Court File and Parties
COURT FILE NO.: CV-16-549999 DATE: 20160929 SUPERIOR COURT OF JUSTICE - ONTARIO
RE: 1575573 Ontario Inc., Plaintiff/Moving Party AND: Armaiti Inc., Defendant/Responding Party
BEFORE: S. F. Dunphy, J.
COUNSEL: B. Zinman, for the Plaintiff/Moving Party S. Toole, for the Defendant/Responding Party
HEARD: September 27, 2016
Endorsement
[1] The plaintiff tenant seeks to interpret a Restrictive Clause in its lease that provides “[n]o restaurant of a similar nature as to menu and eat-in seating facilities shall be permitted in the Plaza”. The plaintiff operator of a “Wimpy’s” 50’s-style diner franchise restaurant seeks to prevent its landlord from permitting a Tim Hortons franchise to operate in the subject plaza.
[2] Both the plaintiff tenant and respondent landlord are successors in title to the original landlord and tenant. Neither has much if any direct evidence as to the nature in terms of menu and eat-in seating facilities of the tenant at the time the subject clause was agreed to. Neither can shed light, directly at least, as to the context in which the Restrictive Clause was introduced into the lease.
[3] This case requires me to consider whether the Restrictive Clause is to be restrictively interpreted and whether it is to be construed as a static restriction (limited in scope to a comparison to the tenant’s business in 1991) or a dynamic restriction (evolving in scope along with the evolution of the tenant’s business).
[4] In the result I find that the business proposed to be conducted by Tim Hortons at the plaza in question is not of a similar nature as to menu and eat-in seating facilities when compared to either the Corner Restaurant operated by the then-tenant in 1991 or the Wimpy’s restaurant operated today. The Restrictive Clause does not prohibit restaurants generally, but only restaurants of a similar nature as to menu and eat-in seating facilities. The overlap in the menu items, to the extent this can be ascertained, is minor. The Corner Restaurant and Wimpy’s that succeeded it were/are sit down, table service restaurants with only incidental take-away facilities; Tim Hortons is a take-away restaurant with incidental self-serve seating capacity.
Procedural history and overview of facts
[5] The statement of claim seeks declarations that the Exclusivity Clause remains in full force and effect in the current lease (not contested by the defendant) and that it applies to prohibit the landlord from entering into a lease with Tim Hortons. The Notice of Motion seeks identical declarations pursuant to Rule 21.01(1)(a) of the Rules of Civil Procedure. Leave was granted to adduce evidence in support of the motion pursuant to Rule 21.01(2)(a) of the Rules of Civil Procedure.
[6] If there is a distinction to be drawn between proceeding with evidence in this fashion under Rule 21 and proceeding under Rule 20 of the Rules of Civil Procedure it is a fine one. Virtually the entire relief sought in the statement of claim is sought in this motion. Both parties filed such evidence as was available to them. As comparatively recent successors in title to the original landlord and tenant who entered into the subject lease decades earlier, their access to direct information was limited. However, each made an effort to locate such fact witnesses as appeared likely to have evidence to offer. I have accordingly treated this as being similar to a motion under Rule 20 of the Rules of Civil Procedure because the issue being argued is dispositive of substantially all of the matters at issue in the claim, leave to file evidence has been granted and no party has suggested that only a trial will permit a fair disposition of the limited evidentiary questions raised by the evidence.
[7] I have accordingly assumed that both parties put their best foot forward and I have considered whether the interest of justice requires a full hearing by way of trial with viva voce testimony in order to make the necessary determinations. I conclude that this is not the case – the facts of 25 years ago (and more) will not likely be brought into better focus with viva voce testimony but considerable expense and delay would be entailed in putting the parties on hold until then. The defendant either has signed or shortly will sign a lease with Tim Hortons and its leased premises have been vacant for almost a year at considerable opportunity cost in large measure due to this simmering dispute. There is no basis to presume the evidentiary foundation on which I must proceed today will be altered materially by proceeding differently nor have any of the parties asked me to.
[8] I shall restrict myself to a summary review of the chronology affecting the subject lease, referring to more details as needed in discussing particular issues.
