Star Systems Inc. v. Overland West Freight Lines Ltd.

2012 BCSC 180 Star Systems Inc. v. Overland West Freight Lines Ltd.

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Star Systems Inc. v. Overland West Freight Lines Ltd., 2012 BCSC 180 Date: 20120110 Docket: S113269 Registry: Vancouver Between: Star Systems Inc. Petitioner And: Overland West Freight Lines Ltd. Respondent Before: The Honourable Mr. Justice Fitch Oral Reasons for Judgment In Chambers Counsel for the Petitioner: J. Rogers Counsel for the Respondent appearing via teleconference: A.R. Elliott Place and Date of Trial/Hearing: Vancouver, B.C. December 15, 2011 Place and Date of Judgment: Vancouver, B.C. January 10, 2012 A. Introduction [1] THE COURT: The petitioner, Star Systems Inc., seeks an order rectifying a term of a Leasing Agreement between it and the respondent that addresses the amount of rent to be paid by the respondent to the petitioner during a renewal term contemplated by the agreement. [2] The petitioner says that agreed upon language governing calculation of rent owing during the renewal term and reflected in a Memorandum of Understanding ("MOU") executed by the parties was, by mutual mistake, omitted from the subsequently prepared Leasing Agreement. [3] Rectification is an equitable remedy designed, in cases of mutual mistake, to remedy a failure by the parties in the wording of the final written contract between them to give effect to the agreement they reached. It has been said that in ordering rectification, a

court does not rectify contracts, but the erroneous expression of contracts in documents. In Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19, Binnie J. noted, albeit in a case of unilateral mistake, that: The court's task in a rectification case is corrective, not speculative. It is to restore the parties to their original bargain . . . (at paragraph 31). [4] Before rectification can be granted, it must first be established that the contract does not reflect the agreement of the parties, and that the parties shared a continuing common intention up to the time of the signing that the provision at issue stand as agreed and not as reflected in the document: see Fraser v. Houston et al., 2006 BCCA 66, per Lowry J.A., at paras. 26 to 30. [5] Rectification is a remedy to be employed with caution. Consistent with this approach, the party seeking to have an executed agreement altered bears a heavy onus to prove not only that what was executed was not the agreement in fact made, but also what the outwardly expressed, continuing common intention actually was. The proof must be clear and convincing as to the agreement actually made by the parties, the existence of their common intention up to the date of the signing, and their mutual mistake. [6] In Performance Industries, Binnie J. held that the standard of proof is captured by the expression "convincing

proof" which lies somewhere between the civil and criminal standards (at para. 41). In Fraser v. Houston, the court concluded from this that the case for rectification must be "compelling". [7] For the reasons which follow, I conclude that the petitioner has fallen short of discharging its heavy onus of establishing a case for rectification of the term of the agreement in issue. In the result, the petition is dismissed with costs to the respondent. B. Memorandum of Understanding and the Lease Agreement [8] In 2005, a group of companies making up the Overland Freight Lines Group ("Overland"), negotiated with Reimer Western Ltd. ("Reimer") for the sale of their assets to Reimer and the lease of a number of trucking terminals owned by companies in the Overland Group to Reimer's subsidiaries. [9] Star Systems Inc. owns the trucking terminal that is the subject of this petition. That terminal is located in Kelowna, British Columbia. Claus Jensen ("Jensen") is the president and sole director of Star Systems Inc. [10] The terms of the negotiations were incorporated into an MOU which was prepared by counsel in October 2005, and signed by both parties. [11] Section 3.01 of the MOU addresses the obligation of the petitioner on closing of the deal to cause new leases to be signed in favour of Overland, as tenant, for a number of trucking terminals, including the one located in Kelowna.

The original term of the lease was to be five years. The respondent was to be given three five‑year options to renew the lease. Section 3.02 of the MOU provides that: The annual rent will be based on 10% of the fair market value, and on a triple net basis. [12] The fair market value of each of the terminals to be leased was set out in the MOU. The fair market value of the Kelowna property was listed as $2,300,000. [13] The parties entered into a five‑year Lease Agreement for the Kelowna terminal on February 1, 2006. The Lease Agreement was prepared by the petitioner's counsel who relied on a precedent. [14] Clause 3.1 of the Lease Agreement provides that the base rent for the initial term was $230,000 per annum. This is an amount equal to 10 percent of the market value of the Kelowna property, and reflects application of the formula contemplated by the MOU. [15] Clause 6.14 of the Lease Agreement is the Option to Renew provision which is the subject of this proceeding and the paragraph in respect of which rectification is sought. It addresses the respondent's option to renew the lease for three further periods of five years each following the initial term. Clause 6.14 addresses the annual rent payable during each option or renewal period in the following terms: The annual Base Rent payable during each Option Period shall be determined by mutual agreement or, failing such

