By addressing the parking lot issue in a comprehensive and cost effective manner, RioCan was acting in a commercially responsible manner. At some point, however, patching and repairing becomes ineffective and a rehabilitation strategy must be adopted.
#Capital expenses Patch
It could not simply continue to patch and repair the parking lot each year as it had done before 2002 and charge the full cost to its tenants in the year they were incurred. RioCan was caught in a difficult situation. The rehabilitation of the parking lot was a capital expenditure and therefore, under the terms of the lease, could not be included as an additional rent charge. The court dismissed RioCan’s application and ruled in favour of Metro. The fact that RioCan amortized the cost over twenty years suggests, by itself, that the cost is a capital one. Metro, on the other hand, successfully contended that it is not necessary to “engage in an exercise of trying to match particular revenues with the improved asset.” The extension of the parking lot’s life and the significant reduction in on-going operating costs were more than sufficient for the repaving of the parking lot to be treated as a capital cost. It did not receive any direct revenues with respect to the parking lot. It argued that “for there to be a finding that the new asphalt layer was capital in nature, there must be a future economic benefit to RioCan by way of increased rental income…” The repaving of the parking lot did not result in any increased rent to RioCan. RioCan argued that this should include not only GAAP but also tax accounting practices. The lease does not define what is meant by “accepted accounting practice”. At that time, Metro disputed this cost, refused to make any further payments with respect to this cost and set-off the monthly instalments already paid from its future rent instalments. Metro’s monthly instalment of this cost was $858 which it paid initially until it reviewed the matter in 2007/2008. The total cost was $431,000 which RioCan (although not required to do so under the terms of the lease) amortized over twenty years. Rehabilitation is a process that involves pulverizing the asphalt and some of the granular base, compacting the pulverized asphalt and granular base and adding a layer of hot asphalt mix on top. In 2002, RioCan (the landlord) rehabilitated the parking lot pavement of a shopping mall in Windsor, Ontario. The facts of the case are straightforward. Metro Ontario Real Estate Limited ONSC 1819 provides an in-depth analysis of language in a retail shopping centre lease that excluded from additional rent charges “expenditures which by accepted accounting practice are of a capital nature.
A very recent decision of the Ontario Superior Court of Justice in RioCan Holdings Inc.
Commercial leases address this issue in a variety of ways. The struggle between landlords and tenants regarding capital costs is not a new one.
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