CITATION: Welsh v. Karangongou, 2018 ONSC 804

COURT FILE NO.: CV-17-585278

DATE: 20180202

SUPERIOR COURT OF JUSTICE – ONTARIO

RE: MARIE WELSH, JOHN WELSH and MATTHEW NEMETH, Applicants

AND:

KIKI KARANGONGOU, Respondent

BEFORE: Stinson J.

COUNSEL: Glenn E. Cohen, for the Applicants

Constantine Alexiou, for the Respondent

HEARD at Toronto: January 19, 2018

REASONS FOR DECISION

[1] The Welsh family love their cats. They have four. To allow their cats to enjoy the outdoors, without the risk of them wandering off or encountering other animals, in 2013 the Welshes installed an open-air cat enclosure at the side of their rented house, behind the garage. This allowed their cats to exit through an existing window of the house, to enjoy the enclosure, and to come back inside when they wished to. It was covered overhead by wire mesh supported by a wooden frame and also included ramps and steps and climbing features for the cats’ use only – in effect, a cat playground.

[2] The Welshes have rented the house since November 1, 2012. It was purchased that year by the respondent Kiki Karangangou as an investment, for the purpose of renting it to the Welshes. It is a single-family detached house, with a garage, on a residential lot that is 47 feet wide by 190 feet deep, located near St. Clair Avenue and Victoria Park Avenue in Toronto.

[3] In October 2012, the parties signed a lease with a seven year term. During the first five years of that term, the lease gave the tenants an option to purchase the house at predetermined prices. The final date upon which the tenants could exercise the option was October 31, 2017.

[4] The tenants exercised their option to purchase by way of a written notice to the respondent landlord on June 21, 2017. In the months that followed, through their lawyer, the tenants attempted to make arrangements with the landlord to complete the purchase. The landlord did not co-operate, however; nor did she dispute the tenants’ right to exercise the purchase option.

[5] On October 26, 2017, having received no substantive response from the landlord, the tenants were forced to commence this application. It seeks an order transferring title to the house to them, at the agreed-upon price.

[6] On December 19, 2017, the landlord responded to the application. In the responding affidavit, the landlord for the first time took the position that the tenants were in breach of the lease and therefore were not entitled to exercise the option to purchase. Specifically, the landlord took the position that, by installing the open-air cat enclosure at the side of the house, the tenants had breached the following clause contained in the lease:

… any proposed renovation to the interior and/or exterior of the Premises is first to be consented to by the Landlord, in writing.

[7] The landlord's affidavit was supported by a letter from a professional engineer who opined that the installation of the cat enclosure would have required a building permit from the City of Toronto.

[8] In the face of the landlord's position and with a view to remedying any perceived default under the renovation clause in the lease, the tenants removed the cat enclosure. The sole remaining signs of it are a series of small holes drilled into some of the exterior bricks of the house, into which the overhead wooden frame of the cat enclosure had been bolted. Despite that action by the tenants, the landlord maintains her position that the option to purchase has been forfeited.

Issues and analysis

[9] There are two issues in this case, as follows:

1. Did the tenants breach the lease and forfeit their option to purchase, by installing the cat enclosure without written permission from the landlord as required by the renovation clause?

2. If the tenants breached the renovation clause by installing the cat enclosure, should the Court grant relief from forfeiture so as to permit them to exercise the option to purchase?

I will consider each of these issues in turn.

Issue 1. Did the tenants breach the lease and forfeit their option to purchase, by installing the cat enclosure without written permission from the landlord as required by the renovation clause?

[10] The option to purchase contained in the lease states as follows:

Provided that the Tenants are not in default under any of the provisions of this lease … the …Tenants shall have the option to purchase the Premises directly from the Landlord during any of the first FIVE (5) years of the Term at the following purchase prices: …

The lease sets out a series of escalating prices, ranging from $556,500 in the first year of the term, to $610,000 in the third, fourth and fifth years of the term.

[11] As I have mentioned, the position of the landlord is that the installation of the cat enclosure amounted to a “renovation to the … exterior of the Premises” that was carried out without written permission. As a result, the argument continues, the proviso in the option clause was triggered, and thus the option to purchase had been forfeited and was ineffective when the tenants purported to exercise it.

[12] For their part, the tenants deny that the cat enclosure amounted to a renovation within the scope of the proviso. They therefore argue that the option was properly exercised and should be enforced.

[13] There is no dispute that the tenants did not ask the landlord for permission to install the cat enclosure. Indeed, the landlord was unaware of its existence until her husband (acting as her agent) attended at the house in early July 2017. He saw it and took photos on that occasion. The landlord did not notify the tenants that they had supposedly breached the lease by failing to obtain her permission, and she continued to accept rental payments from them, up to the hearing of the application.

