Introduction
The calculation of a tenant's share of realty taxes in commercial leases is often overlooked. While the obligation to pay realty taxes is rarely in dispute, the method of calculating each party’s fair share thereof often is. Many leases do not clearly set out the particular method used to calculate a tenant's share of realty taxes. Instead, they rely on general language that the landlord will determine the tenant’s share "acting reasonably", or in accordance with "sound accounting principles" or "using such method of determination which the landlord shall choose".
On paper, that may seem harmless. After all, "reasonable" sounds fair. In practice, however, it can leave room for interpretation, and interpretation can lead to disputes.
The recent Ontario Court of Appeal decision in 100 Bloor Street West Corporation v. Barry's Bootcamp Canada Inc. underscores the risks of relying on ambiguous language for realty tax allocation in leases. This case illustrates how failing to clearly address the specific method for realty tax calculation can lead to costly litigation and uncertainty for both landlords and tenants.
The Case
Barry’s Bootcamp Canada Inc. (Barry’s), a high-end fitness studio, entered into a 10-year triple net lease (Lease) for commercial space at 100 Bloor Street West (Leased Premises), located in Toronto's prestigious Yorkville neighborhood. Under the Lease, Barry’s was responsible for base rent, operating expenses and realty taxes attributable to the Leased Premises. The Lease also granted the landlord, 100 Bloor Street West Corporation (100 Bloor), "sole and unfettered discretion" to determine Barry’s share of realty taxes in the event a separate tax bill was not issued for the Leased Premises, provided it acted "on a reasonable basis."
The Dispute
The dispute arose over the method used to calculate Barry’s share of realty taxes, particularly regarding the allocation of realty taxes for the building’s underground parking garage. The City of Toronto issued a single, global tax bill for the entire property, which included the retail space and the parking garage. Accordingly, the Leased Premises were not separately assessed and 100 Bloor was required to apportion the taxes among its tenants, including Barry’s, in its sole and unfettered discretion.
Barry’s objected to 100 Bloor’s calculation of realty taxes owing for the Leased Premises and brought an application to the Ontario Superior Court of Justice on two key points:
Method of Calculating Barry's Share of Realty Taxes
Barry's disputed 100 Bloor's proposed method to attribute realty taxes to the Leased Premises based on "Proportionate Share". Under the Proportionate Share method, Barry's realty tax share would be based on the percentage of retail floor area it occupied (11.878 percent). Barry's argued that this was unreasonable under the Lease because the Leased Premises lacked frontage on Bloor Street and were only accessible via a rear alley. Barry's argued that this made the Leased Premises less valuable than other retail units of the building. Realty taxes in Ontario are levied based upon the market value of the real estate. The Municipal Property Assessment Corporation (MPAC) assigned a valuation range of 4.06 percent to 5.06 percent to Barry’s Leased Premises, and Barry’s contended its share of the realty taxes should reflect this lower value.
Inclusion of Parking Garage Realty Taxes in Barry’s Obligation
Barry’s also objected to being charged 11.878 percent of the realty taxes for the building’s underground parking garage, which again was calculated using the Proportionate Share method, arguing the parking garage wasn’t part of Barry's Leased Premises and the Lease didn’t require Barry's to contribute to those taxes.
The application judge ruled in favor of 100 Bloor on the first issue, finding the Proportionate Share method reasonable under the Lease terms. However, on the second issue, the judge sided with Barry’s, concluding the Lease did not require Barry’s to pay realty taxes related to the parking garage. The judge further awarded Barry’s substantial indemnity costs of C$709,017.39, criticizing 100 Bloor’s conduct as "reprehensible".
Because the City of Toronto's tax bill combined realty taxes for both the retail space and the parking garage, the judge’s ruling required deducting the parking garage realty taxes from the overall tax bill before calculating Barry’s share of the Leased Premises' realty taxes. The parties were tasked with performing this adjustment but were unable to reach agreement. Barry’s subsequently brought a motion seeking a declaration that 100 Bloor must allocate parking garage realty taxes using the same method applied to the rest of the realty taxes attributable to the Leased Premises.
Barry’s argued that 100 Bloor was unfairly attempting to minimize the amount of parking garage taxes deducted. Initially, 100 Bloor sought to hold Barry’s responsible for 11.878 percent of the parking garage taxes, applying the Proportionate Share method. However, following the application judge's ruling that Barry’s was not responsible to pay realty taxes related to the parking garage, 100 Bloor proposed deducting only 5.03 percent of the total realty tax bill for the parking garage, despite the parking garage occupying 33.2 percent of the building’s space, relying on MPAC’s Current Value assessment. Barry’s claimed that 100 Bloor was "mixing and matching" methodologies: aggressively using the Proportionate Share method to calculate Barry’s realty tax obligation, but applying the more conservative Current Value method to reduce the amount of taxes deducted from Barry’s share.
The application judge agreed and granted a declaration that "the Landlord must use the same method for the calculation of the realty taxes attributable to the parking garage at 100 Bloor Street West as it does for the calculation of the realty taxes attributable to the Leased Premises". It is from this decision that 100 Bloor appealed.
The Appeal
The Ontario Court of Appeal upheld the motion judge’s decision, which required 100 Bloor to use a single, consistent method to calculate Barry’s share of realty taxes. In delivering its judgement, the Ontario Court of Appeal affirmed the application judge's ruling, and found the following:
Inconsistent Methods Were Unreasonable
First, the Lease required 100 Bloor to act "on a reasonable basis" when exercising its discretion. Mixing the "Proportionate Share" method for the Leased Premises with the "Current Value" method for the parking garage was inconsistent with this requirement.
The Court noted that this approach unfairly inflated Barry’s tax burden and violated the Lease’s intent to ensure a fair allocation of taxes.
Single Method Requirement
Second, the Lease stated that 100 Bloor could allocate realty taxes "using such method of determination which the Landlord shall choose". The Ontario Court of Appeal found that this meant 100 Bloor must use a single method for calculating realty taxes. The Court rejected 100 Bloor’s argument that it could apply different methods to different components of the property.
Fairness in Tax Allocation
Third, the Court emphasized that the landlord’s "sole and unfettered discretion" did not extend to maximizing Barry's payment at the expense of a fair determination of its realty tax share. The landlord’s role was to determine Barry’s "portion" of realty taxes, not to identify an amount that would maximize its own financial gain.
Maximizing Profits
Finally, the Court affirmed that while commercial parties are entitled to maximize their profits, this does not relieve them of the obligation to fulfill their contractual commitments. Under the Lease, 100 Bloor was granted the authority to determine Barry’s portion of realty taxes. However, rather than making a genuine determination of Barry’s share, it sought to identify an amount that would maximize Barry’s payment. This was not a purpose the parties could reasonably be understood to have intended when granting 100 Bloor that authority.
The Decision
100 Bloor's appeal of the motion decision was dismissed; however, the Court did grant leave to appeal the costs order and allowed the costs appeal.
Practical Lessons for Landlords and Tenants
This case serves as a cautionary tale for both landlords and tenants, highlighting the importance of clarity, consistency, and fairness in lease agreements. Courts are often reluctant to impose strict calculation methods where lease language leaves discretion to the landlord, provided the landlord’s method falls within a range of reasonable outcomes. However, as this case demonstrates, vague or inconsistent methods can lead to costly disputes.
Ultimately, a lease that leaves tax calculations to vague landlord discretion invites disagreement and costly legal battles. The 100 Bloor case serves as a reminder that in commercial leasing, careful drafting and negotiation of realty tax provisions are essential components of sound commercial leasing practices.
