Zinto Properties Ltd. v. Royalbay Investments Limited

Zinto Properties Ltd. v. Royalbay Investments Limited Collection Decisions of the Court of Appeal Date 1998-10-14 Docket numbers C27287 Judges Brooke, John Watson; Laskin, John Ivan; Charron, Louise Vivianne Subject Civil Decision Content Date: 19981014 Docket: C27287 COURT OF APPEAL FOR ONTARIO RE: ZINTO PROPERTIES LTD., MAARE HOLDINGS LIMITED AND ADSPI PROPERTIES LIMITED (Applicants(Appellants)) and ROYALBAY INVESTMENTS LIMITED AND 783109 ONTARIO LIMITED (Respondents (Respondents in Appeal)) BEFORE: BROOKE, LASKIN AND CHARRON JJ.A. COUNSEL: Kenneth Prehogan and Kim E. D. Snell for the appellants Stephen Schwartz for the respondent 783109 Ontario Limited Katherine M. van Rensburg for the respondent Royalbay Investments Limited HEARD: September 14, 1998 ENDORSEMENT [1] The appellants Zinto, Maare and Adspi are non-defaulting co-tenants of a leasehold interest in land and an office building at 360 Bay Street, Toronto. The appellants brought an application under Rule 14.05 of the Rules of Civil Procedure for an order that under the terms of their Co-Tenancy Agreement they had the right to purchase the interest of the defaulting co- tenant, the respondent Royalbay, free of the mortgage on the property now held by the respondent 783109 Ontario Limited. [2] The motion judge, Ellen Macdonald J., ordered Royalbay to transfer its interest in the property, but she did not discharge the mortgage or resolve a number of corollary issues. The appellants appeal seeking a discharge of the mortgage and a resolution of the corollary issues. Royalbay cross-appeals and asks either that the application be dismissed or that the court direct a trial on all issues because there are disputed questions of fact. [3] The appeal and the cross-appeal raise three main issues: (i) should the application be converted into an action because there are material facts in dispute, which require a trial? (ii) if the answer to the first question is no, are the appellants entitled to an order discharging the mortgage on their purchase of Royalbay's interest? (iii)should there be a trial of the corollary issues? 1. Application or Trial? [4] The appellants' right to purchase is triggered by an event of default as defined in Article 8.01 of the Co-Tenancy Agreement. Royalbay argued before the motion judge and in this court that the facts relevant to whether an event of default had occurred were disputed and therefore the application should be converted into an action. [5] The motion judge concluded that there was an event of default and that there were no material facts in dispute on that issue. The event of default was Royalbay's failure to pay its required contributions to the operating expenses of the property. [6] We agree with the motion judge on this issue. The auditors' statements, which the co-tenants agreed were conclusive and binding on them, showed Royalbay in default. Moreover, Royalbay's conduct was consistent with that of a defaulting co- tenant. Royalbay did not dispute that it was in default until after the litigation started. 2. Are the Appellants entitled to an order discharging the mortgage? [7] This is the main question on this appeal. A preliminary issue, however, is whether the appellants were entitled to exercise their option to purchase Royalbay's interest in May 1996. Before exercising its contractual option to purchase, a non-defaulting tenant must, under Article 8.01 of the Co-Tenancy Agreement, deliver a notice of default. Royalbay submits that a non-defaulting co-tenant cannot deliver more than one notice of default for the same event of default. The appellants delivered a notice of default in December 1995, which they did not act on within the 30-day period provided for in the agreement. They then delivered a second notice of default in April 1996, which they did act on. Royalbay argues that the appellants are disentitled to relief because they did not act on the first notice. We do not have to decide this point. The appellants take the position that they wish to exercise the option only if this court holds they can purchase Royalbay's interest free of the existing mortgage. Even assuming the appellants could revive their option to purchase by delivering and acting on the second notice of default, we do not think that they are entitled to an order discharging the mortgage on their purchase of Royalbay's interest. [8] Whether the appellants are entitled to a discharge of the mortgage turns on the interpretation of the Co-Tenancy Agreement and the intention of the parties. The important article of the agreement is Article 8.04, which provides in part: 8.04Upon the occurrence of an Event of Default any Co-Tenant not in default (the "Non-Defaulting Party") shall, in addition to any other right or remedy available to it at law, equity or pursuant to this Agreement or otherwise, is hereby granted by the Co-Tenant in default (the Defaulting Party) an irrevocable option to purchase the Proportionate Share of the Defaulting Party in the Property ... The purchase price shall be paid by the