[14] In Pierce v. Empey, 1939 CanLII 1 (SCC), [1939] S.C.R. 247, Duff C.J.C. wrote as follows:

It is well settled that a plaintiff invoking the aid of the court for the enforcement of an option for the sale of land must show that the terms of the option as to time and otherwise have been strictly observed. The owner incurs no obligation to sell unless the conditions precedent are fulfilled or, as the result of his conduct, the holder of the option is on some equitable ground relieved from the strict fulfilment of them. [Authorities omitted.]

[15] In 1383421 Ontario Inc. v. Ole Miss Place Inc., 2003 CanLII 57436 (ON CA), [2003] O.J. No. 3752, the Ontario Court of Appeal considered the potential requirement for a landlord to notify the tenant of a default under a commercial lease as a requirement for the landlord resisting the exercise of an option to purchase on the ground of the tenant’s default. At paras. 47-52, Gillese J.A. wrote as follows:

The question for the applications judge was whether the Tenant was in default under the Lease at the time of renewal. In answering that question, it appears that the applications judge concluded that the Landlord had to give notice of default and/or take steps for removal before it could rely on the Tenant's default as a basis to refuse to permit the renewal.

I begin by noting that nothing in the renewal clause requires the Landlord to give notice of default. This is by way of contrast to other lease provisions that expressly require that notice be given by the Landlord. For example, section 15:01(b) provides that the Landlord must give notice of certain types of default and provide the Tenant with an opportunity to rectify before exercising the right of re-entry.

The Landlord's right, upon notice, to take steps to remove the Tenant or re-enter is quite distinct from the Tenant's right to exercise the option to renew. In the circumstances, the absence of a notice requirement in the renewal clause strongly suggests that notice is not required.

While there appears to be no Canadian jurisprudence on point, there is strong English authority for the proposition that a landlord need not give notice of the breach in order to refuse renewal. In West Country Cleaners (Falmouth) Ltd. v. Saly [1966] 3 All E.R. 210 (C.A.), a tenant was found to be in breach of its obligations to paint the inside of leased premises once every three years or more often, as needed. The court held that as the tenant was in breach at the relevant date, it was not entitled to renew the lease.

I see no reason in law to impose such a notice requirement upon the Landlord particularly where, as in this case, the Landlord has repeatedly made the Tenant aware that it was in breach of the lease.

Thus, with respect, the Landlord's actions (or lack thereof) in respect of notice and removal are not relevant to the question of whether the Tenant was in breach. The applications judge erred in relying on the Landlord's failure to give notice when determining whether the Tenant had validly renewed the lease.

[16] To the same effect is Novotny v Fowler, [2009] O.J. No. 978; aff’d on this point 2010 ONCA 120, [2010] O.J. No. 584 (C.A.), also a case involving a commercial tenancy. Counsel was unable to cite a similar decision involving a residential tenancy. As a matter of principle, however, I see no material difference where the option to purchase is contained in a lease for residential premises. While various rights and remedies concerning residential tenancies are governed by the Residential Tenancies Act, 2006, S.O. 2006, c. 17, that statute does not address the topic of tenants’ options to purchase contained in residential leases. Thus (leaving aside the issue of relief from forfeiture, discussed below) the landlord’s failure to notify the tenants of their alleged default and the landlord’s ongoing acceptance of rent from the tenants, do not alter their respective rights in relation to the option to purchase.

[17] The question to be decided, therefore, is whether the installation of the cat enclosure amounted to a “renovation to the exterior” of the house.

[18] The term “renovation” is not defined in the lease. Case law consideration of the term is of little assistance, since most cases deal with the use of the term in connection with statutory interpretation in connection with tax disputes. The term “renovate” is defined in various dictionaries as follows:

a. Concise Oxford Dictionary: to make new again, repair, restore to good condition or vigour

b. Oxford Online Dictionary: restore (something old, especially a building) to a good state of repair

c. Merriam Webster Online English Dictionary: to restore to a former better state (as by cleaning, rebuilding or repairing)

[19] Giving these words in the lease their usual and ordinary meaning would suggest that the landlord required the tenants to seek her consent where they proposed to repair, rebuild or restore the interior or exterior of the building. Read generously, the term might extend to alterations that amounted to rebuilding, such as removal of walls, creation of new doors or windows, or physical changes to the structure itself. All of this suggests that the clause was intended to apply to situations where the tenants proposed to carry out some material, permanent change to the premises.

