Commercial landlords and tenants should always be prepared if a conflict arises during the leasing relationship. Some landlords and tenants anticipate potential disputes and, therefore, include clauses in their lease agreement setting out mechanisms to resolve problems through arbitration. But what happens when a party is not satisfied with the outcome of an arbitration award?

In The Tire Pit v Augend 6285 Yonge Village Properties Ltd, a party sought to appeal an arbitration award it did not agree with. This case, heard before the Ontario Superior Court of Justice, explains when a court can lawfully set aside an arbitration award.

New landlord takes issue with the tenant’s choice to extend the lease

The former landlord and the tenant, Tire Pit, entered into a lease agreement on December 16, 2013. The former landlord sold the property to a company called Augend, which became the new landlord in July 2020. Augend and Tire Pit had previously entered into litigation in May 2021, when Tire Pit sought to extend its lease for five years beyond June 2019.

The Court found that Tire Pit had exercised its option to extend the lease appropriately, even though Tire Pit had not signed a new agreement. The Court also ordered that Augend and Tire Pit submit to arbitration to determine base rent as prescribed by Section 9.13 – Option to Extend in the original lease agreement. Section 9.13 read as follows:

“Base Rent for the extension Term shall be the Landlord’s then-current rent for premises in the Building or, if the Landlord then has no such premises available, such Rent shall be the fair market rental for similar premises in the area of the Building at the time of the extension, but in no event shall the Base Rent be less than the Base Rent payable during the last year of the Term. If the parties are unable to agree on the fair market rental, if applicable, within three months prior to the commencement of the extension Term, the matter shall be referred to arbitration in accordance with the Arbitrations Act, 1991 (Ontario).”

Tenant disagreed with arbitration award

In October 2021, the parties attended arbitration. The arbitrator determined the base rent amount “by examining the ‘fair market rental’ for similar premises in the area of the building at the time of the extension.” When comparing similar premises close by, the arbitrator determined that fair base rent for the property was $50 per square foot. Tire Pit was to be credited any rent paid over that amount.

Tire Pit appealed the order on numerous grounds, some of which the Court deemed repetitive, including:

• The arbitrator found that Tire Pit was a month-to-month tenant in 2020 until the sale of the property, while this Court had found that the Lease had been renewed for five years commencing January 1, 2020;
• The arbitrator failed to find that Tire Pit and the Former Landlord had agreed between them on the fair market renewal base rent;
• The arbitrator failed to follow the directions in the renewal clause of the Lease when determining the fair market rent;
• The arbitrator failed to act fairly and give sufficient legal effect to the word “fair” in determining fair market rent (which Tire Pit defines as rent that is just and reasonable in the circumstances); and
• The arbitrator did not clearly decide whether additional rent was payable.

A court is able to set aside an arbitration award in specific circumstances

The case of Alectra Utilities Corporation v Solar Power Network Inc set out various considerations for the courts when considering whether to set aside an arbitration award. In that decision, the Court held that an applicant must establish that the award relates to an issue which was not covered by an arbitration agreement. Alternatively, the applicant must show that the decision was beyond the scope of the arbitration agreement.

Arbitrators must operate within the limits of the authority granted to them by way of the arbitration agreement and with those prescribed by the Arbitration Act (the “Act”). Under section 45(1) of the Act, a court must grant permission to appeal an arbitration award if the arbitration agreement is silent on appeals. Further, section 46 of the Act provides reasons for a court to set aside an arbitration award.

In the case at hand, the arbitration agreement did not consider appeals.

Court denied the tenant’s request to appeal

The Court found that the arbitrator’s decision was primarily focused on the dispute that was referenced in the arbitration agreement as “i.e. the determination of the fair market rent for the Leased Premises commencing January 1, 2020, as per the provisions of the Lease, and nothing else.”

Concerning the scope and fairness of the arbitrator’s decision, the Court found that the arbitrator acted appropriately. While Tire Pit sought to understand what “additional rent” would be owed in addition to the base rent, this was not an issue which was presented before the arbitrator at the relevant time. The Court did not find that the arbitration had been conducted unfairly, contrary to Tire Pit’s allegations.

The Court refused to grant Tire Pet leave to appeal, explaining that “granting leave to appeal in this case would not contribute to ensure the consistency of the law, but, rather, would only provide a new forum for the parties to continue their private litigation.”

Contact the Lawyers at Bader Law in Toronto for Advice on Commercial Leasing Disputes

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