[9] The original lease was entered into on June 29, 1976. It is thus 40 years old. The only relevant provision of the original lease for present purposes is clause 4 that provided that the tenant’s business “shall be the carrying on of a Restaurant and Snack Bar, for no other purpose in accordance with municipal and provincial regulations”.
[10] The original lessee (Mr. Malakovski) died. Nothing of the business carried on by Mr. Malakovski is known. The lease was assigned to 437434 Ontario Limited, a company that the evidence indicates carried on business as the “Corner Restaurant” (the plaza was known as the “Corner Plaza”). The lease term was extended on two occasions, the last such occasion granting the lessee the right to an extension from July 1, 1991 until June 30, 1995.
[11] The Restrictive Clause is found in the July 1, 1991 agreement by which the lessee exercised its right to extend, although by agreement the extension was for a five year term in lieu of the four year extension right granted in 1987. In other words, the July 1, 1991 agreement was more than a mere unilateral exercise of a renewal or extension right by a tenant. Some bargaining appears to have been undertaken since the term was extended by a further year with agreements as to rent rates for the longer period. Clause 1 of the July 1, 1991 agreement contained various amendments and revisions to the lease itself. Clause 2 is the Restrictive Clause that I have reproduced in full above.
[12] There were a number of assignments thereafter by both landlord and tenant. The current tenant, 1575573 Ontario Inc. (or “Wimpy’s”) became the tenant by way of an assignment dated July 3, 2003. The current landlord Armaiti Inc. became owner of the plaza and assignee of the former landlord on April 1, 2008.
Evidence in relation to Coffee Time
[13] On April 21, 1995 the then-tenant and the then-landlord entered into an agreement (referred to as the “Coffee Time Agreement”). Clauses 1 and 2 of this agreement amended the lease to grant the tenant certain renewal options. Clause 3 contained an additional restrictive clause (not at issue in this case) providing that “during the term of the lease and any renewal or extension thereof, the Landlord will not permit another tenant in the Plaza to operate a licensed premise, carrying on the sale and service of beverage alcohol”.
[14] In addition to the three specific amendments listed, the agreement contained the following acknowledgement:
“The Tenant acknowledges and agrees that it will not object to the Landlord leasing space in the plaza known as Corner Plaza, to a coffee and donut shop, known as Coffee Time. Coffee Time Donuts Incorporated shall have the right to sell the items listed in its menu as attached hereto as Schedule “A”, but shall not have the right to sell breakfast items including but not limited to eggs, omelettes and pancakes, bacon and sausages as outlined in the current breakfast menu of Corner Restaurant”
[15] The attached Schedule contains a “Coffee Time” menu that includes the expected list of coffee, donut and muffin items. However, it also included various meat pies, sandwiches, croissants, soups and salads that might be associated with lunch, dinner or snack menus. Among the listed sandwiches is “Egg Salad”. The Schedule also indicates that “there will be approximately 40 seats (and up to 50 seats provided that municipal approval is obtained), layout to be determined”.
[16] Coffee Time operated in the plaza until late 2015 when it closed following a bankruptcy process. The defendant landlord has been seeking a new tenant to replace Coffee Time and has either entered into a new lease with Tim Hortons to open a restaurant or is on the verge of doing so.
Evidence in relation to other restaurants in plaza
[17] One of the lease renewal agreements entered into by predecessors of the parties was dated July 1, 2002. This agreement contained an acknowledgement similar to the Coffee Time Agreement referred to above in relation to “a Japanese and Korean style sushi restaurant providing sit-down facilities (as currently constituted)”. The agreement in that case also provided that “the said Tenant may serve alcohol beverages limited solely to Korean and Japanese wines, and in no event shall said Tenant be allowed to serve other alcoholic beverages such as beer, liquors and and regular table wines”.
2008-2009 negotiations between parties
[18] The current landlord and tenant negotiated their first lease renewal of March 17, 2009. There is nothing material to this claim contained in that agreement, however the parties have attached some importance to the negotiation process leading up to it.
[19] In the course of those negotiations, counsel for the plaintiff and the landlord traded claims and differing interpretations of the Restrictive Clause and the Coffee Time Agreement. The positions taken then are not dissimilar to the positions taken before me.
