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Firkin Pubs Metro Inc. v. Flatiron Equities Limited, 2011 ONSC 5262

2011-09-12

CITATION: Firkin Pubs Metro Inc. v. Flatiron Equities Limited, 2011 ONSC 5262

COURT FILE NO.:  CV-11-430857

DATE:  20110912

 

 

SUPERIOR COURT OF JUSTICE - ONTARIO

 

 

RE:                 Firkin Pubs Metro Inc. and Firkin Hospitality Group Inc. (Applicants) and

                        Flatiron Equities Limited (Respondent)

 

BEFORE:      Frank J.

 

COUNSEL:   Arleen Huggins, for the Applicants

                                    Bruce Baron, for the Respondent

 

                        HEARD:         September 1, 2011

 

 

E N D O R S E M E N T

 

[1]          The issue on this application is whether the applicants can continue their tenancy pursuant to a lease with the respondent landlord. 

[2]          The applicants (“Firkin”) seek a declaration that the option to extend the lease that would otherwise have expired December 31, 2010, has been validly exercised and an order compelling the respondent, Flatiron Equities Limited (“Flatiron”) to arbitrate the basic rent amount, in accordance with the lease.

[3]          Flatiron opposes the application on the basis of the applicant’s notice to extend being invalid because:

(a)   the tenant was in arrears of rent when the renewal notice was delivered;

(b)   contrary to the provisions of the lease, the tenant had parted with possession of the leased premises; and,

(c)   the notice to extend did not come from the tenant.

[4]          For the following reasons, I find that Firkin has effectively extended the lease and is entitled to the relief sought.

Background

[5]          On February 1, 2000 Firkin Pubs Metro Inc., with Firkin Hospitality Group Inc. as indemnifier, entered into a lease with the owner of what is known as the Flatiron Building, in Toronto.  The term of the lease was 10 years beginning January 1, 2001. The lease contained an option to extend for two five year terms.

[6]          The lease was assigned to Flatiron in 2005, after Woodcliffe Corporation, a company related to Flatiron, purchased the building from the owner, Rospin.

[7]          Prior to the commencement of the lease term, Firkin Pubs Metro entered into a franchise agreement with Kimbrook Investments pursuant to which Kimbrook, as franchisee, was granted a licence to operate a restaurant and bar in the leased premises under the name “The Flatiron & Firkin”.  The licence was for the term of the lease and any renewals under it.  The Flatiron & Firkin has operated in the leased premises to the present.

[8]          On April 7, 2010, Paul Saraiva, an officer and director of Firkin Hospitality Group Inc., wrote to Flatiron’s agent, Woodcliffe, confirming Firkin’s intention to exercise the option to extend the lease for five years. He signed as “Firkin Group of Pubs”, the name under which the Firkin Hospitality Group Inc. operates.

[9]          The option to extend provision in the lease states that the base rent to be paid in the extended term was to be agreed upon, failing which it was to be determined by arbitration.

[10]        Negotiations between Firkin and Flatiron continued into 2011.  In response to Firkin’s offer of March 28, 2011, Flatiron confirmed that the only outstanding issue between the parties was that of base rent and that Flatiron would be making a counteroffer. No counteroffer was made. Instead, on May 20, 2011, Flatiron asserted, thorough its lawyers, that Firkin’s exercise of its option to extend was not valid.  The basis for this position was that Firkin was in default at the time it purported to exercise its option to extend because it was in arrears of “Additional Rent”.  The lawyers demanded that Firkin deliver vacant possession of the leased premises. 

Had Firkin parted with possession, thereby depriving it of the right to extend?

[11]      Flatiron now submits that in addition to being in default of “Additional Rent” payments, Firkin’s exercise of the option to extend was invalid because it had parted with possession of the leased premises, in breach of a condition of the lease.  It did so by permitting a franchisee to occupy the leased premises without the written consent of the landlord.

[12]      Flatiron maintains that at no time did it know that Flatiron & Firkin was a franchisee.  Instead, it believed that in dealing with the representative of Flatiron & Firkin, Andrea Woodruff, Flatiron was dealing with an officer of Firkin Metro. 

[13]      It relies on an Estoppel Certificate signed at Woodcliffe’s request on its purchase of the Flatiron Building, confirming that Firkin Pubs Metro Inc. was in possession of the leased premises.  Ms. Woodruff signed the Certificate above the word “secretary”.  However, Ms. Woodruff was not an officer of Firkin Pubs Metro Inc, but rather the secretary of Kimbrook Investments, the franchisee. 

