COURT FILE NO.: 14-60497

DATE: 2018/03/07

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

846-6718 Canada Inc.

Plaintiff

– and –

1779042 Interior Ltd, 1447735 Interior Inc. and John Ackerman Defendants

H. Witteveen, for the Plaintiff

J.W.K. Griffiths, for the Defendants

HEARD: March 21 to 24, March 27 to 31, April 18 and 20, 2017 (at Ottawa)

REASONS FOR JUDGMENT

KANE J.

[1] This trial involves the plaintiff’s purchase of the assets of a bar and restaurant business, certain problems as to that asset purchase and numerous problems involving the premises where the business continued to be operated. The plaintiff seeks rescission of the asset purchase, return of that purchase price, termination of the lease, damages and judgment for $275,000 together with interest since issuance of this claim.

[2] The defendant 1447735 Ontario Inc. (the “Vendor”) owned and operated a restaurant and bar business under the name and style of “Buds On The Bay” (hereinafter referred to as “BOTB” and the “Business”) in a Premises located at 17 Broad St., Brockville Ontario (the “Premises”).

[3] The Premises was owned by the defendant 1779042 Interior Ltd. (the “Landlord”).

[4] The plaintiff purchased the physical assets of the Business and the right to carry on that commercial activity under its operating name, BOTB, (the “Assets”), pursuant to an asset purchase agreement (the “APA”) from the Vendor.

[5] Mr. Ackerman is the directing mind of both defendant corporations. He made the Vendor’s Asset sale in the APA conditional upon the plaintiff lease of the Premises from the Landlord. The terms of the lease restricted the use of the Premises to a restaurant, which was its then existing use.

[6] The plaintiff:

(a) purchased the Assets for $359,000 from the Vendor pursuant to the APA under which it paid $15,000 as a deposit, $200,000 on closing and $6,000 per month towards the remaining $144,000 balance;

(b) leased the Premises from the Landlord in order to carry on the Business pursuant to which it paid the Landlord monthly rent, HST and realty taxes which combined totalled $10,101 per month; and

(c) operated the Business in the Premises from mid-May 2013 until early April 2014 and then ceased operating the Business due to concerns as to the structural integrity, safety and state of disrepair of the Premises which included repeated instances of waste water backing up inside the Premises and water infiltration into the Premises.

[7] The plaintiff made all Asset purchase and lease payments from May 2013 to March 2014 and then announced it would pay no more until the Premise issues were remedied, failing which it cease operating the business and seek relief in this proceeding.

[8] The defendants in response took possession of the Assets, the Premises and continued thereafter to operate the Business in the Premises.

[9] The pleadings are broader however the parties at the conclusion of trial essentially seek determination of the following issues:

(a) whether the plaintiff is entitled to rescission of APA and recover damages in the amount of $275,000, being the amount it had paid under the APA by March 31, 2014 towards the purchase price of the Assets;

(b) whether the plaintiff is entitled to rescission or termination of the Lease;

(c) whether the plaintiff is entitled to $275,000 damages against the Landlord and Mr. Ackerman; and

(d) whether the Landlord by counterclaim is entitled to damages against the plaintiff in the amount of $123,955, being its estimated cost to repair and replace bathroom fixtures and water pipes allegedly damaged due to the lack of heating by the plaintiff during its possession of the Premises during the winter of 2013/2014.

STATEMENT OF CLAIM

[10] The plaintiff in its Statement of Claim issued on April 2, 2014, in anticipation of the defendants refusal to remedy the issues as to the equipment and Premise, sues the defendants in tort and contract. The plaintiff alleges the defendants are liable based upon:

(a) breach of contract;

(b) breach of an express or implied warranty;

(c) deceit;

(d) negligence;

(e) fraudulent misrepresentation; and

(f) negligent misrepresentation.

[11] In the claim, the plaintiff seeks:

(a) interim injunctive relief to prevent the Landlord and Vendor enforcing their rights under the Lease and APA respectively prior to the trial decision. This interim relief was not pursued before trial;

(b) in the alternative, an order directing the Landlord and/or the Vendor to carry out such repairs as are necessary to restore the plaintiff to safe occupation of the Premises leased within a reasonable period of time and relieving the plaintiff of any obligation to pay rent or instalments on the promissory note pending completion of this work. This head of relief was not pursued at trial; and

(c) a declaration that Mr. Ackerman is the directing mind of the Landlord and the Vendor and is personally responsible for the above defaults of each.

