Commercial Landlord Entitlements Dependent On Lease Contract
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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.

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