[14]      Flatiron’s position is untenable both factually and legally.

[15]      Mr. Pal admitted on cross-examination that he did not see the Certificate until after this application was commenced. As a result, as he conceded, he had no factual basis for believing, in his dealings with Firkin and Ms. Woodruff that she was associated with Firkin and that therefore Firkin was the franchisee.

[16]      On cross-examination, Mr. Pal acknowledged that Ms. Woodruff always represented herself to him as the franchisee and that the payment of rent was by way of monthly rent cheques signed by Ms. Woodruff and embossed with “Kimbrook Investments Inc. o/a The Flatiron & Firkin”.  Further, the person with whom Mr. Pal dealt on behalf of the tenant with respect to “any matters dealing with lease rates, amendments or anything of that nature” was not Ms. Woodruff but first David Gnesin, on behalf of Firkin and then Paul Saraiva when he took over from Mr. Gnesin.  On further questioning, Mr. Pal acknowledged he knew that Mr. Saraiva, who had signed the lease, was not the franchisee.

[17]      Beyond this, e-mail exchanges between Mr. Pal and another Woodcliffe employee and Firkin in October and December 2009 and January 2010 include references by Mr. Gnesin to Ms. Woodruff as “the franchisee at the Flatiron and Firkin”.  In October 2010, Mr. Saraiva confirmed that Ms. Woodruff was not a signatory to the Lease.  No objection was taken by Flatiron to the references to the franchisee or the clear statement that Ms. Woodruff was not the tenant.  Or, more accurately, no objection was taken until after Flatiron, through its lawyers, sought vacant possession from Firkin. 

[18]      The original landlord knew that Flatiron & Firkin was a franchisee and effectively gave its prior written consent.  It did so by way of its September 14, 2000 letter to Suzanne MacLeod, another principal of Kimbrook.  The landlord confirmed to Kimbrook that should Firkin default on the lease, Kimbrook could take it over, subject to its operating performance and the financial strength of the proposed indemnifier.  

[19]      Consistent with this letter, the uncontradicted evidence is that:

(a)      Firkin gave a copy of the franchise agreement to the original landlord prior to the commencement of the lease;

(b)      the original landlord knew that the franchisee was not the tenant or an agent of the tenant and was only a licensee of the leased premises, and

(c)      the original landlord knew that Ms. Woodruff was a principal of the franchisee and had no connection to or authorization from Firkin to act on its behalf with respect to the terms of the lease.

[20]      The uncontradicted evidence is that Ms. Woodruff was asked to sign the Estoppel Certificate for the purposes of the closing of the sale of the Flatiron Building to Woodcliffe and she understood that in signing, she was acknowledging that Kimbrook would henceforth be paying its rent to Woodcliffe.  In fact, the Certificate stated that Firkin Pubs Metro Inc. is “in possession of and are open for business in our space and have commenced paying regular installments of monthly rent.” This statement was not true.  Based on the evidence before me, the vendor knew it to be untrue and Flatiron eventually did, or at least should have, as well.

[21]      Firkin had no involvement in the signing of the Estoppel Certificate. It did not ask Ms. Woodruff to sign it and did not know that she had done so. Ms. Woodruff signed as “Secretary”.  This is consistent with her being the Secretary of Kimbrook.  The face of the lease shows Mr. Saraiva to be the Secretary of Firkin Pubs Metro Inc.

[22]      The Estoppel Certificate does not have the legal effect of establishing that Firkin parted with possession of the leased premises.

[23]      As I have said, I find that Firkin did have the original landlord’s consent to Kimbrook operating in the leased premises.  However, even without that consent the fact that it was not the tenant that was operating in the leased premises does not amount to Firkin having parted with possession. The franchise agreement did not grant exclusive possession to Kimbrook.  (Stoneridge Centre Inc. v. 1079334 Ontario Ltd., [1999] O.J. No. 1688 (S.C.J.) at paras. 53 and 54, affirmed [2000] O.J. No. 1153 (C.A.).  Consistent with this, by its acts, Firkin maintained legal possession of the premises.  Firkin has had complete access to the premises, has dealt with the landlord regarding operational issues involving the premises, exercised the option to extend and negotiated the terms of the extended term of the lease with the landlord.  ( Brockville (Town) v. Dobbie Ritchie, [1929] O.J. No. 21 (C.A.) at para. 14.)

