knowingly assists the non-Canadian in the violation, is up to $10,000. If a corporation or entity violates the Act, the officers, directions, senior officials, or other representations of the corporation or entity can be held liable. 

Additionally, the court may order that the property that was purchased illegally must be sold. If the property is sold, the non-Canadian who purchased it illegally will receive no more than the price they paid for the porperty. Proceeds of the sale can also be used to offset the costs incurred by the government in bringing the application to court. The non-Canadian who has violated the Act is not permitted to profit from the sale, so any remaining sale proceeds of the sale are given to the Receiver General of Canada. 

Contact Baker & Company for Experienced Advice on Real Estate Matters

At Baker & Company in Toronto, our exceptional team of real estate lawyers take the time to speak with you and understand your unique needs to guide you through your real estate matter. Whether you are involved in a commercial or residential property transaction, our lawyers are ready to help. We utilize our extensive experience to ensure that we provide clients with exceptional representation from start to finish of any matter. Call our office at 416-777-0100 or contact us online to schedule your consultation.

Categories
Real Estate Law

Supreme Court of Canada Provides Clarification on Constructive Taking in Expropriation

Municipal governance naturally lends itself to incidental private property regulation. Therefore, land may be subject to various governance and regulations, including zoning by-laws and municipal designations. Expropriation is challenging to prevent; therefore, landowners often focus on obtaining fair compensation. While no property rights are conveyed in the Charter of Rights and Freedoms, Canadian property owners have common law property rights. 

In a recent decision, the Supreme Court of Canada affirmed that a landowner should be compensated if municipal regulations substantially deprive them of the use and enjoyment of their property in an unreasonable manner. In the decision, the Court also revisited the test used to determine constructive taking, focusing on the impacts on property owners, and provided guidance relating to a more expansive definition of de facto expropriations. 

What is Expropriation?

Expropriation is the exercise of a public authority taking land without the owner’s consent. Land may be expropriated by a public body, such as the provincial or municipal government, for a public purpose.  

De facto (or “constructive”) taking occurs when the government body exercises regulatory powers that significantly impair a landowner’s use and enjoyment of their property. In contrast, de jure taking refers to the process in which the government body formally acquires possession or title to the property through the appropriate legislation.  

Where constructive taking has been established, a landowner has a presumptive right at common law to be compensated. However, this presumption may be displaced by evidence of clear statutory language which provides that no compensation is required. The Supreme Court of Canada in Annapolis Group Inc. v. Halifax Regional Municipality has affirmed that a statute may limit a landowner’s right to compensation. While various statutes grant regulation powers to the government, the scope and effect of language that suggests no compensation should be paid will depend on the nature of the constructive taking and the types of claims which flow from it. 

Expropriation Law in Ontario

In Ontario, the Expropriations Act governs the rights of government bodies and landowners concerning the expropriation process and compensation. Legislation such as the Municipal Act and Planning Act may also become relevant in some issues. 

The Ontario Land Tribunal is an administrative tribunal with jurisdiction concerning expropriation compensation. 

Planning Strategy Contemplated Owner’s Development of Land

In Annapolis Group Inc. v. Halifax Regional Municipality, Annapolis Group Inc. (“the owner”) intended to develop 965 acres of land it owned that is situated in Halifax. In 2006, the Halifax Regional Municipality (“the municipality”) included the owner’s land in a proposed Regional Park plan despite the land being zoned for “future serviced residential development.” The planning strategy did not allow for the development of the land until after the municipality adopted a resolution that authorized a “secondary planning process” and amendment to the applicable by-law for land use. 

In 2016, without adopting a resolution to authorize a secondary planning process, the municipality placed signs on the land encouraging the public to use the land as a public park. As a result, the owner brought a claim for constructive taking. The owner claimed that the municipality’s regulatory measures deprived it of all economic or reasonable uses of the land, and the municipality had acquired a beneficial interest in the land by promoting its use to members of the public.

Nova Scotia Court of Appeal Found No Constructive Taking as Land Had Not Actually Been Taken

The municipality requested summary dismissal of the owner’s constructive taking claim. However, the motion judge found the claim raised genuine issues of material fact, including whether the municipality encouraged the public to use the land as a park. The Supreme Court of Nova Scotia dismissed the municipality’s motion. 

At the Nova Scotia Court of Appeal, the Court applied the constructive undertaking test from Canadian Pacific Railway Co. v. Vancouver (City). The Canadian Pacific Railway Co. case states that a claimant must establish there has been an acquisition by the government of a beneficial interest in, or flowing from, the property, and all reasonable uses of the property have therefore been removed. 

The Court of Appeal found no basis for a constructive taking claim and dismissed the owner’s action. The Court interpreted the first prong of the Canadian Pacific Railway Co. test as requiring the land to have “actually been taken”, which had not occurred. The Court went on to state the owner did not have a reasonable chance of establishing that the municipality had acquired a beneficial interest in, or flowing from, the owner’s land. The owner appealed the decision to the Supreme Court of Canada.

