C.A.# 108655
NOVA SCOTIA COURT OF APPEAL
Cite as: J.M.S.C. Holdings Inc. v. Oshawa Group Ltd., 1995 NSCA 25
Matthews, Roscoe and Pugsley, J.J.A.
BETWEEN:
J.M.S.C. HOLDINGS INC. ) Victor J. Goldberg,
) for the appellant
Appellant )
)
)
- and - ) Daniel Campbell, Q.C.
) for the respondent
)
)
OSHAWA GROUP LIMITED )
)
Respondent )
) Appeal Heard:
) November 30, 1994
)
) Judgment Delivered:
) January 18, 1995
)
)
THE COURT: Appeal dismissed with costs to the respondent in the amount of $2,000.00, plus disbursements, per reasons for judgment of Pugsley, Matthews and Roscoe, JJ.A. concurring.
PUGSLEY, J.A.:
The narrow question for determination in this appeal from a Supreme Court Judge sitting in Chambers, relates to the manner of calculation of the reimbursement of real property taxes, from the Oshawa Group Limited (the "Tenant") to JMSC Holdings Inc. and Harrowston Developments Corporation (the "Landlord").
The rights and obligations of the parties are governed by a written lease entered into in June, 1979 by their predecessors in title. Three clauses (which I will designate clauses 1, 2 and 3 for ease of reference) are of direct relevance.
1. "Utility Charges and Business Tax:
The Lessee shall pay as additional rent all private or public utilities, including without limitation, all water, gas, oil and electric rates and charges (which shall be separately metered) in connection with the use and occupation of the leased premises, and pay for its own cost of heating, ventilating and air-conditioning the leased premises, and its own janitor services, window cleaning, and all taxes, rates, duties, assessments and license fees whatsoever, whether municipal, parliamentary or otherwise, now or hereafter charged, assessed or levied upon or in respect of the improvements, personal property, income, business or other activity of the Lessee in connection with the leased premises, or against the Lessor on account of its ownership thereof or its interest therein, and indemnify the Lessor and the Lessor's property from and against all loss, costs, charges and expenses occasioned by or arising out of any and every such charge, tax, rate, duty, assessment or license fee, . . .
2. Lessor to Pay Certain Taxes
The Lessor shall pay or cause to be paid when due all real property taxes, rates, duties and assessments whatsoever, whether municipal, parliamentary or otherwise, now or hereafter charged, assessed or levied upon or in respect of the Shopping Centre save and except for or subject to reimbursement by the Lessee for any of same which the Lessee is required to pay or reimburse the Lessor for as in this lease provided, . . .
3. Lessee to Reimburse Lessor for Taxes:
The Lessee shall also pay, as additional rent, to the Lessor on the basis of separate assessments or tax bills in respect thereof, and within twenty (20) days after demand therefor, all real property taxes, rates, duties and assessments (including local improvement rates), whether general or special, which are levied, rated, charged or assessed against the leased premises by any lawful taxing authority and shall also pay, as additional rent, to the Lessor within twenty (20) days after demand therefor, the Lessee's proportionate share of such real property taxes, as aforesaid, levied, rated, charged, or assessed against that part of the common areas and facilities of the Shopping Centre located on the lands more particularly described in Schedule "A1" and outlined in blue on the site plan attached hereto as Schedule "B", hereinafter called the "Villa Lands", on the basis of a separate assessment or tax bill for the common areas and facilities, in the proportion that the ground floor area of the leased premises bears to the total leasable floor area of all buildings located on the Villa Lands. Provided, if there are not separate assessments or tax bills for the leased premises and the common areas and facilities located on the Villa Lands, the Lessee shall pay, as additional rent, within twenty (20) days after demand therefor by the Lessor, the Lessee's proportionate share of all such real property taxes, as aforesaid, which are levied, rated or assessed by any lawful authority against, or in relation to the lands, buildings and improvements located on the Villa Lands, in the proportion that the ground floor area of the leased premises bears to the total leasable floor areas of all buildings located on the Villa Lands. . . ." (emphasis added)
The Landlord submitted that the Tenant must pay its share based on the proportion that the floor area of the Tenant's premises bore to the leasable floor area of the shopping centre, whereas the Tenant submitted it should pay its share of taxes based on the "separate assessment" of the unit it rents from the Landlord.
