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“Finish What Ya Started”: ONCA Comments on Risks of Not Defining Substantial Completion in a Commercial Lease Agreement

In Paletta International Corporation v. Liberty Freezers London Ltd., 2021 ONCA 383,[1] the Ontario Court of Appeal (“ONCA”) considered a commercial lease dispute wherein the landlord had commenced an action against the tenant to recover damages for breach of contract following alleged delays in completing retrofit work to the premises. Much of the dispute revolved around the timing of “substantial completion” of that retrofit work and the resultant commencement date of the lease.

Ultimately, the ONCA held the effective lease commencement date to be 18 months later than had been determined at trial, resulting in a significant reduction to the landlord’s damages for its otherwise successful breach of contract claim. Commercial lease agreements often include provisions regarding retrofit or other construction work prior to the commencement of the lease term. This decision is highly relevant to commercial landlords and tenants because it demonstrates how a detailed list of agreed-upon obligations can provide sufficient precision to an otherwise undefined date of substantial completion upon which a commencement date is contingent.

Facts

The parties entered into a lease agreement dated October 5, 2010 (the “Lease”). The respondent landlord undertook to carry out an extensive retrofit of the premises to accommodate the appellant tenant’s commercial frozen food warehousing and distribution business. The parties agreed that the Lease would commence when the retrofit was substantially completed in accordance with the requirements and specifications of the Canadian Food Inspection Agency (the “CFIA”).[2]

The tenant informed clients that it would begin offering services in April 2011.[3] However, the retrofit was not completed by this time; as such, by June 2011, the tenant cancelled its contracts with important clients.[4]

In October 2011, with work still ongoing, the tenant put the landlord on notice that it required a firm commencement date and a copy of the final form of the Lease. In January 2012, the landlord proposed a final form of lease (the “Proposed Lease”), which referenced new terms not contained in the Lease.[5]

On March 29, 2012, the tenant advised the landlord that it would not be taking possession of the premises, taking the position that the landlord had failed to complete the promised retrofit by the purported April 2011 deadline and had repudiated the Lease by attempting to introduce material new terms into the Proposed Lease. In response, the landlord commenced an action against the tenant to recover damages for breach of contract and in order to list the property for lease by a new tenant.[6] The premises were eventually leased to a new tenant in June 2013.[7]

The trial judge concluded that the original Lease was valid and binding and that the parties had not entered into the Proposed Lease. Relying on the evidence of the project’s lead engineer, the trial judge found that substantial completion had been achieved, and the Lease had commenced, in April 2012. In addition, it found the tenant was in breach of the Lease and awarded the landlord damages in the amount of $2,006,001.99. The trial judge also ordered that the tenant forfeit to the landlord its $200,000 deposit paid under the Lease.[8]

Issues

This decision presented four key issues:[9]

  1. Did the trial judge err by concluding that the terms of the Lease were certain and that the respondent had not introduced new terms?
  2. Did the trial judge err in finding that “substantial completion” provided an ascertainable commencement date and that the parties did not agree to a definite commencement date?
  3. Did the trial judge err in his interpretation of “substantial completion” under the Lease and in his conclusion that the retrofit was substantially complete in April 2012?
  4. Did the trial judge err in his determination of damages?

Key Takeaways

In determining the “substantial completion” date, which was not defined in the Lease, the ONCA held that the trial judge correctly recognized that “substantial completion” effectively incorporated two conditions: (i) the installation of the features set out in Schedule B, and (ii) that such features were to be installed in accordance with CFIA regulations and specifications.

However, the ONCA held that the trial judge had erred in marking the “Landlord’s work” as substantially complete in April 2012; while there was evidence that the premises were ready for commercial occupancy in April 2012, there was no evidence that the work was completed to the standard required by the CFIA at that time. The pushed date was therefore detrimental to the landlord and resulted in a substantial reduction in damages.

