Source: https://lawoftheland.blogs.com/law_of_the_land_canadian_/leasing/
Timestamp: 2019-04-26 12:40:14+00:00

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As set out in the State Immunity Act (“SIA”), the Foreign Missions and International Organizations Act and the few cases within which these legislative instruments have been considered, the doctrine of sovereign immunity applies to leases in favour of consulates and other foreign state tenants. The 2008 Superior Court of Quebec decision in Teitelbaum v. 9093-8119 Quebec Inc. and the 1980 Ontario Supreme Court decision in Royal Bank of Canada v. Corriveau are particularly helpful in illustrating the application of sovereign immunity in this context. In both of these cases, the courts specifically remarked that the operation of a consulate or embassy is a sufficiently “governmental activity” to capitalize on the protection offered by the SIA.
Section 3 of the SIA establishes a presumption of sovereign immunity that operates notwithstanding a state’s failure to plead it. The onus of defeating this presumption falls on the party that is opposing the foreign state. This may be achieved by persuading the court that the opposing party should be able to rely on one of the exceptions to sovereign immunity set out in the SIA (e.g. that the foreign state is actually operating a purely commercial entity out of the premises). For greater clarity, sovereign immunity is presumed to apply notwithstanding a state's inaction unless the opposing party establishes that an exception is available or the state submits to the jurisdiction of the Canadian court.
Although the SIA establishes a presumption of immunity from the court's jurisdiction, it does not expressly contain prohibitions preventing private parties from exercising their contractual rights when doing so does not require the court’s intervention (e.g. re-entering and changing locks). Accordingly, landlords may have some latitude in exercising self-help remedies. While self-help does not appear to be restricted by the SIA, there is debate within the legal community as to how much protection the doctrine of sovereign immunity will afford to the foreign state tenant if the landlord elects to re-enter the premises. Some commentators have suggested that it may be possible for a tenant to rely on the provisions of the Foreign Missions and International Organizations Act as a way to restrain the landlord from exercising its right of re-entry, although this does not appear to have been litigated as a live-issue.
In addition to the potential for self-help, landlords may be able to turn to section 6 of the SIA. This provision provides an exception to the presumption of immunity in circumstances where a foreign state is a party to a proceeding that concerns “damage to or loss of property that occurs in Canada”. While the judicial definition of “property” in this context means tangible property and therefore does not extend to pure economic loss, this is an exception that landlords may be able to leverage in circumstances where it the tenant’s conduct has resulted in damage to or loss of the leased property.
consents generally in respect of the enforcement of any judgment against it in any proceedings in any jurisdiction to the giving of any relief or the issue of any process in connection with such proceedings including without limitation the making, enforcement or execution against or in respect of any property irrespective of its use or intended use subject to subclause 2 above.
By being aware of the doctrine of sovereign immunity from the onset of the negotiation process, landlords will be better positioned to successfully navigate the unique challenges of leasing to foreign state tenants.
Under the current rules, REITs are generally prohibited from holding any “non-portfolio property”, being investments other than “qualified REIT properties”, at any time in the taxation year. Perhaps most significant of the amendments is an allowance permitting these trusts to hold up to 10% of their non-portfolio property in assets that are not qualified REIT properties without losing their status.
securities of an entity that represent more than 10% of the equity value of the entity or more than 50% of the equity value of the security holder.
some types of qualifying subsidiaries.
This welcoming allowance provides a much needed degree of flexibility and safe harbour for REITs that face unexpected or unintended property issues.
In order to qualify as an REIT, an investment trust must meet two tests designed to determine the nature of its revenue. The current qualification rules require that at least 95% of an REIT’s revenue be derived from passive sources and that at least 75% come from certain passive real estate sources. The proposed amendments reduce the 95% passive revenue source requirement to 90% and clarify that, for both tests, revenue is to be defined as gross revenue inclusive of capital gains.
The proposals go on to clarify that, for purposes of the two thresholds tests referred to above, amounts paid by certain subsidiaries of an REIT to the REIT will have the same character as it had when it was received or earned by the subsidiary. It is expected that this change will serve a beneficial clarification for tax planning purposes.