The matter was initiated by way of originating notice (application inter partes). Affidavits on behalf of both parties as well as an agreed statement of facts were filed with the trial court. No viva voce evidence was called.
After reserving decision, the trial judge dismissed the Landlord's application concluding that the Tenant's business occupancy assessment constituted a "separate assessment" for the purposes of calculating the Tenant's share of the total annual realty taxes.
Facts
Sections 3 to 13 inclusive of the agreed statement of facts provide as follows:
"3. The property is subject to real property tax and business occupancy tax pursuant to Section 226(a) of the Halifax City Charter which provides:
'Real Property Tax
226 The Council shall annually, by resolution, levy real property tax on the assessed owners of all real property in the City that is taxable by the City under the terms of the Assessment Act, at a rate to be fixed by the Council under the provisions of Section 234 on (a) the full assessed value of taxable commercial property and business occupancy assessment . . . .'
4. The assessed value of taxable commercial property and business occupancy assessment are determined by the Director of Assessment, with the assistance of assessors, pursuant to the Assessment Act. The Director and the Assessors are members of the public service of Nova Scotia, in the Department of Municipal Affairs.
5. The six municipal lots comprising the Shopping Centre are assessed to the [Landlord] as taxable commercial property pursuant to the provisions of the Assessment Act, and in particular, pursuant to Sections 25 and 26.
6. Each occupied tenant premises in the Shopping Centre, including the [Tenant's] premises, is assessed as business occupancy assessment pursuant to the Assessment Act, and in particular pursuant to Section 11(1).
7. Pursuant to Section 42(1) of the Assessment Act, all property is assessed at its market value. The method used by the Director to determine the market value of this commercial property is generally known as the 'income approach'. Under this method, the Assessor determines the market value of the property with reference to its expected operating income, as follows:
(a) The market rent for each leasable space in the commercial property is determined separately. This is generally the lease rate, but it may be adjusted to reflect changes in market conditions since the lease was entered into, or other special circumstances.
(b) The market rents for all leasable spaces and other income are aggregated to determine the potential gross income for the commercial property.
(c) The gross potential income is adjusted to allow for reasonable levels of vacancy, and for unrecoverable costs of operation to determine the net operating income of the commercial property.
(d) The capitalized value of this estimated net operating income, using an appropriate capitalization rate, with the addition of an amount representing leasehold improvements, is determined to be the fair market value of the commercial property.
The assessment is made in accordance with the procedures, and subject to the appeals, provided in the Assessment Act.
8. Pursuant to Section 11(4) of the Assessment Act, business occupancy assessment is computed by reference to the assessed value of the property occupied or used. Depending on the purpose for which the property is occupied, the business occupancy assessment is 25%, 50% or 75% of the assessed value. For retail premises, including the [Tenant's] premises, the business occupancy assessment is 50% of assessed value of the property occupied.
9. Business occupancy assessment is determined by the Director of Assessment as follows:
(a) The assessed value of the commercial property is divided by the potential gross income to determine a 'business occupancy assessment factor' (dollars of assessed value per dollar of market rent).
(b) The market rent for each leasable premises is multiplied by the business occupancy assessment factor to determine the assessed value of each leasable premises. (Thus by definition, the aggregate of assessed values of leasable premises is equal to the assessed value of the commercial property).
(c) The assessed value of each occupied premises is multiplied by the appropriate factor (25%, 50% or 75%) in accordance with Section 11(4) of the Assessment Act to determine the business occupancy assessment.
10. The assessment of the Shopping Centre for the tax year April, 1993 to March, 1994 was $7,980,700.00, and the commercial property tax for that year was $308,342.33.
11. The tenant occupies 24,988 square feet, and the leasable area of the Shopping Centre comprises 89,460 square feet. According to the [Landlord's] calculation, the [Tenant's] tax obligation is 24,988.00 89,460.00 x $308,342.33 = $86,126.27 for commercial property taxes.