[20] By letter dated October 7, 2008, counsel for the tenant took the position that Coffee Time was prohibited from selling any breakfast items whatsoever and complained that Coffee Time has a number of breakfast items on its menu, suggesting that the tenant might have a damages claim to advance. The landlord’s counsel responded on October 23, 2008 with a copy of the Tenant’s Acknowledgement executed by the plaintiff at the time the defendant purchased the plaza and took the position that the plaintiff was thereby estopped from raising any issues with respect to Coffee Time that could have been raised at that time.
[21] This exchange of letters appears to have ended the matter. The lease renewal of March 17, 2009 makes no reference to the issue. I have recited the evidence for the sake of completeness but can find nothing probative to be taken from the analysis.
Issues to be determined
[22] Ought the Restrictive Clause to be interpreted restrictively?
[23] Does the Restrictive Clause operate from a static or dynamic perspective?
[24] What relevance if any may be attached to the “Coffee Time Agreement”?
[25] Is Tim Hortons of a “similar nature as to menu and eat-in seating facilities” compared to the Corner Restaurant operating in 1991?
[26] Is Tim Hortons of a “similar nature as to menu and eat-in seating facilities” compared to Wimpy’s operating today?
Analysis and discussion
(a) Ought the Restrictive Clause to be interpreted restrictively?
[27] The plaintiff submits that while restrictive covenants are generally treated as agreements in restraint of trade and construed restrictively, covenants such as the Restrictive Clause when found in leases for the benefit of tenants ought to be given a more benevolent reading, relying on the decision of Spence J. in Russo et al. v. Field et al., [1973] S.C.R. 466, 34 D.L.R. (3d) 704. Russo involved a restrictive covenant contained in lease of a store in a small suburban mall that was designed to ensure that the tenants of the mall did not compete with each other. The finding in that case was that “the prospective purchasers at the various shops which it is planned to attract are residents in the neighborhood”. In such a case, Spence J. found (at SCR p. 486) that “the disposition as a matter of public policy to restrictively construe covenants which may be said to be in restraint of trade has but little importance in the consideration of the covenants in the particular case” (emphasis added).
[28] Russo was clearly a case that turned on its particular facts. I draw from it the proposition that the public policy mandating a restrictive interpretation of clauses in restraint of trade is of greater or lesser force depending upon the actual effects of the relevant provision viewed in its proper context. In the present case, neither party has sought to adduce evidence as to the expected impact of the Restrictive Clause for the very good reason that neither has much in the way of concrete evidence as to the circumstances giving rise to its creation. The mall owner in Russo was apparently dealing with a localized market area and sought to maximize the ability of tenants to attract custom from the area without competing with each other. No evidence of market catchment basins is present in this case. There is no reason to presume that the patrons of this particular mall, located as it is on a major multi-lane arterial road (Shepherd Avenue) between two subway stops draws its patrons from the immediate neighborhood, North Toronto generally or elsewhere. On the other hand, this is a small strip mall and not a regional mall of the sort Spence J. referenced in Russo. On a spectrum of extreme restriction to no restriction, the Restrictive Clause is relatively narrow in scope. It does not bar competition generally nor does it prohibit all restaurants – only restaurants similar in nature having regard to the two criteria of menu and eat-in facilities are restricted.
[29] I find that the Restrictive Clause is to be construed neutrally as regards this public policy criterion. The Restrictive Clause is to be interpreted in accordance with the usual and ordinary meaning of the words used considered in the context in which they are found. The public policy against agreements in restraint of trade finds its expression here in the conclusion that ambiguity in such clauses that cannot be resolved by reference to the normal tools of construction ought generally to be resolved against inferring a greater restraint of trade than the parties have explicitly expressed.
(b) What relevance if any may be attached to the “Coffee Time Agreement”?
[30] In my view little if any useful purpose can be served in attempting to extrapolate from the Coffee Time Agreement to the lease itself. The Restrictive Clause must be construed as it was drafted and in the context then existing (in 1991). While it is certainly possible that the Coffee Time Agreement might be an instance of subsequent conduct of the parties that casts some light on to their probable intention at the time of the 1991 Agreement, this is not such a case. The evidence of the Coffee Time Agreement is simply too equivocal.
