In Exchange Corporation Canada Inc. v. Mississauga (City),1 Exchange Corporation Canada Inc. (“Exchange“) operates kiosks in various terminals at Toronto Pearson International Airport (the “Airport“) pursuant to a 2003 agreement (the “Agreement“) with the Greater Toronto Airports Authority (the “GTAA“). Exchange carries on the business of providing currency exchange and travel insurance services.
In 2006, the City of Mississauga (the “City“) and the Municipal Property Assessment Corporation issued notices of omitted assessment to Exchange for municipal realty taxes based on the value of space occupied by Exchange pursuant to section 33 of the Assessment Act.2 Exchange argued that although the Agreement was called a “lease” and uses the terms “landlord” and “tenant”, due to the numerous reservations to the landlord, the Agreement should not be characterized as a lease, and as such Exchange should not be considered a “tenant” within the meaning of the Assessment Act and therefore was not liable for the realty taxes. Alternatively, Exchange argued that if it was liable, the premises should be assessed at a more favourable rate as an “eligible property” under section 331 of the Municipal Act, 2001.3
Whether Exchange is a “Tenant” Under the Assessment Act
Ontario’s Assessment Act allows municipalities to collect realty taxes from property owners within such municipalities’ borders. However, properties owned by the federal government are exempt from such realty taxes. While tenants generally do not pay municipal realty tax under the Assessment Act, a tenant of land owned by the Crown is assessed and liable for realty taxes as if it were the owner if rent or any valuable consideration is paid in respect of the land.4 In addition, land owned or leased by a designed airport authority is exempt from realty tax if the designated airport authority makes “Payments In Lieu Of Taxes” (“PILT“).5 This realty tax exemption, however, does not apply to any portion of the Airport leased by a tenant that is not a designated airport authority.6 The Airport is owned by the federal government but is leased to the GTAA, which is a designated airport authority and makes PILTs to the City. All tenants of the GTAA who occupy and pay rent for space in the Airport are assessed (i) on a distinct assessment roll number and (ii) based on the value of the space occupied by them.
In determining whether or not Exchange is a “tenant” under the Assessment Act, the application judge focused his analysis on the controls and reservations by the GTAA under the Agreement regarding Exchange’s use of the space, including GTAA’s right to:
- terminate the Agreement on 60 days’ notice to accommodate re-development of the Airport (provided the GTAA must pay a termination fee equal to the un-depreciated costs of Exchange’s leasehold improvements);
- approve signs and other advertisements visible from the outside of Exchange’s premises;
- require Exchange to discontinue any business conduct or practice which may harm the GTAA’s business or reputation;
- require Exchange to occupy and use its premises in accordance with the specified uses of selling insurance, foreign currency and related uses and not to direct business elsewhere;
- impose limits on prices charged by Exchange;
- require Exchange to operate during specified hours;
- access the premises for inspection and repairs;
- approve alterations to the premises;
- relocate Exchange to other premises in the terminal if necessary for operational or re-development purposes; and
- consent to an assignment of the Agreement.
The application judge characterized the Agreement as a “concession agreement” and not a lease, and concluded that Exchange is a licensee and not a “tenant” of its premises. According to the application judge, since Exchange’s premises did not constitute “a portion of the land leased by a tenant” within the meaning of subparagraph 3(1)(24)(iv) of theAssessment Act, Exchange’s premises should be exempt from taxation.
The Divisional Court overturned the application judge’s decision and held that the application judge erred in law by focusing only on certain clauses and failing to consider the Agreement as a whole. The Divisional Court also held that the application judge failed to consider significant clauses of the Agreement indicative of tenancy, including a clause granting quiet enjoyment and the habendum clause granting an estate in the property. Citing the Ontario Court of Appeal in Re B.A. Oil Co. & Halpert,7 the Divisional Court stated that “[a]n essential element of the [landlord-tenant] relationship is that the landlord grants exclusive possession to the tenant in relation to the purpose for which occupation is intended. Furthermore, restrictions imposed on the tenant must be considered to determine whether they dilute or undermine the exclusivity of possession.”8
The Court of Appeal agreed with the Divisional Court that the application judge failed to consider the Agreement as whole and specifically failed to consider the habendum and quiet enjoyment clauses, as well as the following features of the Agreement:
- the Agreement is called a “lease” and refers to the GTAA as “landlord” and to Exchange as “tenant”;
- the Agreement specifically states that it constitutes the relationship of landlord and tenant;
- the GTAA covenanted that it enjoyed the benefit of a leasehold interest in the lands sufficient to permit it to grant Exchange the leasehold interest contemplated by the Agreement;
- the Agreement “is a completely carefree absolutely net lease to the Landlord”, except as set out in the Agreement;
- Exchange is obliged to pay rent;
- Exchange is required to pay taxes attributable to its premises, if separately assessed, or, if not separately assessed, as allocated by the GTAA;
- Exchange’s premises are specifically described;
- Exchange is required to surrender its premises on expiration or termination of the Agreement; and
- the Agreement is binding on permitted successors and assigns.
The Court of Appeal ultimately concluded that while the Agreement “did contain significant reservation of rights to the GTAA, when considered in the context of the lease as a whole, those rights were consistent with Exchange’s legal status as a tenant. The rights reserved by the GTAA are similar to those commonly found in commercial leases [and are] consistent with the degree of exclusive possession required to constitute the legal status of tenant”.9
Whether Exchange’s Premises Qualify as “Eligible Property” under the Municipal Act, 2001
Section 331 of the Municipal Act, 2001 was introduced to alleviate what might otherwise have been excessive tax increases on certain properties due to changes to the assessment system. If a property qualifies as an “eligible property”, the taxes in respect of that property are limited to the average effective level of taxation derived from up to six comparable properties.
Exchange relied on subsection (b) under the definition of “eligible property” in subsection 331(20) of the Municipal Act, 2001, which captures properties that “[cease] to be exempt from taxation for 2001 or thereafter”, and argued that its premises qualify as “eligible property” since the premises were exempt from taxation while occupied by the GTAA and ceased to be exempt when occupied by Exchange starting in 2003. All three levels of court determined that Exchange’s premises were not “eligible property” since the word “property”, as used, is meant to apply to entire parcels, that is, the entire Airport land, and not individual spaces occupied by different tenants. As a result, the Court of Appeal affirmed the Divisional Court’s finding that the assessment of Exchange as a tenant under the Assessment Act does not create a separate “property” and does not bring Exchange’s premises within favourable treatment under section 331 of the Municipal Act, 2001.
The Exchange decision highlighted several factors to consider when determining whether an agreement constitutes a lease under the Assessment Act:
- The quiet enjoyment clause and the habendum clause are both important indicators of a lease;
- Reservations imposed on a tenant are commonly found in commercial leases and are not mutually exclusive with the degree of exclusive possession required for tenancy; and
- Reservations to a landlord must be considered in the context of the lease as a whole.