12. The business occupancy tax assessment of the [Tenant's] premises for tax year April, 1993 to March, 1994 was $594,400.00, (rounded), and the assessed value of the property was $1,188,729.00 (as shown in column 22 on Attachment B). The tax rate for commercial property fixed by the City of Halifax for that tax year was 3.8636. According to the [Tenant's] calculation, the [Tenant's] tax liability is $1,188,729.00 x .038636 = $45,927.73. (Alternatively, if the tax is apportioned based on assessed value, the calculation is 1,188,729 7,980,700 x $308,342.33 = $45,927.73.)
13. No separate assessment or tax bill is made or issued with respect to the common areas."
Background
The provisions of the Assessment Act, R.S.N.S. c. 23, which are relevant to this appeal include the following:
Section 4 provides that subject to certain exemptions, all assessable property (a defined term) and business and residential occupancy assessments are liable to taxation.
Section 25 requires the Director of Assessment to prepare an assessment roll setting forth the location and a concise description of each separate piece of assessable property, with the name and address of the owner, together with the "assessed value" and classification of each lot or piece of assessable property in such detail as the Assessor may determine.
All property, according to s. 42 of the Act, shall be assessed at its market value "such value being the amount which in the opinion of the Assessor would be paid if it were sold on a date prescribed by the Director in the open market by a willing seller to a willing buyer..."
Under the heading Business Occupancy Assessment, s. 11(1) provides that every person occupying or using any commercial property (with some exceptions) "shall be assessed for a sum to be called business occupancy assessment".
Business Occupancy Assessment is computed by reference to the assessed value of the property in a sum equal to a certain percentage of the assessed value depending on the purpose for which the property is occupied or used. In the present case the sum is equal to fifty per cent (50%) of the assessed value.
Section 11(2) of the Act provides that common areas in a shopping centre are deemed to be occupied proportionately by the other occupiers of the centre.
Counsel for the Landlord submits that the interpretation of the relevant provisions of the lease raises a question of law, not based on the assessment of evidence or the credibility of witnesses and that accordingly this court can set aside the decision of the trial judge if we determine that the latter's interpretation of the lease was in error.
ISSUES
As at trial, the Landlord raises four separate submissions:
1. The term " separate assessment" is confined to a real property assessment. There is no separate real property assessment with respect to the demised premises and accordingly the calculation should be determined on square footage.
2. The phrase in clause 3 (provided, if there are not separate assessments or tax bills for the leased premises and the common areas and facilities...) should be interpreted conjunctively. Section 13 in the Agreed Statement of Facts provides "No separate assessment or tax bill is made or issued with respect to the common areas" hence the square footage formula must be employed.
3. The use of the formulas proposed by the Tenant results in an inequitable division of property taxes.
4. The historical manner in which taxes were calculated is reflective of the true intention of the parties.
Issue No. 1
The respondent has correctly characterized the first issue in this case as follows:
"Commercial leases invariably contain a provision for the recovery of property taxes by the Landlord from the Tenants. Such provisions must provide a mechanism for apportionment of the taxes paid with respect to the entire development among the various tenancies. Ultimately such mechanisms must apportion taxes on the basis of area of the premises (proportionate share of leasable area) or on the basis of the value of the premises (based on separate assessment). The issue in this case is which of these mechanisms is properly applicable under the lease between the parties."
The lease was negotiated and executed in 1979 by parties who were predecessors to the present disputants. Not surprisingly, in view of the lapse of time, no attempt was made to introduce extrinsic parol evidence to shed light on the parties' intention, or the background circumstances in which the document was negotiated.
We are left therefore with the language of the lease as our sole guide to that intention.
The Landlord relies on the last clause of the lease which provides:
Net Lease:
It is the intention of the parties that this lease shall be net to the [Landlord] and the [Tenant] shall pay for its own account, to the complete exoneration of the [Landlord], all costs and expenses affecting the leased premises and the business carried on therein, other than such amounts as are specifically required to be paid by the [Landlord] hereunder and other than the payment of any interest or principal required to be paid by the [Landlord] under the terms of any mortgage or charge affecting the leased premises or any income taxes paid and payable by the [Landlord].