[24]      Finally, this alleged breach by Firkin would not deprive it of its right to extend the term of the Lease.  The option to extend is contained in Schedule “D” to the lease.  It provides that the tenant has the right to extend the term provided that an “Event of Default” has not occurred, or if there has been an “Event of Default”, the Landlord has declined to exercise its rights under the Lease.  “Event of Default” is defined in Section 11.1 of the lease.  It provides that a default or breach constitutes an Event of Default only when it remains unremedied after the time specified following the Landlord giving written notice of the tenant’s default or breach.

[25]      Flatiron did not give any notice of this alleged breach to Firkin.  The alleged breach, therefore, was not an “Event of Default”.  Further, Flatiron declined to exercise its rights under the Lease.  As a result, even if there had been an “Event of Default”, Firkin remained entitled to exercise the option to extend. 

Was Firkin in arrears and thereby deprived of the right to extend?

[26]      Flatiron submits that Firkin was in arrears of “Additional Rent” as defined in the lease, when it gave notice of its intention to extend.  It relies on its letter to Firkin dated September 2, 2009 in which it forwarded its invoice for Firkin’s proportionate share of operating costs for 2008 and requested payment pursuant to the Additional Rent provisions of the lease. The invoice is based on Flatiron’s calculation of the amount owing after giving credit for the amounts already paid on a monthly basis in accordance with Flatiron’s estimates at the time.

[27]      Flatiron made no demand for payment of the Additional Rent until sending a notice of default dated April 26, 2011. It gave Firkin 15 days within which to pay the amount demanded. Firkin complied with the demand, though it maintained that the calculations contained discrepancies and inaccuracies.

[28]      Flatiron’s calculation of Additional Rent owing was based on a rented area of 3000 square feet.  However, the lease provides for Additional Rent to be paid on the basis of 2500 square feet.   This provision of the lease has not been amended.  Neither Firkin nor Woodruff had agreed to any increase in the square footage to be used in calculating the Additional Rent and the area that compromises the leased premises has not changed since the commencement of the Lease.

[29]      Flatiron relies on a document entitled Tenant Acknowledgement that it claims was attached to and formed part of the Estoppel Certificate signed by Ms. Woodruff, to which I have referred, as the justification for the increase in the square footage on which the Additional Rent is based. This document states that the tenant pays Additional Rent based on a rented area of 3000 square feet.  Ms. Woodruff denies that this document was attached to the Estoppel Certificate that she signed.  There is no evidence to the contrary.

[30]      Flatiron submits that even if I accept that the increase in the square footage on which Additional Rent was calculated was not known to Firkin at the time the change was made, it can rely on the Tenant Acknowledgement as Firkin knew since 2008 that Additional Rent was being charged on the basis of 3000 square feet and made no objection. 

[31]      Firkin, through Mr. Gnesin, learned that Flatiron was charging more than provided for in the Lease as a result of having requested an explanation of why the rent paid by Kimbrook was so high. Flatiron eventually responded by forwarding the Tennant Acknowledgment and stating that Additional Rent was being charged in accordance with it.

[32]      The uncontroverted evidence is that Mr. Gnesin let the matter drop because he assumed that, for her own reasons, Ms. Woodruff had made a private arrangement with Flatiron for the use of additional space. But, Ms. Woodruff had not done so.  She did not know of the increase until she received correspondence from Flatiron dated December 1, 2009 enclosing a rental notice showing that operating costs were being based on 3000 square feet.  When she asked Flatiron for an explanation, she was told the increase in the square footage was based on a document whereby the tenant had agreed to the change.  She asked for a copy of the document but was never provided with one.

[33]      Flatiron’s position is inconsistent with its own admission that absent an amendment to the lease, it had no basis for charging Additional Rent on an amount in excess of the stipulated 2500 square feet. The Estoppel Certificate did not modify the Lease; rather, it confirmed the terms of the existing lease, (Vancouver City Savings Credit Union v. New Town Investments Inc., 2008 B.C.S.C. 1617, at paras. 25-32)  and the evidence does not support a finding of any agreement on which Flatiron can rely.

[34]      Given that Flatiron was entitled to the payment of Additional Rent only on the square footage stipulated in the lease, as of April 7, 2010, the date on which the option to extend was exercised by Firkin, there were no rent arrears owing to Flatiron.  Rather, as of that date Firkin owed Kimbrook a credit of over $62,000.

