British Columbia Court of Appeal Affirms Principles Applicable to Lease Interpretation

The first appellate case heard in May 2020 by Zoom in British Columbia[1], Trenchard v. Westsea, 2020 BCCA 152, and its trial judgment, Trenchard v. Westsea, 2019 BCSC 1675, presented an interesting question regarding who should bear the costs of a building remediation project: the lessor or the leaseholders. The trial and appellate decisions provide further guidance on the interpretation of contracts, and in particular leases, in this province.

The lease in question was a 99-year lease of an apartment building in Victoria. The lease obligated the lessor “to keep in good repair and condition the foundations, outer walls, roofs, spouts and gutters of the building …”. Costs incurred by the lessor in performing its obligations under the lease were defined as “operating expenses”, and each leaseholder was obligated to pay their proportionate share of the operating expenses incurred by the lessor in a calendar year.

The lease also contained a clause which obligated each leaseholder to repair and maintain all doors and windows in their individual suite, reasonable wear and tear excepted.

The lessor undertook a project to remediate the building envelope, which involved the replacement of windows, sliding doors, and bathroom fans which had deteriorated due to reasonable wear and tear. The lessor’s position was that it was obligated to perform the repair project pursuant to its covenant to keep in good repair the foundations and outer walls of the building. As such, the lessor charged each leaseholder with their proportionate share of the costs of the project as an operating expense under the lease.

Subsequently, a leaseholder brought an action alleging that the leaseholders were not financially responsible for the repairs under the lease. The leaseholder argued that the reasonable wear and tear exception in the lease exempted the leaseholders from paying for the project, and that the project was a capital cost which could not be charged to leaseholders as an operating expense under the lease. He also argued that the windows were not part of the “outer walls” of the building.

The trial judge rejected the leaseholder’s arguments, finding that the lease was clear and unambiguous in obliging the lessor to undertake the repairs and entitling the lessor to charge the leaseholders their proportionate shares of the project as an operating expense under the lease. Her Ladyship further found that the windows were part of the “outer walls” within the meaning of the lease, on the basis of the evidence about the role of the windows in the weather proofing system of the building.

In doing so, the trial judge applied the notion of commercial efficacy to interpreting the lease, finding that the lessor’s obligation to repair the outer walls of the building necessarily included the replacement of windows, sliding doors, and fans necessary to ensure the integrity of the building envelope and building structure. As the lease exempted leaseholders from replacing windows, sliding doors, and fans which had deteriorated due to reasonable wear and tear, the trial judge found that it would lead to an absurd result if the lease did not obligate the lessor to replace these failing building components.

The trial judge further found that it was unnecessary to consider whether the project cost was a capital cost because “operating expenses” had a clear and unambiguous definition in the lease, which encompassed the project and did not differentiate between capital and non-capital costs.

The leaseholder appealed the trial judge’s decision to the British Columbia Court of Appeal, where the trial decision was held to be correct.

In ruling that the trial judge had correctly interpreted the lease, the Court of Appeal affirmed its holding in JEKE Enterprises Ltd. v. Northmont Resort Properties Ltd., 2017 BCCA 38 regarding the ability of contracting parties to define terms differently than their ordinary usage. The Court held that it was unnecessary for the trial judge to consider whether a project to repair and maintain a building was an operating expense versus a capital cost when the lease had given the term “operating expenses” a defined meaning that allowed for the clear and unambiguous interpretation of the contract.

Further, the Court of Appeal affirmed that a clause that required leaseholders to repair windows in their individual suites, wear and tear excepted, did not categorically exempt leaseholders from financial responsibility for the replacement of windows, failing due to wear and tear, that were potentially undermining the structural integrity of the building. The Court held that the two sets of obligations were complimentary: one was with respect to a leaseholder’s individual suite and the other was with respect to paying the costs of keeping the building in good repair.

Also of note, the Court of Appeal found that the lease in question was a standard form contract due to being used in a similar form across multiple properties. This means that the interpretation of this lease has precedential value for similar leases across Canada. This finding however did not affect the Court of Appeal’s decision to uphold the trial decision.

Ultimately, this case affirms that the determination of whether a lessor or a leaseholder is responsible for the costs of a repair and maintenance project will be specific to the language of the lease, the nature of the project, and the circumstances in which the need for the project arises. The Court of Appeal rejected the use of a categorical approach to determining whether a given project is the financial responsibility of the lessor or the leaseholders.

[1] The digital hearing went very smoothly, and overall was a procedural success. The hearing video is available to the public on the BC Court of Appeal website.

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