[31] Firstly, the Coffee Time Agreement contains a number of what are clearly new agreements for fresh consideration. It cannot be reduced to an arrangement predicated solely upon the views the parties then had of their rights under the 1991 Agreement. The Coffee Time Agreement contains agreements as to lease extensions (and lease rates), options for further renewals and the conferral of a new restrictive clause for the benefit of the tenant in relation to other tenants selling alcohol.
[32] Secondly, the Coffee Time Agreement came about almost four years after the 1991 agreement and involved a different tenant entirely. There is no reason to expect that the successor in title to the 1991 agreement could be expected to have had any particular insights into the common intentions of the parties in 1991 when it was not a party to the 1991 agreement.
[33] Thirdly, it cannot be said from this vantage point whether the parties drafted the acknowledgement for greater certainty or whether, to the contrary, both parties expected that Coffee Time’s lease would breach the Restrictive Clause and therefore effectively negotiated a waiver. Even if the acknowledgement were read as a negotiated waiver (and I do not conclude it was), it cannot be said from this vantage point what aspect of Coffee Time’s business may have be seen by the parties as coming near or crossing the line – its menu or its eat-in seating facilities? The then-tenant Corner Restaurant may well have negotiated menu restrictions with the leverage obtained by the proposed seating arrangements or vice versa.
[34] The Coffee Time Agreement is a particular agreement confined to a particular tenant: Coffee Time. It does not by its terms apply to Tim Hortons who is proposing to take over the vacant space. I have therefore concluded that no useful evidence as to the correct interpretation of the Restrictive Clause can be derived from a parsing of the Coffee Time Agreement, still less from a review of the inconclusive debate conducted between lawyers in 2008 in relation to it.
(c) Does the Restrictive Clause operate from a static or dynamic perspective?
[35] The plaintiff submits that I ought to construe the Restrictive Clause from a dynamic perspective such that the operations of the proposed tenant (Tim Hortons) ought to be compared against the current operations of the existing tenant (Wimpy’s) to consider whether the proposed restaurant is of a similar nature in terms of menu and eat-in seating facilities. In support of this submission, the plaintiff relied on a number of cases that held that such clauses were to be construed as of the present time: Captain Developments Ltd. v. McDonald’s Restaurants of Canada Ltd., (1988), 64 O.R. (2d) 341 (H.C.J.) and Luu v. Sinbads Hallel Meats.
[36] In my view, clauses in other agreements using different language and accomplishing different goals are of little utility in considering whether the Restrictive Clause in this case requires me to compare the proposed new tenant’s business to that carried on by the original tenant when the Restrictive Clause was agreed to or by current tenant. I prefer instead to start from first principles and simply construe the words used by the parties in the ordinary meaning having regard to the context in which they used them.
[37] I start with the words used in the ordinary meaning. The Restrictive Clause does not prohibit all restaurants. It merely prohibits the landlord from permitting other restaurants “of a similar nature as to menu and eat-in seating facilities”.
[38] Clearly the words used are capable of either a static or a dynamic interpretation. The comparison of the businesses of the existing and proposed tenants could be done as of the time of the proposed new lease or having regard to the business then being carried on. The language used does not preclude one or the other.
[39] I next turn to context for assistance in resolving the ambiguity.
[40] The Restrictive Clause is contained in an agreement of July 1, 1991 that extended the term of the original lease (as previously assigned to the then-lessee). The underlying lease being extended (from 1976) contained a clause restricting the businesses authorized to be carried on by the tenant to a “Restaurant and Snack Bar”.
[41] In my view, commercial common sense and the context of the lease in question tilt the balance towards a static interpretation of the Restrictive Clause. The public policy against agreements in restraint of trade also suggests that the ambiguity be resolved in favour of the less restrictive interpretation which in this case would be the static one since that generates greater certainty and less scope for expansion.
[42] The original lease contained only the lightest of restrictions on the nature of the restaurant operations of the tenant. Constrained only to carry on the business of a “Restaurant and Snack Bar”, the tenant or his successors in title was (and is) entirely free to alter the “nature as to menu and eat-in seating facilities” of the tenant’s business without hindrance from the landlord. It would thus seem unlikely that the landlord would have consented to grant the tenant the unilateral authority to expand the ambit of the Restrictive Clause through time by altering the nature of its business without any negotiation or requirement of landlord consent. Restrictive covenants operate to constrain the pool of potential tenants a landlord can look to in order to fill a vacancy or extract the highest value from the property. Even after granting the Restrictive Clause in 1991, the landlord retained the undoubted ability to grant leases to other restaurants. It would seem to me to be implausible to infer that the landlord intended to grant the tenant a unilateral right to restrict the landlord’s universe of potential future tenants beyond restaurants of a type that were within the reasonable contemplation of the parties when the agreement was actually negotiated and signed.
