Court File and Parties
Court File No.: CV-15-543354 CV-16-548229 Date: 2017-05-02 Superior Court of Justice – Ontario
Re: Wittington Properties Limited, Applicant/Respondent in CV-16-548229 And: GoodLife Fitness Centres Inc., Respondent/Applicant in CV-16-548229
Before: Pollak J.
Counsel: W. Kaufmann and D. Waldmann, for the Applicant R. Leach and M. Polvere, for the Respondent
Heard: February 28, 2017
Endorsement
[1] There are two Applications before this Court. The applicant, Wittington Properties Limited (“Wittington”), seeks an order for:
(a) a declaration that the respondent, GoodLife Fitness Centres Inc. (“GoodLife”) does not have the right to extend the Lease; (a) a declaration that the respondent has lost its entitlement to exercise the Further Option to Extend contained in section 4 of the Lease Amending and Extension Agreement (LAEA); (b) a declaration that the Lease expires on February 28, 2017; (c) GoodLife to deliver vacant possession of the premises on or before February 28, 2017 in accordance with the Lease; (d) leave to issue a writ of possession after March 1, 2017.
[2] In response, GoodLife makes its own Application for:
(a) a declaration: (i) that the Lease is in full force and effect; (ii) that GoodLife has validly exercised its Further Option to Extend the Lease Term with respect to the Leased Premises for a further period of five (5) years from February 28th, 2017 to and inclusive of February 28, 2022 (the "Extension Period"); (iii) a mandatory Order compelling Wittington to provide possession of the Leased Premises for the Extension Period, so long as the Tenant is not in default during the Extension Period; and (b) in the alternative and if necessary, an Order for relief from forfeiture; (c) in the further alternative, a declaration that, as a result of Wittington's own conduct and acquiescence, Wittington is estopped from relying on any alleged breach by GoodLife of the Lease and denying that the Tenant has validly exercised its Further Option to Extend.
[3] GoodLife’s position on these two Applications is that Wittington regrets a deal it made 20 years ago with GoodLife and is trying to force GoodLife to pay a higher rental rate by alleging that GoodLife is in breach of the Lease.
[4] GoodLife relies on the evidence of the president of Wittington, Tony Grossi, that Wittington has "been encouraging GoodLife to blend and extend and renovate their premises in conjunction with [Wittington's] expansion."
[5] In correspondence dated October 7, 2014, October 23, 2014 and December 29, 2014, Wittington's counsel notified GoodLife that it had lost its right to exercise the Option as a result of the various defaults they outlined. The breaches set out in the October 23, 2014 letter are the breaches that Wittington relies on in its Application.
[6] The question on these Applications is whether GoodLife has lost its option to extend the Lease as a result of the alleged ongoing breaches of the Lease.
[7] Both parties agree that these Applications are the appropriate way to resolve their disputes and both parties agree that there are no material facta of disputes.
[8] The parties agree that, as stated by the Ontario Court of Appeal in 1290079 Ontario Inc. v. Beltsos, 2011 ONCA 334, 280 O.A.C. 312, at para. 29, a breach "will not preclude a tenant from exercising an option to renew so long as the Lease is 'effectively clear' on the renewal date. If a landlord has a subsisting cause of action against the tenant that is rooted in the breach, the Lease is not effectively clear.”
[9] Wittington relies, in part, on the Ontario Court of Appeal decision in 1383421 Ontario Inc. v. Ole Miss Place Inc. (2003), 67 O.R. (3d) 161, which held that a tenant was not entitled to exercise its option to renew as a result of ongoing defaults. The Court also held that the landlord was not required to give the tenant notice of the default in order to rely on the default to invalidate the tenant's option to renew.
[10] In the correspondence of December 29, 2014, Wittington referred to the alleged breaches as follows:
“Our client again rejects your allegations of bad faith. It is reasonable for any landlord to expect its tenant to honour its Lease obligations.
The Tenant has repeatedly taken a cavalier attitude towards its Lease commitments. It is the Tenant who has exercised its contractual rights in a bad faith manner.