Supreme Court of Canada Clarified Test for Constructive Taking of Land in Expropriation Cases

The Supreme Court of Canada clarified the test for constructive taking. It held that to establish a public/government authority has obtained a proprietary interest in a piece of land, a court must decide whether:

  1. The public/government authority has acquired a beneficial interest (advantage) in, or flowing from, the property; and
  2. The regulatory measure taken has removed all reasonable uses of the land.

When determining whether a regulatory measure equates to a constructive taking, courts assess the context of the alleged taking, including:

  • The nature of the land and its historical or current uses;
  • The nature of the government action;
  • Notice to the owner of any restrictions at the time of the property acquisition;
  • Whether the restrictions are consistent with the owner’s reasonable expectations; and 
  • The substance of the alleged advantage gained by the government/public body.

Formal Transfer of Property Not Required to Establish Constructive Taking

The Court noted that some examples of constructive undertaking might include:

  • Confining the use of private land to a public purpose; 
  • Regulations which deprive a land of its economic value and leave a landowner with only notional use of the property; and
  • Indefinite or permanent denial of access to a landowner’s property or the government’s indefinite or permanent occupation of the land.  

The Court clarified that the law does not require a formal property interest transfer to occur to establish constructive taking. Instead, demonstrating that the government has obtained an advantage flowing from the property may be sufficient. Further, while the governing body’s intention is not a component of the test for constructive taking, it may be evidence that constructive taking has occurred. This decision also clarified that zoning “which effectively preserves private land as a public resource” may lend itself to a constructive taking claim if it eliminates all reasonable uses of the land by the property owner.

As the majority of the Supreme Court allowed the appeal, the owner’s claim will proceed to trial to determine whether the municipality is promoting the land as a public park and whether the municipality’s actions have impaired all reasonable uses of the land.

Baker & Company: Toronto Expropriation Lawyers Assisting Property Owners

The skilled expropriation lawyers at Baker & Company understand the immense stress that property owners, businesses, and tenants can experience when the land they own or occupy is being expropriated. We help clients navigate this complicated area of the law and take decisive action to preserve their rights and entitlement to the maximum compensation possible. Our firm has over 30 years of experience representing parties affected by expropriation – never the government or other expropriating bodies. Call us at 416-777-0100 or reach out online to schedule a consultation.

Categories
Property Disputes Residential Real Estate

Condo Buyer Loses Deposit In Dispute Over Purchase Agreement 

The case of Chen v. Brookfield Residential (Ontario) Limited illustrates how changing market conditions and unpredictable construction schedules can affect condominium developments, both for the purchaser and for the builder. 

In Chen, the Ontario Court of Appeal upheld a decision from the Superior Court of Justice, permitting a condominium builder (the “Builder”) to retain a deposit paid by a condominium buyer (the “Buyer”), after terminating the Agreement of Purchase and Sale due to imminent breach. 

Buyer requests cancellation of the Purchase and Sale Agreement due to changing market conditions

The Buyer had entered into an Agreement of Purchase and Sale with the Builder for a detached condominium with joint ownership of common elements. Common elements included a parkette as well as automated entry and exit gates.  

The Agreement of Purchase and Sale was signed on January 19, 2017. A significant change in market conditions in late 2017 resulted in a lower valuation for the property at the time of closing. 

The Buyer contacted the Builder on November 24, 2017, seeking a mutual release or postponement, stating “at this time, I cannot close the deal due to low appraisal value.” 

The Builder offered a short extension, but was advised that the Buyer was seeking a “cancellation of the deal.” 

Buyer submits a Notice of Rescission

On December 7, 2017, the Buyer provided what he called a “written notice of recession” (the “Notice of Rescission”) pursuant to section 74(6) of the Condominium Act. Designed to protect consumers, section 74(6) permits a purchaser to rescind an agreement of purchase and sale when there has been a “material change” to the agreement, by delivering a notice of rescission under section 74(7).

The Notice of Rescission claimed that the amenities promised in the Agreement of Purchase and Sale would not be completed at the time of the closing, notably, the parkette and entry and exit gates. On this basis, the Buyer claimed that there had been a material change that justified the rescission of the contract. 

Builder terminates Buyer’s Purchase and Sale Agreement due to anticipated breach

The same day the Builder received the Notice of Rescission, it advised the Buyer that it was terminating the Agreement of Purchase and Sale due to the Buyer’s anticipatory breach of the contract. As a result, the Buyer’s deposit was forfeited, and the Builder reserved its right to recover losses against the Buyer. 

Buyer initiates a claim against Builder for deposit and damages

On January 18, 2018, the Buyer issued a Statement of Claim, in which he sought the return of his deposit, as well as damages against the Builder. 