[20] While the landlord’s engineer may have opined that the cat enclosure required a building permit, that does not resolve the question whether it falls within the language of the renovation clause in the lease. The installation of the enclosure did not involve repairing, rebuilding or restoring the house. There were no structural changes to the building. No fixtures, walls, doors or windows were removed. No plumbing or electrical changes were made. Rather, the cat enclosure was, more or less, a fenced-in cage. The sides of the enclosure were the walls of the house and garage and a fence and gate. The open roof of the enclosure consisted of wire mesh, supported by wooden rafters attached to the side of the house – in essence, a large pergola. It was not weatherproof or intended for human use or habitation.

[21] Significantly, the cat enclosure was not a permanent modification to the house or its structure. This was evidenced by the fact that the entire enclosure was removed by the tenants over the course of a weekend, leaving the house in its original state, save for a series of small drill holes in some of the exterior bricks.

[22] In light of these facts, in my opinion the installation of the cat enclosure was not a “renovation to the exterior of the premises.” It did not involve rebuilding, altering or restoring the interior or exterior of the building. It therefore follows that the tenants did not breach the renovation clause in the lease when they installed it. It follows that the landlord had no proper basis to decline to transfer the house to the tenants when they exercised the option to purchase.

Issue 2. If the tenants breached the renovation clause by installing the cat enclosure, should the Court grant relief from forfeiture so as to permit them to exercise the option to purchase?

[23] Although I have concluded that the tenants’ actions did not amount to a renovation to the exterior of the house, and thus they did not breach the renovation clause, in the event another Court reaches a different conclusion on that issue, I propose to address the tenants’ request for relief from forfeiture. The following discussion, therefore, is premised on the assumption that the landlord prevails in relation to Issue 1.

[24] The tenants submit that, in the event the installation of the cat enclosure constituted a breach of the renovation clause, with the consequence that they forfeited their option to purchase at the designated price, the Court should exercise its equitable jurisdiction to grant relief from forfeiture. The landlord argues that relief from forfeiture is unavailable on these facts.

[25] Section 98 of the Courts of Justice Act, R.S.O. 1990, c. C.42, provides as follows:

A court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just.

[26] As LaForme J.A. put it in Kozel v. Personal Insurance Co., 2014 ONCA 130, [2014] O.J. No. 753, at para. 28, “[r]elief from forfeiture simply refers to the power of a court to protect a person against the loss of an interest or a right because of a failure to perform a covenant or condition in an agreement or contract.” In the present case, the tenants seek to be relieved from the loss of their right to purchase the house arising from their failure to obtain the landlord’s permission before installing the cat enclosure.

[27] In Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co. 1994 CanLII 100 (SCC), [1994] 2 S.C.R. 490, at para. 32, the Supreme Court described the considerations relevant to a request for relief from forfeiture as follows:

The power to grant relief against forfeiture is an equitable remedy and is purely discretionary. The factors to be considered by the Court in the exercise of its discretion are the conduct of the applicant, the gravity of the breaches, and the disparity between the value of the property forfeited and the damage caused by the breach. [Authorities omitted.]

[28] This approach was followed by the Ontario Court of Appeal in Kozel at para 59.

[29] In Ontario (Attorney General) v. 8477 Darlington Crescent, 2011 ONCA 363, 333 D.L.R. (4th) 326, Doherty J.A. stated at paras. 86-87:

Courts of equity have always had the power to relieve against the forfeiture of property consequent upon a breach of contract. That power is now expressed in various statutes dealing with specific kinds of contracts (e.g., contracts of insurance, leases) and has been given more general expression in s. 98 of the Courts of Justice Act ….

The power to relieve from forfeiture is discretionary and fact-specific. The power is predicated on the existence of circumstances in which enforcing a contractual right of forfeiture, although consistent with the terms of the contract, visits an inequitable consequence on the party that breached the contract. Relief from forfeiture is particularly appropriate where the interests of the party seeking enforcement by forfeiture can be fully vindicated without resort to forfeiture. Relief from forfeiture is granted sparingly and the party seeking the relief bears the onus of making the case for it. [Authorities and citations omitted].

[30] Doherty J.A. elaborated on the three relevant factors as follows at paras 89 to 92:

The first factor, the conduct of the breaching party, requires an examination of the reasonableness of the breaching party's conduct as it relates to all facets of the contractual relationship, including the breach in issue and the aftermath of the breach.