As you may be aware, the Landlord has inquired into the Tenant's reporting of Gross Revenue under the Lease. The Tenant's obligation under the Lease is to report all gross sales of the Tenant, whether for the Tenant's account, or for the account of any other person or business, and includes all Membership Fees and all sales of services originating from the Premises or from members whether performance is made from the Premises or elsewhere. It appears that, based the preliminary inquiries made by the Landlord's independent accountant, the Tenant has its own system for apportioning revenue among various clubs. Reallocations of revenue occasionally occur, and lump sum annual membership fees are amortized over visits. The Tenant takes an approach to reporting revenue that satisfies its corporate objectives but does not appear to satisfy the Tenant's obligations under the Lease.
Pursuant to Section 3.01 of the Lease, the Tenant's rental is effectively a percentage of Gross Revenue. This is due to the threshold rate (set out in Section 3.0l(a)) being a meaningless amount. Pursuant to Section 10.02, the Tenant agreed to continuously and diligently carry on business in a manner so as to produce all of the Gross Revenue which may be produced. The clear intent of the parties was that the radius limit within Section 10.03 would ensure that Gross Revenues would be as high as possible. Given the definition of Gross Revenue under the Lease, and the fact that all members of GoodLife can access all clubs, it is at minimum, inappropriate of the Tenant to apportion Gross Revenue as it sees fits among its portfolio of clubs.
Recently, it has been noted that in addition to the location previously operated by the Tenant at Delisle Court in breach of the Competition provision under Section 10.03 of the Lease, the Tenant continues to operate a location at 8 Park Road, Toronto. This location is also in violation of Section 10.03 of the Lease. It is undeniable that in the context of the Tenant's method of reporting Gross Revenue, the Tenant's operations at 8 Park Road, and its former operations at Delisle Court, have deprived the Landlord of rent by siphoning revenue away from the Premises.
As per our earlier correspondence, we continue to maintain that, in accordance with Section 4 of the lease amending and extension agreement dated February 7, 2007 (which states that to enjoy an option to extend, the Tenant must not be in default and must not have regularly been in default during the extended term beyond any applicable cure periods as set forth in the Lease), the Tenant is not entitled to further extend the term of the Lease.
The Landlord is very concerned that the Tenant has blatantly disregarded the Landlord's lawful rights under the Lease. Given the tenor of your correspondence, it seems that the Tenant intends to persist in ignoring the Landlord's lawful demands.
Under the circumstances, the Tenant is forcing the Landlord to commence an application for an accounting of all revenues; and (2) an order confirming the loss of the Tenant's entitlement to the extension option. Please confirm, and advise whether service on the Tenant of any materials in this regard should be made upon you or your designated external counsel.”
[Emphasis in original.]
[11] This warning from Wittington was given to GoodLife more than two years ago and is a good summary of Wittington’s position on these Applications. GoodLife has had ample notice of the alleged breaches.
The Alleged Breaches
a) Reporting of ‘Gross Revenue’
[12] The evidence of GoodLife is that “gross revenue” from membership fees is allocated to the club that a member uses most frequently, which is designated as the member's "home club". GoodLife does not determine gross revenue based on fees paid by members at the Premises. This revenue calculation is also adjusted. Wittington submits that this adjustment is not permitted by the definition of “Gross Revenue” in the Lease.
[13] Wittington relies on the evidence of Mr. Fleming, GoodLife's chief financial officer. He admitted that GoodLife does not report Gross Revenue in accordance with the terms of the Lease, as GoodLife does not determine Gross Revenue based on Membership Fees which originated at the leased premises. However, GoodLife has used its "home club" system for 17 years. Wittington denies having had knowledge of this method of calculation.
[14] At para. 40 of its factum, Wittington argues that Mr. Fleming also admitted GoodLife makes deductions which are not permitted in the terms of the Lease and that GoodLife therefore calculates revenue on a “net basis” rather than a gross basis.
[15] Wittington submits that this evidence proves that GoodLife has not been properly reporting Gross Revenue and that therefore it is not paying rent in accordance with the Lease. It submits this is a serious and ongoing breach of the Lease which goes to the very heart of the landlord and tenant relationship.
