The Assistant Chairman:—This is the appeal of Berlin Motels Limited from an assessment in respect of the appellant’s 1969 taxation year.
From May 1961 to March 15, 1966 the appellant carried on the business of a hotel and restaurant under the name of “Town House Motor Hotel”, hereinafter referred to as “Town House”.
On March 15, 1966 the appellant entered into a written agreement with C Leonard Yanover, pursuant to which the appellant entered into a lease agreement with Mileyan Hotels Limited as lessee, C Leonard Yanover as guarantor and Maurice W Wright as trustee for a term of 15 years commencing on May 1, 1966 at an annual base rental of $90,000.
Inter alia the lease contained a provision that Mr Yanover would purchase a debenture or deposit certificate in the amount of $75,000 as security.
The lease also provided that if the lessee were in default for 32 days, then the lessor would be entitled to serve upon the lessee a written notice. of such default, and if the default were not remedied within 15 days of the notice, the lessor would be entitled to seize the said deposit certificate.
The lease was, in fact, terminated for default on or about January 2, 1969, and the amount of $75,000 was paid to the appellant during the 1969 taxation year.
The issue to be determined in this appeal is whether the receipt of $75,000 by the appellant in its 1969 taxation year is rent, payment in lieu of rent, income from property, or whether it is a capital receipt.
Counsel for the appellant contends that the appellant is not ordinarily engaged in the business of leasing property, that he leased a business as a going concern, that the $75,000 received was not in lieu of future rent but was for liquidated damages for deterioration of capital assets of the business, and that at no time did the appellant enter into an arrangement for the cancellation of the lease in consideration of payment of any moneys.
Counsel for the respondent contends that the amount of $75,000 received by the appellant in 1969 was received in satisfaction of the guarantor’s covenant to pay the rent on default by the tenant, and that the $75,000 received by the appellant was rent or payment in lieu of rent.
From evidence adduced, the volume of business previously realized by Town House decreased substantially under the lessee’s management from March 1966 to January 1969 and some deterioration of the premises took place because of lack of proper maintenance. The appellant’s principal shareholder, Mr Morris Berlin, alleges that owing to the lessee’s poor management, expenditures of $38,510 were incurred in rebuilding the assets of the business. Moreover, demands from Mr Yanover’s creditors in the amount of $16,500 were received by the appellant.
Evidence also indicates that under Mr Morris Berlin’s management subsequent to the lessee’s default in January 1969 the volume of business was again increased to figures comparable to those prior to the lease transaction. From this, one can reasonably conclude that the decrease in the volume of business which eventually led to the lessee’s default was due to inefficient management. However, it does not necessarily follow that the payment of $75,000 to the appellant was by way of liquidated damages for the deterioration of capital assets of the business including goodwill.
The nature of the $75,000 payment can only be determined by the actual wording of the lease agreement. Counsel for the appellant contends that the $75,000 was security against the deterioration of the business as well as security for the financial responsibility of Mr Yanover as guarantor. The appellant’s contention that the $75,000 payment was security against the deterioration of the business is not really substantiated by any of the clauses of the lease, whereas clause 22(f) of the lease is crystal clear in providing that the $75,000 guarantee be paid to the lessor should the lessee be in default of rental payments. Clause 22(f) of the lease provides:
As a condition of the execution and delivery of the within lease and as security for payment of the rental by the Lessee in thet event of the death of Charles Leonard Yanover and as further security for the guarantee herein given by the said Charles Leonard Yanover, the Lessee and Yanover agree with the Lessor as follows: . . .
(f) If at any time during the term of the within lease, the Lessee should be in default for a period of thirty-two (32) days in making any of the rental payments referred to in paragraph 2 hereof, then the Lessor shall be entitled to serve upon the Lessee a written notice of such default and, if such default shall not be remedied within a period of fifteen (15) days from the date of delivery of such notice, then, in such case, the Trustee shall request the Bank or Trust Company to transfer the said certificate to the name of the Lessor and the said certificate shall thereupon become the absolute property of the Lessor.
The agreement signed by the lessee, the lessor and the trustee on January 3, 1969 (Exhibit A-2) authorizing the lessor to enter and to operate Town House before the expiry of the period of 15 days referred to in subparagraphs (f) and (g) of paragraph 22 of the lease is quite significant in that it follows directly upon the lessee’s incapacity to pay the arrears of $18,400 for rent and its acknowledgement that it is in default for a period of 32 days in making its rental payments. The procedure followed in that agreement in having the certificate transferred to the lessor, in authorizing the lessor to take immediate possession of the premises, and discharging the guarantor from further liability is strictly pursuant to subparagraphs (f), (g) and (h) of paragraph 22 of the lease which deal specifically and clearly with the default of rental payments.
The fact that the appellant may have had to make expenditures in refurbishing the premises and may have so used part of the $75,000 guarantee cannot, in my view, alter the nature of the $75,000 payment made by the guarantor.
Counsel for the appellant suggests that the $75,000 payment was for the lessee a means of buying its way out of honouring its covenants. Certainly that is true for the lessee’s obligation to pay the lessor a monthly rent, and is specifically provided for in subparagraphs (f) and (g) of paragraph 22 of the lease, but the relationship between the payment of $75,000 and the lessee’s other covenants is undetermined and nebulous.
The fact that the appellant required as a condition for the execution of the lease that a $100,000 insurance policy on the life of C Leonard Yanover be purchased by the lessee and made payable to the trustee as security for the payment of rent in the event of the death of C Leonard Yanover cannot reasonably be interpreted in a way that the $100,000 life insurance was considered security for rental payments and that the $75,000 was security for the fulfilment of the lessee’s other covenants. If these two guarantees are indicative of anything, it is the importance that the appellant placed on the rental income from the premises.
Whether the lease is an ordinary commercial lease or not, it is a legal document relative to the leasing of Town House as an operating concern. One can neither ignore the clauses that are contained therein and agreed upon by the parties, nor interpret the lease on the basis of ex post facto considerations.
On the facts of this appeal I have come to the conclusion that the amount of $75,000 received by the appellant was not for liquidated damages arising out of the deterioration of capital assets of Town House but was received as payment in lieu of rent.
The appeal is therefore dismissed.
Appeal dismissed.