When REITs hold foreign real or immovable property, they may finance the acquisition of such property using debt denominated in a foreign currency. Given the potential foreign currency risk in holding foreign assets, REITs may choose to enter arrangements in an effort to hedge that risk. To that effect, the proposed amendments will allow REITs to earn, as qualifying revenue, gains realized from foreign currency fluctuations in respect of revenues derived from foreign real or immovable property, exposing investors to additional revenue sources.
While the final form of these proposed amendments remains to be seen, collectively they appear to improve the attractiveness of real estate investment trusts for those looking beyond securities. By providing both clarification and improved qualification thresholds, the amendments modify the rules governing REITs in a manner that better reflects the practical realities within which these investment vehicles operate.
At trial, the application judge determined that, at the time the property was sold, the most that the Vendor could be said to have in respect of its assessment appeal was a “contingent prospect for receiving a tax refund in an amount yet to be determined”. As the Vendor could not have sued on the basis of such an interest, the Court concluded that this interest did not constitute a chose in action. The application judge then considered whether the doctrine of unjust enrichment could be leveraged so as to require the Purchaser to disgorge the refund. Although the case law favoured the Vendor on this point, the Court concluded that the operation of section 306(2) of the City of Toronto Act, 2006 (requiring payment to the owner of the land as of the date that the adjustment was made) constituted a juristic reason for the Purchaser’s enrichment.
The Court of Appeal reversed this ruling. It held that the Vendor’s application should succeed on the grounds that it both overpaid taxes on the property during the period in which it was the owner and took the necessary steps to have the taxes reassessed. Ultimately, the right to receive the proceeds of the assessment appeal was a chose in action – an intangible personal right enforceable by legal action. This chose in action did not automatically run with the property when it was sold and, as the Vendor did not explicitly assign this right to the Purchaser, it retained its entitlement to the refund notwithstanding the sale.
The Court of Appeal then considered whether the City of Toronto Act, 2006 should operate as a bar to the Vendor’s application. Writing for the Court, Gillese J.A. observed that nothing in the legislation indicated that the legislature intended to interfere with the rights of property owners. Since express wording is necessary if the courts are to interpret legislation as having adversely affected a person’s rights, it could not be said that the legislature intended section 306(2) to strip the Vendor of its right to sue for the refund. Given the findings that the Vendor retained a chose in action and that the City of Toronto Act, 2006 was not a juristic reason for the enrichment, the Purchaser was ordered to disgorge the refund less the portion of it that related to the period after the sale.
The Court of Appeal’s decision is consistent with the practice on a real estate transaction. In a typical transaction the parties would have specifically dealt with this matter by an undertaking of the Purchaser to pay over to the vendor the appropriate share of any refund if and when received.
The terms of the lease prohibited the tenant from assigning the lease without the landlord’s consent (such consent not to be unreasonably withheld).
The purchaser (“proposed assignee”) entered into preliminary negotiations with the landlord over the terms of the lease assignment during which it provided the landlord with information about its proposed new business. After reviewing that information, the landlord refused a straight assignment without conditions, alleging that the proposed assignee was not in a satisfactory financial condition.
The landlord was willing to grant its consent if the proposed assignee agreed to pay an increased rent and addressed the landlord’s concerns about its protection in the event of the proposed assignee’s default by agreeing to additional lease terms. However, when the landlord provided these additional lease terms, many of them were unrelated to the proposed assignee’s financial condition. The proposed assignee refused to agree to the additional lease terms but offered to post a $100,000 letter of credit as well as confirmation that its bank had approved a $250,000 loan, including $150,000 for renovations to the premises.
Following further discussions, the proposed assignee agreed to pay the increased rent, as well as a deposit towards the landlord’s legal costs for the assignment. The tenant, however, refused to agree to the assignment unless the landlord agreed to pay the tenant’s legal fees and provide a certain period of rent relief. As a result, consent to the assignment was not given by the landlord and the lease was not assigned.
The tenant left the premises and the landlord leased them to the proposed assignee at a higher rent and with a $175,000 inducement for the landlord to sign the lease. The tenant proceeded to bring an application that the landlord had unreasonably withheld its consent in order to benefit itself by re-leasing the premises.