[16] GoodLife, however, relies on evidence of a calculation done by Mr. Fleming of the amounts payable pursuant to s. 6(i) and (ii) of the LAEA from March 2011 to November 2015 if calculated strictly as contemplated in the Lease. His affidavit evidence is:
“I have also completed a calculation of what amounts would have been payable pursuant to s. 6 (i) and (ii) of the LAEA for the years March 2011 to November 2015 if calculated strictly as contemplated in the Lease, which calculation is shown on Exhibit “L” attached herein. As shown on Exhibit “L”, the aggregate difference in the net amount owing using the two methodologies is only $13,367.72. This difference is equal to 10% of the revenue variance described in paragraph 41 as it relates to the Percent Rent calculation. This is a net accumulation for the years March 2011 to November 2015.”
[17] This evidence is relied on to support the argument that the breach is de minimis. At the hearing, counsel for GoodLife presented Wittington with a cheque for this amount, thereby submitting that they have cured this breach. Wittington however, relies on Mr. Fleming’s cross-examination to dispute the accuracy of his calculation. Wittington submits that his evidence does not explain the differences in the two methods of calculation I have referred to above and does not address the problems that are complained of with respect to the ultimate calculation of the rent.
[18] As GoodLife advances the de minimis argument, it is GoodLife’s burden to prove that it applies. I find that I do not have proper evidence to establish that the breach by GoodLife is de minimis or that GoodLife has remedied the breach by paying the amounts properly due.
[19] I do find that GoodLife has been and is in default of the Lease on the basis of Mr. Fleming’s evidence. I do not have the necessary evidence to establish the monetary value of the default. It should be remembered that this is not a trial or a motion for summary judgment but an Application pursuant to Rules 14.05(3)(d), (e) and (h) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194.
[20] In addition to this breach of the terms of the Lease, Wittington also alleges that GoodLife breached the Competition Provision in the Lease by operating two GoodLife Fitness Clubs in the “Restricted Area”. Namely, the Park Road Club and another club at 1521 Yonge Street ("Delisle Club").
[21] On October 7, 2014, Wittington's counsel notified GoodLife in a letter that as a result of its failure to close the Delisle Club, Wittington continued to be in default of the Lease beyond any applicable cure period, and that GoodLife "has lost its entitlement to exercise its option to renew the Lease".
[22] GoodLife then closed the Delisle Club on October 31, 2014. Wittington submits that such closure is evidence of GoodLife’s acknowledgement of its breach and its previous failure to remedy it.
[23] GoodLife however continued to operate their Park Road Club. In correspondence dated December 29, 2014, Wittington's counsel informed GoodLife that it continued to act in breach of the Competition Provision by operating the Park Road Club as follows:
“Recently, it has been noted that in addition to the location previously operated by the Tenant at Delisle Court in breach of the Competition provision under Section 10.03 of the Lease, the Tenant continues to operate a location at 8 Park Road, Toronto. This location is also in violation of Section 10.03 of the Lease. It is undeniable that in the context of the Tenant's method of reporting Gross Revenue, the Tenant's operations at 8 Park Road, and its former operations at Delisle Court, have deprived the Landlord of rent by siphoning revenue away from the Premises.”
[24] GoodLife submits firstly that the Non-Compete Area in s. 10.03(a) of the Lease applies only to "premier clubs". Section 10.03(b) of the Lease provides that any competing club in the Non-Compete Area will be a regular club and not a "premier facility" and "the facilities, services, equipment and ambiance will not be comparable with, nor as of a high standard, quality or ambiance as, those offered or available at the Leased Premises."
[25] GoodLife's position is that there is no violation of the Lease because the Park Road Club is a “regular club” and not a “premier club”. GoodLife relies on evidence that GoodLife only operates "regular clubs" and therefore "there are no distinctions at GoodLife between premier and regular clubs". It has however, no argument to counter the fact that the operation of the Delisle Club was in breach of the Lease.
[26] On the Applications, GoodLife also argues in the alternative, that if the geographic restriction applies, that the Park Road “fronts” on Bloor Street and does not therefore violate the Lease. GoodLife relies on Mr. Sorrell's affidavit in this regard. Wittington disputes the “regular club” argument and argues that there is no sign, entrance or any presence whatsoever on Bloor Street for the Park Road Club. The photographs show that Longos food store fronts on Bloor St. not the Park Road Club. The only sign for the Park Road Club is on Park Road above the entrance to the club. The address listed on the Tenant's website for the Park Road Club is "8 Park Road".
