SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: CV-09-374349
DATE: 20131212

RE: ASHBURY CLEANERS (2003) LIMITED, Plaintiff

AND:

CRISOLAGO HOLDINGS LIMITED, Defendant

BEFORE: CHIAPPETTA J.

COUNSEL:
A. O’Brien, for the Plaintiff
Michael Hassell, for the Defendant

HEARD: December 2, 2013

ENDORSEMENT

Overview

[1] The plaintiff has sued the defendant for damages for breach of contract and bad faith. In order to be successful, the plaintiff must prove on the balance of probabilities that the defendant was acting in bad faith in deceiving the plaintiff of its stated intention. For reasons set out below, I have concluded that the plaintiff has failed to satisfy this onus. The plaintiff’s action is therefore dismissed.

Background

[2] Prior to June 2003, Ms. Marilyn Amersey (“Amersey”) worked part-time at a dry cleaning business owned and operated by Crisolago Holdings Limited (“Crisolago Holdings”). The business was located at 418 Summerhill Avenue in Toronto, Ontario (the “Premises”). On July 7, 2003, as the sole officer and director of Ashbury Cleaners (2003) Limited (“Ashbury”), Amersey offered to purchase the Crisolago Holdings dry cleaning assets and business at the Premises from the principal of Crisolago Holdings, Mr. Simone Crisolago (“Crisolago”). Amersey’s then husband and legal counsel assisted her throughout this transaction. Crisolago Holdings accepted the offer. The purchase price was $250,000.

[3] The parties further negotiated an asset purchase agreement for the equipment in the Premises and a lease for the use of the Premises (the “Lease”), both dated August 22, 2003.

[4] The Lease was for an initial term of five years, from September 1, 2003 until August 31, 2008. Base rent by the end of the term was $4,000 per month plus tax. The parties negotiated a right of first refusal in the Lease to replace an option to renew. Clause 5(3) of the Lease reads as follows:

The Tenant shall have the first right of refusal (the “First Right of Refusal”) to lease the Premises following the Term. The First Right of Refusal shall be exercisable by the Tenant in the event the Landlord has agreed to lease (the “Offer to Lease”) the Premises to the Tenant. The First Right of Refusal shall be exercisable by the Tenant upon the same terms and conditions as the terms and conditions of such Offer to Lease upon receipt by the Tenant of a written notice from the Landlord of the Offer to Lease together with a copy of the lease. The Landlord shall not complete the lease of the Premises until the rights of the Tenant hereunder have expired, which rights are to be exercised by the Tenant within thirty (30) days of receipt of the written notice of the Offer to Lease from the Landlord.

[5] At the request of Amersey’s husband on her behalf, as communicated through legal counsel, an option to renew the Lease was revised to the right of refusal as set out above. Crisolago stated that he too wanted a right of refusal over an option to renew; he always intended to return as operator of the business after the initial five-year term.

[6] Amersey states that she advised Crisolago in January 2008, and thereafter whenever she saw Crisolago, of her desire for the Lease to continue beyond its natural expiry of August 31, 2008. Her evidence is that Crisolago always responded positively.

[7] On March 20, 2008, the parties discussed renewing the Lease. Amersey states that Crisolago advised her that, if she wished to renew the Lease, the rent would increase to $5,000 per month plus tax. She replied “c’mon I can’t afford that” and asked him to discuss it with her. It was a brief informal discussion.

[8] Crisolago agrees the conversation took place on March 20, 2008. However, he states that therein he asked Amersey if she wanted to renew the Lease for five years at $4,500 per month plus tax. She replied that she could not afford the increased rent and she only wanted to renew the Lease for one year because she hoped to sell the business.

[9] Later that same day, Crisolago delivered Amersey a letter from his lawyer advising that she had indicated to Crisolago that she would not be able to renew the Lease as she could not afford the rent. As a result, the letter informed Amersey, “the landlord expects to receive the [P]remises at the end of the [L]ease”. Amersey states that Crisolago advised her to remove the dry cleaning equipment on the Premises by August 31, 2008. He intended to operate the dry cleaning business himself, as he had done prior to the Lease.

