Newfoundland and Labrador – agreement to arbitrate renewal option’s financial terms ensures lease is enforceable – #369

In Copper Stop Limited v. Parkland Fuel Corporation, 2020 NLSC 114, Madam Justice Kendra J. Goulding had to resolve a lease dispute which arose when the lessee sought to exercise an option to renew but for which the lease provided no specific term governing the method or time within which to exercise that option.  Despite lessor’s argument that the lease was enforceable, Goulding J. held that the option to renew was enforceable as the financial terms of the renewal option were capable of being made definite through imposition by the arbitrator.  The ability to arbitrate if negotiations failed made the lease’s renewal option more than just “an agreement to agree

By February 7, 2013 lease (“Lease”), Copper Stop Limited (“Copper”) leased to Parkland Fuel Corporation (“Parkland”) a service station in Baie Verte, Newfoundland and Labrador.   The Lease provided for an initial first term of seven (7) years, a right of first refusal in favour of Respondent as lessee and a renewal clause granting Respondent the right to renew the Lease for one (1) further term of five (5) years.

The renewal option provided for a renewal subject to new “financial terms and gasoline/diesel volumes” either negotiated by the parties or “to be determined by arbitration should the parties fail to reach an agreement”. 

On May 16, 2019, Copper as lessor advised Parkland that it will not renew the Lease. Parkland as lessee responded on July 3, 2019 advising that it would renew the Lease for the additional five (5) year term provided in the renewal provisions.  Despite sporadic exchanges and a January 13, 2020 meeting to discuss terms, the parties did not agree on renewal terms.  During that same period, Copper received a competing offer to lease from Irving Oil (“Offer”) and transmitted it to Parkland.  Sending the Offer triggered a sixty (60) day period within which Parkland had to meet the terms in the Offer, failing which Copper would be free to contract with Irving Oil.

Parkland applied to the court for a declaration that the Lease be renewed for the five (5) year term and that the parties negotiate the financial terms and fuel volumes.  It argued that the right of first renewal operated to Parkland’s benefit after the Lease terminated and not as way for Copper to disregard the renewal right and terminate the Lease before the new term.  Parkland argued that its interpretation was the only commercially reasonable interpretation of the Lease and that Copper’s interpretation was “a coy attempt to escape its obligations under the Lease”, depriving Parkland of its renewal rights.

Copper argued that Parkland had failed to match Irving Oil’s offer in the time required and that Copper was now free to contract with Irving Oil.  Copper argued also that it and Parkland had not reached an agreement on financial terms and fuel volumes and Parkland had not applied or had waived the renewal option.  In addition, Copper argued that as key issues had not been determined by the parties, the Lease was “invalid, uncertain and unenforceable” and that the renewal clause was an “agreement to agree” which did not settle the terms necessary for the Lease to be renewed.

Goulding J. referred to key principles applicable when interpreting contracts, and linked them to key decisions:

– “A court should lean against interpreting a contract in a manner prejudicial to vested rights unless the words plainly require that interpretation” – Red Lake (Township) v. Drawson (1963), 1963 CanLII 282 (ON SC) para. 13; and,

– “Contractual interpretation requires a court to consider commercial reasonableness and efficacy” – Resolute FP Canada Inc. v. Ontario (Attorney General), 2019 SCC 60 para. 79; Atos IT Solutions v. Sapient Canada Inc., 2018 ONCA 374 para. 60, leave to appeal to S.C.C. refused; and, Unique Broadband Systems Inc., Re, 2014 ONCA 538 para. 88;

Goulding J. then narrowed in on two (2) precedents which spoke specifically to how the provision to arbitrate a disagreement over a rental rate made the lease enforceable.  The agreements to arbitrate following negotiations made the leases enforceable leases and more than just agreements to agree.  See Ramona Morrison Hospitality Services Ltd. v. Stonebridge Hotel Ltd., 2008 ABCA 222 in which the parties agreed that the rental rate “shall be settled by arbitration”.  In Oak Harbour I Management Ltd. v. Villanova (2000), 96 A.C.W.S. (3d) 861, [2000] O.J. No. 1476 (Sup. Ct. J.) para. 24 (not posted online), the court stated the following on the role of the arbitration agreement:

… The option was to renew the lease on its present terms except for the rental to be charged.  I conclude this because the provision relating to the renewal option in the offer to lease provides “rent renewal shall be agreed upon between landlord and tenant failing which an arbitrator shall impose on both parties.”  I do not find the terms of the option vague or unenforceable, as the Applicant contends.  An option for renewal that contained no time limit and no condition on the manner of exercise was considered by the Supreme Court of Canada in Guardian Realty Co. of Canada v. John Stark & Co. (1922), 64 S.C.R. 207 (S.C.C.).  Under the circumstances, in that case, the option was found to be enforceable at any time up until either the tenant vacated or the landlord put the tenant to his option.  Nor is the option simply an agreement to agree and as such unenforceable, because, in the absence of agreement, the rental terms – presumably fair market value – are capable of being made definite through imposition by an arbitrator”.

