Rental amount imposed by landlord not extortive: court

The Ontario Court of Appeal has rejected a private school’s claim that a minimum rent of $18 per square foot imposed by its landlord was extortive pricing.

In 2501306 Ontario Inc. v. Country Garden Academy Inc., 2022 ONCA 177, the appellant operated a Montessori school in premises it rented from the respondent. Under the lease contract, the appellant was entitled to renew its lease for a three-year term and the minimum rent during any renewal was to be negotiated “based on the prevailing market rates at the time of renewal for comparable premises.”

The appellant exercised its option to renew its lease for the third time, although the respondent was not the landlord for the first and second term renewals. The appellant and respondent failed to agree on the minimum rent during the third renewal.

The appellant presented expert reports showing estimated market rates between $12 to $16 per square foot. On the other hand, the respondent offered an expert report indicating a market rate that ranged from $20 to $25 per square foot. The respondent sought a declaration from the court that the minimum rent would be $23 per square foot per year.

In determining the appropriate minimum rent for a “comparable premise,” the judge observed that location, surrounding neighborhood, size, condition, amenities, demand, zoning, and available uses were all relevant factors to be considered.

The judge noted that the lease specified that the premises should be used as an educational facility and the appellant’s expert pointed to several comparable premises that lacked the amenities and improvements of the subject property. The judge also recognized that the property’s zoning permitted limited uses which required downward adjustment, resulting in a judgment that the minimum rent for the renewal period should be $18 per square foot.

The appellant contested the amount, arguing that the judge failed to interpret the term “comparable premises” in a manner consistent with how the appellant and the original landlord previously interpreted that term. They did not focus on properties that could be used as an educational facility, rather they concentrated on properties in industrial parks and were subject to zoning restrictions that had limited uses.

The court disagreed with the appellant’s position. The court found that while the appellant asserted that the original landlord agreed on a rate “based on similar properties in the area which were also located in industrial parks,” the appellant failed to point to similar properties which were used as comparables in the past. Further, the appellant did not provide any evidence of the rental rates of those properties at the time of the renewal.

The court also rejected the appellant’s argument that the respondent was guilty of bad faith or wrongful conduct by imposing extortive pricing that effectively forced the appellant to move out of the property. The court found that the minimum rent for the renewal period determined by the judge was supported by evidence concerning the terms of the lease, the nature of the property and the prevailing market rates for comparable premises. The court also found that expert evidence presented by the respondent was not in any way influenced or tainted by alleged wrongful conduct or improper motivations.