The court agreed with the tenant and found that the landlord would not have been worse off by consenting to the assignment, but rather may have been better off given the financial condition of the tenant. The landlord had acted unreasonably in refusing to grant its consent to the assignment.
This case illustrates that a landlord’s refusal to grant its consent to a tenant’s request to assign the lease will be seen by the court to be unreasonable where it is designed to obtain a benefit to the landlord which is unconnected to the existing terms of the lease.
In Autorama, the landlord and tenant signed an Offer to Lease for an auto body shop in a strip mall. The Offer provided that the tenant would pay its proportionate share of the operating costs of the building, which included the cost of insuring the building. While the tenant was required to contribute to the cost of insurance, the Offer did not contain a corresponding covenant of the landlord to obtain insurance.
A fire started in the tenant’s unit and caused damage to the building and its contents, as well as an interruption of business and a loss of profits for the landlord. The parties brought a motion to the Ontario Superior Court of Justice to decide whether the terms of the Offer permitted the landlord to sue the tenant for damages (and its insurer to make a subrogated claim standing in the shoes of the landlord) or whether, when it included insurance as part of the cost of the tenant’s proportionate share of the cost of the premises, the landlord assumed the risk of damage by fire, and thus could not sue the tenant for damages arising from the tenant’s negligence. The motions judge had held that under the terms of the Offer, the Tenant assumed the risk for any losses caused by the tenant’s negligence and that the Landlord was not precluded from pursuing a claim against the tenant.
The tenant appealed the decision.
The Ontario Court of Appeal allowed the appeal, set aside the order of the motions judge and ordered that the landlord is precluded from maintaining its claim against the tenant.
In reaching its conclusion, the Court of Appeal held that Ross Southward Tire Ltd. v. Pyrotech Products Ltd.,  2 S.C.R. 35 (“Ross”), a Supreme Court of Canada case was in substance identical to the present case and dispositive of the appeal. Ross had been considered by the motions judge, but was incorrectly distinguished on the basis that the landlord had covenanted to insure the property against fire loss (when in fact it had not).
The lease in Ross stated that “the lessee shall pay all realty taxes including local improvements and school taxes, electric power and water rates and insurance rates immediately when due.” The Supreme Court held that the obligation to pay all insurance rates included fire insurance and that because the lessee paid for insurance, it received the benefit of insurance coverage.
The same reasoning was applied by the Court of Appeal in the present case. The provision in the Offer requiring the tenant to contribute to all costs of insurance had the effect of allocating the risk of fire loss to the landlord.
The decision of the Court of Appeal is more in line with the majority of the case law and the generally accepted thinking on the subject. The landlord had insurance which the tenant paid for, so why should the tenant not benefit from that?
This case also illustrates the hazards of parties choosing to live under the terms of an offer to lease, rather than proceeding with a lease. It is likely that the parties here would have turned their minds more fully to insurance obligations and allocation of risk during negotiation of the lease terms and perhaps avoided the litigation.
Landlord's Termination Right in Lieu of Granting Consent to Sublease, Etc.
Almost all commercial leases will restrict a tenant from assigning, subleasing or otherwise dealing with its lease without the consent of the landlord, with the landlord generally agreeing to not unreasonably withhold such consent. It is also very common in a commercial lease to provide the landlord with a right, in lieu of granting such consent, to terminate the lease and take back the space. This is an additional right bargained for by the landlord so it can regain control of the space (rather than let it go to another occupant) if it so desires.
From time to time it seems that the landlord’s exercise of this right following a request for consent comes as a surprise to a tenant. The tenant may be trying to protect a sale of a business, a lower lease rate or some other interest. In those circumstances a tenant may take the position that the landlord’s termination right is not an independent right but must be read in conjunction with its obligation to act reasonably in considering consents.
Two Ontario cases have dealt with this issue.
In 590207 Ontario Limited and 526442 Ontario Limited v. Mascan Corporation and Hammerson Canada Inc. (Ontario District Court, August 15, 1985) the Court held that the landlord was merely exercising its right to elect to terminate the lease in lieu of either giving or withholding consent and in those circumstances it cannot be said that the landlord’s consent was unreasonably withheld. The landlord was simply exercising an option available to it pursuant to the lease and the tenant’s application to determine whether the landlord has unreasonably withheld consent was dismissed.
