COURT FILE NO.: 15-64821

DATE: 2015/09/16

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

OSTERIA DA LUCA INC. and EMILE ETOTA

Applicants

– and –

1850546 ONTARIO INC. MIN ZHAO and JASON YAO

Respondents

Dr. Séverin Ndéma-Moussa, for the Applicants

J.F. Lalonde, for the Respondents

HEARD: July 9, 2015 (at Ottawa)

REASONS FOR JUDGMENT

Kane J.

[1] The applicants commenced this application on June 26, 2015, wherein Osteria Da Luca Inc. (“Osteria”) seeks:

(a) A declaration that Osteria’s lease of commercial premises, consisting of suites 106 and 107, 2208 St. Joseph Boulevard, Orleans, Ontario (the “Premises”), from the owner respondent 1850546 Ontario Inc. (“185”) be renewed for 5 years, commencing July 1, 2015;

(b) An order obliging Osteria and 185 to complete their negotiations, which began March 2, 2015, as to the renewal of the subject lease, which were unilaterally terminated by 185;

(c) A declaration that the amount of monthly rent payable to 185 is $3,858.58, plus a minimum interest as established by the Province of Ontario;

(d) An order prohibiting 185 from interfering with Osteria’s occupation of the Premises for a minimum of 18 months, to permit such tenant to locate alternate commercial space on St. Joseph’s Boulevard, Orleans, relocate its equipment to such new premises and advise its clientele;

(e) Damages of $1,000,000; and

(f) Exemplary and punitive damages of $250,000 and $50,000 respectively.

[2] In argument today, Osteria seeks:

(a) Possession of the Premises commencing July 1, 2015;

(b) An order granting Osteria possession of the Premises for at least 18 months to find alternate accommodation and relocate itself and its equipment to that new location; and

(c) Confirming Osteria’s claim for damages or $434,000 damages.

[3] Osteria on June 30, 2015, without notice, sought and obtained a 10 day interim, interlocutory injunction from Labrosse J. which provides that:

(a) 185 had been avoiding service of the application;

(b) Osteria is permitted in the interim to remain in possession of the Premises;

(c) 185 is prohibited from interfering with such tenant’s possession during such interim period;

(d) Osteria is required to pay rent for the month of July, 2015, on or before July 3, 2015;

(e) Osteria was to serve the Notice of Application on 185; and

(f) Adjourns the matter to July 9, 2015.

CURRENT MOTION

[4] On the return of this matter today, the individual applicant filed an affidavit on behalf of Osteria. No notice of motion was filed for today.

CROSS-MOTION

[5] 185 presented a cross-motion in which it seeks:

(a) An order terminating the lease between itself and Osteria, effective June 30, 2015; and

(b) Summary judgment dismissing this application.

[6] The grounds relied upon by 185 are:

(a) The commercial lease between the parties commencing November 8, 2013, terminated on June 30, 2015;

(b) 185 was notified to vacate the Premises on the expiration of the Lease;

(c) 185 entered into a lease of the Premises with a new tenant, commencing July 1, 2015;

(d) 185 is over holding despite notice to vacate the Premises;

(e) Section 74 of the Commercial Tenancies Act, R.S.O. 1990, c. L.7; and

(f) Section 1 of the Statute of Frauds, R.S.O.1990, c. S. 19.

BACKGROUND

[7] The Premises were previously owned by 1503886 Ontario Inc. (“Original Owner”).

LEASE #1

[8] The Original Owner on May 5, 2010, leased the Premises to 1799717 Ontario Inc. (the “Original Tenant”) pursuant to a written lease for a term of 5 years, commencing July 1, 2010 and ending June 30, 2015 (“Lease #1”).