[10] In response to the letter, Amersey retained counsel and attempted to sell the dry cleaning equipment used at the Premises. No one was interested in purchasing the equipment as newer technology was available.

[11] Amersey states that Crisolago said he would buy the dry cleaning equipment back from her. He asked her how much she thought the business was worth. She told him that its value was $150,000. He offered her $35,000 on a take it or leave it basis. She took it.

[12] Crisolago states that he told Amersey he would buy back the business when she advised of her intention to sell it, during their discussion on March 20, 2008. Amersey asked him how much he would pay for it. He advised her that he would pay $25,000. Amersey countered with $35,000. He agreed.

[13] Amersey and Crisolago met on the morning of June 14, 2008 to discuss the sale of the business. The discussions were not successful. Discussions to complete the sale continued thereafter through counsel acting on behalf of the plaintiff and the defendant.

[14] By agreement dated August 15, 2008, Ashbury sold the assets and dry cleaning business, including the Lease, back to Crisolago Holdings. The purchase price was $35,000. The closing date was August 31, 2008. Counsel represented both parties. A bill of sale was executed August 29, 2008.

[15] Ashbury terminated its employees effective August 15, 2008 and advised its customers that it was going out of business.

[16] On Tuesday September 2, 2008, Ms. Rosemarie Sanghera (“Sanghera”) passed by the Premises on her way to a store. Sanghera worked for a different drycleaner on Summerhill Avenue for many years, since she was 17 years old. She and her husband offered to purchase a dry cleaning business in June 2008. Although the offer was accepted, the deal did not close.

[17] Sanghera saw Crisolago on her way past the Premises. Crisolago knew Sanghera. Her employer was a past tenant at the Premises. Crisolago asked Sanghera if she wanted to buy a dry cleaning business. Sanghera advised that she was interested.

[18] On September 3, 2008, Crisolago met with Sanghera and her husband, Mr. Tirlok Sanghera, (the “Sangheras”) to confirm their interest in purchasing the dry cleaning business as soon as possible.

[19] On September 4, 2008, the Sangheras’ counsel contacted Crisolago’s counsel to further express an interest in purchasing the dry cleaning business located at the Premises.

[20] On September 8, 2008, the Sangheras, in trust for a corporation to be incorporated, offered to purchase the dry cleaning assets and business operated at the Premises. Crisolago accepted the offer on September 12, 2008. The purchase price was $225,000.

[21] On October 2, 2008, Crisolago and the corporation incorporated by the Sangheras, 2185451 Ontario Inc., entered into a lease for the Premises. The lease was for a five-year term with one five-year option to renew. Base rent started at $4,500 per month plus taxes and rose steadily every year up to $5,469.78 per month plus taxes in thefifth year.

Analysis

A. Liability

[22] The plaintiff does not deny that the plaintiff’s rights and the defendant’s obligations under the Lease were legally terminated effective August 15, 2008. Rather, the plaintiff submits that Amersey voluntarily terminated her rights only because Crisolago stated that he intended to operate the dry cleaning business himself. As Crisolago had no intention to operate the business himself, he tricked Amersey to give up her right of first refusal under the Lease. In doing so, the defendant breached the duty of good faith it owed to the plaintiff as its bargaining partner and deceived Amersey into signing away her rights under the Lease.

