COURT OF APPEAL FOR BRITISH COLUMBIA

Date: 20100312

Docket: CA036849

Between:

666465 B.C. Ltd.

Respondent

(Petitioner)

And

Concord International Lands Ltd.

Appellant

(Respondent)

On appeal from:  Supreme Court of British Columbia, January 23, 2009
(666465 B.C. Ltd. v. Concord International Lands Ltd., 2009 BCSC 52,
Docket S081300)

Reasons for Judgment of the Honourable Mr. Justice Mackenzie:

[1]             This is an appeal by the landlord from an order granting the tenant a declaration that it is entitled to a renewal of its commercial lease (“the Lease”) for a five-year term.  The issue at trial was whether certain articles in the Lease related to a renewal term were sufficiently uncertain to render the entire Lease void.

Background

[2]             The appellant landlord, Concord International Lands Ltd. (“Concord”) is the successor by assignment of the original lessor, L.I.I. Investments Ltd. (“LII”) which entered into the Lease with 666465 B.C. Ltd. (“Bellagio”) dated 12 April 2003. LII and Bellagio were related corporations.  Bellagio made improvements and opened for business as an ice cream parlour under the name Bellagio’s Gelato in July 2003.  On 30 April 2004 Concord purchased the property which included the premises on which Bellagio was operating from LII, including an assignment of LII’s interest in the Lease.  A dispute between Concord and Bellagio over the Lease culminated in Bellagio’s petition for declarations of entitlement and Concord’s response that the Lease was void for uncertainty.

Issues

[3]             The issues in this Appeal primarily concern the determination of rent during a renewal term and revolve around two provisions of the Lease, Article 25.1 (Right of Renewal) and 3.1 (Base Rent).  The material parts of those articles read:

25.1     Right of Renewal

If the Tenant duly and regularly pays all rents and performs each and every of the covenants herein to be performed and observed by the Tenant and if this Lease has not been assigned or the Premises sublet in whole or in part with or without the consent of the Landlord, the Landlord shall grant to the Tenant a renewal lease for three (3) consecutive terms of Five (5) years each (in this Lease called the “Renewal Term”) which shall automatically be renewed after each term, upon the same terms and conditions contained herein, save as to rental and this option to renew without written notice to the Landlord. The Basic Rent for the Renewal Term shall be agreed upon between the parties and shall be based on the fair market rent of a renewal lease for premises of similar size, quality and location and with the existing improvements as are in the Premises installed by whomsoever. Increases in Base Rent shall be calculated based on the inflation rate as determined by the Government of Canada, but in no event shall exceed more that Five Percent (5%) in total for each consecutive term, whichever is less. Decreases in Base Rent shall be calculated based on the fair market rent for other premises of similar size, quality and location as submitted by at least 3 independent leasing agents. For the purposes of computing the Basic Rent payable during the last year of the Term, there shall be excluded any rental abatements, free rents or inducements provided to the Tenant. The Landlord and Tenant shall attempt to agree on the fair market Basic Rent for the Renewal Term during the three (3) month period immediately following the receipt by the Landlord of the written notice aforesaid. Failing agreement as to the Basic Rent, the Basic Rent shall be determined by arbitration pursuant to the Commercial Arbitration Act, S.B.C. 1996, Ch. 55. Should the matter of the rent not be determined by agreement or arbitration prior to the commencement of the renewal period, the Tenant shall pay the Basic Rent immediately applicable prior to the renewal period on account of the Basic Rent payable during the Renewal Term.

3.1       Base Rent

The Tenant shall pay to the Landlord yearly and every year during the Term a basic rent (herein called “Base Rent”) of Twenty Seven Thousand Two Hundred ($27,200.00) dollars payable in equal monthly instalments of Two Thousand Six Hundred and Sixty Six Dollars and Sixty Seven Cents ($2,266.67) dollars each in advance on the first day of each and every month during the Term. Notwithstanding anything contrary to this clause, during the Term of the Lease, the Base Rent plus Operating Costs, Property Taxes and any other additional rent (herein called “Gross Rent”) shall not exceed Forty Two Thousand Dollars ($42,000.00) dollars payable in equal monthly instalments of Three Thousand Five Hundred Dollars ($3,500.00) each in advance of the first day of each and every month during the Term. If the Landlord acting reasonably in accordance with section 1.1 hereof determines that the Rentable Area of the Leased Premises is other than the area set out in section 1.1, there shall be a proportionate increase or decrease in the Base Rent.

