In some commercial real estate matters, a lease agreement may not adequately consider the full nature of a dispute in electing certain forms of alternative dispute resolution mechanisms. This situation arose in the recent case of KMH Cardiology Centres Incorporated v Lambardar Inc. where the Ontario Superior Court of Justice awarded an order allowing specific types of disputes to be heard before an independent professional consultant, instead of an arbitrator.

A disagreement arose between commercial landlord and tenant about the amount operating costs

KMH provides nuclear cardiology services in Canada and three of its locations were the subject of this proceeding. Lambardar owns the office properties that KMH leases for its Toronto and Mississauga locations. KMH and Lambardar were under the same ownership until KMH was sold several years ago. In the same transaction, the three leases were negotiated and finalized.

A disagreement arose regarding the tenant’s share of operating costs between 2017 and 2020 regarding three key issues:

1. whether the basements in two of the properties were considered part of the “gross leaseable office area”;
2. whether the landlord could charge a 15% administration fee on taxes; and
3. whether the landlord could charge the tenant for its site supervisor’s services.

The total value incurred by the tenant in relation to these issues was approximately $900,000.

The relevant terms of the lease

Generally, a lease requires a landlord to provide the tenant with an estimate of their approximate portion of operating costs at the beginning of each year. Of that portion, the tenant is required to pay one-twelfth of the total estimated amount each month. After the end of the year, the landlord must provide the tenant with a written statement of the actual costs paid, at which point the tenant is required to pay the landlord to make up for any shortage, or the landlord must repay any excess paid back to the tenant.

In this case, section 4.7(c) of the Lease Agreement stated the following regarding the accuracy of the written statement:

“If Tenant disputes the accuracy of any Statement, Tenant shall nevertheless make payment in accordance with the Statement, pending resolution of the dispute, but, subject to Section 4.8, the disagreement shall be referred by Landlord for prompt decision to an independent professional consultant approved by the Tenant, acting reasonably, who is qualified by education and experience to make such decision and who shall be deemed to be acting as an expert and not an arbitrator…”

The above provision was subject to section 4.8 of the Lease Agreement, which outlined various steps and conditions the tenant could take to audit the landlord’s Operating Costs. These conditions included an agreement “to contract with the Tenant’s accountant/auditor in a manner other than on a commission basis or on a basis where compensation is based upon a percentage of the recoveries obtained.” If a disagreement was not resolved within 15 days after the audit, only then could the parties rely on section 4.7(c).

The landlord felt an expert was not qualified to assess matters that contain a question of law

Despite the tenant’s request, the landlord refused to appoint an expert to resolve the dispute regarding Operating Costs. The landlord’s refusal to work towards resolution had cost the tenant $900,000 more than required in Operating Costs payments.

The landlord’s refusal was predicated on the fact that in the Lease Agreement, the “expert” was not intended to operate as an arbitrator or judge. Neither arbitrators nor judges are supposed to bring their personal knowledge into their assessment of the facts. Instead, they can only make a decision based on the evidence presented to them by each party. Parties may include expert evidence. Unlike in court proceedings or arbitration, relying on an expert assessment does not provide the same opportunities for appeal.

The landlord submitted that appointing an expert decision-maker was inappropriate in the circumstances because the issues went beyond simple mathematical problems and required contractual interpretation.

The Court finds that the parties intended this exact issue to be resolved by an expert, not the civil justice system

The Court disagreed with the landlord’s position that an expert could not be a decision-maker when questions of law arise. The Court pointed to how, in contract law, expert determinations are sometimes necessary.

In this case, the Court outlined various reasons as to why it was clear that the parties, through their Lease Agreement, intended for their disputes to be assessed by an expert, including:

1. The expert’s knowledge was limited only to the calculation of operating costs in the context of this particular commercial lease;
2. The clause itself does not appoint anyone with specifically defined expertise. Instead, it states that the parties would need to agree on an appointee who is “qualified by education and experience to make such [a] decision”;
3. Before the parties appoint an expert, the Lease Agreement provides for the tenant’s unilateral right to request supporting documentation relating to the landlord’s estimated operating costs and subsequently request an audit. If the tenant disagrees with the audit results, the expert’s role extends beyond adding up numbers and they will instead provide an assessment to “resolve any disagreements relating to the payment by Tenant of Tenant’s Proportionate Share of Operating Costs”; and
4. Each of the parties were sophisticated and appreciated the amount of money which was spent on operating costs each year.

Court orders landlord to appoint expert to resolve dispute

With the above reasons in mind, Justice Myers held that the landlord’s interpretation of the limitation on section 4.7(c) could not stand. Because each of the issues in this case were contemplated by section 4.7(c), the Court ordered the landlord to appoint an expert to promptly resolve the dispute.

Contact the Real Estate Lawyers at Bader Law for Help Interpreting Commercial Lease Agreements

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