[23] The plaintiff’s theory is that on March 20, 2008 when Crisolago spoke to Amersey about renewing the Lease, and thereafter consulted his lawyer, Crisolago learned that he could sell the business a second time if he represented to Amersey that he would operate it himself. To this end, the plaintiff relies on the following:

1. Crisolago’s intention to operate the business himself is not consistent with his discussion about renewing the Lease in March 2008

2. It is improbable that Crisolago would meet Sanghera on the street days after the expiry of the Lease and have a brief discussion that results in the sale of the business shortly thereafter

3. The defendant’s business registration is effective September 9, 2008.

[24] I have concluded that the plaintiff’s position, although sound in law, fails on the facts of this case. There is no evidence to conclude on a balance of probabilities that Crisolago told Amersey he wanted to run the business himself to defeat her right of first refusal under the Lease. There is also no evidence to conclude on a balance of probabilities that Crisolago did not fully intend to run the business, as he stated to Amersey.

1. March 2008 discussion to renew the Lease

[25] Amersey and Crisolago agree that, in the brief discussion on March 20, 2008, Crisolago offered a monthly amount to renew the Lease and Amersey said she could not afford it. In my view, it is not unreasonable for Crisolago to thereafter consider operating the business himself. He operated the dry cleaning business at the Premises prior to the Lease. He was under no obligation to negotiate the terms of a renewal with Amersey. The first right of refusal is triggered in the event the defendant agreed to lease the Premises to a different tenant. There is no evidence during the term of the Lease that Crisolago pursued a different tenant for the Premises.

2. Sanghera

[26] The defendant called Sanghera as a witness. She is a disinterested party. I find her evidence to be credible and I accept it.

[27] There is no evidence that Crisolago and Sanghera conspired to defeat the plaintiff’s right of first refusal in the Lease.

[28] Sanghera described her failed attempt to purchase a Mississauga-based dry cleaning business in June 2008. The agreement to purchase Spencers Cleaners for $100,000 was signed June 4, 2008. The deal did not close as scheduled on June 30, 2008. Sanghera was concerned about a term in the lease that permitted the owners to move the business to a different location at their discretion and her expense. Sanghera states that, after the failed attempt, she was actively looking to purchase a dry cleaning business.

[29] Sanghera describes running into Crisolago on September 2, 2008. Because Crisolago was operating the business by this time, he and Sanghera worked down the street from each other. Crisolago asked her if she was interested in buying his business. She did not know if he was joking but told him she was interested. Sanghera wanted to move quickly. She purchased the business at the first purchase price offered, without seeing its financials, assessing its operations, or valuing the equipment. In her mind, none of this was necessary. She ignored her lawyer’s advice to have the equipment valued.

[30] Sanghera explains that she worked in the dry cleaning business on Summerhill Avenue from the time she was 17 years old. She knew Crisolago’s business did well. Close to half of her required financing was already in place from the failed attempt to purchase Spencers Cleaners. Her mother assisted with the remaining required financing.

[31] During her evidence at trial, Sanghera was honestly mistaken about what she paid for Crisolago’s dry cleaning business. Her review of the relevant section of the Offer to Purchase did not assist her confusion. Sanghera presents as an honest, hardworking person with little patience for paperwork or formalities. I accept her evidence that, given her experience in the dry cleaning business on Summerhill Avenue, she saw no need to exercise the formalities custom to this type of transaction. Rather, she was comfortable moving forward based on instinct and experience.

[32] Crisolago’s intention to sell the business cannot be inferred from Sanghera’s actions. Sanghera was motivated for her own reasons. There is no evidence that Crisolago knew Sanghera was actively looking to purchase a dry cleaning business. There was no reason for him to ask her if she was interested in purchasing a business other than in jest, speaking to a longtime neighborhood dry cleaning employee, upon recently taking over the dry cleaning operations again after many years.

[33] Crisolago was not actively engaged in selling the business he assumed days earlier. There is no evidence that he was working with a real estate agent, had retained counsel, or that he contacted people in the industry to inquire about a potential sale. Rather, the evidence is that he took over the operations, as he represented to Amersey. He had retained two of the plaintiff’s previous five employees and was at the business in operation on September 2, 2008.