[12] The claim alleges that the Vendor:

(a) breached the express terms of the APA that the Premises and fixtures at the date of closing of the transaction were in a good state of repair, which was not the case as:

i. the condition of the Premises as reflected in the WESA and Belec Reports, were in a state of disrepair which had existed long before and on closing; and

ii. the plaintiff was required to carry out multiple repairs and replacement of equipment following closing.

(b) in addition or in the alternative, there was an implied warranty that the Premises and equipment leased and sold were fit to operate the normal business of BOTB, which implied they breached the warranty;

(c) in addition or in the alternative, the Vendor was or should have been aware of the seriously deteriorated but non-apparent state of the equipment, fixtures and the premises which would not be known to or discovered by the plaintiff. The Vendor accordingly had a duty to warn the plaintiff, failed to do so and is guilty of deceit; and

(d) in addition or in the alternative, the Vendor represented that the equipment, fixtures and the Premises were in a good state of repair when it knew or should have known this was not true and that the plaintiff might rely on and did rely these representations to its detriment. The vendor knew the representations were untrue, or was reckless as to their truth and is therefore liable for fraudulent or negligent.

[13] The plaintiff at trial submitted that:

(a) the Landlord had breached its covenant to provide the plaintiff with quiet enjoyment of the Premises;

(b) the Landlord had breached section 9 of the Lease requiring that the Premises and fixtures upon commencement of the Lease be in good working order;

(c) the Premises and fixtures in fact required extensive repairs and/or replacement before they could be safely used for their intended purposes;

(d) the Landlord breached its obligation to provide the plaintiff with quiet enjoyment and failed to rectify the problems arising from water infiltration and the failure of various mechanical systems in the Premises thereby materially impairing the plaintiff’s ability to operate the Business in the Premises; and

(e) the Vendor breached its contractual obligation in the APA by failing to:

i. transfer ownership of the Assets to the plaintiff;

ii. ensure that the Assets including equipment was in good working order; and

iii. ensure that the Premises and its fixtures were in a good state of repair.

[14] The plaintiff alleges that Mr. Ackerman:

(a) is the governing mind of the Landlord and as such, the Landlord is fixed with the same knowledge and the liability flowing from such knowledge as the Vendor;

(b) as the directing mind of the defendants’ corporations, authored all of the breaches by the Vendor and the Landlord;

(c) the corporate veil of those corporations should therefore be pierced; and

(d) Mr. Ackerman should be held personally liable for the misconduct by those corporations against the plaintiff.

[15] The plaintiff in seeking rescission of the APA, the Lease and damages equivalent to the $275,000 it paid under the APA alleges that:

(a) the defendants were negligent in not disclosing known issues as to the Assets and the Premises; and

(b) made dishonest, negligent, misleading misrepresentations and withheld known information as to the Assets and the Premises which were relied upon by the plaintiff to its detriment but for which, the plaintiff would never have entered into the AGA and Lease contracts.

[16] The plaintiff in seeking “rescission” of the Lease does not seek return of the 11 months of rent it paid thereunder which totalled $111,111.

[17] The plaintiff at the start of trial withdrew its claims for lost Business income and expenses caused by the defendants and its alternative remedy to oblige the Landlord and/or the Vendor to repair and restore the Premises to permit the plaintiff’s safe occupation.

Statement of Defence

[18] The defendants in their defence and at trial allege and submit:

(a) the Vendor fulfilled its obligation in the APA to ensure the Assets were in good working order on the date of closing and that obligation was a condition precedent to closing which merged on and did not extend beyond closing;

(b) the Premises was leased on an “as is” condition with no promise, representation or undertaking as to equipment and fixtures binding on the Landlord;

(c) the plaintiff breached the Lease by failing to heat and prevent damage to the Premises and is responsible for any complaints it had as to the Premises;

(e) the plaintiff during the trial acknowledged its principle complaints were as to the Premises and not the Assets purchased. The plaintiff accordingly is limited to claims against the Landlord, which does not extend to the APA or liability against the Vendor; and

(d) there is no basis to pierce the corporate veil of either defendant corporation and determine liability against Mr. Ackerman.

Counterclaim

[19] In argument at the conclusion of trial, the only counterclaim sought by the Landlord was $123,955 in damages, being the estimated cost to repair plumbing and bathroom fixtures allegedly damaged by the plaintiff’s failure to properly winterize those pipes and fixtures for the winter of 2013/2014.

Background

[20] The evidence is clear that Mr. Ackerman is the directing mind of the defendant corporations. He, in addition, is:

(a) the President of both defendant corporations;

(b) the only Director and shareholder of the Vendor; and

(c) is a Director of the Landlord Corporation. He stated his wife may be a second Director of the Landlord. The shares of the Landlord are owned equally by Mr. and Mrs. Ackerman.