The parties agree that the lease must provide a means to determine the rent during the renewal term for the right of renewal to be upheld as enforceable.

[4]             The chambers judge approached the issues of interpretation in the light of the broad observation, approved by this Court in Empress Towers Ltd. v. Bank of Nova Scotia (1990), 50 B.C.L.R. (2d) 126 at 129, 73 D.L.R. (4th) 400 (C.A.), that “courts will try, wherever possible, to give the proper legal effect to any clause that the parties understood and intended was to have legal effect”.  He noted that the Lease was poorly drafted but he rejected the submission that its meaning could not be determined.  He made an order that Bellagio was entitled to a renewal of the lease for a five year term commencing 1 October 2008 “in accordance with section 25.1 of the Lease”.

Discussion

[5]             On appeal, Concord presented several arguments regarding the clarity of the contract, and particularly the proper means to determine rent on renewal.  It argued that the provisions of the lease are fundamentally inconsistent and uncertain and thus the trial judge erred in upholding the contract.  As noted above, Concord’s submissions are aimed primarily at two provisions.  First, it argues that Article 25.1 is confused and inconsistent.  Second, it argues that the Lease is unclear whether the provisions of Article 3.1, and particularly a cap on rent, are carried forward into a renewal term.

[6]             Concord submits that the meaning of Article 25.1 is indeterminate in several respects.  First, it claims that the Article uses several undefined and uncertain terms. The Article employs the capitalized terms “Basic Rent” and “Base Rent” without any apparent distinction.  Base Rent is a term defined in Article 3.1 as rent payable during the “Term”, defined in Article 2.1 as the first term of the lease.  “Basic Rent”, capitalized, is not defined anywhere in the Lease.

[7]             While this drafting is careless, I think that it can be reasonably inferred that the terms Basic Rent and Base Rent are used interchangeably and convey the same meaning in Article 25.1.  The Article states that the “Basic Rent for a Renewal Term … shall be based on the fair market rent of a renewal lease for premises of similar size, quality and location…” according to a complex formula which is set out in the latter portion of 25.1.  The term “Base Rent” has a particular Article 3.1 definition, but I think that the intention is clear that in Article 25.1 it is equated with Basic Rent as determined by the fair market rent formula.  The fact that it is defined with a different meaning in Article 3.1 is simply inept drafting and does not preclude a sensible interpretation of its meaning in the context of Article 25.1.

[8]             Article 25.1 also uses the term “rental” as one of two elements of the contract which are not carried forward to form the new contract during a renewal term.  The term “rental” is not defined but in the context of Article 25.1 it can be sensibly interpreted as the amount of rent, inclusive of taxes and operating expenses, which is due to the lessor under Article 5.1.  Such an interpretation of “rental” within Article 25.1 is neither incomprehensible nor uncertain, and would be compatible with the basic rent formula in Article 25.1, and the remainder of the contract.

[9]             In addition to alleging that Article 25.1 contains uncertain terms, Concord argues that the formula the lease sets out to determine the rent for a renewal term is itself unclear.  The formula is complex, as the chambers judge noted, but I agree with him that it is not so complex as to be incapable of reasonable application.  In the event that the parties cannot agree on the basic rent, certainty is provided by the agreement to determine it by arbitration.

[10]         The other ambiguity in Article 25.1 raised by Concord concerns the exercise of the right of renewal.  Concord submits that it is unclear whether there is one renewal term of 15 years or three terms of five years each.  The wording is awkward but in my view the dominant intention of the wording is that there are three terms of five years each, renewed automatically at the end of each term without written notice to the landlord.  “Renewal Term” consequently means each separate five year term. The provision is unusual but it accords with the wording and is not internally inconsistent.  Left hanging is the reference to “written notice aforesaid” later in the article in connection with the obligation “to attempt to agree on the fair market Basic Rent for the Renewal Term…” but I do not think absence of an effective stated notice requirement undermines the obligation on both parties to attempt to agree on the basic rent and, failing agreement submit the matter to arbitration.