[9] Lease #1 granted an option to the tenant to extend the June 30, 2015 expiration date for a further 5 years, conditional upon:

(a) The Original Tenant paying rent as due;

(b) The Original Tenant performing the covenants in the Lease #1;

(c) No event of default occurring by the Original Tenant;

(d) The Original Tenant providing written notice exercising such option to renew the Original Lease, no early than 18 months prior to June 30, 2015, and no later than 12 months prior to June 30, 2015 (the “Extension Notice”); and

(e) At a minimum rent during the renewal period to be agreed upon within 45 days after the Extension Notice. Failure to so agree as to the new minimum rent would result in termination of the right to renew the lease term.

LEASE #2

[10] 185 purchased the property from the Original Owner in 2012. Shortly thereafter, Osteria began to operate a restaurant in the Premises.

[11] Osteria and 185 entered into a contract entitled “Lease”, of the Premises dated November 8, 2013, (“Lease #2”). It provides that the term thereof, commences October 8, 2013 and ends June 30, 2015, which is the remaining original lease term in Lease #1.

[12] In argument, the parties accept that Lease #2 is the lease in issue. Neither party argued Lease #2 is an assignment of Lease #1 containing the latter’s right of renewal commencing July 1, 2015.

[13] Osteria had no right of renewal under Lease #2.

[14] Osteria’s right to a new lease term is dependent therefore upon it and 185’s agreement to such a lease.

LEASE NEGOTIATIONS

[15] Osteria wrote 185 on January 6, 2015 and asked for a meeting. Mr. Etota states the purpose of the meeting was to discuss whether the size of the Premises could be increased. The purpose of the meeting in the portion of the email attached to his affidavit does not say that. It merely states the meeting is to discuss “the future of the restaurant”.

[16] 185 in an email dated February 17, 2015, reminded Osteria that the “LEASE” ends June 30, 2015 and seeks confirmation ASAP whether the tenant “would like to extend the LEASE for another term or not, so that 185 could either prepare a new LEASE or get ready for a new tenant”.

[17] Osteria responded on February 23, 2015 that it wished to remain in the Premises and asked for a meeting with 185.

MARCH 2, 2015 MEETING

[18] At the meeting between the parties on March 2, 2015, Osteria indicated that it wished to rent the Premises for another 5 years, commencing July 1, 2015, but asked if more space could be provided. 185 undertook to inquire whether a tenant adjacent to the Premises (“Tatoo”) would relocate.

[19] Tatoo in an affidavit confirms that 185 asked whether Tatoo would agree to relocate in March 2015.

[20] Tatoo refused that request of the landlord in an email to Mr. Yao on March 13, 2015. That is important as to what was discussed and agreed upon on May 1, 2015. Specifically, 185 knew on May 1, 2015 that the space occupied by Tatoo was not available for Osteria.

MAY 1, 2015 MEETING

[21] 185 and Osteria met on May 1, 2015. Osteria states that at this meeting:

(a) Its lawyer was in attendance;

(b) 185 advised that the space rented by Tatoo would not be available to Osteria;

(c) Notwithstanding the unavailability of the Tatoo space, Osteria stated it wished to continue renting the Premises; and

(d) 185 in reply stated it would have its lawyer prepare and forward a new lease of the Premises for Osteria’s execution.

[22] The allegation by 185 that any offer to lease by Osteria on May 1, 2015 was conditional upon inclusion of the space occupied by Tatoo is neither credible nor accepted.

[23] Osteria states that between January and May, 2015, neither party indicated that the Premises would not be leased to or rented by Osteria after June 30, 2015.

JUNE 1, 2015

[24] Osteria states it learned on or about June 1, 2015 that 185 had decided to rent the Premises to one of its former employees. Osteria thereupon telephoned 185 to communicate and discuss this information.

[25] Osteria sent two emails to 185 on June 1, 2015. The first one is short and states:

(a) Osteria thereby confirmed in writing its wish to renew the lease of the Premises; and

(b) Osteria was still waiting for the lease renewal document from 185 as promised at the May 1, 2015 meeting.