[35]      Even if Firkin owed rent to Flatiron, that would be insufficient to invalidate Firkin’s exercise of the option to extend.  I referred above to the terms of the “Option to Extend” contained in Schedule “D” to the lease and the reference in it to an “Event of Default”.  Based on these provisions of the lease, absent Flatiron giving written notice to Firkin of the default and Firkin failing to remedy that default within five days of receiving written notice, there would be no “Event of Default” to invalidate the exercise of the option to extend.

[36]      Flatiron did not give written notice to Firkin of default in the payment of rent until long after Firkin exercised its option to extend.  The letter on which Flatiron relies was no more than a request for payment.   Further, even if Flatiron had given notice of default, its failure to exercise its rights under the lease in response to the default precludes reliance on the default to deny Firkin the right to extend.  

[37]      In maintaining that the lease has not been extended, Flatiron also relies on the provisions of the lease that require Firkin to pay double rent as of January 1, 2011.  The lease provides that Flatiron is entitled to receive double rent from Firkin if it becomes an overholding tenant or in the event that the amount of the rent to be paid on renewal has not been agreed to, the latter being subject to adjustment. 

[38]      Flatiron gave notice to Firkin by letter dated July 5, 2011 of its default in the payment of double rent. Firkin remedied that default in accordance with the terms of Flatiron’s notice and did so pursuant to the “Option to Extend” provisions in Schedule “D” that provide for the retroactive adjustment of the actual rent owing once that amount has been determined.

[39]      This default does not result in Firkin losing the right to extent.  It occurred after notice of intention to extend was given and, in any event, was remedied and therefore did not amount to an “Event of Default”. 

[40]      Flatiron submits the default in paying double rent denies Firkin the right to extend even if there has been no “Event of Default”.  In taking this position, Flatiron relies on the final paragraph of the “Option to Extend” provision, which provides that if the tenant fails to exercise the option to extend in accordance with the provisions of that option, including the paying of double rent pending a determination of the basic rent payable on the extension,   “the remaining options to extend shall be null and void.” In my view, this cannot be read as meaning that the first option to extend is deemed null and void if the tenant has not exercised that option in accordance with the “Option to Extend” section of Schedule “D”. Such an interpretation would deprive the word “remaining” of all meaning. 

Is exercise of the Option to Extend invalid because it was not done in the name of tenant?

[41]      Flatiron takes the position that the exercise of the right to extend was invalid because Firkin’s notice to extend[1] was given not by the tenant but by “The Firkin Group of Pubs”, a name under which Firkin Hospitality Group carries on business. It argues that as the tenant is obligated to strictly comply with the provisions of the lease, and as the lease requires notice to be given by the tenant, the fact that notice came from the Firkin Group of Pubs means that Flatiron should not be compelled to extend the term of the lease.

[42]      The letter giving notice of the exercise of the option to extend was sent by Mr. Saraiva, with whom Flatiron had dealt on behalf of Firkin from the time he replaced Mr. Gnesin. In all written communications to Mr. Pal from Mr. Gnesin, and subsequently Mr. Saraiva, their names appeared above the words “The Firkin Group of Pubs.”  However, Mr. Saraiva had signed the lease and was a director and secretary of the tenant.  He was writing on behalf of the tenant.

[43]      In response to the April 2010 notice, Mr. Pal began discussions with Mr. Saraiva regarding the “renewal options”, as he put it in his May 3, 2010 e-mail to Mr. Saraiva.  At no time prior to the notice sent by Flatiron’s counsel in May, 2011 ending the negotiations did Flatiron take the position that the exercise of the option to extend was invalid or ineffective.  Indeed, Mr. Pal expressed frustration at the delay in finalizing the new amount of rent to be paid. On October 12, 2010, he confirmed to Mr. Saraiva that “the landlord is becoming somewhat impatient on the delay in determining the renewal rent which will be in effect January 1, 2011…” (emphasis added) 

[44]      The lease does not specify by what method the option to extend is to be exercised.  It requires only that actual notice be given.  In sending the notice letter of April 7, 2010, Mr. Saraiva was acting as agent for Firkin as was known to Flatiron.  Flatiron had notice of Firkin’s intended exercise of the option to extend and acted on that notice.  As a result, the fact that the exercise of the option to extend did not specify that it was being given by the tenant is of no consequence to the validity of the exercise of the option. (Burke v. Wil Strange Jewellery Manufacturing, 1988 CarswellOnt 800, 28 O.A.C. 359, at para.5.)

[45]      Given my finding, it is not necessary for me to consider whether Firkin is entitled to equitable relief so as to be entitled to the extension of the Lease.  But, for completeness, I will briefly address this issue.