Analysis

Under the first issue, the ONCA agreed with the trial judge in determining that the parties’ Lease was valid, and the Proposed Lease was not entered into.[10]

Under the second issue, the ONCA agreed with the trial judge in finding that the Lease was sufficiently clear to permit the identification of a breach.[11] At both levels of court, little deference was given to the parties’ communications hoping for an April 2011 completion of retrofits because the parties could not satisfy that they “had otherwise agreed on a specific date for substantial completion of the retrofit or that the respondent made any such representation to the appellant.”[12] Instead, both levels of court turned to the text of the Lease, which set out the condition for commencement as follows:[13]

3. THE LEASE shall commence upon substantial completion of the Landlord’s work hereinafter referred to as the “Final Commencement Date” and shall terminate ten (10) years and six (6) months from the date of commencement.

With respect to the “Landlord’s work”, the ONCA turned to Schedule B of the Lease. Schedule B set out a specific list of such work to be carried out, including: the removal roof leaks, installing a sprinkler system, supplying and installing refrigerated panels, supplying and installing refrigeration equipment (i.e., compressors, evaporator coils),[14] alongside other tasks, “in accordance with CFIA regulations and specifications”.[15]

By stipulating a list of tasks required to determine substantial completion, the ONCA found that the parties demonstrated enough certainty to identify substantial completion with sufficient precision.[16] In addition, the ONCA pointed out that a term of a lease is not uncertain simply because the parties define commencement in relation to a contingent future event, rather than a specific date in the calendar.[17]

Under the third issue, the ONCA found that the trial judge erred in finding the “Landlord’s work” to be substantially complete in April 2012. At trial, the trial judge relied on evidence from project engineers who marked the premises as ready for commercial occupancy, with only minor work remaining, as of April 2012.[18] Instead, the ONCA noted that the correct date of substantial completion, as set out in Schedule B, should have been August 2013, when the CFIA officially registered the premises.[19]

Notably, the ONCA found that the trial judge conflated “substantial completion” of the building under the Building Code Act, S.O. 1992, c. 23 with “substantial completion” of the work in relation to CFIA requirements as stipulated in Schedule B to the Lease.[20] The mere fact that the premises were ready for occupancy did not mean that they were substantially complete as far as CFIA requirements, and therefore the terms of the Lease, were concerned.[21]

In addition, while Schedule B did not explicitly require CFIA registration (and notwithstanding that such registration went beyond what is necessary to achieve substantial completion), the CFIA registration was the only evidence of CFIA compliance available in this case.[22]

Under the fourth issue, the ONCA found that the trial judge erred in calculating damages. A new assessment for damages, based on the revised substantial completion date of August 2013 was ordered. Given that the tenant breached its contract, the $200,000 lease deposit was not returned, but could serve as a credit against damages otherwise payable.[23]

 

[1] See generally, Paletta International Corporation v. Liberty Freezers London Ltd., 2021 ONCA 383 [Paletta].

[2] Paletta at paras. 2-3.

[3] Paletta at para. 3.

[4] Paletta at para. 3.

[5] Paletta at para. 4.

[6] Paletta at para. 5.

[7] Paletta at para. 7.

[8] Paletta at para. 9.

[9] Paletta at para. 10.

[10] Paletta at para. 13.

[11] Paletta at para. 26.

[12] Paletta at para. 22.

[13] Paletta at para. 20.

[14] Paletta at para. 31.

[15] Paletta at para. 21.

[16] Paletta at para. 24.

[17] Paletta at para. 21, citing Canada Square Corp. v. Versafood Services Ltd. (1982), 1981 CanLII 1893 (ON CA), 130 D.L.R. (3d) 205 (Ont. C.A.), at pp. 225-226, quoting: “As a matter of principle I can think of no valid reason why, if parties choose to agree that a lease is to commence on a future specified contingency, a court should not uphold their bargain.”

[18] Paletta at para. 27.

[19] Paletta at para. 36.

[20] Paletta at para. 35.

[21] Paletta at para. 35.

[22] Paletta at para. 39.

[23] Paletta at para. 65.

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