Builder counterclaims and seeks summary judgment for damages arising from Buyer’s contractual breach

The Builder defended the claim, and brought a counter-claim for damages against the Buyer. The Builder re-sold the property in October of 2018, at a lower price than what the Buyer had agreed to pay in 2017. 

Shortly thereafter, the Buyer withdrew his claim. 

The Builder brought a motion for summary judgment on its counterclaim for damages resulting from the Buyer’s failure to complete the Agreement of Purchase and Sale (i.e., the lower purchase price that resulted). 

The Buyer then sought to reinstate his original claim, which the Court allowed.

The Motion Judge dismissed the Buyer’s claims and permitted the Builder to retain the deposit. 

Buyer appeals to the Ontario Court of Appeal

The Buyer then appealed to the Ontario Court of Appeal, requesting the Court set aside the decision and return his deposit, plus interest. 

In the alternative, the Buyer asked the Court to amend his claim to include that the Builder breached the Agreement by re-selling the property and seeking relief from forfeiture. 

The Ontario Court of Appeal dismissed the Buyer’s appeal. 

The Buyer argued that the Motion Judge made three main errors:

  1. Finding that the Notice of Rescission was not valid; 
  2. Finding that the Buyer anticipatorily breached the Agreement, which allowed the Builder to terminate it; and
  3. Finding that the Builder could retain the deposit and seek damages.

The Ontario Court of Appeal rejected each of these arguments.  

Notice of Rescission was invalid; failure to complete certain amenities on time does not constitute a material change

The Ontario Court of Appeal found that the Motion Judge correctly concluded that the Notice of Recisions provided by the Buyer was invalid.  

The “material changes” identified in the Buyer’s Notice of Rescission do not fall under the definition of “material change” found within the Condominium Act. The Buyer’s Notice of Rescission claimed that the “material changes” were the failure to complete the parkette and the main entry and exit gates before closing. 

The Condominium Act, in section 74(2) defines material change as:  

“a change … that a reasonable purchaser, on an objective basis, would have regarded collectively as sufficiently important to the decision to purchase … that it is likely that the purchaser would not have entered into an agreement…”

The definition goes on to say that it does not include “a change in the schedule of the proposed commencement and completion dates for the amenities of which construction had not been completed.” 

Consistent with the Condominium Act, as well as with previous case law, the Ontario Court of Appeal held that the non-completion of the parkette and entry/exit gates was not a material change that would justify a Notice of Rescission. 

The Ontario Court of Appeal rejected the Buyer’s argument that a Notice of Rescission not delivered in good faith can still qualify as a valid notice. The Court noted that if this was accepted:

“this would create an absurd result by enabling purchasers to strategically use the rescission mechanism provided under the [Condominium] Act to side-step their otherwise valid contractual agreement, pressure vendors to negotiate releases or unjustifiably extend closing timelines. This could not have been the legislative intent.”

Notice of Rescission was an anticipatory breach of the purchase and sale agreement

Further, the Ontario Court of Appeal agreed with the Motion Judge that the Buyer’s notice of rescission, along with prior communications declaring his desire to “cancel” the Agreement, was an anticipatory breach of the contract. This entitled Brookfield to terminate the Agreement as well as claim damages.  

Builder entitled to retain the deposit and seek damages

Given that the Notice of Rescission was invalid and the Buyer anticipatorily breached the Agreement, the Ontario Court of Appeal upheld the Motion Judge’s decision that the Builder could retain the Buyer’s deposit and seek damages for the repudiation of the contract. 

Buyer not permitted to amend pleadings to seek damages for breach of contract or relief from forfeiture

The Buyer’s alternative claim that sought leave to amend his claim to include claims for breach of contract by the Builder (for selling the unit to a third party) and to seek relief from forfeiture were dismissed. 

The Court of Appeal held that these claims were not previously raised and it would not be in the interests of justice to allow them to be raised in the case at hand. Further, it seemed clear that these claims would be unlikely to succeed, as the Court commended that the Builder was obligated to mitigate its damages by re-selling the property once the Buyer communicated their anticipatory breach of the Agreement of Purchase and Sale. 

Contact Baker & Company in Toronto to speak with a knowledgeable real estate lawyer

At Baker & Company, our skilled real estate lawyers provide dynamic legal solutions and robust advice to clients on a variety of property disputes, including commercial real estate and title issues. We also represent clients in residential real estate issues, development projects, and leasing matters. To schedule a confidential consultation, contact us at 416-777-0100 or reach out online.

Categories
Corporate & Commercial Law

Buyer Successfully Rescinds Franchise Agreement

When buying or selling an existing business, it is essential to ensure the potential buyer is aware of all information relevant to the sale. Sellers must also be mindful of additional requirements set out in industry-specific legislation.

This blog discusses a recent case where the seller of a franchise did not meet applicable disclosure requirements. This resulted in a hefty damages award after the buyer rescinded the agreement a year later.