Non-Defaulting Party as follows: ... (b) the balance of the purchase price, if any, subject to the usual adjustments for income and expenses for properties of similar nature to the Property shall be paid on closing by certified or official bank cheque, provided however that the balance of the purchase price shall be applied firstly to the discharge of any charge or encumbrance of the Defaulting Party's Proportionate Share in the Property at closing, including without limitation the charge and encumbrance thereon, if any, pursuant to paragraph 7.02. Upon payment of the purchase price the Defaulting Party shall have no further legal or equitable interest in the Property or in the Cash Flow and the Defaulting Party or the Involuntary Transferee as the case may be shall promptly execute and deliver all necessary deeds, conveyances, bills of sale, assignments, assurances, consents and other documents in registrable form that the solicitors for the Non- Defaulting Party shall reasonably require to effectively and irrevocably transfer a good and marketable title to the Proportionate Share in the Property of the Defaulting Party to the Non- Defaulting Party. [9] Granting a right to purchase an interest in property in the event of default creates an immediate equitable interest in the property, which takes priority to the interest of a mortgagee. But it does not follow that in purchasing that interest in the property, the purchaser is entitled to a discharge of a subsequent mortgage. [10] Several provisions of the Co-Tenancy Agreement suggest that in this case the parties intended that the mortgage be discharged only if it was paid off. For example, Article 6.04 permits a co-tenant to mortgage its interest but provides for a cap at 75% of the mortgagor co-tenant's share. This cap suggests that the parties contemplated the mortgagee would be paid out of the purchase price. Bolstering this view is Article 6.06, which provides that any mortgage must be available for immediate repayment if a non-defaulting co-tenant exercises its right to purchase. [11] It seems to us that much clearer language in the Co- Tenancy Agreement would be required to give effect to the appellants' position, particularly when the appellants consented to the mortgage and when the mortgagee is not even a party to the contract on which the appellants rely. [12] There was considerable argument before us on whether "good and marketable title", as that phrase is used in Article 8.04, meant title free of the mortgage. On the view we take of this appeal, the reference to good and marketable title does not resolve the question whether the appellants can obtain a discharge by court order. The defaulting co-tenant may have an obligation to provide good and marketable title, including a discharge, and the appellants may have remedies for its failure to do so. But this does not mean that the appellants can obtain a court order discharging the mortgage. [13] The problem in this case was created by a fall in the real estate market. Royalbay's interest is now valued at approximately $225,000 and the mortgage is now worth more than $2.1 million dollars. The appellants argue that the decision of the motion judge makes no business sense. If that is so, it is because the appellants consented to a collateral mortgage of Royalbay's interest in the amount of $5,250,000 and because of the current state of the market, a market that does not appear to have been contemplated by the parties when they signed the Co- Tenancy Agreement. The appellants have other remedies under the Co-Tenancy Agreement, but in our view they do not have the remedy of a court order discharging the mortgage. 3. The Corollary Issues [14] Because of our decision on the main issue, we need not decide the corollary issues. If called on to do so, however, we would have resolved them in favour of the appellants. In our opinion, Royalbay is not entitled to relief from forfeiture under the Co-Tenancy Agreement. Moreover, Royalbay has not even offered to pay the outstanding arrears. Also, in our view, the appellants are entitled to exercise a right of set off. Finally, we are of the opinion that the motion judge was wrong to conclude that the application of the minority discount and the appropriate valuation date were issues requiring a trial. Her conclusion flies in the face of Article 8.05 of the Co-Tenancy Agreement, which provides that the appraiser's determination of fair market value shall be "conclusive and binding". Conclusion [15] Because of the position taken by the appellants that they do not wish to exercise any option they may have unless the mortgage is discharged, we allow the appeal, set aside the order of Ellen Macdonald J. and dismiss the application. The cross- appeal becomes moot and is also dismissed. [16] As between the appellants and Royalbay there shall be no costs of the motion. The appellants shall pay 783109 Ontario Limited its costs of the motion in the amount fixed by the motion judge, $2,500. Both respondents are entitled to their costs of the appeal. There shall be no costs on the cross- appeal.