The Landlord submits that this clause is consistent with an obligation assumed by the Tenant to pay for all utilities, taxes, heats and repairs incurred in connection with the demised premises.
The parties under clause 1, the Landlord argues, clearly contemplated that separate taxes, rates, duties, assessments or license fees, might be levied by municipal or other governments, in respect of the improvements, personal property, income, business or other activity of the Tenant, and further that the Tenant should bear the ultimate responsibility of paying those items. Clause number one does not relate to real property taxes.
While acknowledging that the calculation of business occupancy is a separate assessment, the Landlord argues that it does not constitute a "separate assessment" within the meaning of s. 3 of the lease, which section deals exclusively with the issue of real property taxes.
Finally, the Landlord submits that the opening words of s. 3 assist his interpretation:
"The Lessee shall also pay, as additional rent, to the Lessor on the basis of separate assessments or tax bills in respect thereof, and within twenty (20) days after demand therefor, all real property taxes...which are levied... against the leased premises..."
The words "in respect thereof" the Landlord submits refer to "real property taxes".
This argument, is at first glance attractive. It is, however, inconsistent with the provisions of the Assessment Act. The assessed value of the premises, determined by market value, is the key to the determination of realty taxes and business occupancy taxes under the Act. There is only one assessed value of a property, not a commercial realty assessed value, and a business occupancy assessed value. Before determining the assessment of a shopping centre, the assessor must determine the assessment of each of the individual premises leased within the centre. Each tenant's property is therefore, separately assessed.
There is no "assessed value for business occupancy purposes only" as advanced by the Landlord.
The trial judge relied on the decision of Hallett, J., of the Supreme Court (as he then was) in Sunnyside Shopping Plaza vs. Zellers (1987), 78 N.S. R. (2d) 235. Justice Hallett pointed out that there was "an obvious correlation between the assessment and market value of a shopping centre pursuant to s. 78 of the Assessment Act and a computation of the business occupancy assessment of a tenant pursuant to s. 7 of the Act."
In agreeing with that comment, the trial judge went on to say:
"The correlation can be seen by examining the methods used by the Assessor in determining both realty and business occupancy assessment values. In order to arrive at a total assessment for the Shopping Centre, the assessor first determines the assessed value of each unit in the Shopping Centre. That is done by using the "market rent" or "income" approach to valuation. The formula used to arrive at the total assessed value of the Shopping Centre includes a totalling of the assessments of all the units in the Centre. In order to determine each tenant's occupancy tax assessment, the realty assessment of the demised premises, in this case, is simply halved in accordance with s. 11(4) of the Assessment Act.
The tenant here agreed to pay all real property taxes assessed against the leased premises on the basis of separate assessments or tax bills in respect thereof. Although there are no tax bills for each unit, there are separate assessments. Only coincidentally is the separate assessment used to calculate business occupancy tax."
In finding that the business occupancy assessment of the Tenant constituted a "separate assessment" for the purposes of calculating realty tax apportionment under the lease and in particular clause 3, in my opinion the trial judge committed no error.
Issue No. 2
The Landlord contends that the highlighted wording in clause 3 requires that there be separate assessments for both the leased premises and the common areas before a calculation based upon a separate assessment can be adopted. In order to accept the Tenant's submission, the Landlord submits that the trial judge was required to substitute the word "and" with the word "or".
This provision in my opinion does not affect the primary intention of the parties as expressed at the outset of clause 3, namely that the tenant is obliged to pay real property taxes on the basis of separate assessment.
The argument advanced by the Landlord is somewhat analogous to the argument raised in Sunnyside (supra) where the issue involved a separate assessment of land and buildings.
Hallett, J. stated at p. 249:
"The lease simply provides that where there is a separate assessment for the land, how the taxes relating to the land would be apportioned to Zellers. It is difficult to know what the parties contemplated when the lease was signed. One can only look at the words used in the lease. At the time, there was a separate assessment for land and the parties directed their attention to this issue and provided a mechanism to deal with it. It cannot be inferred that the parties did not contemplate the day that there would not be a separate land assessment. The primary intention of the parties is that Zellers would pay taxes levied against the leased premises and, if the shopping centre was assessed en bloc, then Zellers was entitled to apply for apportionment. The Assessing Authority made that apportionment in 1982. Zellers was responsible only to pay the taxes that relate to the assessed value of its premises. It is not a matter of disregarding s. 8; it is simply that the section is at the present redundant as there is no separate assessment of the land." (emphasis added)
In my opinion, the primary intention of the parties as disclosed from the provisions of the lease is that the tenant would pay real property taxes on the basis of a separate assessment.