[43] The Restrictive Clause is not to be read as a blank cheque in favour of the tenant. The parties intended only to restrict the landlord from entering into future tenancies with restaurants carrying on businesses similar in nature as to menu and eat-in seating facilities to the business the landlord and tenant both had in contemplation when the agreement was entered into in July 1991. That business was the Corner Restaurant.
(d) Is Tim Hortons of a “similar nature as to menu and eat-in seating facilities” compared to the Corner Restaurant operating in 1991?
[44] The defendant landlord correctly points out that we have but little evidence to paint a picture of what the nature of business of the Corner Restaurant was in 1991 as to menu and eat-in seating facilities. The burden being upon the plaintiff to prove its case (that a least to Tim Hortons would violate the Restrictive Clause), the defendant submits that the plaintiff’s claim and motion must be dismissed.
[45] There is some attraction to this position. The tenant is taking the position that a lease with Tim Hortons would violate the Restrictive Clause that it claims the benefit of. It is for the plaintiff tenant to prove its case and, given the age of the Restrictive Clause and the fact that neither party was involved in its negotiation, no inferences of superior knowledge or records can be applied to shift the burden of proof. The plaintiff has adduced no evidence as to what the nature of the business of Corner Restaurant was in 1991 as to its menu or eat-in seating facilities. I cannot therefore reliably compare Tim Hortons to a now-closed 1991 business whose operations remain a cipher.
[46] In my view, some basic inferences about the nature of the Corner Restaurant can be made, even if cautiously. From the Coffee Time Agreement in 1995 as well as the 2002 renewal agreement, it would appear that Corner Restaurant had eat-in table service, a liquor license (suggesting afternoon and evening offerings) and a morning breakfast menu including such items as “eggs, omelettes and pancakes, back and sausage”. I make these inferences with some caution since the evidence supporting them is derived from agreements dated four and eleven years after the 1991 agreement and must therefore be open to some doubt as to how accurately they paint a picture of the 1991 business.
[47] About Tim Hortons considerably more can be said. It is not presently known exactly what table lay-out will be proposed by Tim Hortons. However, the evidence before me (of the business of an entity whose operations are so universally familiar to Canadians) is that Tim Hortons is primarily a take-out operation. Clients place their order from a menu visible in the store (an on-line version of which was in evidence) and pick their order up after paying for it. There is no table service and it is not licensed to serve alcohol. Clients may take their purchases away or choose to consume them at tables in the store. The number of seats to be arranged at this particular location is not known, but the evidence is that the seating area is generally relatively small. Full meals on plates are not offered. While eggs and bacon are available in some sandwich offerings, a plated meal of bacon and eggs is not.
[48] In argument, the plaintiff exerted most of its energy to comparing the breakfast offerings of Tim Hortons to those of Wimpy’s. That exercise is, in my view, at best part of the story. The Restrictive Clause does not refer to a portion of the menu but the menu as a whole. It does not refer to eggs, bacon or breakfast at all – those reference come from the (spent) Coffee Time Agreement.
[49] The Restrictive Clause does not bar restaurants generally and restaurants by their nature serve food. The nature of a particular restaurant business in terms of menu and eat-in seating facilities is not to be determined by a quest for the presence or absence of individual ingredients such as bacon or eggs. The nature of a restaurant business is to serve food after all. The task in my view is to assess the broader category of restaurant in relation to menu and eat-in seating facilities rather than to parse the contents of the larder to see what ingredients are used in a particular dish.