agreement at least four (4) months prior to the commencement of each renewal term by arbitration in accordance with the Commercial Arbitration Act of British Columbia on the basis of the then current market value of the Leased Premises, but in any event shall not be less than the Base Rent payable per annum during the lease period then expiring. [Emphasis added] [16] The respondent gave notice of its intention to exercise the lease renewal option in accordance with the terms of the agreement. The initial five‑year term has now expired. The parties have not been able to determine by mutual agreement the annual base rent payable during the renewal term. C. The Position of the Parties [17] The petitioner takes the position, correctly in my view, that the language of Clause 6.14 of the agreement is "vague" and "ambiguous". As worded, Clause 6.14 does not provide guidance on how the current market value of the leased premises ought to be used to calculate the base rent for the renewal period. As Mr. Jensen points out in his affidavit sworn May 19, 2011, and filed for use on the hearing of this petition: Without the 10% factor or some factor to multiply by the "current market value" of the Kelowna Property, I am unable to obtain an opinion on the proper Base Rent for the renewal term. [Emphasis in bold added] [18] The petitioner contends that the parties intended that the 10 percent

formula from s. 3.02 of the MOU apply not only to the calculation of rent payable during the original term, but also to the determination of annual rent payable during any renewal term. The petitioner contends, and Mr. Jensen deposes, that the 10 percent formula or "lease ratio" as applied to the fair market value of the property was omitted from Clause 6.14 of the Lease Agreement due to inadvertence. [19] The petitioner argues that it was the mutual intention of the parties to carry forward the lease ratio (10 percent of current fair market value) as a means of determining annual rent payable from the MOU to the Option to Renew term of the Lease Agreement. The petitioner says that inattention by the parties to the language of the renewal term in Clause 6.14 of the agreement constitutes a mutual mistake. It is argued that s. 3.02 of the MOU evinces a clear and express common intention, operative at the time the agreement was executed, that the lease ratio set out therein be applied to determine the rent payable during any renewal term. In support of its position, the petitioner points out that had the parties not intended that the lease ratio in the MOU apply to both initial and future terms, it could have simply inserted the rent payable for the initial term, without including the formula used to calculate this rent. [20] The respondent contends that the lease ratio was not

omitted from Clause 6.14 of the agreement through inadvertence. Rather, the respondent says that the 10 percent formula was never agreed to by the parties as being applicable to the calculation of rent payable during a renewal term. It says that the 10 percent of fair market value formula was intended to apply only to the determination of rent to be paid for each of the terminals to be leased during the initial term of the lease. [21] In support of its position, the respondent relies on the affidavits of W. Al Redekopp and Tobin Robbins, both sworn on June 14, 2009. [22] Mr. Redekopp is General Counsel for the respondent and was the person primarily responsible for negotiating the MOU on the respondent's behalf. He deposes that the 10 percent lease ratio was agreed to by the respondent as a quick and simple means, in the context of a much larger deal, of calculating the rent for the original term for each of the leased terminals, as it fell within the respondent's revenue and expense projections. Mr. Redekopp also deposes that the formula set out in s. 3.02 of the MOU was not included in the renewal clause of the final Lease Agreement, as this was not a method for calculating rent during a renewal term that was agreed to by the respondent. Mr. Redekopp's evidence is that there was never any discussion between himself and Mr. Jensen (or Mr. Jensen's solicitors) that rent payable

in a renewal term would be based on 10 percent of the fair market value of the leased premises. [23] Mr. Redekopp also points out that not all of the terms in the MOU were included in the final agreement. In this regard, Mr. Redekopp notes that in January 2006 (several months after execution of the MOU but several weeks before conclusion of the Lease Agreement) the calculation of rent payable during a renewal period continued to be a subject of discussion between the parties. Mr. Redekopp points out that during this period, Mr. Jensen did not agree to give the respondent an option to purchase the Kelowna property as contemplated by the MOU, and insisted that the respondent be given only a right of first refusal. The respondent countered that it would agree to accept the right of first refusal if Mr. Jensen would agree that rent during a renewal term be based on the existing rent in the final year of the current lease, with a consumer price index ("CPI") adjustment for each five‑year lease option based on the CPI for the Kelowna region. While Mr. Jensen was not prepared to agree that rent during a renewal term be determined on this basis, the respondent points to this exchange in support of its contention that there existed no common intention as to how rent was to be calculated during a renewal term. [24] Mr. Robbins was retained as outside counsel to act for the respondent.

