Court of Appeal for Ontario
Citation: Goodlife Fitness Centres Inc. v. Rock Developments Inc., 2019 ONCA 58
Date: January 28, 2019
Docket: C66152
Judges: Rouleau, van Rensburg and Benotto JJ.A.
Parties
Between
Goodlife Fitness Centres Inc. Applicant (Respondent)
and
Rock Developments Inc. and Rocco Tullio Respondents (Appellants)
Counsel
James Renihan, for the appellants
Michael Polvere, for the respondent
Hearing and Appeal
Heard: January 21, 2019
On appeal from: The judgment of Justice Jonathon C. George of the Superior Court of Justice, dated November 13, 2018, with reasons reported at 2018 ONSC 6755.
Reasons for Decision
Background
[1] Goodlife Fitness Centres Inc. ("Goodlife") operates health and fitness facilities across Canada. Rocco Tullio, as a principal of Lifestyle Family Fitness Centre Inc. ("LFF"), owned and operated health and fitness facilities in Windsor, Ontario. Tullio, through his company Rock Developments Inc. ("RDI"), and other entities, also owned various other properties in the area.
[2] Goodlife agreed to purchase LFF from Tullio, with the sale closing on November 30, 2014. Since then, Goodlife has operated the Windsor fitness facilities.
[3] Email exchanges as early as a year before closing reveal that the parties were discussing restrictive covenants on three other properties owned by Tullio, preventing the use of these properties for health and fitness facilities. In October 2013, Tullio was prepared to provide restrictions on two of the properties but not on 650 Division Road ("650") because he planned to "divest" himself of it. In May 2014, having decided not to divest himself of 650, Tullio told Goodlife that the co-owners of 650 would not agree to provide the same restrictions on 650. On June 13, 2014, Goodlife advised that it was willing to move forward provided that it got a right of first refusal ("ROFR") with respect to any offers to lease 650.
[4] Goodlife also sought and received a restrictive covenant in respect of the reciprocal access between 650 and a neighbouring property, owned by Windsor Commons Inc. ("WCI"), in which Tullio had an interest. The covenant sought to prevent parking rights to any owner or tenant of 650, if used for a fitness facility.[1]
[5] There were ultimately three agreements at issue between Goodlife and Tullio: (i) a Non-Competition and Non-Solicitation Agreement ("NCA"); (ii) an agreement creating restrictive covenants with respect to two properties owned by Tullio, preventing the use of the properties for fitness centres; and (iii) a ROFR in favour of Goodlife with respect to 650. The NCA was signed on November 30, 2014. The ROFR was signed the following day.
The Non-Competition Agreement
[6] Section 6 of the NCA provided:
Without the prior written consent of the Purchaser, which consent may be arbitrarily withheld, the undersigned will not at any time during the Restricted Period, within the Restricted Territory, directly or indirectly, either individually or in partnership or jointly or in conjunction with any person as principal, agent, shareholder, partner, employee or in any other manner whatsoever: (i) carry on or be engaged in, or have a business or financial interest in, a business that is the same as or substantially similar to the Business or any separate aspect or component of the services or facilities of the Business, including, for greater certainty, a single business location or multiple business locations; or (ii) advise, assist, provide consulting or development services to, lend money to, or guarantee the debts or obligations of, any person engaged in or having a business or financial interest in a business that is the same as or substantially similar to the Business or any separate aspect or component of the services or facilities of the Business, including, for greater certainty, a single business location or multiple business locations, and further, for greater certainty, the restrictions in subclause (i) and (ii) shall include and extend to any business location or locations that focus on specific aspects or components of services of the Business, such as, for example, personal training facility or facilities, yoga studio or studios, or suntanning facility or facilities.
[7] The NCA expires on November 30, 2019.
The Right of First Refusal
[8] The ROFR provided that, if a competing fitness facility offered to lease 650, Goodlife had the option to lease on same terms, and if Goodlife declined, Tullio could lease the premises to the offeror.
[9] Four years later, in July 2018, RDI negotiated a lease with Movati Athletic (Group) Inc. ("Movati") for the construction of a health and fitness facility on 650. Goodlife was given notice in accordance with the ROFR, but declined to exercise the right of first refusal. RDI went ahead with the lease to Movati.
The Application
[10] Goodlife then brought an application seeking a declaration that the Movati lease was void because it violated the terms of the NCA and an injunction requiring Tullio to abide by the terms and conditions of the NCA.
Application Judge's Decision
[11] The application judge reviewed the negotiations leading up to the signing of the closing documents and made findings of fact with respect to the meaning of the NCA and the ROFR. He rejected the argument that the ROFR granted the right to lease 650 to Movati during the term of the NCA. Based on the email exchanges during negotiations and the timing of the signing of each agreement, the application judge concluded that the NCA took precedence over the ROFR and that the ROFR was intended to "supplement" the NCA by "adding an additional layer of protection" for Goodlife, and that for the first five years the two agreements would work together to prevent anyone other than Goodlife from operating a fitness facility on the property, unless Goodlife provided its written consent. He observed that the contrary interpretation would render the NCA ineffective and without meaning.
Court of Appeal Analysis
Three Problems with the Application Judge's Analysis
[12] There are three problems with this analysis.
