Apeco of Canada, Ltd. v. Windmill Place, [1978] 2 SCR 385

Supreme Court of Canada

Apeco of Canada, Ltd. v. Windmill Place, [1978] 2 S.C.R. 385

Date: 1978-02-07

Apeco of Canada, Ltd. Appellant;

and

Windmill Place, a partnership registered under The Partnership Act of Nova Scotia, R.S.N.S. 1967, c. 244. Respondent.

1977: November 30; 1978: February 7.

Present: Laskin C.J. and Ritchie, Spence, Dickson and Beetz JJ.

ON APPEAL FROM THE SUPREME COURT OF NOVA SCOTIA, APPEAL DIVISION

Leases—Agreement to lease—Repudiation by lessee—Damages—Mitigation of damages—Duty of lessor—Building substantially vacant—Subsequent leasing of a larger area including the space in question.

The parties entered into an agreement whereby appellant was to lease from respondent 2,526 square feet of accommodation in a warehouse type building in Halifax for five years. Subsequently, while the terms of the agreement were still executory, appellant abandoned its Halifax project and repudiated the lease. The respondent landlord had rented none of the rest of the building at the time of the repudiation but subsequently rented 17,000 square feet to another tenant. The area eventually taken by this other tenant included the square footage reserved by appellant. By the date of the trial the respondent had still rented only half the building and the trial judge awarded damages in the net amount of $18,051.14. The damages were increased to $36,180 by the Appeal Division which held that in the circumstances the fact that the area in question was rented to the other tenant should not be taken in mitigation of the damages.

Held: The appeal should be dismissed.

The general principle that a plaintiff cannot recover for any part of its loss which it has successfully avoided by its subsequent action is subject to the modification that the subsequent transaction must be one arising out of the consequences of the breach and in the ordinary course of business. The application of this rule supports conclusion of the Appeal Division. The building remained more than half empty and the renting of the 17,000 square feet could have been concluded even if the appellant had not breached the original agreement. That subsequent transaction was therefore an independent transaction which in. no way arose out of the consequences of the breach by the appellant.

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British Westinghouse Electric and Manufacturing Co. v. Underground Electric Railways, [1912] A.C. 673; Karas v. Rowlett, [1944] S.C.R. 1 referred to.

APPEAL from a judgment of the Supreme Court of Nova Scotia, Appeal Division[1], allowing an appeal from a judgment of Hart J. and varying the award of damages. Appeal dismissed.

John M. Roland, for the appellant.

Stewart Mclnnes, for the respondent.

The judgment of the Court was delivered by

RITCHIE J.—This is an appeal from a judgment of the Appeal Division of the Supreme Court of Nova Scotia allowing the appeal of the present respondent from a judgment rendered by the trial judge, Mr. Justice Hart, and varying the order granted by him by ordering that the respondent recover from the appellant the sum of $36,180 instead of the $18,908.36 awarded at trial as damages for the appellant’s breach of its contract to lease from the respondent 2,526 square feet of accommodation in a warehouse type building on Windmill Road in the City of Halifax for a period of five years.

At the time of the appellant’s repudiation, the agreement between the parties had not ripened into a lease and was entirely executory although its terms had apparently been finalized and are accurately summarized in the reasons for judgment rendered by Chief Justice MacKeigan on behalf of the Appeal Division, which are now conveniently reported in 72 D.L.R. (3d) 539 where he said, at p. 541:

I agree with the learned trial judge that ‘the parties had, in fact, agreed to the terms of the lease’ and that ‘all the major terms of the lease had been finalized’.

The lease was for 2,526 square feet of office-warehouse space in a large one-storey warehouse and shopping mall containing about 70,000 square feet. It was for five years beginning October 1, 1975, at an annual ‘net net’ rental of $4.05 per square foot per year or $10,230.24 per year payable in monthly instalments, or a total of $51,150.20 for the five years. The tenant also

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was to pay as rent its prorated share of real property taxes, insurance and other expenses incurred by the landlord for all tenants. For this purpose the respondent’s space was agreed to be 3.97 per cent of the total rentable space in the building. The respondent’s share of such common expenses for the five-year period would have been a minimum of $14,974.20. The total rent payable during the five-year term was thus at least $66,124.40.

Both parties agree with the learned trial judge that prima facie the landlord’s damages for the tenant’s breach should, subject to the effect of possible mitigation, be the present value of the future rentals lost, following Highway Properties Limited v. Kelly, Douglas and Company Limited, [1971] S.C.R. 562.

In mid-September, 1975 there was a change in policy of the Apeco Company which involved abandoning its Halifax project and the lease was accordingly repudiated on September 19th. It is significant that at the date of repudiation the respondent landlord had rented no other part of the new 70,000 square foot building (of which 62,500 square feet were apparently available for rental). The situation therefor was that the respondent was left with an empty building which appears to have remained empty for the next four months when an area of 17,000 square feet was leased to Goodboy’s Furniture Limited. This subsequent leasing of this much larger area, which included the space reserved for the appellant, was treated by the trial judge as a mitigating factor in determining the damages to be recovered by the respondent for breach of the agreement to lease.