His involvement in the transaction commenced the day after the MOU was signed. He dealt with the petitioner's counsel in the negotiation of the Lease Agreement involving the Kelowna terminal. [25] On December 1, 2005, Mr. Robbins provided counsel for the petitioner with his handwritten comments in a draft of the Lease Agreement. Beside Clause 3.1 of the draft (dealing with rent payable during the initial term of the lease) Mr. Robbins made a marginal note that the annual rent was to be determined by the formula set out in s. 3.02 of the MOU. Mr. Robbins made no similar note beside the draft Option to Renew clause that would reflect an understanding that the lease ratio set out in the MOU would also be applicable to the calculation of rent payable during renewal terms. [26] Like Mr. Redekopp, Mr. Robbins deposes that there was never any discussion between himself and counsel for the petitioner about including the lease ratio from the MOU in the Option to Renew clause of the Lease Agreement. Further, Mr. Robbins deposes that he had no instructions from his client to agree to inclusion of the lease ratio provision of the MOU as part of the Option to Renew clause of the final agreement. [27] Like Mr. Redekopp, Mr. Robbins deposes that the lease ratio was not excluded by inadvertence, but was in fact never intended to be inserted in the Lease Agreement. [28] The respondent claims

that it understood from Clause 6.14 that the determination of rent payable during a renewal term would be based on fair market rent for the leased premises at the time of the renewal. [29] The respondent's position, as I understand it, is that this Court should also look to the conduct of the parties, both before and after execution of the Lease Agreement, in determining whether the petitioner has advanced a compelling case that the parties intended, and manifested an intention, that the 10 percent lease ratio apply to renewal terms. [30] In this regard, the respondent points to an email sent by Mr. Jensen on May 18th, 2010 (well before expiry of the initial term on February 1, 2011) which invited discussion about the lease rate during the renewal term. A portion of Mr. Jensen's email reads as follows: My understanding is that Overland wants to continue to lease the Kelowna terminal based on the terms and conditions outlined in the current lease. The "only" thing that needs to be determined is the new lease rate. I stated that I would like to see the lease amount escalate every year by some percentage for the next 5 year term. One possibility is to index future lease payments on property taxes payable on the property. . . . Subject to an improvement in maintenance, I told you that I was not looking for the market lease rate from Overland. I would like annual increases so that

we are not faced with the current situation of a huge lease increase. And I asked you come back to me with your proposal as well as the "rationalization" of that proposal. [31] I understand the respondent to rely on this email in support of its position that a determination of the rent payable on a renewal term was not settled when the original Lease Agreement was executed. [32] In all of the circumstances, the respondent contends that the petitioner has not made the case for rectification and that this Court should decline to grant the relief sought. [33] Indeed, the respondent goes further and invites this Court to construe Clause 6.14 to mean that rent during any renewal period be calculated on the basis of fair market rent for the property at the time of the renewal but, in any event, not be less than the rent payable per annum during the lease period then expiring. D. Application of the Test for Rectification to the Case at Bar [34] To the extent that the respondent is suggesting that it would be inappropriate for me to look to the terms of the MOU because it is expressly agreed not to be binding on either party, or because the Lease Agreement includes a provision stating that it is the entire contract between the parties, I would reject those arguments. In my view, it is appropriate in this case, despite the factors the respondent points to, to consider the terms of the

MOU and the evidence of those involved in negotiating its terms and in preparing the Lease Agreement. Although it is not clear to me that the respondent is making this suggestion, neither would I find it to be a bar to rectification that the petitioner was represented throughout the negotiations and was responsible for creating the first draft of the Lease Agreement which contains the ambiguous language giving rise to this proceeding. [35] As noted above, I have, however, concluded that the petitioner has not discharged its heavy onus of establishing that the parties shared, on February 1, 2006, a continuing common intention not reflected in the Lease Agreement by mutual mistake, that the rent to be paid in renewal terms be governed by the 10 percent lease ratio referred to in the MOU. In my view, the petitioner has fallen short of offering "convincing proof" that the parties mutually intended that rent payable during a renewal term be 10 percent of the then fair market value of the leased premises, and that this common intention is outwardly and clearly manifested by the terms of the MOU. [36] I have come to this conclusion for a variety of reasons. [37] First, I do not believe that the language of the MOU in ss. 3.01 and 3.02 constitutes clear and convincing evidence that the parties were ad idem when the agreement was executed that rent during a renewal period be based on 10