Goulding J. did consider the particular facts raised in the record and evaluated them against the provisions in the Lease.  It is clear that her reading of the Lease endorsed the role of arbitration as a means to make the Lease an enforceable contract.  Goulding J. flagged the availability of arbitration at various points in her analysis:

[30] The Lease does not provide a date by which Parkland was required to give notice of its intention to renew under clause 9.  However, I find Parkland did provide such notice on a timely basis being almost one year before the expiry of the initial term.  Nor did the Lease set out any timeframes for negotiations or if necessary, arbitration but the parties agree a meeting to discuss renewal terms took place on January 13, 2020 which is 5 ½ months prior to the end of the initial term”.

[35] However, it should be noted that even if Parkland was solely responsible for any delay, it would not result in the renewal right being rendered null and void.  The Lease does not set out a time line for negotiations and arbitration”.

[38] I am satisfied that the renewal right in the Lease is strong as it contains a requirement for good faith negotiations and a dispute resolution mechanism (that is arbitration) if the financial terms and gasoline/diesel volumes cannot be resolved by the parties.

[39] The agreement of Copper and Parkland to engage in good faith negotiations and then arbitration distinguishes this case from the decisions cited by Copper being Imperial Oil Ltd. v. C & G Holdings Ltd. (1986), 39 A.C.W.S. (2d) 48, 58 Nfld. & P.E.I.R. 326 (Nfld. (T.D.)), Donovan Homes Ltd. v. Modern Paving Ltd., 2011 NLCA 39, Mifflin v. North Atlantic Refining Limited, 2017 NLTD(G) 140”.

[41] The information from Irving Oil could have been used to inform both parties.  However, if it was being used as a sword, which I cannot say on the Agreed Facts, then Copper must also take responsibility for no agreement being reached.  Copper would have been entitled to make inquiries regarding competitor’s offers so that it could bargain effectively with Parkland and to possibly present such information to an arbitrator.  To enter into negotiations with Parkland without being properly informed would have been foolhardy on the part of Copper”.

[47] Further, the interpretation would permit Copper to present a competitor’s offer to Parkland during the initial term, but after Parkland had given notice of its intention to renew and after the parties had successfully negotiated or had proceeded to arbitration, which if not matched within 60 business days, would result in Parkland losing its right to renew.  Copper interprets their Right of First Refusal as being paramount to the renewal right which is not commercially reasonable.  This interpretation by Copper clearly disregards the strong renewal right and takes away a vested right of Parkland which has been contractually agreed to by the parties.  Copper’s position does not result in the two clauses (8 and 9) being read harmoniously whereas Parkland’s position does”.

Goulding J.’s review of the facts against the terms of the Lease lead to her conclusion that the Lease provided an enforceable renewal option in favour of Parkland.

[49] In the case before me, the option to renew is clearly enforceable as the terms of the option are not vague and are capable of being made definite through imposition by the arbitrator.  This is supported by the decisions in Oak Harbour and Ramona Morrison”.

Goulding J. granted Parkland’s request for a declaration that Parkland was entitled to renew the Lease and stipulated that the parties were to negotiate in good faith and arbitrate, if necessary, to establish the financial terms and fuel volumes.

urbitral notes – First, the parties’ contract, like those in Ramona Morrison Hospitality Services Ltd. v. Stonebridge Hotel Ltd., 2008 ABCA 222 and Oak Harbour I Management Ltd. v. Villanova (2000), 96 A.C.W.S. (3d) 861, [2000] O.J. No. 1476 (Sup. Ct. J.), provided for negotiations and then arbitration, in that order.  The agreement was not so much a stepped-dispute resolution clause but a way for the parties to provide first for the opportunity to agree on the terms of the contractual terms and, if need be, arbitration.

In each of the cases, the parties did not sign their leases assuming there would be a disagreement. Rather, they assumed an opportunity to have an ongoing business relationship which, failing agreement in the future on terms, would continue on those terms as resolved by a third party.  There was no “dispute” necessarily but more the pre-emptive opportunity to resolve terms by first agreement and, if not then, by arbitration.