[21] There are many troubling aspects and events regarding the parties, the Assets sold, the Premises leased and the testimony of several witnesses as to this conflict in this small Ontario community.

[22] Mr. Ackerman had worked in the Business since the early 1990s. He incorporated the Vendor and caused it to buy the Business in 2001 which it operated in the Premises until the plaintiff’s involvement in 2013. Mr. Ackerman in 2013 had full knowledge as to the state of the Business, its assets and the state of the Premises.

[23] Mr. Ackerman caused the Landlord Corporation to buy the Premises in 2008. In order to do that, he caused the Vendor, as owner of the Assets and the Business, to finance that purchase of the Premises for the Landlord/owner, namely the Vendor borrowed the $793,000 purchase price from its institutional lenders which was then advanced to the Landlord to pay its purchase price which it then owed to the Vendor as reflected in the Vendor’s 2010 financial statements.

[24] Mr. Ackerman testified that the Vendor then rented the Premises from the Landlord.

[25] The resulting long term debt thereby incurred for the Landlord’s purchase of the Premises consisted of a mortgage and three promissory notes from the Vendor to institutional lenders. The total monthly payments under those four loans by the Vendor was $7,500. That is the same base monthly rent later charged by the Landlord to the plaintiff under the Lease.

[26] There is nothing improper as to the above structuring of debt. This structure of the Vendor borrowing from its lenders for the Landlord’s purchase and the Vendor then continuing to finance that debt is unusual however as:

(a) the Landlord benefited in becoming owner of the Premises for consideration that was paid by Vendor, a separate corporation;

(b) the Vendor borrowed and became indebted for that purchase price and was liable for the $793,000 paid and was liable to pay those loans in the amount of $7,500 monthly to its lenders;

(c) Mr. Ackerman testified the Vendor for its occupancy of the Premises was obligated for approximately $26,000 annual rent to the Landlord, which was the amount of the annual decrease in the Landlord’s indebtedness to the Vendor. He stated, however, that such rent was not paid directly by the Vendor to the Landlord but was instead off-set by the reduction in the same amount ($26,000) of the Landlord’s indebtedness owed to the Vendor;

(d) the Vendor, under the heading “Investing Activities”, in its financial statements shows the $793,00 as owing to it by the Landlord and decreasing (paid down) annually starting in 2010 by some $26,000;

(e) the $26,000 annual decrease of the Landlord’s opening $793,000 liability owed to the Vendor is well below the $90,000 ($7,500 X 12) annual payments the Vendor was paying to its lenders and despite that, the Landlord’s liability owed to the Vendor decreases annually; and

(f) the Vendor accordingly had rented occupation of the Premises but continued by making higher monthly loan payments to subsidize the Vendor’s purchase and ownership of the Premises.

[27] The point is that Mr. Ackerman was directing the Vendor and non-owner of the Premises to finance that purchase and pay the ongoing borrowing costs, which exceeded the rent charged, as if the Vendor was a beneficial or joint owner of the property.

[28] The court acknowledges these corporate defendants are separate legal entities, as relied upon by the defendants in their defence of this proceeding. They were not on the above facts, however acting as such, and in fact were acting as if joint partners as to the Premises, as evidenced by the Vendor’s $90,000 annual loan payments which were well in excess of the $26,000 annual rent. There joint relationship as to the Premises is further evidenced in other ways relevant to the issues in this proceeding.

[29] Mr. Ackerman in approximately 2012 decided he no longer wished to operate the Business. He accordingly marketed the sale of the Business on behalf of the Vendor via Internet. Mr. Ackerman’s posted the Vendor’s business as: “Successful Waterfront Restaurant And Bar In Brockville For Sale”.

[30] The plaintiff responded to that representation and entered into negotiations with Mr. Ackerman.

[31] Although not determinative of the issues in this trial, Mr. Ackerman knowingly misrepresented the financial viability of the Vendor’s Business. The Vendor had been operating at a loss for several years, despite his personal infusion of capital as a shareholder to continue its operation.

[32] The Vendor’s 2009 to 2012 annual financial statements contradict Mr. Ackerman’s representation to the plaintiff that the Vendor in 2013 was selling a “Successful” business. Those annual statements record the following annual net losses and slight profit in 2012:

Net (Loss)/Profit

Deficit End of Year

2009

($22,806)

($107,085)

2010

($88,788)

($129,891)

2011

($61,508)

($323,187)

2012

$14,791

$323,178

[33] Those statements record the Vendor’s long-term debt, excluding current liabilities, owed to its lenders and the indebtedness owed to Mr. Ackerman as its sole shareholder as follows:

Long Term Debt

Amount Owed To Mr. Ackerman

2009

$724,520

$152,717

2010

$703,246

$152,717

2011

$657,414

$196,776

2012

$617,016

$196,776

[34] Mr. Ackerman in testifying acknowledged the Business was operating at a loss. He testified that the financial health of the Business in 2012 was not good, was struggling, necessitated that he delay cashing his paycheque on occasion and limited the increase in his salary to $100 over 20 plus years.