Buyer wanted to acquire a news franchise

In 1901709 Ontario Inc. et al. v. Dakin News Systems Inc., two parties sought to strike a deal for one to acquire the franchise of another. The plaintiff, Mr. Tan, wanted to increase his income and found an opportunity in Mr. Ashtiani, who operated an International News franchise in Toronto and was looking to sell. The parties entered an Agreement of Purchase and Sale to transfer the franchise to Mr. Tan in trust (through his corporation, the other plaintiff, 1901709 Ontario Inc). 

The sale would go through on the condition that the franchisor approved and the landlord consented to the lease being reassigned. The franchisor and landlord, Dakin News, agreed to the sale and had Mr. Tan sign a franchise agreement and a sublease agreement. Mr. Tan provided Dakin News with several fees.

Buyer tried to pull out of purchase a year later

Mr. Tan, through 1901709 Ontario Inc., operated the store from March 2014 to April 2015. In April 2015, he sought to rescind the franchise agreement. Mr. Tan wanted to recoup his losses because, he alleged, Dakin News had not provided him with adequate disclosure as required by the Arthur Wishart Act (Franchise Disclosure). Section 5 of that Act reads as follows:

Franchisor’s obligation to disclose

5 (1) A franchisor shall provide a prospective franchisee with a disclosure document and the prospective franchisee shall receive the disclosure document not less than 14 days before the earlier of,

(a) the signing by the prospective franchisee of the franchise agreement or any other agreement relating to the franchise, other than an agreement described in subsection (1.1); and

(b) the payment of any consideration by or on behalf of the prospective franchisee to the franchisor or franchisor’s associate relating to the franchise, excluding the payment of a deposit if it,

(i) does not exceed the prescribed amount,

(ii) is refundable without any deductions, and

(iii) is given under an agreement that in no way binds the prospective franchisee to enter into a franchise agreement.

Dakin News responded that it did not believe any disclosure was required. Subsection 5(7) of the Arthur Wishart Act waives the disclosure requirement if a third party purchases the franchise from an existing franchisee. As a result, the central issue was whether Dakin News was required to provide disclosure to Mr. Tan and his trust company, 1901709 Ontario Inc.

Was the six-step approval process enough to fulfill disclosure?

In addition to the required approval by Dakin News of the sale of the franchise and assignment of the lease, Dakin News imposed a six-step procedure upon Mr. Tan’s company. The steps were as follows:

  1. “Email us the lawyers’ (the buyers’ and the seller’s) contact information which includes the name, address, telephone number, fax number and email address.
  2. Fax or email us a copy of the Purchase and Sale Agreement
  3. BUYER to provide the following information through the SELLER or its Solicitor:
  1. The last mortgage statement showing principle [sic], interest amounts and current balance outstanding
  2. Letter from financial institution confirming cash on hand, stocks, bonds, other investments, debts and loans
  3. Current credit card balances
  4. Articles of Incorporation listing of all shareholders and directors
  5. Completed Franchise application
  1. SELLER to provide a certified document (from your accountant) showing the total gross sales (which includes HST) for the last 12 months immediately preceding the transfer.
  2. BUYER to obtain a Bulk Sales Act from the SELLER through your lawyer to make sure all debts (the seller’s) have been settled before the transfer. This document does not have to be handed over to us. BUYER to have their lawyer do a “holdback” on the funds you are going to release to the SELLER to cover any rental adjustments that are still to come. The Landlord does not have the reconciled numbers until at least 3 to 9 months (in the majority of the cases) after the end of the current year.

When we receive all of the above to our satisfaction, the BUYER AND SELLER shall be contacted AND THE BUYER will be asked to come in for an interview.

  1. A transfer date will then be determined by Operations Department provided there are no more outstanding issues and all funds are in from both parties and the new Franchise and Sublease Agreements are signed.”

Rescission fee demanded from buyer after approval process completed

The plaintiffs completed all the steps on January 27, 2014. In July 2014, Mr. Tan received a letter from Dakin News advising of plans to rebrand the International News franchise. This would require payment of $75,000 in three installments for the refurbishment. Since the franchise agreement and sublease were set to expire in May 2015, Mr. Tan was obligated to accept this, even though 1901709 Ontario Inc. had already paid a renewal fee.

For this reason, the company issued its Notice of Recission in May 2015 under section 5 of the Arthur Wishart Act. Mr. Tan sought refunds of the purchase price, inventory and supply costs, losses incurred from the franchise’s acquisition, and damages under the Arthur Wishart Act. 

Dealings between franchisor and new franchisees require disclosure

Under section 6(2) of the Arthur Wishart Act, a franchisee can rescind the franchise agreement without penalty if disclosure requirements are not met. The time limitation to do this is within two years of signing the franchise agreement. If Dakin News believed it to be exempt from disclosure requirements, it would have to prove this fact under section 12 of the Act.