[27] Wittington submits that GoodLife continues to operate the Park Road Club in breach of the Competition Provision and that, as this is an ongoing breach of the Lease, the Tenant has lost its right to exercise the Option. Further, as mentioned above, Wittington relies on the fact that GoodLife breached the Lease by the operation of the Delisle Club. I agree with all these arguments advanced by Wittington.
[28] GoodLife’s defence is to rely on Wittington’s alleged bad faith. At para. 60 of their factum, they argue that “[n]otwithstanding the closure of the Delisle Club, Wittington has continued to take actions…to create a default situation under the Lease to coerce GoodLife to negotiate with Wittington to pay a higher rental rate”. In particular, they state that:
“(a) On October 7, 2014, GoodLife received notice from Wittington's counsel asserting that GoodLife was in default under the Lease for regularly remitting rental payments late, thus giving the Landlord further justification to allege that GoodLife had lost the right to renew the term of the Lease. No previous notice of such “default” or failure to regularly remit GoodLife's rental payment on time had been received, and no particulars of the payment that were allegedly remitted late were provided. On investigation, GoodLife was advised that the “late” rental payments related to invoices for utility chargebacks. There had been no change to the timeframes under which GoodLife paid such invoices, and no previous complaint had ever been received in respect of such timeframes. This letter was also delivered to the Subject Premises, even though Wittington was well accustomed to dealing with GoodLife's home office in respect of all administrative matters, and caused GoodLife's associates in that club unnecessary concern; (b) On November 5, 2014, GoodLife received a letter from Angela Park advising that Wittington was exercising its rights to review GoodLife's books and records of its Gross Revenue. Wittington was entitled to do so pursuant to the terms of the Lease, but had not exercised this right at any prior time during the Lease term; (c) On or about September 30, 2014, GoodLife received an email from Angela Park indicating that two of GoodLife's signs at the Subject Premises had to be removed – one on the exterior of the building and the other inside the centre facing the escalator. Ross was advised by Jeff Van Haeren, Director of Construction for GoodLife, that such signage has been in place since 2009 and was approved by Ian Newlands, Wittington's then property manager. Ms. Park continued to push for removal of the signage through February, 2015, notwithstanding Ross advising her that it had been previously approved, and the fact that it had been in place, without objection by Wittington, for years; (d) On December 29, 2014, Ross received a letter from Wittington's counsel alleging that GoodLife was in default under its Lease as a result of the operation of GoodLife's facility at 8 Park Road, Toronto. GoodLife commenced operations at the 8 Park Road location in or around May, 2007. The December 29, 2014 letter was the first time that Wittington took the position that GoodLife's operation of the 8 Park Road club represented a breach of the Competition Provision. (e) In that same letter dated December 29, 2014, Wittington's counsel, advises that “the Tenant is forcing the Landlord to commence an application for (1) an accounting of all revenues; and (2) an order confirming the loss of the Tenant's entitlement to the extension option”. She asks that Ross advise where service of such application materials be made. Ross responded to her by email on January 6, 2015 and advised that service of application materials would be accepted by GoodLife's external litigation counsel, Raymond Leach. Ross notes that (1) prior to receipt of the letter dated December 29, 2014, the Landlord had not at any time requested that GoodLife provide an accounting of revenues; and (2) no application materials were served until almost a year later, on December 23, 2015.”
[29] GoodLife also argues, in the alternative, that Wittington agreed to waive the competition radius clause as it previously consented to the operation of a fitness club by GoodLife within the restricted Radius.
[30] Further, it is argued that Wittington did not object to GoodLife's operation of the Delisle Club before June of 2014.
[31] GoodLife also takes the position that Wittington waived the alleged Radius breach through previous correspondence and Wittington's acceptance of rent of approximately $800,000.00 per annum for the Delisle Club. I do not accept any of GoodLife’s argument. I do not find that there is evidence to support the waiver argument. I find that GoodLife has not met its burden of proving that Wittington has waived its right to rely on the non-competition clause.
[32] GoodLife further relies on correspondence from Wittington to demonstrate “bad faith”. In an email dated October 2, 2014, Mr. Grossi states:
“…you and your company have assumed that closing the Delisle club will make the problem go away. If you sell the Delisle club, you are doing so because it is your decision to make as you yourself have deduced on your own that you are not in default. Without dialogue, you are making assumptions without knowing the facts.”