percent of the then fair market value of the property. [38] I think it is very likely that Mr. Jensen believed that the 10 percent lease ratio would apply to renewal terms. The MOU is certainly capable of bearing that interpretation, but it is also possible that the lease ratio was set out in the MOU so that the annual base rent for the initial term of the lease for all of the terminals subject to this transaction could be fixed and separate Leasing Agreements prepared for each one. [39] The petitioner does not advance the position that omission of the lease ratio from the final agreement was the product of unilateral error, nor could he, on this record, possibly meet the high test for rectification contemplated in cases of unilateral mistake. [40] At best, the petitioner can do no more than rely on the evidence of Mr. Jensen as to his understanding of the scope and future application of the MOU. That evidence is flatly contradicted by the evidence of counsel for the respondent, Mr. Redekopp and Mr. Robbins. Given this direct conflict in the evidence as to the scope and future application of the MOU, and specifically whether the lease ratio employed therein was to be applied to the Option to Renew clause of the Lease Agreement, it is my view that the remedy of rectification is unavailable in this case. [41] The petitioner argues that the language of the Option to Renew clause

makes it clear that the parties jointly agreed that the current market value of the leased premises, as opposed to fair market rent or market rental value, would be the benchmark that ultimately determined rent payable during a renewal period but that, by mutual mistake, the 10 percent formula was omitted from the agreement by oversight. Again, this flies in the face of the evidence of two experienced counsel who worked on the deal. [42] The phrase "on the basis of the then current market value of the leased premises" is at least capable of being construed as referring to either the fair market value of the property or the rent the leased premises would likely attract on the open market. [43] Even if I was to favour the petitioner's view, and I do, that the phrase likely refers to the market value of the property (or the price the property would command on a sale in the open market) the petitioner's position would require me not only to conclude that the parties agreed that the market value of the property on a sale would be the benchmark for determining rent payable in a renewal term, but also that the parties were ad idem that a lease ratio of 10 percent was to be applied not only during the initial term, but, if all of the options were exercised, for the three five‑year renewal terms to follow. I am not prepared, on this record, to make that finding on the standard of proof

the petitioner must meet to obtain the order sought. [44] It will be recalled that Mr. Jensen deposed that without the 10 percent factor "or some factor to multiply by the current market value of the Kelowna Property", the base rent for the renewal term could not be determined on the language used in Clause 6.14. I agree, but the suggestion would appear to at least admit of the possibility that while the fair market value of the property on a sale would benchmark the rent to be paid in a renewal term, the precise lease ratio to be applied during such a term had not been determined. [45] I would also point out that on the evidence before me of general business practices concerning commercial leases of this type, no conclusion can be drawn that the determination of rent would invariably be tied to the fair market value of the property. It is apparent that in commercial leases of this kind, one approach to determine the lease renewal rate is to determine the relationship of the market value of the property to annual rent. But that is not the only approach. In other cases, renewal rates are determined by reference to fair market rental value. [46] Further, I do consider it appropriate to take account of the conduct of the parties, both after the MOU was prepared and after the option to renew was exercised. I do not suggest that the subsequent conduct of the parties is at all

conclusive of the matter, and I accept the need for caution in drawing conclusions from subsequent conduct. The fact that a party does not seek to enforce his rights does not necessarily prove that he never had them. Having said that, subsequent conduct may be helpful in showing the meaning the parties attach to a document after its execution, which may in turn support an inference that they took the same view of that document at an earlier date. [47] In this case, the parties continued to discuss how rent would be calculated for renewal terms after execution of the MOU. Such conduct supports an inference that the calculation of rent payable on a renewal term was not settled in the minds of both parties by the terms of the MOU. [48] Additionally, after the respondent gave notice of its intent to exercise its option to renew the lease, Mr. Jensen opened a dialogue to the end of determining the new lease rate that introduced options inconsistent with the petitioner's position that the parties had already agreed that rent for subsequent terms would be 10 percent of the then fair market value of the property on a sale. [49] While I appreciate the position that the petitioner is now in, and why the matter was brought to this Court for consideration before pursuing commercial arbitration, I am left with the impression that what the petitioner is really after is clarification of an

ambiguous term in the agreement, not rectification of a mutual mistake. As Binnie J. observed in Performance Industries, the Court's task in a rectification case is corrective not speculative. In my respectful view, this petition invites too large a measure of speculation on the part of the Court as to what it was the parties intended on the question of rent to be paid during a renewal term. [50] Accordingly, and for the reasons given above, I conclude that the petitioner has fallen short of discharging its heavy onus of establishing a compelling case for rectification. [51] Equally, I would not grant to the respondent the relief it seeks, namely that the clause in issue be interpreted so that rent payable in a renewal term be calculated on the basis of fair market rent for the premises at the time of the renewal. The Court cannot grant this relief on the petitioner's application for rectification and would decline, in any event, to impose upon the parties an agreement they may not have intended to reach. [52] As summarized at the outset, the petition for rectification of Clause 6.14 of the Lease Agreement between the parties is dismissed with costs to the respondent. [53] MR. ELLIOTT: Thank you, My Lord. [54] THE COURT: Thank you, counsel. "The Honourable Mr. Justice Fitch" __________ The Honourable Mr. Justice Fitch