[50] If anything at all can be inferred about the nature of the menu and eat-in seating facilities of the now-defunct Corner Restaurant, it is that it had a full menu for a sit-down restaurant covering breakfast, lunch and dinner. Even if some food could be had in take-out format (and there is no evidence that this was so), the menu of such an establishment is not normally designed around take-out. Tim Hortons’ menu contains nothing at all resembling a dinner menu and, as noted, contains no “meals” per se so much as individual fast-food items that might be combined to form a meal. The menu is designed for the take-out market, even if the option of eating in is also available. It is not licensed to serve alcohol and has no wait staff. Its focus is clearly in the “fast food” segment with take-out rather than eat-in being the dominant form of transaction.
[51] In the world of restaurants that I must consider as the context of the agreement being construed here, an eat-in, sit-down restaurant and a take-out fast food restaurant are as different in nature from each other as two restaurants can be. In focusing on the “nature” of the restaurant by reference to the two categories, the Restrictive Clause is focused on the category of restaurant. The lines between categories of restaurants will never be cut and dried – some overlap may occur. The test is not whether there is any overlap or indeed any element of competition between them. The test is whether the true nature of the one is similar to the true nature of the other having regard to both criteria (menu and eat-in seating facilities). A fast-food restaurant focused on take-out with some eat-in facilities is of an entirely different nature than a full service, full menu restaurant.
[52] I therefore find that Tim Hortons is not of a similar nature to the Corner Restaurant in terms of menu and eat-in seating facilities and the defendant landlord is not barred by the Restrictive Clause from entering into a lease with Tim Hortons. Whether the business of Tim Hortons evolves in future in ways that might contravene the Restrictive Clause cannot now be said.
(e) Is Tim Hortons of a “similar nature as to menu and eat-in seating facilities” compared to Wimpy’s operating today?
[53] While I have found that the proper comparator for purposes of the Restrictive Clause is the business of Corner Restaurant in 1991, I have also considered whether the current business of Wimpy’s conducted by the plaintiff on the leased premises is of a “similar nature as to menu and eat-in seating facilities” when compared to Tim Hortons. On the evidence before me, I have concluded it is not.
[54] In my view, the operations of Wimpy’s are even farther removed from the nature of the business that I have inferred was operated by Corner Restaurant in 1991 when compared to the business of a Tim Hortons.
[55] Wimpy’s is a “theme” diner. Its décor contains prominent nostalgic 50’s-themed references, complete with period movie posters, vinyl albums and the like, as well as a large mural painting of the cartoon character after which the chain is named. The seating layout consists of booths, tables and a counter attended by servers. No take-out facilities are visible in the photos produced at least. The menu is a full menu of breakfast, lunch and dinner items. The price point is considerably higher than a typical fast food restaurant such as Tim Hortons. Hamburgers are a featured item while breakfast offerings are overwhelmingly of a “sit-down” nature (bacon and egg or omellette platters).
[56] Even if a dynamic interpretation to the Restrictive Clause were applied, I find that Wimpy’s current operations are of a very different nature as to menu and eat-in seating facilities when compared to Tim Hortons.
Disposition
[57] Accordingly, I dismiss the motion as regards the requested declaration that the “Exclusivity Clause restricts Defendant from entering into a lease with Tim Hortons (paragraph 3 of the Notice of Motion and paragraph 1(c) of the Statement of Claim. No dispute was raised as to the relief claimed in paragraphs 1 (a) and (b) of the Statement of Claim (paragraphs 1 and 2 of the Notice of Motion).
[58] I find that the Exclusivity Clause does not restrict the defendant from entering into a lease with Tim Hortons as its business is currently carried on. I can make no finding regarding any possible future evolution of the business of Tim Hortons that may make its business more closely resemble the nature of the business formerly operated by Corner Restaurant in terms of menu or eat-in seating facilities.
[59] The defendant has been successful on its motion and is entitled to its costs. The parties have reviewed each other’s outlines of costs and have agreed that $13,916 all inclusive is a reasonable figure to be awarded to the winning party payable by the losing party. I am accordingly ordering the plaintiff to pay the respondents costs fixed at $13,916.
[60] While the dispositions of this motion appear to substantially dispose of the entire statement of claim, I have not been asked to grant judgment by either of the parties and decline to do so. However, if my assumption that there is nothing left of the claim is accurate, it would be sensible for the parties to clean up the action with a consent order to its dismissal subject of course to any appeals that may be taken from this decision.
S.F. Dunphy, J. Date: September 29, 2016