While Mr. Tan’s initial contact with the franchise was through an existing franchisee, Mr. Ashtiani, the Ontario Superior Court found that the deal ultimately struck was with the franchisor, Dakin News. Dakin News required Mr. Tan to enter an entirely new agreement and sublease. It also demanded Mr. Tan pay an inventory fee of $20,000, even though Mr. Tan had purchased Mr. Ashtiani’s existing inventory. The Court found that the exemption set out in section 5(7) of the Arthur Wishart Act as Dakin News was the party that had effected the grant of the franchise.  As a result, Dakin News could not use its existing franchisee to shield it from its statutory disclosure obligations.

The franchisor was obligated to pay the franchisee who rescinded the agreement

As a result of the above analysis, the Court concluded that Mr. Tan and 1901709 Ontario Inc. were entitled to rescind the franchise agreement under section 6(2) of the Arthur Wishart Act. The Court ordered that Dakin News and its associates were liable to pay 1901709 Ontario Inc. a sum of $32,048. This sum was to reimburse Mr. Tan and 1901709 Ontario Inc. for training, the security deposit, and royalties. The Court added $1,123 in damages for inventory costs. Finally, Mr. Tan and 1901709 Ontario Inc. were to be reimbursed $51,274 for the operating losses incurred.

Baker & Company Provides Trusted Advice on Mergers, Acquisitions, and Franchise Agreements in Toronto

The knowledgeable corporate and commercial lawyers at Baker & Company provide reliable advice and innovative legal solutions to entrepreneurs looking to start or grow a business. Whether you are a new or seasoned business owner, we help navigate the business law landscape and ensure your company is structured to maximize profitability and avoid risk. Our team advises on all aspects of mergers and acquisitions, as well as franchise agreements (especially pertaining to hotel law). To speak with a member of our business law team, please call 416-777-0100 or contact us online.

Categories
Commercial Leases

Lease Interpretation Leads to Successful Appeals

The Ontario Court of Appeal recently decided the matter of 402 Mulock Investments Inc. v. Wheelhouse Coatings Inc.. The issue in this case arose from a dispute between a commercial landlord and tenant regarding the meaning of the provisions relating to unpaid rent and payment of repairs in their Lease Agreement. Both parties appealed the initial decision and were successful in their own right.

This case is a reminder to both commercial landlords and tenants to ensure that relief is requested in the proper form.

Commercial tenant alleges landlord illegally terminated lease

The commercial landlord, Wheelhouse Coatings Inc., terminated the lease with the tenant, 402 Mulock Investments Inc., early in December 2020. Approximately two weeks after the termination, the landlord entered the unit to remove the tenant’s property and subsequently leased the unit to another party.

In January 2021, the tenant commenced an action against the landlord alleging that the landlord had illegally terminated the lease and removed the tenant’s property. The tenant sought an injunction from the Court, in addition to the return of the security deposit in the amount of $65,000 which the landlord was holding under the lease.

Commercial landlord was ordered to vacate the premises and return tenant property

Under the Commercial Tenancies Act, commercial landlords cannot enter premises occupied by a tenant as they please, even after issuing a notice of termination of a lease as a “non-enforcement period” applies after a notice is issued. At the initial hearing, the Court determined that the non-enforcement period ran from the date the notice was issued, December 8, 2020, through January 3, 2021.

The landlord was ordered to give vacant possession of the portion of the leased premises which were not subject to subleases by April 15, 2021, and return the tenant’s property to the tenant. 

There was no order made regarding the security deposit.

Commercial landlord claims tenant responsible to “top up” security deposit

After the initial hearing, the landlord sent the tenant an invoice to split the cost of replacing the roof. When the tenant’s invoice was not paid, the landlord held the invoiced amount back from the return of the security deposit. The landlord claimed that the Lease Agreement required the tenant to “top up” the security deposit to the full $65,000. Since the tenant did not do so, the landlord considered the tenant to be in default and applied for an order for writ of possession.

The tenant argued that it was not obligated to pay the invoice and that the landlord should have returned the security deposit months earlier. Even if it was obliged to pay the invoice, the tenant submitted it was not required to “top up” the security deposit.

Commercial landlord application for writ of possession is unsuccessful

The application judge held that the tenant had to pay the roof invoice. While the Lease Agreement required the deposit to be returned by August 2020, the application judge found that the landlord should have returned the deposit to the tenant much earlier in August 2017. Furthermore, the invoiced amount should not have been deducted from the deposit, nor should the landlord have asked for a “top up.” 

The application judge ordered that the tenant pay the invoice and offset this amount against the deposit. The deposit, less the unpaid invoice, was to be paid by the landlord to the tenant. No writ of possession was issued by the Court.