[26] After speaking to one another, Osteria sent a second email to 185 to the attention of Mr. Yao:

(a) Confirming their conversation that date;

(b) Confirming Osteria’s decision to renew its lease of the Premises for 5 years, as stated at and agreed to by 185 at their May 1, 2015 meeting;

(c) Stating that 185 gave an undertaking on May 1, 2015 to prepare and provide a new 5 year lease of the Premises to Osteria, containing all other terms without amendment of Lease #2. The new lease as promised May 1, has not been provided;

(d) Osteria learned on June 1, 2015 that 185 had been requested to lease the Premises by a friend of a former employee of Osteria, Luca Lafortune, or Mr. Lafortune himself. Osteria states Mr. Lafortune has disclosed or used information obtained in his Osteria’s employment and had also misappropriated some $20,000 from Osteria during the first 5 months of 2015; and

(e) Osteria expressed its understanding that their conversation that day had cleared any misunderstanding and Osteria awaited receipt of the above new lease from 185.

[27] In its affidavit, Osteria states that Mr. Etota telephoned and spoke to Mr. Yao on June 1, 2015 because he had learned that not only had 185 been asked, but 185 had agreed to rent the Premises to a party presented by Mr. Lafortune to the landlord.

[28] Osteria states that 185 did not reply to these two emails, nor did it deny the above summary of the agreement of the May 1, 2015 meeting between the parties. The only response received from 185 was that Osteria should calm down and not get excited.

[29] Osteria states it heard nothing further from 185, until receipt of a written notice from that landlord on June 22, 2015, which:

(a) Is entitled Notice of Termination of Lease;

(b) Is pursuant to paragraph 3.2 of the lease; and

(c) Requires Osteria to vacate and deliver up vacant possession of the Premises to 185 on June 30, 2015, failing which 185 will commence legal proceedings to recover possession.

[30] Osteria alleges:

(a) Mr. Lafortune was the only employee who knew of Osteria’s June 30, 2015 lease maturity date and its negotiations with 185 to renew the lease for 5 years effective July 1, 2015;

(b) Mr. Lafortune used this information for his own benefit by presenting his friend Scott Dunsford and they together caused the new tenant to be incorporated, pursue, obtain and execute a lease of the Premises; and

(c) Osteria spent $120,000 to renovate the Premises since October, 2013, including construction of a new kitchen, a new bar, new ceramic, a new washroom and changed the ceiling.

[31] Osteria subsequently learned that 185 signed a 5 year lease of the Premises with 2467786 Ont. Ltd., carrying on business as Casa Da Luna, (versus Osteria Da Luna) of the Premises, commencing July 1, 2015, for a base rent equal to that in Lease #2 and which includes a 5 year renewal option (“Lease #3”).

POSITION OF 185

[32] In its cross-motion for summary judgment, 185 alleges that:

(a) Lease #2 is the lease to Osteria;

(b) Mr. Etota “use to operate 1799717 Ontario Inc.”, the Original Tenant in Lease #1;

(c) The Original Tenant and then Osteria have consistently been in arrears of rent (four instances thereof are prior to the commencement of Lease #2); and

(d) Due to the problems with this “tenant”, 185 decided, on an unstated date, to rent the Premises to a new tenant pursuant to a lease dated and executed on June 15, 2015.

[33] The affidavit of 185 on its cross-motion attaches the application and affidavit of Osteria which include the above applicants’ allegations as to Osteria and 185 agreeing to a 5 year lease on May 1, 2015 and the June 1, 2015 emails from that tenant citing that agreement and the landlord’s undertaking to prepare a new 5 year lease to Osteria on the same terms. Despite attaching these allegations, 185, in its supporting affidavit, makes no comment about the alleged May 1, 2015 verbal agreement to lease the Premises to Osteria.