The second factor …, the gravity of the breach, looks both at the nature of the breach itself and the impact of that breach on the contractual rights of the other party. If, for example, the forfeiture provision operated as a means of securing payment of the rent required under a lease, the fact that the breaching party had paid all amounts owing could obviate the need to resort to forfeiture and support a claim for relief from forfeiture.

The third factor … engages a kind of proportionality analysis. If there is a large difference between the value of the property to be forfeited and the amount owing as a result of the breach, equity will favour relief from forfeiture. [Authorities and citations omitted.]

[31] Since granting relief from forfeiture is fact-specific, I turn now to an examination of these factors in the present case.

(a) The reasonableness of the breaching party's conduct

[32] The tenants occupied and treated the house as their family home. There is no suggestion that they failed to pay rent or that they violated any of the other terms of the lease. The lease did not prohibit pets and in any event, such a provision would be void under the Residential Tenancies Act, 2006, s. 14. In the absence of such a prohibition, it is reasonable for the occupier of a rented house to make use of the backyard for pets to exercise and play. The cat enclosure was installed by the tenants in order to give their pets a safe place to do so. In this respect, it is not unlike placing a dog house or installing a dog run in the backyard of a rented house.

[33] The enclosure installed by the tenants did not materially alter the building – it was the equivalent of a removable playground. The evidence supports the inference that the tenants were unaware that the installation of the cat enclosure might be construed as a violation of the lease. And when the landlord objected to what they had done, the tenants promptly removed the enclosure and restored the premises to their former state.

[34] I find that the tenants acted reasonably throughout. This factor favours the tenants.

(b) The gravity of the breach and the impact on the contractual rights of the other party

[35] Even if the installation of the cat enclosure is properly classified as a “renovation” to the premises, the renovation was minor. The installation did not permanently alter the physical structure of the building in any material fashion. There were no structural changes to the building. No walls, doors or windows were removed. No plumbing or electrical changes were made.

[36] The enclosure has now been removed, at no cost to the landlord, and the premises have been restored to their former condition. The drill holes left in some of the bricks after the removal of the rafters are a de minimis change to the building. Importantly, the landlord did not suffer any loss due the breach and thus there was no impact of any consequence to the landlord’s rights. Put another way, the landlord has been “fully vindicated” without need to resort to the loss of the option to purchase.

[37] I would therefore classify the gravity of the breach as minor. This factor, too, favours the tenants.

(c) Proportionality

[38] The third factor calls for a comparison between the value of the property forfeited and the amount owing as a result of the breach. The tenants submit that the conduct of the landlord in seeking a higher price for the exercise of the option (as discussed in more detail below) is proof that the value of the property is greater than the price that was agreed upon five years earlier. Although there was no valuation evidence, given the well-known upward spiral in the Toronto housing market over the past several years, it is reasonable to conclude that the landlord’s actions were motivated by the fact that the current market value of the house is considerably higher than the option price. Since the tenants’ option to purchase was exercisable only during the first five years of the lease term, if she is not bound to respect the option, the landlord will be able to sell the house for a substantially higher price.

[39] It follows that, if the tenants are required to purchase this (or a comparable) house at today’s property values, they will incur a significantly larger expense. Put another way, if they are found to have forfeited the option to purchase, the tenants will lose a very valuable right.

[40] On this point the landlord argues that each side stands to lose the same amount: if the tenants are permitted to exercise the option to purchase, the landlord will lose as much as the tenants will save, since the landlord will be prevented from realizing the higher price the property would command in today’s market.

[41] I do not accept the landlord’s argument. The correct comparison is not between the impact of the Court’s decision on each side, but instead between the relative impact of the wrongful conduct giving rise to the forfeiture of the right sought to be reinstated. Here, the wrongful conduct was the failure of the tenants to obtain written consent from the landlord before installing the cat enclosure, leading to the forfeiture of the option to purchase at the fixed price. No material damage was done to the house or property and the premises were easily restored to their former state. Thus the impact of the wrongful conduct, monetary and otherwise, on the landlord was negligible.

[42] By contrast, the impact of the loss of the option to purchase on the tenants would be very significant. Not only would they lose the right to purchase their family home, in which they have lived with their family for more than five years, but to be successful in doing so as against other potential purchasers, they would be forced to pay the current market price, a significantly higher sum than provided by the option clause.

[43] To summarize on this point, the value, monetary and otherwise, of the right forfeited is significant; by contrast, the damage to the landlord or amount owing as a result of the breach is nominal. Put another way, the value of the right lost by the tenants is vastly greater than any amount that might be owing as a result of their breach. The proportionality factor strongly favours the tenants’ position.