[35] Mr. Ackerman testified that several parties before the plaintiff responded to his Vendor sale posting, however, their initial interest ended upon disclosure of the Vendor’s financial performance statements.

[36] Ms. Frenette as part of the initial negotiations requested Mr. Ackerman to provide the Vendor’s financial records.

[37] The plaintiff sent a letter of intent to Mr. Ackerman on February 11, 2013 offering to buy the Assets of the Vendor and lease the Premises from the Landlord for stated amounts with the terms thereof to be incorporated into a final agreement of purchase and sale. The plaintiff undertook, in the event the acquisition was not completed, to keep confidential the financial disclosure requested as to the Vendor’s Business.

[38] Mr. Ackerman, knowing that financial disclosure by the Vendor had terminated the interest of other prospective purchasers, refused the plaintiff’s financial disclosure request. He responded that there would be no disclosure of the Vendor’s financial records until all essential elements of the APA and the Lease had been agreed upon and the plaintiff had submitted a signed offer with a deposit. The plaintiff proposed a $5,000 APA deposit. Mr. Ackerman insisted upon a $15,000 deposit before providing financial disclosure by the Vendor. That $15,000 is recorded as a deposit in the APA, with the associated law which normally results in its forfeiture in the event the purchase does not proceed.

[39] The operating loss position of the Vendor and its financial viability was likely to worsen with Mr. Ackerman’s total rent requirement of the Landlord of $10,101 per month.

[40] The Vendor did not pay but recorded the following annual rent for its lease of the Premises to the Landlord:

2009

$64,832 (rent and undefined occupancy costs)

2010

$27,600

2011

$26,600

2012

$26,300

[41] The annual rental cost of $121,212 negotiated with the plaintiff occurred prior to disclosure of the Vendor’s 2009 to 2012 financial statements demonstrating the above annual “cost” of some $26,000, despite Mr. Ackerman knowing that the Vendor, under his management, was operating with an annual deficit. That was an increase in the Business’;

(a) annual rent by some $95,000 ($121,000 - $26,000); and

(b) annual operating expenses of some 31,000 ($121,000 - $90,000 being the Vendor’s prior monthly borrowing costs of the Landlord’s purchase price).

[42] It was almost as if Mr. Ackerman was structuring the lease costs, for the Business already operated at a loss, as if to ensure its financial failure.

[43] In response to the argument that no Vendor and Lessor would so financially risk default in payment of the balance of the Asset purchase price and likely default under the Lease, the Landlord, the Vendor and Mr. Ackerman bore little if any risk as:

(a) the Vendor by closing of the APA had received $215,000 thereby improving its financial position considerably;

(b) the Vendor, pursuant to the APA, received a General Security Agreement charging the Assets for the two year term of the promissory note until payment of the $144,000 balance of the purchase price was received; and

(c) the Landlord in the interim was receiving the greatly escalated monthly rent on the five year Lease and could retake possession of the Premises upon default in payment, seize the Assets sold and put the plaintiff out of business.

[44] There likely, in addition, would be other unsuspecting subsequent purchasers like the plaintiff when and if the Landlord and the Vendor took possession of the Premises and the Assets in the event of default by the plaintiff.

[45] The plaintiff however made all payments to the Landlord and Vendor until April, 2014.

[46] The court recognizes the legal principle of caveat emptor and the plaintiff’s resulting obligation to perform due diligence, which in this case required it obtain and examine the Vendor’s financial statements which reveal Mr. Ackerman’s intentional misrepresentation as to the “successful” business for sale.

[47] The plaintiff’s obligation in the APA to proceed and close its purchase of the Assets was not made conditional upon its receipt and consideration of the Vendor’s financial statements regarding the Business.

[48] The intentional misrepresentation by Mr. Ackerman as to the financial “success” of the business being sold is relevant in considering his credibility and the many contradictions between his and the plaintiff’s testimony during this trial.

[49] The plaintiff asked for the last five years of financial statements. Upon completion of negotiations as to the terms of purchase and sale, the APA and the Lease, Mr. Ackerman on April 12, 2013 provided the plaintiff with the Vendor’s annual financial statements for the years 2009 to 2012, but not for the year ending March 31, 2013, as requested. Mr. Ackerman replied the 2013 financial statements were not yet completed. Instead of providing the Vendor’s internal 2013 financial records of sales and expenses, Mr. Ackerman instead offered to provide the Vendor’s 2008 financial statements, reflecting six-year-old financial activity. Ms. Frenette was then out of the country for several weeks and Mr. Ackerman was dealing with her daughter in the interim.