Both parties appealed parts of the application judge’s findings

Both the landlord and the tenant appealed the application judge’s decision to the Ontario Court of Appeal. The landlord appealed on the basis that the application judge should not have ordered the return of the security deposit to the tenant. The tenant cross-appealed, claiming that the invoice was not in accordance with the Lease Agreement and should not have been used to offset what the landlord owed.

Court of Appeal finds the security deposit did not have to be returned as the commercial tenant was in default

The Court of Appeal was required to interpret section 1.9 of the Lease Agreement, which provided that the:

“The Landlord may… apply all or any portion of the Second Security Deposit to any Tenant default. In the event that… the Second Security Deposit is applied by the Landlord on account of any Tenant default, the Tenant shall pay to the Landlord an amount sufficient to restore the Second Security Deposit to the original amount… The Second Security Deposit shall be held for a period of Three (3) Years from the Commencement Date, August 15, 2017. At the end of the Three (3) Year period, on August 14, 2020, and provided that the tenant is not then in default at that time, the Second Security Deposit shall be returned to the Tenant, and provided there has been no deduction from the amount of the Second Security Deposit by the Landlord as a result of default by the Tenant, without any setoff or deduction. If the amount of the Second Security Deposit has been reduced… then the remaining amount of the Second Security Deposit shall be returned to the Tenant.”

The application judge interpreted this provision to mean that the landlord was required to return the security deposit to the tenant without deducting any amounts in default. However, the Court of Appeal found that this interpretation did not factor in the clear wording relating to defaul, therefore the landlord was entitled to retain the deposit if the tenant was in default as of August 2020. The application judge did not assess whether the tenant was in default, however, the Court of Appeal found that the tenant had not paid rent when it became due on August 1, 2020, therefore the landlord was allowed to retain the deposit.

The cost of the roof replacement was to be amortized over its useful life, not over two years

Regarding the tenant’s cross-appeal, the Court of Appeal considered sections 2.6 and 1.6 of the Lease Agreement, under which the landlord was responsible for “serving the Leased Premises and amortizing this cost in the Additional Rent.” 

Regarding additional rent, section 1.6 read:

“Notwithstanding the foregoing, (i) the landlord shall, at its own expense, be responsible for all structural repairs or replacements and all work done specifically for other tenants, (ii) any other capital repairs or replacements shall be amortized over the useful life of the repair or replacement determined in accordance with generally accepted accounting [principles], consistently applied, and (iii) the Landlord’s management and administration fees shall not exceed fifteen percent (15%) of the Additional Rent excluding taxes and insurance.”

The application judge had concluded that the cost of replacing the roof at the premises could be amortized as additional rent. However, the Court of Appeal found that the application judge erred in allowing the cost of the roof replacement to be amortized over two years when it should have been “amortized over its useful life.” The roof replacement was found to be a “capital repair.”

The parties did not request declaratory relief 

Given that neither party applied for declaratory relief, or a determination of the amount payable to the landlord, the Court of Appeal merely struck two findings from the application judge’s decision. 

Since both parties were successful in their own right on appeal, an order for costs was not awarded. 

Contact the Lawyers at Baker & Company in Toronto for Experienced Advice on Commercial Leasing

At Baker & Company, our real estate lawyers take the time to learn about each clients and understand their unique needs when it comes to commercial and residential real estate matters. Our team utilizes our broad base of experience and expertise to provide exceptional risk management and legal advice when guiding clients through leasing disputes. To speak with a member of our team regarding your real estate concerns, call us at 416-777-0100 or contact us online to schedule a consultation.

Categories
Employment Law

Discretionary Bonuses Must Be Fair and Reasonable

When an employee’s employer is bought out by another company, the employee may either lose their job, or alternatively, arrangements may be made to retain the employee in an acquisition. When an employee is retained, it is crucial to ensure that the employee and the new employer are on the same page about the terms of the employment relationship. If a mutual understanding is not reached, it could lead to contract analysis by a court at a later date.

The appellants were employed at a hedge fund that was sold to the respondent

In Bowen v JC Clark Ltd, a recent case before the Ontario Court of Appeal, the appellants were portfolio managers of a hedge fund. The respondent acquired the hedge fund and the appellants were hired as part of that acquisition. The appellants worked for the respondent for one and a half years, from December 2012 until July 2014, when they were terminated without cause.

In lieu of notice, the appellants were given two weeks’ salary in addition to $577.00. The appellants started an action against the respondents seeking performance fees totalling more than $1.3 million, which they claimed was a term of their employment contract. The trial judge dismissed the action and the appellants appealed that decision to the Ontario Court of Appeal.

The appellants believed their new contract included performance fees earned in 2014

The hedge fund initially hired the appellants in 2003. Under the previous owner, Mr. Braun, the appellants grew from junior positions to managers of the fund by the spring of 2012. When Mr. Braun sold the company to the respondents, he negotiated a term that he would remain at the company to focus on investor-client relations. He also requested that the appellants be hired to manage the day-to-day activities of the fund. Mr. Braun and the appellants were supposed to be the three portfolio managers of the fund.