However, there is a conflicting result in Priftis v. Trilea Holdings Inc. (Ontario District Court, June 17, 1988). In this case, the Court held that the provision in the lease permitting the landlord to terminate on the mere request of the tenant to assign the lease was contrary to the earlier lease provision that consent to an assignment was not to be unreasonably withheld. The Court resolved the ambiguity in favour of the tenant.
This issue was most recently considered in the Alberta decision of Orbus Pharma Inc. v. Kung Man Lee Properties Inc., 2000 ABQB 754 (CanLII). In this case the tenant made a written request to the landlord for its consent to assign the lease. The landlord elected to exercise its option to cancel the lease in preference to giving that consent. The tenant brought an action against the landlord claiming the landlord was in breach of its obligation under the assignment and sublease provisions of the lease for unreasonably withholding its consent.
That is, the landlord argued it could terminate the lease in either case, whether there was a reasonable basis to withhold consent or not.
(b) in the event there was no reasonable basis to withhold consent, then the landlord was limited to consenting to the assignment and the termination right did not operate.
The court agreed with the landlord finding that the landlord had the separate contractual right to terminate the lease in preference to the consenting to the requested assignment. In its decision the court considered the Priftis v. Trilea Holdings case referred to above and found that the lease there was worded differently and therefore that case was not helpful to the tenant.
As with many lease issues, the decision ultimately turned on the drafting of the lease. Once again, this shows the importance of how lease provisions are drafted.
Typical language in an agreement of purchase and sale provides that the purchaser agrees to accept title “subject to any easements for sewers, drainage, public utilities, phone or cable lines or other services that do not materially affect the present use of the property.” Language such as this is usually found in either a preprinted form that may be used by the parties or in specifically negotiated “Permitted Encumbrances” in larger deals.
… the test to be applied is whether the vendor can convey substantially what the purchaser contracted to get. In this regard, all of the surrounding circumstances must be considered to determine if the alleged impediment to title would, in any significant way, affect the purchaser’s use or enjoyment of the property.
Justice Forestell, in Ridgely v. Nielson,  O.J. No. 1699 (Ont. S.C.J.), outlined four factors to be considered in determining whether an easement is material: the location of it; the size of the easement; the point of access; and the owner’s enjoyment of the property.
The point at which an easement “materially affects” a purchaser’s use of a property was recently considered by the Ontario Superior Court of Justice in Macdonald v. Robson (2008), 76 R.P.R. (4th) 156.
In this case, the parties entered into an agreement of purchase and sale for a two acre property. The purchaser gave evidence at trial that the property suited his interests as its lay-out would enable him to build a structure on the west side of the property to house his tractor.
The real estate listing for the property made no reference to any easements. However, in fact an easement in favour of the Town of Flamborough affected approximately 25% of the property. The terms of the Easement Agreement permitted access to the property by the Town to deal with sewer systems and required the property owner to keep the easement area free of all obstructions, including buildings and structures. The restrictions imposed by the easement would have prevented the purchaser’s planned construction of a shed and future building projects.
On discovery of the easement the purchaser’s lawyer requisitioned its removal on the basis that it materially affected the purchaser’s intended use for the property. The vendor’s lawyer countered that given the size of the property there were alternate areas where a shed could be constructed. An application to court was launched.
At trial, Justice Wilson of the Ontario Superior Court of Justice considered the tests in Stefanovska and Ridgely (outlined above). Given the purchaser’s intention to use the property to indulge his building hobby, and given the size and location of the easement, it had a material affect the on the present use of the property. Justice Wilson ordered the return of the deposit and held that the purchaser was entitled to rescind the agreement of purchase and sale.
On appeal, Justice Carnwath of the Ontario Superior Court of Justice (Divisional Court) upheld Justice Wilson’s decision.
This case is important as it provides insight into when an easement crosses the line between a permitted encumbrance and something that has a material affect on the benefit received by the purchaser. Whether an easement is “material” will be determined on an objective basis, taking into consideration the view of the purchaser.
This case also highlights the importance of a thorough title investigation early in the purchase transaction.

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