Executive Summary: Key Legal and Evidentiary Issues

• Contract formation was contested, with the court asked to determine whether an unsigned tripartite agreement could nonetheless bind two of its three intended parties.
   
• Credibility played a limited role overall, but the court found it could not rely on the live testimony of one BC Housing witness whose evidence shifted markedly between direct and cross-examination.
   
• Interpretation of a hotel restoration clause required the court to reconcile a "brand standard" restoration obligation with a separate clause referencing repair to a condition "as close as possible" to the pre-lease state.
   
• Pleadings issues arose because the defendant attempted to raise arguments, including that the underlying leases were void for uncertainty of term, that had not been pleaded.
   
• Questions of betterment and mitigation were deferred to a second trial phase because the evidentiary record on room-by-room pre-lease condition was insufficient.
   
• Rent continued to accrue under the agreement's terms because the hotel had not been restored and returned to the plaintiff's inventory by the date of judgment.
   

Facts of the case

Cowichan Hospitality Group Ltd., operating the Ramada Duncan hotel, agreed in May 2020 to rent all 34 rooms of the hotel to the Canadian [also referred to elsewhere in the judgment as "Canada"] Mental Health Association, Cowichan Valley Branch 1992 ("CMHA"), so that the vulnerable, unhoused population could be sheltered during the COVID-19 pandemic. The British Columbia Housing Management Commission ("BC Housing") and its land-holding arm, the Provincial Rental Housing Corporation ("PRHC"), funded the arrangement. The initial one-month lease was repeatedly extended, and when the CMHA ended its involvement at the end of November 2020, BC Housing/PRHC stepped in directly. Guests continued to occupy the hotel, funded by BC Housing/PRHC, until April 30, 2022.

In February 2021, Cowichan and PRHC signed an agreement (the "February 2021 Agreement") intended to have the CMHA assign its rights under the earlier lease to PRHC, incorporating that lease's terms with certain modifications. The CMHA never signed this document. Cowichan and PRHC nonetheless continued to deal with each other on the basis of its terms, including negotiating extensions of the rental period and rate increases, through to April 2022. By that date, all guests had vacated, but the hotel's rooms were gutted by a BC Housing contractor in May 2022 and were never restored. Cowichan sued for breach of contract, seeking restoration of the hotel and unpaid rent; it discontinued its claim against the CMHA before trial and dropped its claim for specific performance. The trial was severed into two phases, with phase one addressing what the agreement between Cowichan and PRHC consisted of and whether PRHC breached its restoration and rent obligations, leaving damages, mitigation, and betterment for phase two.

Policy and legislative provisions at issue

The parties disputed which document governed their relationship. Cowichan argued the February 2021 Agreement was binding on PRHC despite the CMHA's refusal to sign, while PRHC argued the parties instead had only an informal, three-part unwritten agreement covering rent, restoration, and a mutual repair obligation. Central to the restoration dispute were three incorporated lease provisions: section 10.1, requiring PRHC to repair damage caused by guests "to a condition as close as possible" to the hotel's pre-lease condition, excepting reasonable wear and tear; section 11.2(a), tying PRHC's rent obligation to delivery of vacant possession "in the condition contemplated in Schedule A"; and Schedule A itself, which required restoring each room "to the same condition (or better) as on initial inspection" and paying a daily rate "until room meets brand standard." Section 11.2(c), added through the February 2021 Agreement, set escalating monthly holdover rental rates depending on how many rooms PRHC retained beyond the lease term.

Reasoning and analysis

Applying the objective test for contract formation, the court found that Cowichan and PRHC's own signing of the February 2021 Agreement, together with their subsequent conduct, demonstrated a manifested intention to be bound by its terms independent of the CMHA's participation. The court rejected PRHC's argument that the underlying leases were void for uncertainty of term, both because that argument had not been pleaded and because, on the merits, the documents defined a certain term subject to extension. The court also rejected reliance on the subjective views of two BC Housing employees, noting that the test is objective and that, in any event, their contemporaneous statements were largely consistent with treating the February 2021 Agreement as binding. The court found the evidence of one of those employees unreliable overall due to significant inconsistencies between her direct and cross-examination testimony.

On interpretation of the restoration obligation, the court declined to read section 10.1 in isolation from Schedule A, applying the principle that a contract must be read as a whole. It concluded that "brand standard" referred to an external, objective standard tied to the hotel's Ramada franchise status rather than to a specific technical document, and that PRHC's restoration obligation required matching consistency among rooms that had previously matched, without requiring a "brand new" result. Given the undisputed fact that the hotel remained gutted and unrestored at the time of trial, the court found PRHC had breached this obligation. On the rent obligation, the court found no textual basis for reading in a September 30, 2022 cut-off date, since the provisions tied PRHC's payment obligation to actual restoration and return of the rooms, not to a target date. The court deferred questions of betterment and of Cowichan's own restoration-related conduct to phase two, given the limited room-by-room evidentiary record and the parties' agreement that those issues relate to mitigation.

Ruling and overall outcome

The court found in Cowichan's favour on the central liability questions addressed in this first phase of the bifurcated trial. It held that the agreement between Cowichan and PRHC consisted of the terms of the February 2021 Agreement, as later amended by the parties regarding the lease term and rental rate, and that PRHC breached both its obligation to restore the hotel to brand standard and its obligation to continue paying rent after September 2022, since the rooms had not been returned to Cowichan's inventory. No monetary award, damages figure, or costs order was made at this stage; the court expressly deferred quantification, mitigation arguments, and PRHC's claim for a betterment reduction to phase two of the trial, of which the same judge remains seized.