In a recent decision[1] involving a commercial lease dispute, the Ontario Court of Appeal provided clarification on what constitutes “rent” under the Real Property Limitations Act[2](the “RPLA”).
This ruling has important implications for both landlords and tenants because a six-year limitation period applies to what is considered rent under the RPLA, whereas a two-year limitation period under the Limitations Act, 2002[3] (the “LA”) applies to lease obligations not considered rent under the RPLA.
Background
The dispute in the decision arose from a commercial lease requiring the appellant tenant, Torstar Corporation (“Torstar”) to pay to the respondent landlord, Pinnacle International (One Yonge) Ltd. (“Pinnacle”), as additional rent, net “profit” earned from any sublease.
Pinnacle sued Torstar for profit that Torstar had allegedly made on a sublease. Torstar maintained that it had made no profit because it had paid Pinnacle more rent for the subject property than what it received from its subtenant. Torstar also argued that Pinnacle’s claim was statute-barred because it was subject to the two-year limitation period under the LA, which had already passed.
The motion judge in Superior Court found against Torstar. On appeal, the majority found in favour of Torstar.
The lease provision at the centre of the decision provided as follows:
8.1 Assignment, Subletting: The Tenant shall have the right: (i) to assign this Lease with the prior written consent of the Landlord, not to be unreasonably withheld, and (ii) to sublet … all, or any part of the Premises upon notice to the Landlord… Upon any such assignment or sublet, the Tenant shall not be relieved from its obligation to pay Rent and to perform all of the covenants, terms and conditions herein contained. … Any profit (net of all reasonable costs incurred by the Tenant in connection therewith) earned by the Tenant in assigning this Lease or subletting or licensing all or any part of the Premises…shall be paid by the Tenant to the Landlord as Additional Rent… [Emphasis added.]
One of the primary issues before the Court was whether Torstar’s obligation to remit the net “profit” from the sublease was considered “rent” under the RPLA.
The Majority’s Decision
The majority of the Court of Appeal held that the LA applied, reasoning that the claim was “not based on an obligation to pay ‘rent’, as that term is defined in the RPLA” and was rather for “an alleged breach of a term of the [l]ease that is governed by the [LA].”[4]
Section 1 of the RPLA provides that “rent” “includes all annuities and periodical sums of money charged upon or payable out of land”.[5] Therefore, the definition is non-exhaustive. The majority relied on the decision of Pickering Square Inc. v. Trillium College Inc.[6] (“Picking Square”), where Mew J. noted that the term “rent” in the RPLA refers to “a payment due under a lease between a tenant and a landlord as compensation for the use of land and premises”.[7] He explained that it does not matter whether the parties to the lease define a specific item as being “rent”, but rather that “the obligation must be interpreted in light of the context, scheme, and object of the RPLA, and the law of limitations in Ontario”.[8] If this is not the case, any amount payable by a tenant to a landlord under the lease would be treated as rent.[9] Mew J. further held that the LA should be applied broadly and the RPLA narrowly, because with the enactment of the LA, “the legislature created a single, comprehensive general limitations law that is to apply to all claims for injury, loss or damages except, in relevant part, when the RPLA specifically applies”.[10]
The majority also referred to the decision of Northwinds Brewery Ltd. V. Caralyse Inc.[11], where the Court held that the RPLA applied to monthly payments by the tenant for use of a shed area because the payments “fit neatly” within the definition of “rent” under the legislation, as they constituted “periodical sums of money charged upon or payable out of land”.[12] The majority distinguished the case, holding that the obligation to remit profit under the lease between Torstar and Pinnacle was not an “annuity” nor a “periodical sum of money charged upon or payable of out land”- rather, Torstar was required to pay net profit, “which was a variable amount calculated based on a formula allowing it to deduct reasonable expenses such as legal fees and commissions.”[13] Therefore, even though the lease considered the net profit as “Additional Rent”, that obligation was not to pay “rent” as defined in the RPLA.[14]
The Dissenting Opinion
In dissent, Brown J.A. disagreed with the majority’s interpretation, arguing that the sublease profit should be considered “arrears of rent” within the meaning of the RPLA.[15] Brown J.A. noted that the RPLA does not provide an exhaustive definition of the term “rent” and, as explained by Mew J. in Pickering Square, “the inclusionary language of s. 1 simply means that ‘rent’ can refer to either of two concepts of rent under English law: (i) “rent charge” – a landowner’s obligation to pay a periodic sum to another, secured by a charge on the land; as well as (ii) “rent service” or “rent reserved” – the amount payable under a lease between a landlord and a tenant for the exclusive possession of land or other property capable of being held in possession.”[16] Further, “rent” in Section 17 of the RPLA, as it pertains to rent service or rent reserved, “means the payment due under a lease between a tenant and a landlord as compensation for the use of the land or premises.”[17]
To determine what constitutes “arrears of rent” under the RPLA, it is necessary to analyze the nature of the payment obligation in the lease to “ascertain whether it constitutes a payment due under a lease as compensation for use of land or premises”.[18] This includes looking at the language used by the parties in the lease to describe the payment, although this is not determinative. As a result, referring to the obligation as “rent” is not conclusive. In this case, the dissenting judge looked at the language of the clause in issue, its location in the lease, and its main financial effect on Torstar. He held that the clause was fundamentally about allocating the benefit of the rent received for the use of the premises during the lease term.[19] The fact that Torstar could deduct reasonable costs from the profit did not change the nature of the payment as “rent”.[20] Brown J. concluded that the RPLA should apply to the claim.
Implications of the Decision
This decision further narrows the scope of what is considered “rent” under the RPLA. As a result, certain alternative rent structures, such as royalty rents, percentage rent, profit-sharing arrangements, and crop-sharing agreements, may now fall under the potentially shorter two-year limitation period of the LA if they involve variable amounts calculated through complex formulas or deductions.
Leases should make clear that these alternative rent structures are “a payment due under a lease between a tenant and a landlord as compensation for the use of land and premises”, as noted by Mew J. in Pickering Square. However, even such language may not bring these provisions within the RPLA in light of Mews J.’s comment that it does not matter whether the parties to the lease define a specific item as being “rent”, but rather “the obligation must be interpreted in light of the context, scheme, and object of the RPLA, and the law of limitations in Ontario”.[21] Given this uncertainty, landlords and their legal counsel may be forced to proceed defensively and commence proceedings prior to the expiry of the two-year limitation period and consider the potentially longer RPLA limitation period as a fall-back.
[1] Pinnacle International (One Yonge) Ltd. v. Torstar Corporation, 2024 ONCA 755.
[2] Real Property Limitations Act, R.S.O. 1990, c. L.15.
[3] Limitations Act, 2002, S.O. 2002, c. 24, Sched. B.
[4] Supra note 1 at para 100.
[5] Ibid at s 1.
[6] Pickering Square Inc. v. Trillium College Inc., 2014 ONSC 2629.
[7] Supra note 1 at para 101.
[8] Ibid at para 102.
[9] Ibid at para 102.
[10] Ibid at para 103.
[11] Northwinds Brewery Ltd. v. Caralyse Inc., 2023 ONCA 17.
[12] Ibid at para 106.
[13] Ibid at para 107.
[14] Ibid at para 107.
[15] Ibid at para 206.
[16] Ibid at para 208.
[17] Ibid at para 209.
[18] Ibid at para 12.
[19] Ibid, at paras 216-217.
[20] Ibid, at para 218.
[21] Ibid at para 102.
The authors would like to thank Harinder Singh, Student-at-Law, for his assistance with this blog.