[46]      Contrary to the submission of Flatiron, the court does have jurisdiction to grant relief from forfeiture with respect to the extension of a lease. (120 Adelaide Leaseholds Inc. v. Oxford Properties Canada Ltd., [1993] O.J. No. 2801, at para. 9)  In 120 Adelaide, the Court of Appeal considered whether relief from forfeiture was available to a tenant that, through inadvertence, failed to give written notice of its intention to exercise its option to renew.  In upholding the trial judge’s decision not to grant relief from forfeiture, the court relied on the fact that “[T]here is no conduct on the part of the landlord which equity would find reason to criticize.”  (at para. 12) The same most certainly cannot be said of Flatiron. 

[47]      Unlike the landlord in 120 Adelaide, Flatiron conducted itself in such a way as to lead Firkin to believe that it had effectively exercised its option and in doing so prevented Firkin from correcting the alleged inadequacy in the notice in the time.  Flatiron acted to Firkin’s detriment both by preventing it from taking steps to locate alternate leasehold premises and by putting it in the position of paying double rent as an overholding tenant with no right of adjustment. 

[48]      The doctrine of estoppel by silence prevents Flatiron from relying on the alleged inadequacy of the notice of intention to extend.  The landlord cannot remain silent and then later insist that the situation of which it had known all along was a default under the lease.  (Becker Milk Co. Ltd. v. Goldy et al., [1977] O.J. No. 2505 (H.C.J.) at paras. 14-16.)

[49]      Flatiron submits that the doctrines of estoppel have no application because of section 12.4 of the lease, entitled “Waiver.”  However, I do not accept Flatiron’s interpretation of this section as meaning that even if the landlord waived a right, it does not constitute a waiver for the purposes of the lease.  The section is clear in stating that if a landlord waives any breach by the tenant, it will not constitute waiver of his rights “in respect of any continuing or subsequent breach.”  The section is of no assistance to Flatiron.  I find that it has waived its right to rely on the form of notice, its conduct amounting to promissory estoppel or estoppel by conduct.  (6781427 Holdings Ltd. v. Alma Mater Society of University of British Columbia, [1987] C.L.D. 727 (B.C.S.C.) at paras. 10-12, affirmed at 91987), 44 D.L.R. (4th) 257 (B.C.C.A.), Petridis v. Shabinsky, [1982] O.J. No. 3119 (H.C.J.) at para. 20.)

[50]      In my view, the equities are clearly with Firkin.  This is reinforced by the fact that since taking the position that Firkin’s exercise of its option to extend was invalid, Flatiron has been actively attempting to sell the Flatiron Building.  The extension of Firkin’s lease has the effect of preventing Flatiron from selling the building unencumbered by any lease. 

[51]      The equities of the case require that relief from forfeiture be granted.  The consequences of forfeiture of Firkin’s right to extend are significant.  It will lose a franchise location, the franchisee will lose its business and numerous employees will lose their jobs.  Such losses are inequitable and warrant relief in the circumstances.  (Towcon Holdings Inc. v. Pinnacle Millwork Inc., [2007] O.J. No. 1917 (S.C.J.) at paras. 62-66.)

Summary

[52]      The application is granted.  The following relief is ordered:

(a)   A declaration that Firkin has validly exercised the “Option to Extend” contained in Schedule “D” to the Lease Agreement dated February 1, 2000 made between Rospin (49 Wellington) Corp., as assigned to Woodcliffe Corporation, and as further assigned to Flatiron, as Landlord and Firkin Pubs Metro Inc., as Tenant and Firkin Hospitality, as Indemnifier and therefore the term of the lease has been extended, effective January 1, 2011, for a term of five years.

(b)    An order requiring Flatiron to proceed to arbitration in accordance with the Arbitrations Act of Ontario at the first available date to determine the “Basic Rent” payable under the extended term, in accordance with the provisions of Schedule “D” to the lease.

 

 

[53]      The parties, to their credit, have agreed to the costs of the successful party being ordered in the all inclusive amount of $40,000.  Firkin shall have costs in that amount, payable forthwith.

 

___________________________

Frank J.

 

DATE:            September 12, 2011



[1] Firkin first notified Flatiron that it would exercise its option to extend in June 2009.  Flatiron takes the position that the option to extend was not exercised until April 7, 2010, the date of Paul Saraiva’s letter to Woodcliffe.  From the perspective of the issue of the adequacy of the notice, which date was the actual date of notice is of no consequence as both notices were from individuals signing on behalf of the Firkin Group of Pubs. 

 


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