[11]         The second thrust of Concord’s argument raises issues with respect to the $42,000 cap on “Gross Rent” set out in Article 3.1.  It contends that the Article is unclear as to whether the application of the cap extends into a renewal term.  In the Lease, the cap is applied to limit the “Base Rent” as defined in Article 3.1 (in combination with other charges).  In contrast, it does not appear in relation to the different definition of “Basic Rent” in Article 25.1.  Concord argues that it is therefore unclear whether the cap is intended to be carried forward in connection with the use of “Basic Rent” in Article 25.1, or excluded along with the other elements of Article 3.1.  As discussed above, I think that Basic Rent and Base Rent are intended to be given different meanings in the two articles, and this conflict therefore does not arise. I do not think that the poor drafting surrounding these terms causes serious difficulty in interpretation.

[12]         In the alternative, Concord submits that if the Gross Rent cap in Article 3.1 is clear, it is intended to only apply to the original term and not to the rent payable during renewal terms.  The chambers judge did not directly address this question.  Bellagio argues that the question of whether the $42,000 cap on Gross Rent applies during renewal terms was not raised before the chambers judge and was not addressed by him for that reason.  Bellagio’s petition was simply for a declaration that it was entitled to a renewal of the Lease and it was unnecessary to resolve the cap question in granting the declaration.  However, Concord did argue that the uncertainty about the extension of the cap to a renewal term was one reason that the renewal provision of the Lease was void for uncertainty.  The parties appear to agree that if the renewal provisions of the Lease are upheld and Base Rent issues are arbitrated, the cap issue would be a question of law outside the arbitrator’s jurisdiction.  This issue is sufficiently important in the context of this dispute that, in my view, it should not be left unresolved.

[13]         On the substantive issue of interpretation, Bellagio contends that the rent provisions of Article 25.1 are confined to determining Base Rent and Basic Rent (the two terms used interchangeably) and the $42,000 cap on Gross Rent set out in Article 3.1 continues to apply during the renewal terms.  It argues that this interpretation is supported by the carryover into renewal terms of the obligations to pay operating expenses and taxes.  Bellagio argues that this implies that it is only the Base Rent provisions of Article 3.1 that are superseded by Article 25.1 and thus that all other rental provisions carry forward, including the cap.  To do this would require interpreting the “Term of the Lease” in Article 3.1 as including renewal terms.

[14]         Concord submits that Bellagio’s interpretation of “Term of the Lease” is in direct conflict with the definition of “Term” in Article 2.1 as the term ending 30 September 2008.  It is also inconsistent with other provisions that distinguish between Term and Renewal Term, notably 3.3 (Administration Fee), 14.1 (Taxes on Premises) and 14.10 (Payment for Operating Expenses).  Concord notes that the obligation to pay Base Rent, taxes and operating expenses flows from Article 5.1 (Payment of Rent) and not 3.1.  Finally Concord submits that an intention of the parties to extend the cap through renewal terms totalling up to 15 years is not commercially reasonable having regard to potential increases in taxes and operating expenses (limited by 25.1) over such a lengthy period.

[15]         In my view, Bellagio’s interpretation is not supportable.  I am satisfied that the exclusion of “rental” from the renewal terms and conditions, under Article 25.1 was intended to address the entirety of Article 3.1, not only the Base Rent amounts. This extends to supersede the $42,000 cap on Gross Rent.  In the context of those articles and the Lease as a whole I am satisfied that “Term of the Lease” in Article 3.1 means only the term ending 30 September 2008 and does not include renewal terms.

[16]         The parties also raised one additional dispute concerning the area of the leased premises.  Bellagio apparently occupies a space of about 74 square feet at the front of the premises not included in the site plan appended as Schedule A to the Lease and asserts it does not occupy about 200 square feet at the back of the premises.  Concord contends that this makes the premises that are the subject of the lease uncertain.  In my view, there is no merit in that submission.  On this point, the Lease is clear.  Article 1.1 defines the “Premises” as the lands “as shown outlined in the Site Plan attached hereto as Schedule “A”.”  There is nothing in Article 25.1 that changes the definition of Premises on renewal.  Any variation in Bellagio’s pattern of occupation that is not in accord with the Site Plan boundaries is outside the Lease and does not make it uncertain.

Conclusion

[17]         In the result, I am satisfied that there was no reversible error in the order of the judge upholding the validity of the Lease and specifically the renewal provision.  I would therefore dismiss the appeal.

“The Honourable Mr. Justice Mackenzie”

I AGREE:

“The Honourable Madam Justice Saunders”

I AGREE:

“The Honourable Madam Justice Bennett”