[34] 185 did present a further affidavit from Mr. Zhao, one of its principals, during argument of these motions which states:

(a) Osteria’s request at the March 2, 2015 meeting between the parties to expand its rental space to include the Tatoo premises “was a precondition to renew the lease”;

(b) 185 was represented at the March 2, 2015 meeting by Mr. Zhao of 185 and its property manager, Mr. Yao;

(c) Osteria’s lawyer attended the meeting of the parties on March 2, 2015 and not the meeting of May 1, 2015, together with Mr. Lafortune, Osteria’s former employee manager, and Mr. Lafortune will confirm that getting the Tatoo space was a condition precedent to Osteria’s new 5 year lease;

(d) 185 was represented at the May 1, 2015 meeting by its property manager, Mr. Yao who states in an email that he spoke to Osteria about the possibility of a new lease of the Premises but made no commitment thereto on behalf of the owner and told Osteria on May 1, 2015, or previously, that the landlord’s approval would be required;

(e) Mr. Lafortune has agreed to provide information to and assist 185; and

(f) As the lease to Osteria was not renewed (no dates as to who made that decision or when), discussions were held with other potential tenants of the Premises, (no names or dates of discussions are provided).

[35] 185 does not allege that it advised Osteria between May 1 and June 21, 2015, that the 5 year lease renewal of the Premises as proposed at the May 1, 2015 meeting, was rejected by 185 prior to June 22, 2015.

[36] 185 does not deny receiving the two June 1, 2015 emails from Osteria stating that the parties on May 1, 2015 agreed to lease the Premises to Osteria for 5 years commencing July 1, 2015 on the existing terms.

[37] 185 does not deny that:

(a) Its first notice to Osteria rejecting its May 1, 2015 proposal to lease the Premises for 5 years on the existing terms; and

(b) Its first denial of the June 1, 2015 email statement of Osteria that a verbal agreement was made on May 1, 2015, to lease the Premises for another 5 years on all other terms of Lease #2 to Osteria and to prepare and present such a lease to that tenant for execution;

were not communicated to Osteria prior to it sending its June 22, 2015, Notice Of Termination to vacate the Premises in 8 days.

[38] Despite filing two affidavits, 185 does not address or deny the relationship between Messrs. Lafortune and Dansford, the principal in the new tenant corporation, Mr. Lafortune’s introduction of Mr. Dansford as a possible tenant to 185 or Mr. Lafortune’s role in relation to the corporate tenant in Lease #3.

[39] 185 submits in argument that:

(a) It negotiated terms of a new lease with Osteria but never committed to the same orally or in writing;

(b) The lease of the Premises to Osteria ended June 30, 2015; and

(c) No agreement as to an interest in land is enforceable unless agreed to in writing and signed by the parties or their authorized agents. Leases of land must be in writing: Statute of Frauds, R.S.O. 1990, c. S.19, ss. 1 (1) and (2).

[40] Mr. Yao’s July 8, 2015 email addresses the May 1, 2015 meeting between the parties. As property manager in attendance at that meeting, he does not deny Osteria asked to lease the Premises for 5 years on the existing terms in Lease #2. Mr. Yao simply states that he did not accept that offer to lease nor make any promise of such. He states if Osteria believed such a verbal agreement was made on May 1, 2015, the tenant knew it was conditional on the owner’s approval “which I told them already”.

[41] The above email “clarification” by Mr. Yao, as to the necessity to obtain owner approval:

(a) Could and should have but is not contained in his July 3, 2015 sworn affidavit;

(b) Is silent as to the allegation that 185 committed to prepare and present a lease on the other existing terms at the May 1, 2015 meeting;

(c) Is not confirmed in an affidavit from the corporate owner;

(d) Ignores why 185 remained silent and only announced its rejection of Osteria’s May 1 offer to lease on June 22, 2015;

(e) Does not say that Mr. Yao, in the conversation with Osteria on June 1, 2015, told that tenant that its offer to lease was rejected; that the tenant’s recorded understanding that the parties on May 1, 2015, agreed to the terms of a new 5 year lease was incorrect or conditional on the owner’s approval, which approval had or had not been granted; why no denial of the alleged agreement referred to in the June 1 email was ever communicated and provides no explanation why the owner waited until June 22, 2015 to announce the “termination” of Lease #2, effective 8 days later; and

(f) Why 185 and its property manager remained silent about all of the above.