[33] I also find that GoodLife has been operating the Park Road Club in violation of the Lease. GoodLife has therefore not met its burden of proof to show that it was and is in good standing under the Lease. I therefore find that it could not exercise its option to renew the Lease.
Relief from Forfeiture
Tenant
[34] Finally, GoodLife requests relief from forfeiture pursuant to s. 20 of the Commercial Tenancies Act, R.S.O. 1990, c. L.7 asking this Court to use its discretion to grant relief from forfeiture.
[35] GoodLife relies on the case of Greenwin Property Management Inc. v Greenwin Tennis Courts Inc., 2003 CarswellOnt 5003. In that case, the Court also considered the factors important in determining whether the Court should exercise its discretion and grant relief from forfeiture. These include the conduct of both parties, such as the tenant's diligence to comply with the terms of the Lease, and the financial loss to the landlord.
[36] GoodLife argues that there is no financial loss to Wittington and that therefore, the reasonableness of the parties' conduct is important. They cite Cumming J. in Armenian Community Centre v. Morland Marketing Inc., 1995 CarswellOnt 6525 (Gen. Div.), at paras. 71 and 76 as follows:
“In Ross, supra, the Court of Appeal held that an essential condition for a tenant to meet for forfeiture relief is that he or she have made diligent efforts to comply with the terms of the lease. In Shiloh Spinners Ltd. v. Harding, [1973] A.C. 691 (H.L.) at 723-24, the House of Lords considered the meaning of "appropriate" circumstances to grant relief against forfeiture. It was held that "The word "appropriate" involves consideration of the conduct of the applicant for relief, in particular whether his default was wilful, of the gravity of the breaches, and of the disparity between the value of the property of which forfeiture is claimed as compared with the damage caused by the breach."
“A court will decline to exercise its equitable discretion in favour of an applicant if the applicant has failed to attempt diligently to comply with the terms of the lease; the applicant has failed to come to court with clean hands; the applicant has engaged in improper conduct; or the applicant has in any way attempted to mislead the court: Kochhar v. Ruffage Food (1992) 23 R.P.R. (2d) 200 (Ont. Gen. Div.); Dominelli Service Stations Ltd. v. Petro-Canada Inc. [1992] O.J. No. 1158 (Ont. Gen. Div.); rev'd [1992] O.J. No. 1823 (C.A.).”
[Emphasis added.]
[37] GoodLife argues that its conduct was reasonable in contrast to Wittington, which it says has acted “underhandedly and using thinly veiled threats in an attempt to bully GoodLife into forfeiting its rights under the Lease”. Wittington, of course, argues the opposite: notwithstanding a two year notice of its breaches, GoodLife has done nothing to remedy its breaches. I do not accept GoodLife’s argument that it has acted reasonably and that Wittington, by contrast, has acted in bad faith. GoodLife has known about its defaults of the Lease for at least two years and has not taken steps to remedy these breaches. Wittington asserted its legal rights pursuant to the Lease throughout this period.
[38] GoodLife argues that the Court should consider whether Wittington would suffer any financial damages or prejudice from GoodLife's breach. If the technical breach of a covenant does not cause Wittington serious financial loss or prejudice, then relief from forfeiture may be granted. GoodLife submits that the courts have held that 'technical breaches' are examples of where the Court should exercise its discretion and grant relief from forfeiture. As I have found that GoodLife has not provided this Court with evidence that their breaches are “technical”, I do not accept this argument.
[39] On the basis of the above, I order as follows:
(1) a declaration that the respondent, GoodLife Fitness Centres Inc. (“GoodLife”) does not have the right to extend the Lease; (2) a declaration that the respondent has lost its entitlement to exercise the Further Option to Extend contained in section 4 of the LAEA; (3) a declaration that the Lease expires on February 28, 2017; (4) GoodLife to deliver vacant possession of the premises on or before February 28, 2017 in accordance with the Lease.
Costs
[40] If the parties are unable to agree on costs, they may make brief written submissions to me no longer than three pages in length. Wittington’s submissions are to be delivered by 12:00 p.m. on May 10, 2017, and GoodLife’s submissions are to be delivered by 12:00 p.m. on May 17, 2017. Any reply submissions are to be delivered by 12:00 p.m. on May 24, 2017.
Pollak J. Date: May 2, 2017