In finalizing these terms, Mr. Braun signed a “combination agreement”, which provided that Mr. Braun would receive a 40% share of the management fees and the same amount in performance fees earned by the fund for four years after the acquisition. This agreement also required the respondents to hire the appellants as per Mr. Braun’s request, and it allowed Mr. Braun to share these entitlement fees with the appellants.

Mr. Braun shared copies of this agreement with the appellants, but they did not have the final signed version. Before they signed their new offers of employment, Mr. Braun told the appellants that he planned to share his entitlement with them. Specifically, he committed to paying them 50% of the management fees and 100% of the performance fees allocated to him. A provision in the appellants’ employment contact also referenced their eligibility for a bonus based on performance and profitability of the hedge fund.

After being fired, the appellants wanted more money in performance fees

The fund did not earn any performance fees in 2012, therefore there were no fees to allocate in 2013. In December 2013, the respondent gave the appellants a discretionary bonus totalling $15,000. The performance fees earned in 2013 equated to over $121,000.00. In January 2014, Mr. Braun directed the respondent to share his 40% of that performance fee with the appellants. Each of the appellants was paid just over $24,000.00, in addition to the discretionary bonus. In July 2014, the respondents abruptly terminated the relationship with the appellants however Mr. Braun remained at the company. Heinsisted that the entire 40% of his performance fees for 2014 be paid out to each appellant (a total of $358,000.00 after tax). Unhappy with this amount provided by Mr. Braun, the appellants claimed the respondent owed them performance fees as well.

At the initial trial, the appellants were unsuccessful on the basis that Mr. Braun had paid them their performance fees for the portion of 2014 which they were employed with the fund. On appeal by the appellants, there were two main issues:

  1. The Court of Appeal considered the trial judge’s finding that “the appellants were not entitled to a percentage of the performance fees of the fund as an implied term of their employment agreements.”
  2. The court considered “the appellants’ claim that they were entitled to a discretionary bonus under paragraph 5 of their employment agreements.”

The appellants were not entitled to additional performance fee payout from the respondent employer

The Court of Appeal maintained the trial judge’s finding that the appellants were not entitled to a share of the fund’s performance fees as the appellants knew they would be paid performance fees through Mr. Braun, instead of directly from the respondents, when they signed their contract. The written terms of the agreement were clear on plain reading. The record at trial indicated that the appellants were not entirely satisfied with this arrangement and had unsuccessfully tried to renegotiate it numerous times. Ultimately, the appellants signed the employment contract under the understanding that the respondent was not responsible for providing them a share of the performance fees directly. The Court of Appeal found no error in the trial judge’s decision on this issue.

The payout of discretionary bonuses must be fair and reasonable

On the second issue, however, the trial judge did not allow the appellants to argue their case for entitlement to a discretionary bonus under paragraph 5 of the employment agreement they signed. The Court of Appeal found this to be an error. In considering the bonus provision set out in paragraph 5 of the employment agreement, the Court of Appeal found that although the bonus was discretionary, the respondent was not “entirely unconstrained as to how that discretion was exercised.” Implied in any discretionary bonus term is that discretion will be exercised both fairly and reasonably.

The Court of Appeal noted that the only discretionary bonus paid to the appellants in 2014 was the $577.00 which was termed a “2-week pro-rata bonus” for the two-week notice period from July 17 to July 31, 2014. There was no discretionary bonus for the period of January 1 to July 16, 2014. Consequently, the Court of Appeal found this not to be a fair and reasonable exercise of the respondent employer’s discretion. In referring to two employees similarly situated to the appellants, who were paid $200,000.00 as a discretionary bonus, the Court of Appeal held that the appellants should have been paid a discretionary bonus of their own in the same range. The appeal was therefore allowed in part. The Court of Appeal pro-rated the discretionary bonus owed to the appellants for the period of seven months of work, which was equivalent to $115,000, awarded to each appellant.

Contact Baker & Company to Defend the Terms of Your Employment Contract

The employment lawyers at Baker & Company in Toronto regularly work with employees and employers to manage risk and enforce rights with respect to employee contracts and wrongful dismissal matters. Our employment lawyers know how critical it is to ensure that an employer’s obligations to their employees have been satisfied, and also understand the importance in mitigating an employer’s exposure to potential liability and risk claims. To speak with a trusted lawyer about a wrongful dismissal, employment contracts, or other employment law issues, contact us online or call us at 416-777-0100.

Categories
Wrongful Dismissal

Can an Employee Claim Damages if They are Fired and Rehired by the Same Employer

If an employee is terminated and later rehired in a different capacity by the same employer, have they really been terminated? Is the employee entitled to claim damages through an action commenced for wrongful dismissal or constructive dismissal?