[34] Crisolago is quite fortunate that Sanghera was actively seeking to purchase a dry cleaning business. Once he understood how motivated she was, it is not unreasonable that he would decide to no longer run the operations himself, but rather to facilitate the sale on his own terms with a highly motivated purchaser.

3. Business Registration

[35] The plaintiff submits that the defendant’s business registration form was not filed until September 9, 2008. The plaintiff suggests that the registration was made only to facilitate the sale to Sanghera. If Crisolago intended to operate the business himself, he would have registered it soon after August 15, 2008 when he signed the agreements to take the business back.

[36] Crisolago states that he applied for registration prior to September 9, 2009, the effective registration date. In my view, given the compressed timing of the respective transactions, the registration date is not determinative of Crisolago’s intention to operate or sell the business.

[37] For reasons set out above, I conclude that the evidence fails to establish on a balance of probabilities that the defendant breached the duty of good faith it owed to the plaintiff as its bargaining partner and deceived Amersey into signing away her rights under the Lease. As the plaintiff has not met its onus, the claim must fail.

B. Damages

[38] I will comment on the quantum of damages independent of my findings on liability as set out above.

[39] The plaintiff suggests that the sum of $190,000 is a reasonable amount for damages. The assessment is the result of subtracting what the defendant paid the plaintiff ($35,000) from what the defendant received from the Sangheras for the dry cleaning business ($225,000). The plaintiff admits a small contingency is appropriate considering Amersey’s reduced bargaining position with the Sangheras given the pending expiry of the Lease.

[40] The plaintiff submits that its assessment is logical. Had Amersey matched the Sangheras’ lease, Crisolago would have received the same rental payments and he would not have received the $225,000. Crisolago should not now benefit from “scooping the business in a fire sale”. If Amersey could not have afforded the Sanghera lease, she could have sold the business to the Sangheras.

[41] The defendant submits that the plaintiff’s suggested damage assessment is flawed.

[42] First, the defendant submits that damages should place Amersey in the same position as if the Lease had been performed. After selling the business to Crisolago, Amersey secured employment at a higher hourly rate. However, she reduced her employment hours from 73 hours per week to 37 hours per week. Amersey failed to mitigate her loss. Had she not reduced her hours, her post-Lease employment income would have been greater than her employment income from her dry cleaning business on the Premises. Considering Amersey’s failure to mitigate, the plaintiff has suffered no loss.

[43] Second, the defendant submits that its payment to the plaintiff of $35,000 has made Amersey whole. Assuming no mitigation issues, Amersey’s lost employment income is $89,000; this is the difference between her post-Lease income and her employment income from her business on the Premises. Had the plaintiff assumed the terms of the Sanghera lease, she would have paid the defendant additional lease costs of $57,000. The difference between Amersey’s lost employment income and the additional lease costs is $32,000. She was therefore made whole when the defendant paid her $35,000 for the business.

[44] Had the plaintiff successfully proved liability, this would not have been a straightforward case of damages for breach of contract. Rather, there would have been a finding that the defendant acted in bad faith in deceiving or tricking Amersey into terminating her contractual rights. The damage claim must be assessed with two goals in mind: (i) the plaintiff should not be denied its loss, as difficult as that may be to calculate and prove and (ii) the defendant should not reap a reward as a result of its nefarious bad faith conduct.

[45] In my view, although not perfectly precise, the most reasonable way to achieve both goals is to accept the plaintiff’s submission and award damages at $190,000, with a discounted contingency of $15,000, balancing the Sangheras’ negotiating leverage with their demonstrated motivation to purchase the dry cleaning business.

Disposition

[46] For reasons noted above the plaintiff’s claim is dismissed.

Costs

[47] The parties are encouraged to agree on an appropriate cost award for this action. If they are unable to agree, I will receive written submissions of no more than two pages. The defendant shall submit first within 30 days of the release of my reasons for judgment. The plaintiff shall submit within 20 days thereafter.

CHIAPPETTA J.

Date: December 12, 2013