The facts relative to mitigation are well summarized by Chief Justice MacKeigan in the following terms, 72 D.L.R. at p. 544:

The facts relative to mitigation are simple. The appellant’s building has about 62,500 square feet of rentable space in a one-story, U-shaped building. The front or bottom of the ‘U’ is 332 feet long and faces Windmill Road. The arms of the ‘U’ are 301 feet and 276 feet long respectively on their outer edges and are about 100 feet deep. The building was designed as one large open warehouse-type structure. The developer was prepared to lease to any prospective tenant any desired number of units of about 625 square feet each and then would instal any necessary fixtures, including partitions to wall

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off the tenant’s choice. No particular part of the building was apparently any better than any other part, except that some tenants might favour the premises facing Windmill Road for their greater advertising value.

The respondent’s space of 2,526 square feet consisted of four units extending horizontally across and about halfway along the left arm of the ‘U’.

The appellant had rented none of the rest of the building when the respondent repudiated its agreement. It. later rented about 17,000 square feet to Goodboys Furniture Ltd. effective February 1, 1976 four months after the repudiated lease to the respondent. The area thus rented, at. a square-foot rental slightly less than that which was to have been paid by the respondent, consisted of the left hand corner of the ‘U’, being about 100 feet on the bottom of the ‘U’, the Windmill Road side, and extending 175 feet up the full width of the left arm so as to include the space set aside for the respondent. Mr. Duckworth, the moving spirit in the Windmill Place project, testified that Goodboys had first wanted to go just back to the APECO space and to take some extra space along the front. He persuaded them to take the rear APECO space and forego the extra front area, which was to his advantage because he had feared that ‘I’d be sitting with that space forever… empty and half-finished’.

By the date of the trial, March 22, 1976, he had, however, not rented the extra front space and indeed had rented less than half the building. The right arm of the ‘U’ was entirely vacant. The front or bottom of the ‘U’ was half vacant, only two sections totally about 3,700 square feet having been rented in addition to the front space rented by Goodboys. The area to the rear of the original APECO space on the left arm of the ‘U’ was slightly more than half rented.

It is apparent from the above account that the vacancy created by the appellant’s breach did not have any bearing on the new tenant’s decision to rent 17,000 square feet of accommodation in the new building. If the premises formerly reserved for Apeco had been the only available space suitable to the new tenant’s needs, different considerations would have applied, but the building was more than half empty and the Goodboy’s company was at first not interested in renting the Apeco space at all and it was only after some persuasion on the part of the respondent that it was induced to do so.

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It follows, in my view, that the February 1976 transaction could have been concluded even if the appellant had not breached the original agreement and that it was an independent transaction which in no way arose out of the consequences of the breach by the appellant.

It was agreed between the parties that the issue in this appeal is whether the Appeal Division erred in failing to hold that the respondent by re-letting the specific area of space which the appellant had agreed to lease had thereby mitigated its damages and in light of the facts relating to the Goodboy’s lease, which are recited by Chief Justice MacKeigan, the governing consideration appears to me to be whether the fruits of a transaction which was entered into subsequently and independently of the lease to the appellant, are to be deducted from the damages to which the respondent would otherwise be entitled by reason of the appellant’s breach.

The case of British Westinghouse Electric and Manufacturing Co. v. Underground Electric Railways[2] is generally accepted as a leading authority on the extent and nature of mitigation in breach of contract cases and establishes the general principle that a plaintiff cannot recover for any part of its loss which it has successfully avoided by its subsequent action. This general principle is, however, subject to the qualification expressed by Viscount Haldane in the following language which was adopted by this Court in Karas v. Rowlett[3], where Kerwin J., as he then was, said at p. 18:

In breach of contract cases the rule was stated in British Westinghouse Electric and Manufacturing Co. v. Underground Electric Railways by Viscount Haldane with the concurrence of all the Lords present that ‘the subsequent transaction, if to be taken into account, must be one arising out of the consequences of the breach and in the ordinary course of business’.

The application of this rule to the present circumstances in my opinion strongly supports the conclusion reached by the Appeal Division.

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As I have indicated, I am satisfied that the Goodboy’s lease entered into in February 1976 at a time when the building was still more than one-half vacant, was not a transaction arising out of the consequences of the respondent’s breach in October of the previous year, and the rental received from Goodboy’s is not to be deducted in mitigation of the damage suffered by the respondent. I am, however, in agreement with Chief Justice MacKeigan that some consideration should be given to the hope that the appellant’s loss may eventually be mitigated if the building is filled with tenants in less than five years from the date of the original agreement to lease and I accordingly agree with him that the damages should be fixed at a net amount of $36,180.

For these reasons, as well as for those advanced by Chief Justice MacKeigan, I would dismiss this appeal with costs.

Appeal dismissed with costs.

Solicitors for the appellant: Osler, Hoskin & Harcourt, Toronto.

Solicitor for the respondent: Stewart Mclnnes, Halifax.