This article will set out basic principles of wrongful dismissal and constructive dismissal before analyzing a recent decision of the Ontario Superior Court of Justice in which an employee claimed damages for wrongful dismissal after being terminated and then rehired by the same employer at a lower position with a reduced salary.

Has the employee been wrongfully dismissed?

If an employee is terminated by an employer that does not assert its legal justification for terminating the individual’s employment without notice, or compensation in lieu of notice, the employee is deemed to have been terminated without cause. If an employee does not receive either reasonable notice of termination or reasonable compensation in lieu thereof, they may have a claim for wrongful dismissal.

A court may make a finding that a terminated employee has been wrongfully dismissed even if they are later employed by the same employer in a demoted position.

Has the employee been constructively dismissed?

An employee that has been demoted may be able to make a claim for constructive dismissal. If the employer unilaterally and fundamentally changes one or more of the existing terms and conditions of the employment relationship it may amount to a breach of contract, or constructive dismissal.

Constructive dismissal disputes can be complex and challenging for the employee to prove, therefore guidance is generally sought from a knowledgeable employment lawyer. It is imperative to speak to a lawyer early because failure to resign within a reasonable timeframe could be viewed as passive acceptance of the circumstances by the employee.

Is the employee required to accept the new position in order to mitigate their damages?

Employees that have been wrongfully dismissed or constructively dismissed have a duty to mitigate their damages by attempting to secure alternative employment.

It is possible that an employee may be required to mitigate their damages by returning to work for the same employer if the employer offers the employee an opportunity to do so. However, the courts will not require the employee to do this in every circumstance, for example, if continuing employment with the same employer would result in working in “an atmosphere of hostility, embarrassment or humiliation”.

Employee worked in a new position for the same employer after termination

In Amerato v TST-CF Solutions LP, the plaintiff employee began working for the defendant in 2005. She was later promoted to Customer Service Supervisor before going on short-term disability leave in June 2020. The initial short-term leave transitioned to long-term disability in December and she began receiving benefits equivalent to 60% of her pre-leave salary.

In January 2021, the employer said that the employee’s employment was terminated effective on February 1, 2021, and subsequently confirmed this in a letter. The employer claimed that the termination was due to a merger of the company and challenges related to the COVID-19 pandemic. That same day, the employer issued another letter to the employee offering her a job change to Senior Customer Service Representative with a 20% salary reduction.

The plaintiff’s lawyer wrote to the defendant, taking the position that the employee had been wrongfully terminated. The lawyer later stated that the plaintiff would work in her new position to mitigate her damages without waiving her legal rights. The employee continued to work for the defendant for four hours a day, three days per week, with a top-up income paid from her long-term disability insurer.

Court finds employee wrongfully terminated

Justice Chalmers found that the letters from the employer were clear – the employee was first terminated and then offered a job change. His Honour rejected the employer’s argument that the employee was presented with two options, termination or job change, and selected the latter.

As an aside, his Honour noted that:

“If I had not found that [the employee] had been terminated from her employment, I would have found she had been constructively dismissed. There is no dispute that the new position is a demotion from her previous position as a supervisor and pays a lower salary.”

As the plaintiff had been dismissed, his Honour went on to apply the Bardal factors to assist in determining a reasonable notice period which the employee should have been entitled to, and ultimately decided that a reasonable notice period of 18 months was appropriate in the circumstances.

Damages reduced by income earned in notice period, but not by amount of disability benefits

At the date of termination, the employee was receiving long-term disability benefits. Justice Chalmers explained that the issue of whether the disability benefits received during the notice period ought to be deducted from the award of damages was to be determined by the terms of the employment contract and the intention of the parties.

The employee had paid a portion of the premiums for her disability coverage, therefore his Honour held that the employer was not entitled to a deduction of the long-term disability benefits received by the plaintiff during the notice period. Whether the insurer would require reimbursement of the benefits paid during a period when the employee was receiving damages for wrongful dismissal was a separate issue between the plaintiff and the insurer.

However, Justice Chalmers noted that income earned by the employee during the notice period is generally treated as mitigation of loss. As the employee had accepted the demotion and was working for the employer 12 hours per week, the employer was entitled to a credit for the amount the employee had earned in income during the notice period. As a result, the Court awarded damages to the employee in the amount of $88,000 (18 months of pre-termination salary), reduced by the income she earned through her employment during the notice period.

Contact Baker & Company Employment Lawyers in Toronto for Guidance on Employee Termination

The employment lawyers at Baker & Company in Toronto regularly work with both employees and employers with respect to managing risk, and enforcing rights, related to wrongful dismissals. It is vital that these documents be kept up to date to ensure that they comply with all relevant legislation and that an employer’s obligations have been satisfied while also mitigating an employer’s liability and risk. To speak with a lawyer about a wrongful dismissal, or other employment law issue contact us online or by phone at 416-777-0100.