(d) Other equitable considerations

[44] Since relief from forfeiture is a fact-specific equitable remedy, several additional facts in this case bear mention. The affidavit filed by the landlord’s husband and agent confirms that the landlord wanted the tenants to pay a higher price than the option to purchase specified. The affidavit further confirms that, if the tenants were not prepared to pay a higher price, the landlord intended to oppose any attempt by them to purchase the property pursuant to the option clause. This position was communicated well before the landlord knew about the cat enclosure. It reflects an advance determination by the landlord to seek to avoid the due performance of her contractual obligations, without any proper basis for doing so. This announced intention flies in the face of the recognized common law duty of honest performance imposed on a contracting party to perform their contractual obligations in good faith: Bhasin v. Hrynew 2014 SCC 71.

[45] As I have noted previously, the option to purchase was exercisable only during the first five years of the term of the lease, and it expired on October 31, 2017. The tenants gave notice of their exercise of the option on June 21, 2017, more than four months prior to the expiry date. The visit by the landlord’s agent, at which the cat enclosure was seen and photographs were taken, occurred shortly after the notice was given. Thus from that date forward the landlord was aware of the breach of the renovation clause.

[46] I have also previously recited the case law that establishes that there is no duty on a landlord to notify a tenant of a breach of covenant that voids a tenant’s option to renew or purchase. That said, despite the exercise of the option by the tenants, in this case the landlord gave no explanation for her failure to convey the house for many months. Indeed, she said nothing about the breach of the renovation clause until well after the deadline for exercising the option had expired. She kept silent despite the exercise of the option and repeated enquiries from the tenants’ lawyer, who was attempting in good faith to make arrangements for the closing or to determine why the landlord was not co-operating.

[47] Thus, not only did the landlord offer no explanation for her failure to respect the option, but the tenants were unaware of the landlord’s position or her grounds for non-performance. As a result, they were unable to remedy the complaint - as they easily could have well before the commencement of proceedings. The landlord could still have asserted that the original installation of the cat enclosure amounted to a breach of the renovation clause that caused the forfeiture of the option (as, in effect, she did before me, despite the removal of the enclosure prior to the hearing). Instead, the landlord “lay in the weeds” and forced the tenants to go to court, without disclosing the basis for her refusal to convey the house until after the expiry of the option period.

[48] I am alert to the fact that the landlord’s affidavit was not delivered until she received the opinion from the engineer regarding the building permit issue. That piece of evidence, however, was not required to enable the landlord to communicate to the tenants the grounds for her refusal. If she was relying on the installation of the cat enclosure as the basis for the forfeiture of the option to purchase, she could have notified the tenants of her position soon after it came to her notice.

[49] I conclude and find that the landlord’s strategy was designed to maximize her prospects of avoiding her contractual obligation to convey the house at the agreed-upon option price, and that she formed an intention to do so even before she found a supposed ground to support it. I conclude and find that she pursued this approach with a view to either (a) forcing the tenants to pay a higher price to remain in their home or (b) realizing a higher price through a sale on the open market. To me, the landlord’s approach smacks of unfairness. At the very least, it confirms her intention to seek to avoid the performance of her contractual obligations and an absence of good faith. While not determinative of the outcome, I consider this conduct an additional factor relevant to the equities in this case, that would further support granting equitable relief to the tenants.

(e) Conclusion on relief from forfeiture

[50] The three factors discussed above – the reasonableness of the breaching party's conduct, the gravity of the breach, and proportionality – all support the conclusion that this is an appropriate case in which to exercise the Court’s equitable jurisdiction to grant relief from forfeiture. In my view, this is a case in which the tenants have proven that forfeiture of their option to purchase would be inequitable and unjust in all of the circumstances. I reach that conclusion even apart from my comments regarding the conduct of the landlord.

[51] I would therefore exercise my discretion to grant the tenants relief from the forfeiture of their right to exercise the option to purchase contained in the lease.

Conclusion and Disposition

[52] For these reasons, the tenants’ application is granted. The landlord shall convey the property to the tenants, or as they may direct, at the option price of $610,000, subject to the usual adjustments. The conveyance shall take place no later than 30 days after the date of the release of these reasons. The date for calculation of adjustments on the sale shall be as of July 31, 2017, such that the tenants shall be entitled to credit all rental payments made by them after that date against the purchase price. Should the parties require further directions regarding the sale, they may arrange a case conference before me, by contacting my assistant.

[53] In relation to costs, the landlord shall pay the costs of this application to the tenants in the agreed-upon all-inclusive amount of $15,000. Should the tenants wish, that sum may also be credited against the purchase price of the property.

___________________________

Stinson J.

Date: February 2, 2018