Court File and Parties

COURT OF APPEAL FOR ONTARIO DATE: 20210526 DOCKET: C68087

Juriansz, Huscroft and Jamal JJ.A.

BETWEEN

Subway Franchise Restaurants of Canada Ltd. Applicant (Appellant)

and

BMO Life Assurance Company, Bank of Montreal, and Yonge Melinda Realty Inc. Respondents (Respondents)

Counsel: Christopher J. Cosgriffe and Mark T. Dzurman, for the appellant Mitch Koczerginski, for the respondents

Heard: May 10, 2021 by video conference

On appeal from the judgment of Justice Edward M. Morgan of the Superior Court of Justice, dated January 22, 2020, with reasons reported at 2020 ONSC 371.

Reasons for Decision

[1] The appellant, Subway Franchise Restaurants of Canada Ltd. (“Subway”), is the tenant in a commercial lease and appeals from the dismissal of its application for relief from forfeiture after it failed to exercise an option to renew the lease within the timeframe specified in the lease.

[2] The appellant is the franchisor of Subway restaurants in Canada. The appellant is provided with operational and administrative services by Franchise World Headquarters, LLC (“FWH”), a Connecticut limited liability company. FWH negotiates the leases that the appellant enters into and then sublets to its franchisees. The respondent, BMO Life Assurance Co., was not the original landlord but acquired this lease in October 2008.

[3] The lease provided that the renewal option had to be exercised at least 9 months and not more than 12 months prior to the expiration of the term. However, the lease did not specify the expiration date – it provided the lease would begin following fixturing and terminate 10 years later. The application judge found there was no contemporaneous documentation that indicated when the fixturing period ended and the lease began.

[4] The documentation accompanying acquisition by BMO included an estoppel certificate executed by the appellant. The estoppel certificate certified that the lease expired on August 23, 2018. Consequently, the appellant’s option to renew had to be delivered between August 24, 2017 and November 23, 2017. The application judge found that the estoppel certificate was “the one and only document that contain[ed] the termination date for the ten-year Lease.” Both parties were in possession of the estoppel certificate.

[5] FWH’s central database recorded the lease as expiring on May 31, 2018. The application judge observed that the reason the incorrect date was entered into the FWH database was unexplained.

[6] On February 1, 2017, FWH, on behalf of the appellant, sent a letter to BMO indicating its mistaken understanding of the term of the lease:

According to our records, the current lease term for the above-referenced location shall expire on May 31, 2018. Pursuant thereto, renewal notice is due on or before May 31, 2017. In the event that any of these dates differ from your records, please contact us in writing immediately as your silence will be an acknowledgement and authorization of their accuracy and our reliance.

[7] The letter indicates the entries in the FWH database were incorrect in two respects. The termination date was wrong and the time when notice of renewal could be given was not consistent with the lease.

[8] FWH had sent BMO similar letters in earlier years. All went unanswered. The application judge observed these were standard form letters automatically generated that the appellant sent to all of its landlords. FWH sent another letter to BMO on May 1, 2017 asking for confirmation that the lease expired on May 31, 2018 and the right of renewal had to be exercised before August 31, 2017. The FWH employee who authored the May 1, 2017 letter was aware of the date in the estoppel certificate and that the date in the estoppel certificate was different from the date in the FWH database.

[9] In accordance with the incorrect date of May 31, 2018 in the FWH database, the appellant purported to exercise the option to renew by providing notice on May 19, 2017. This attempt to renew was outside of the notice period.

[10] The application judge rejected the appellant’s argument that BMO had failed to perform the contractual terms of the lease in good faith by remaining silent when the appellant had asked for confirmation of the termination date of the lease and the window for the lease’s renewal. In rejecting this argument, the application judge cited this court’s decision in CM Callow Inc. v. Zollinger, 2018 ONCA 896, 429 D.L.R. (4th) 704. After the application judge’s decision, the Supreme Court reversed this court’s decision: C.M. Callow Inc. v. Zollinger, 2020 SCC 45. In analysing the appellant’s submission that the application judge erred in finding BMO did not breach its duty of good faith, it is necessary to consider the application judge’s decision in light of the Supreme Court’s decision in Callow.

[11] The Supreme Court’s decision in Callow does not disturb the application judge’s reasoning in this case. The application judge reasoned that the appellant had the estoppel certificate and did not make diligent efforts to comply with the terms of the lease. He said that the appellant “could have and should have known and complied with the relevant dates for giving notice.” Significantly, the application judge found that BMO did not “intentionally obscure anything from the [appellant]”. He found that BMO was “up front and entirely transparent” with the appellant, including disclosing its plans to redevelop the property and offering the appellant various forms of assistance and compensation for having to relocate.

[12] The application judge concluded that the appellant could not “cast blame” on BMO because it had itself “mis-diarized the termination date and so miscalculated the notice date for renewal of the Lease.” He stated the duty of good faith did not require BMO to make sure that the appellant fulfilled its own obligations correctly.

[13] The facts as found by the application judge are different from those in Callow in an important respect. In Callow the trial judge had found deception on the part of the defendant that was directly linked to the contract, and the breach of the duty of good faith was premised on that deception. Kasirer J. writing for himself and four other judges said, at para. 38, “In circumstances where a party lies to or knowingly misleads another, a lack of a positive obligation of disclosure does not preclude an obligation to correct the false impression created through its own actions” (emphasis added). At para. 104, Kasirer J. spoke of the duty to correct a misapprehension, but this duty arose because of the defendant’s false representations. In the absence of the defendant’s false representations, “the failure to disclose a material fact, without more, would not be contrary to the standard”: at para. 77.

[14] Brown J. writing for himself and two other judges in Callow, said, at para. 133, “the question is whether the defendant’s active conduct contributed to a misapprehension that could be corrected only by disclosing additional information” and then stated clearly that “a contracting party is not required to correct a misapprehension to which it has not contributed” (emphasis added).

[15] The Supreme Court’s decision in Callow does not support the appellant’s attempt to invoke the duty of good faith performance of a contract in the circumstances of this case. Here, there was no finding, or any basis in the evidence to find, that BMO lied or knowingly misled Subway, created a false impression through its own actions, or actively contributed to Subway’s misapprehension. The application judge applied the correct legal principles to the facts he found.

[16] The record amply supported the application judge’s determination that the appellant failed to make diligent efforts to comply with the terms of the lease and his determination that the appellant failed to properly deliver the renewal notice.

[17] The appeal is dismissed. Costs of the appeal are fixed in favour of the respondent in the amount of $25,000 all inclusive.

“R.G. Juriansz J.A.”

“Grant Huscroft J.A.”

“M. Jamal J.A.”