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Landlord and Tenant (Commercial) - Interpretation. Royal Bank of Canada v. Peace Bridge Duty Free Inc.
In Royal Bank of Canada v. Peace Bridge Duty Free Inc. (Ont CA, 2025) the Ontario Court of Appeal dismissed an appeal, here from a tenant's motion (in an application) denial of "rent adjustment or abatement" under a 'material adverse effect' negotiation lease provision, during the COVID pandemic.
Here the court considered contractual interpretation, in this commercial lease context:(a) The Governing Principles
[24] The purpose of contractual interpretation is to determine the objective intentions of the parties; it is a fact-specific exercise: JPM Trade Capital Inc. v. Blanchard, 2024 ONCA 876, at para. 11, citing Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2024 SCC 20, 492 D.L.R. (4th) 389, at para. 28.
[25] The Supreme Court laid out the principles of contract interpretation in relation to the “factual matrix” in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633. This court in Weyerhaeuser Company Limited v. Ontario (Attorney General), 2017 ONCA 1007, 77 B.L.R. (5th) 175, at para. 65, per Brown J.A., rev’d on other grounds, Resolute FP Canada Inc. v. Ontario (Attorney General), 2019 SCC 60, [2019] 4 S.C.R. 394, summarized the principles guiding the approach to interpreting commercial contracts as follows:When interpreting a contract, an adjudicator should:(i) determine the intention of the parties in accordance with the language they have used in the written document, based upon the “cardinal presumption” that they have intended what they have said;
(ii) read the text of the written agreement as a whole, giving the words used their ordinary and grammatical meaning, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective;
(iii) read the contract in the context of the surrounding circumstances known to the parties at the time of the formation of the contract. The surrounding circumstances, or factual matrix, include facts that were known or reasonably capable of being known by the parties when they entered into the written agreement, such as facts concerning the genesis of the agreement, its purpose, and the commercial context in which the agreement was made. However, the factual matrix cannot include evidence about the subjective intention of the parties; and
(iv) read the text in a fashion that accords with sound commercial principles and good business sense, avoiding a commercially absurd result, objectively assessed. [Emphasis added.] [26] There are therefore limits to the effect that can be given to the factual matrix surrounding the formation of a contract: Sattva, at para. 58. The Supreme Court noted:1. The surrounding circumstances must never overwhelm the words of an agreement. The interpretation of a contract is necessarily grounded in its text and read in light of the whole contract: Sattva, at para. 57.
2. Courts may never use the surrounding circumstances to deviate from the text of the contract such that it creates a new agreement: Sattva, at para. 57.
3. The surrounding circumstances must only consist of evidence that is objective of the background facts at the time of the contract’s execution: Sattva, at para. 58. . 2249778 Ontario Inc. v Smith (Fratburger)
In 2249778 Ontario Inc. v Smith (Fratburger) (Ont CA, 2014) the Court of Appeal, without comment, applied principles of contractual interpretation to the interpretation of a commercial lease, thus confirming that it was treating real estate leases as a form of contract. This is a variation from traditional law which viewed contracts and real estate leases as qualitatively distinct types of legal obligations [paras 16-18]. The Court also restated principles of interpretation applicable to commercial contracts, with particular attention to the role of 'surrounding circumstances' in interpretation (aka parole evidence), and the principle of contra proferentum:[19] As stated in Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205 (CanLII), 85 O.R. (3d) 254 (C.A.), at para. 24, a commercial contract is to be interpreted:(a) as a whole, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective;
(b) by determining the intention of the parties in accordance with the language they have used in the written document and based upon the “cardinal presumption” that they have intended what they have said;
(c) with regard to objective evidence of the factual matrix underlying the negotiation of the contract, but without reference to the subjective intention of the parties; and (to the extent there is any ambiguity in the contract),
(d) in a fashion that accords with sound commercial principles and good business sense, and that avoids a commercial absurdity. [20] In Sattva, the Supreme Court addressed the issue of surrounding circumstances. Rothstein J. wrote, at para. 57:While the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement. The goal of examining such evidence is to deepen a decision-maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract. The interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract. While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement. [Citations omitted.] [21] Evidence of surrounding circumstances should consist only of objective evidence of the background facts at the time of execution of the contract: knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting: Sattva, at para. 58.
[22] Finally, the rule of contra proferentum applies in cases where the contractual terms are ambiguous: Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888, at p. 900 and Manulife Bank of Canada v. Conlin, 1996 CanLII 182 (SCC), [1996] 3 S.C.R. 415, at pp. 425-426.
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