[42] 185 knew at least by June 1, 2015 that Osteria understood new lease terms had been negotiated and agreed to. 185 knew Osteria was acting in anticipation of that verbal agreement. 185 knew that if it did not find another tenant acceptable to it, 185 had Osteria waiting to sign a new lease for the same base rent it negotiated and obtained from the eventual new tenant.

[43] When approached by Mr. Lafortune as to his friend renting the Premises, 185 felt no obligation under its existing contract and negotiations to disclose that to Osteria and advise the landlord was seeking a new tenant and Osteria should act accordingly.

[44] If 185 was unwilling to enter into a new lease with Osteria for past non-performance by that tenant, 185 choose to not divulge that position until it had a new tenant signed to a lease on June 15, 2015, and only revealed that one week later on June 22, 2015.

[45] The landlord remained silent and did not dispute the tenant’s understanding of their lease agreement because if negotiations with the new tenant were unsuccessful, 185 continued to have Osteria waiting to receive and sign a new lease and no commercial restaurant tenant could relocate in 8 days.

ANALYSIS

[46] Section 1 of the Statute of Frauds relied upon by 185 provides that every estate or interest of freehold to lands and tenements shall be in writing and signed by the parties and is otherwise only an estate at will.

[47] During argument, Osteria conceded it is no longer seeking a 5 year lease of the Premises. It stated instead that it needs to remain in the Premises another 6 months to relocate and windup its business in the Premises. Osteria accordingly is now seeking a 6 month injunction permitting it to remain in possession and complete its plans.

[48] The test for an interlocutory injunction requires:

1. A preliminary assessment as to the merits of the case to ensure that there is a serious question to be tried;

2. A determination whether the applicant would suffer irreparable harm if the application were refused; and

3. An assessment as to which of the parties would suffer greater harm from the granting or refusal of the remedy pending a decision on the merits.

[49] These three factors are not watertight compartments: the strength of one may compensate for the weakness of another. The overarching consideration is whether the interests of justice call for a stay: RJR Macdonald Inc. v. Canada (Attorney General), 1994 SCC 117, [1994] 1 S.C.R. 311 at p. 334; International Corona Resources Ltd. v. LAC Minerals Ltd. (1986), 21 C.P.C. (2d) 252 at p. 334 (Ont. C. A.) and Langley v. Canada (Attorney General), 2007 ONCA 149, 223 O.A.C. 102 (Weiler J.A, in chambers).

[50] There is no serious question to be tried as to a permanent extended lease. There is a serious question as to the misrepresentations by silence in allowing Osteria to remain in the Premises without knowledge that 185 would not enter into a new lease with it unless the landlord could not find and enter into a new lease with another tenant or as is the case, the landlord had found and leased to a new tenant.

[51] The Supreme Court in Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, determined that a duty of honesty in contractual performance is owed between parties to a contract. The Court initiated two incremental steps on this subject to the law of contract which are:

(a) Good faith contractual performance is a general organizing principle of the common law of contract;

(b) There is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations; and

(c) The result of these two steps is a law that is just, accords to the reasonable expectations of commercial parties and will enhance commercial certainty: Bhasin, para. 33.

[52] The Court held that:

(a) “Commercial parties reasonably expect a basic level of honesty and good faith in contractual dealings… a basic level of honest conduct is necessary to the proper functioning of commerce.”;

(b) The organizing principle of good faith requires contractual parties to:

(i) act honestly;

(ii) in good faith;

(iii) to have regard for the legitimate interests of the contracting partner;

(iv) not seek to undermine those interest in bad faith through lies or knowingly misleading the other party about matters directly linked to the performance of the contract; and

(v) This duty of honesty and good faith operates even where the parties have included an “entire agreement clause” and cannot be excluded by the parties (at para. 75); Bhasin, paras. 60, 65-66, 70, 73 and 75.