The effect of the Landlord's submission would result in the Tenant being obliged to pay taxes both on the basis of separate assessment and on the basis of proportionate share of a leasable area.
Such an interpretation is in my opinion repugnant to the scope and effect of clause 3 (Re International Woodworkers of America Local 2-1000 and G. W. Martin Lumber Ltd. (1972), 24 L.A.C. 352).
Issue No. 3
Apart from the lease between the parties, no other leases with tenants in the Shopping Centre have been placed before us. We do not know whether the other tenants have similar tax obligations as borne by the Tenant.
If the other leases are similar, and assuming full occupancy, the Landlord will be completely indemnified for all real property taxes levied against the Centre. If not, the Landlord may suffer a shortfall, or, depending upon the wording of the individual leases, a windfall.
Neither result would be determinant of, or affect, the issue of interpretation of the lease between the present parties.
The Landlord submits that the separate assessment approach "uses as its basis the amount of market rent paid by each of the tenants. Larger and more powerful tenants are able to negotiate lower rents than are smaller tenants and as a result the business occupancy assessments of larger tenants, like the (Tenant) are proportionately lower than the business occupancy assessments of smaller tenants. Consequently, smaller tenants pay a proportionately larger share of the real property taxes. In the absence of contractual language to the contrary, payment of property taxes based on the square footage formula results in a more equitable division of the tax burden."
The submission, while novel, takes the doctrine of business efficacy not only beyond the traditional approach that "only what is necessary may be implied" but even beyond that suggested by Lord Denning that terms could be implied in contracts where it was reasonable to do so (Liverpool City Council vs. Irwin (1976), 1 Q.B. 319, overruled by the House of Lords (1977) A.C. 239).
The interpretation of the lease between the Landlord and Tenant should not, in my opinion, be affected by considerations of what would be fair to other tenants, who are not before this court, with respect to lease terms of which we have no knowledge.
Issue No. 4
From 1979 to 1985, Dominion Stores Limited, the Tenant's predecessor, paid its proportionate share of all real property taxes in the proportion that the ground floor area of the leased premises bore to the total leasable area of all buildings in the Shopping Centre.
From 1985 to 1993, the Tenant paid its proportionate share of all real property taxes in the proportion that the ground floor area of the leased premises bore to the total leasable area of all buildings located in the centre.
In 1990 the Tenant questioned the method of tax apportionment, and requested that the taxes be apportioned based on separate assessments. The Landlord took the position that there was no separate assessment. By letter dated August 26, 1993, the Landlord's property manager wrote to the Tenant stating in part:
"I am advising you again, as we do every year, that no separate assessment is available for your premises and the Shopping Centre lands."
The trial judge accepted the statement of Robert Kline, the Tenant's Director, Leasing and Rental Administration, who deposed in an affidavit sworn in April 15, 1994, that the Tenant (through a subsidiary company) owned a shopping centre known as Colby Village Plaza in Cole Harbour, Nova Scotia, and in that capacity, in 1993, first became aware that business occupancy tax assessments were based on realty assessed values of individual tenant premises.
The trial judge determined that the past incorrect apportionment of realty taxes based on square footage "resulted from incorrect information provided by the Landlord who each year informed the Tenant that there was no separate assessment upon which to base an apportionment of taxes..". Immediately upon finding out that the information was incorrect, the Tenant repudiated the square footage formula".
In view of this finding, the past practice of the parties, in my opinion, should be completely disregarded.
Conclusion:
I would dismiss the appeal, affirm the order of the trial judge, and order costs to be paid to the Respondent in the amount of Two Thousand Dollars ($2,000.00) plus disbursements.
Pugsley, J. A
Concurred in:
Matthews, J.A.
Roscoe, J.A.