First Problem: Plain Language of the Agreements
[13] First, neither the NCA nor the ROFR suggests one is paramount over the other. The plain language of the two documents, when read together, requires Tullio to abide by the terms of the NCA with an obligation to provide Goodlife with a right of first refusal should 650 be leased to a fitness, health or wellness facility.
Second Problem: Palpable and Overriding Error of Fact
[14] Second, the application judge misunderstood what the negotiations actually said, giving rise to a palpable and overriding error of fact. The email exchange makes it clear that Tullio refused to grant the requested restrictive covenant over 650. The ROFR was agreed to with respect to 650 as a substitute for the restrictive covenant and specifically contemplates a lease to a fitness, health, or wellness facility.
Third Problem: Reliance on Negotiations
[15] Third, and most important, the application judge erred in relying on the negotiations to interpret the agreements. This court has repeatedly cautioned against looking to negotiations to interpret a contract. The basic principles of commercial contract interpretation were summarized in Salah v. Timothy's Coffees of the World Inc., 2010 ONCA 673, 268 O.A.C. 279. At para. 16, Winkler C.J.O. stated:
When interpreting a contract, the court aims to determine the intentions of the parties in accordance with the language used in the written document and presumes that the parties have intended what they have said. The court construes the contract as a whole, in a manner that gives meaning to all of its terms, and avoids an interpretation that would render one or more of its terms ineffective. In interpreting the contract, the court must have regard to the objective evidence of the "factual matrix" or context underlying the negotiation of the contract, but not the subjective evidence of the intention of the parties. [Emphasis added.]
[16] Likewise, in The Canada Trust Company v. Browne, 2012 ONCA 862, 115 O.R. (3d) 287, Feldman J.A. said at para. 71:
While the scope of the factual matrix is broad, it excludes evidence of negotiations, except perhaps in the most general terms … Ultimately, the words of the agreement are paramount.
[17] Brown J.A. cited this in his decision in Weyerhaeuser Company Limited v. Ontario (Attorney General), 2017 ONCA 1007, 77 B.L.R. (5th) 175, at para. 112:
Canadian common law generally treats evidence of the parties' specific negotiations as inadmissible for purposes of interpreting a contract … evidence of the factual matrix cannot operate as a kind of alternate means by which an adjudicator constructs a narrative about what the parties must have discussed or intended in their negotiations. In other words, evidence of the factual matrix cannot be used to do indirectly that which the principles of contract interpretation do not permit doing directly. [Emphasis in original; citations omitted.]
[18] The plain wording of the ROFR contemplates that RDI may lease 650 to a fitness, health or wellness facility. By relying on negotiations to interpret the ROFR, the trial judge made findings of fact that were both erroneous and not open to him. In the result, the application judge effectively superseded the plain wording of the agreement and rendered the ROFR meaningless.
Development Services Issue
[19] Having found the lease to be void ab initio, the application judge then considered the work that Tullio had agreed to carry out under the terms of the lease.
[20] The terms of the lease required RDI to prepare the property by grading, paving, landscaping, extending services such as sewer and water and so on. The application judge determined that this work violated the terms of the NCA because Tullio would be providing "development services". He enjoined the appellants from doing any work in connection with the lease that would violate the NCA.
[21] The application judge's analysis is at paras. 34 and 35:
[Tullio] is directly involved in preparing a fitness facility to compete with the Applicant. He is influencing the schedule of preparations and the speed at which the space will become operable as a fitness facility. He is allowing Movati (at no cost) to advertise on the property assisting with Movati's promotion and marketing, and he has guaranteed Movati's development charges beyond a capped amount.
Tullio argues that since the terms 'financial interest' and 'development services' are not defined in the NCA that I should interpret them in "light of the overall purpose of the transaction". I agree, and in the result find that the overall purpose of the NCA was to prevent, for five years, a competitor from operating a fitness facility on the property. The only sensible conclusion is that while the NCA does not preclude Tullio from leasing the property, it does prevent him from leasing to the Applicant's competitors.
[22] The appellants submitted that the services set out in the lease, are those typical of a landlord to a tenant and are not restricted by the NCA. The application judge did not accept this submission. At para. 36, he stated:
Just because it is common for a landlord to provide services such as grading, installing sewer and drainage systems, landscaping, paving etc., does not mean they are not development services. They are, and they are prohibited under the NCA when the purpose is to prepare the space to be a fitness facility.
[23] This conclusion cannot stand as it was tainted by the application judge's erroneous conclusion that the purpose of the NCA was to prohibit a competing fitness facility at 650. Since RDI had the right to lease the property to Movati, it also had the right to provide the services normally provided as a landlord. To prevent RDI from preparing the property as part of a legitimate lease would result in a commercial absurdity and indirectly invalidate the lease.
Decision
[24] Accordingly, the appeal is allowed.
[25] Costs are ordered in accordance with the agreement between the parties. Costs of the appeal are payable to the appellant fixed at $12,000 inclusive of HST and disbursements; costs of the application will be paid by the respondent to the appellant in the amount of $20,000 all inclusive.
"Paul Rouleau J.A."
"K. van Rensburg J.A."
"M.L. Benotto J.A."
Footnote
[1] An issue was raised during oral argument about the WCI parking. This issue was not in the Notice of Application and it was not before the application judge. Therefore, it is not before this court and does not need to be addressed.