[53] The irreparable harm relied upon if Osteria is immediately forced to give 185 vacant possession includes:

1. the time needed to find and relocate to another location;

2. the loss of its $120,000 investment in upgrading the Premises;

3. the loss of its equipment which requires time to disconnect and relocate;

4. the loss of its liquor and operating licenses which are associated to the Premises and will require time to reapply for transfer to a new location;

5. its loss of clientele to the tenant in Lease #3, which includes Mr. Lafortune and his knowledge of the restaurant business at this location which the new tenant proposes to operate under a name similar to the applicants; and

6. the loss of income during the down time while Osteria finds, fits and opens a new premises in the area.

[54] There is no information before the court as to when the renovations amounting to some $120,000 were carried out, the past benefit thereof and therefore whether Osteria is entitled to any consideration in relation thereto.

[55] The election of 185 to remain silent in face of Osteria’s conduct and assertions from May 1 or June 1, 2015, should not operate to the benefit of 185 in the form of Osteria’s loss of equipment, inventory, clientele and revenue, where the only realistic outcome is the possible loss of business and potential bankruptcy, if Osteria must move immediately and is out of business for several months at least and is then limited to a possible claim for damages if it then has the financial capacity to pursue that lengthy remedy. The immediate loss of a business location, equipment, inventory and revenue often results in the termination of a business and the dismissal of employees.

[56] It is hard to imagine any restaurant business knowing it must vacate a property by June 30, 2015, taking no action during the last 2 months of its current lease to locate alternative premises, advertise its relocation and make moving arrangements including the removal of its equipment and inventory.

[57] The base rent under Lease #2 and #3 is the same. To the extent it is paid, the landlord is protected as to receipt of that from one tenant or the other.

[58] 185 has not alleged any claim by the tenant in Lease #3 if possession of the Premises cannot immediately be delivered to that new tenant.

[59] The newly incorporated tenant in Lease #3 has filed no affidavit evidence as to harm or inconvenience to it and has not yet gone into possession and incurred the costs in relation thereto.

[60] If 185 as of June 21, 2015 was not legally in a position to force eviction and deliver vacant possession to the new tenant on July 1, 2015, it should not be able to rely upon its default in signing Lease #3 or its failure on May 1 or June 1, 2015 to advise Osteria it must vacate the Premises by June 30, 2015, in the analysis of which party will suffer the greatest harm.

[61] On balance, the evidence establishes far greater harm if the current injunction is not extended is to Osteria, not 185, thereby supporting a continuation of the interim injunction.

[62] A three month extension of the term of Lease #2 to Osteria in the form of extending the interlocutory injunction is hereby granted, which shall expire on November 30, 2015, to permit Osteria’s orderly relocation to another location.

[63] 185 is not entitled to summary judgment as it has failed to present all relevant evidence to resolve central issues including:

(a) the May 1, 2015 meeting and what was agreed to thereat;

(b) what it did and did not do in response to Osteria’s June 1 emails asserting an agreement;

(c) when did it decide to not grant a new lease to Osteria?; and

(d) when and with what other potential tenants did it negotiate lease terms and when did it agree to the terms of lease with the tenant in Lease #3?

[64] 185’s version of the conditional result of the May 1 meeting is contradicted by Osteria.

[65] 185 has failed to address its silence between May 1 and June 21, 2015, in response to the allegations of the alleged May 1 verbal agreement to renew the lease and to present a new lease for signing to Osteria.

[66] There have been no cross-examinations on any of the conflicting affidavits.

[67] The above are central issues which require a trial, including the tenants’ claim for damages.

[68] An interlocutory 3 month injunction is granted. 185’s cross-motion for summary judgment to dismiss the proceeding is denied.

COSTS

[69] Any party seeking costs shall submit brief written submissions within 30 days for the date hereof. Any opposition thereto shall be in writing and submitted 20 days thereafter. Any reply to that shall be due 10 days thereafter.

Kane J.

Released: September 16, 2015

COURT FILE NO.: 15-64821

DATE: 2015/09/16

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

OSTERIA DA LUCA INC. and EMILE ETOTA

Applicants

– and –

1850546 ONTARIO INC. MIN ZHAO and JASON YAO

Respondents

REASONS FOR judgment

Kane J.

Released: September 16, 2015