Following the case of RioCan Holdings Inc. vs. Metro Ontario Real Estate Limited1, the Ontario Superior Court of Justice released Parsons Precast Inc. v. Sbrissa2, another decision involving a landlord and tenant fighting over the cost of parking lot work.
The Court released Parsons, involving a similar fact situation, six months after the RioCan decision. In Parsons, Parsons Precast Inc., as tenant (the “Tenant”) leased commercial space from Anna Sbrissa and Armando Sbrissa, as landlord (together, the “Landlord”) in a multi-tenanted project. The lease was described as a net lease, with some of the relevant provisions regarding responsibility for repairs and maintenance being as follows:
- “The parties hereto agree that this lease shall be a net/net lease in that the parties have agreed that this lease is a completely care-free net lease to the lessor... The lessee… shall pay its proportionate share of all expenses arising from the lessor’s operation of the building in which the demised premises are located, including without limiting the generality of the foregoing, all expenses arising from… common area maintenance expenses…”3
- “The lessee shall additionally pay monthly a proportionate share of all costs and expenses incurred by the landlord in maintaining, operating, cleaning, insuring, and repairing the property…”4
- “The lessee will repair according to notice in writing (reasonable wear and tear, and damage by fire, lightning and tempest only excepted.)”
There was an initial three year term, beginning on November 1, 2004. The lease was renewed on two occasions, and as a result, the expiry date of the lease was ultimately extended to October 31, 2011.
In September of 2010, the Landlord provided notice to the Tenant that the Landlord had incurred expenses of $76,125 to completely repave the entire parking lot. The Landlord’s notice advised the Tenant that its proportionate share of such repaving was $14,533. Payment was requested on a lump sum basis. The Tenant refused to pay this amount, and vacated the premises at the end of the term on October 31, 2011.
The Tenant brought an application for an interpretation of the terms of the lease, citing the RioCan case in support of its argument that it was not responsible for the cost of the parking lot repaving. To briefly summarize, in the RioCan case, RioCan Holdings Inc. (“RioCan”), as landlord of a commercial plaza, resurfaced the plaza’s parking lot and charged its tenants, including Metro Ontario Real Estate Limited (“Metro”), a proportionate share of the cost. The total cost of the parking lot resurfacing was $431,000, which RioCan amortized over a 20 year period before charging the cost to its tenants as part of their monthly common expense charges. The lease provided that the following expenditures were payable by Metro as additional rent:
- “The Tenant shall pay… the Tenant’s proportionate share of the cost of the following services provided by the Landlord… Repairs to and maintenance of the sidewalks, paved areas, storm, sanitary, water and utility services, directional signs and landscaping… provided that the term “costs” within the meaning hereof… shall not include… expenditures which by accepted accounting practice are of a capital nature…”6
After a lengthy review of the submissions of both parties regarding the nature of the parking lot resurfacing work and the interpretation of the terms “accepted accounting practice” and “capital nature”, the Court in RioCan concluded that the resurfacing work performed on the parking lot was a capital expenditure, and therefore was not chargeable to Metro as additional rent pursuant to the terms of the lease.
The Tenant in Parsons argued that the decision in RioCan was determinative. However, the Court noted that the RioCan decision turned on the Court’s interpretation of the language in Metro’s lease. As noted above, the RioCan lease explicitly excluded “expenditures which by accepted accounting practice are of a capital nature” from additional rent. This language was critical to the Court’s conclusion in RioCan that Metro was not responsible for the cost of repaving the parking lot, as the repaving work was found to be an expense of a capital nature. The lease in the Parsons case, however, did not contain any similar exclusion or carve-out from additional rent for “capital costs” or expenses “of a capital nature.” Because the leases did not share this language, the Court found that the result in RioCan could not be directly applied to the facts in Parsons.
Instead, the Court considered whether the repaving of the parking lot could properly be characterized as “maintenance”, or a “repair (reasonable wear and tear… excepted)” as these were the provisions in the Parsons lease that described costs that were the responsibility of the Tenant.
The Court heard evidence that the existing parking lot was approximately 19 or 20 years old at the time that the repaving occurred. The Court determined that the deterioration of the parking lot over a period of 19 or 20 years was due to the effects of wear and tear. Therefore, although the Tenant was responsible for certain costs of repair, the repaving of the parking lot fell under the wear and tear exception. The cost of the parking lot repaving could not be charged to the Tenant as “repair.”
Next the Court looked at the definition of the word “maintenance” and found that this term is used to describe the concept of “keeping the property up.” The Court concluded that the parking lot, rather than being “kept up”, was completely replaced, which was outside the scope of the word “maintenance”, and therefore, the cost of the parking lot repaving could not be charged to the Tenant as “maintenance.”
The Court concluded, “the total cost of replacing the entire parking lot is beyond what was contemplated in the tenants’ obligation to pay on a monthly pro-rata basis for ‘repairs (reasonable wear and tear excepted)’ or ‘maintenance’ of the common areas.”7 The Tenant was not responsible for paying the $14,533 amount to the Landlord.
It is important to note that, aside from an examination of the specific wording in the lease, the Court also looked at the manner in which the Landlord purported to charge the Tenant for the repaving cost. The Landlord billed the Tenant for its proportionate share of the total amount of the repaving cost on a lump sum basis. This was not the usual method of charging for common area costs, which were normally estimated for the year and billed on a monthly basis. According to the Court’s reasoning, this lump sum billing implied that the Landlord was aware that the repaving of the parking lot was not truly a common area cost.
Further, the Court also expressed the view that even if, on the terms of the Lease, the Tenant was actually responsible for a proportionate share of the repaving cost, it would be “unfair and unjust” to charge this amount to the Tenant on an unamortized basis, when the repaving of the parking lot would add 20 years to the life expectancy of the parking lot, and the Tenant had only 14 months left in its term.
Looking at Parsons and Riocan together, landlords may feel some anxiety. However, although these two cases were each decided in favour of the tenant, this does not mean that tenants can never be charged for the costs of any major parking lot work. Instead, these decisions serve as a reminder to both landlords and tenants that the language used in the lease is critical. If a landlord expects to be able to charge its tenants for this type of work, it should ensure that its leases actually allow it. Similarly, a tenant who feels that the landlord should bear all the costs of major parking lot work should ensure that costs of this nature are clearly excluded from the tenant’s responsibility, or at the very least, such costs should be amortized. A well-drafted lease can help both parties avoid unpleasant surprises down the road when it comes to the costs of parking lot work.