[50] Mr. Ackerman was not going to risk again losing this purchaser by disclosure of the Vendor’s available financial records for the period of April 2012 to March 2013 in advance of closing.

[51] Ms. Frenette on behalf of the plaintiff visited the Business in the Premises. Her initial visit was short. She attended several times later on, often unannounced and simply as a customer to observe. She spoke to Mr. Ackerman on some of these occasions. Her daughter who has business experience and works with her mother attended on behalf of the plaintiff before closing to review the list of Assets attached as Schedule A to the APA as Ms. Frenette was out of the country at the time.

[52] The APA and the Lease transactions closed on May 18, 2014. The plaintiff continued to carry on the Business under the name BOTB in the Premises until early April, 2014.

Vendor’s Breach of APA

[53] The APA states that the assets sold or assigned include:

(a) all assets used by the Vendor in its operation of the Business carried on under the name of Buds on the Bay (“BOTB”);

(b) all equipment chattels and software owned or leased by the Vendor for the Business including all restaurant equipment located in the Premises, including but not limited to the property listed as Schedule A;

(c) all inventories including food and beverage supplies;

(d) all rights of the Vendor in all contracts dealing with the Business; and

(e) all intellectual property owned or used by the Vendor in connection with the Business, including logos, trademarks, trade names, such as BOTB, software and goodwill (the “Assets”).

[54] The Vendor through Mr. Ackerman breached the above provisions in failing to transfer or assign assets used in the Business. The assets used in the Business included an ATM machine which Mr. Ackerman continued to operate in the Premises after closing and earned an income from instead of the plaintiff. The assets used in the Business also involved a jukebox in the restaurant. The APA contained a list of assets excluded from those sold (“Excluded Assets”). The ATM machine and the jukebox are not in the Excluded Asset list.

[55] The APA required the Vendor to use its best efforts to obtain the assignment of any assets used in the Business but not owned by the Vendor. Mr. Ackerman testified that obligation as to these two pieces of equipment was inapplicable, as the Vendor had purchased but not paid for the ATM machine which it therefore did not own, but continued to operate for a profit post-closing and then unilaterally removed from the Premises. He testified the Vendor did not own the jukebox, which ignores its obligation to arrange for its assignment to the plaintiff on closing.

[56] The APA:

(a) states the Vendor will provide the plaintiff with access to its books and records after the signing of the APA;

(b) states the Vendor will be liable for all pre-closing expenses and liabilities associated with the running of the Business including and all monies due under contract, for two years; and

(c) warrants there are no Vendor liabilities of any kind, whether or not accrued or determinable, for which the plaintiff may become liable on or after closing.

[57] Mr. Ackerman was aware of the Vendor’s liability under its gift card and locality card credit programs, one of which totalled some $17,000 in November 2013. He failed to disclose those credit program liabilities, of which the Vendor had already received payment for the gift card purchases. He then on behalf of the Vendor avoided honouring that obligation after closing.

[58] The plaintiff complained to Mr. Ackerman about the failure to disclose and failure to assume liability for these programs. Mr. Ackerman responded that the plaintiff should simply not honour the customers’ gift and loyalty card credits, despite knowing that would impair the reputation of the Business purchased and its new owner.

[59] In response to continuing complaints by the plaintiff and from its lawyer, Mr. Ackerman ultimately paid $3,000 towards the gift card program and stated the Vendor would limit its remaining liability to demonstrated subsequent purchases, but only for two years.

[60] The Vendor on Mr. Ackerman’s direction breached the above covenant in the APA to be solely responsible for all pre-closing liabilities of the Business.

[61] After closing, Mr. Ackerman, without authority or permission, issued a $500 gift card from BOTB to his friend Mr. Harkness, thereby incurring liability against the plaintiff. Mr. Harkness had been engaged for years as a handyman by Mr. Ackerman for his home and for the Premises. Each testified they were friends and had played hockey together.

[62] The conditions precedent to closing stated in the APA include:

(a) the plaintiff’s execution of the five year lease with the Landlord, a non-party to that APA contract, for a monthly rent of $7,500 plus municipal taxes payable by the Landlord plus utilities;

(b) the Vendor ensuring that all equipment was in good working order on the date of closing; and

(c) the Vendor ensuring that the leased premises and fixtures were in a state of good repair.

[63] The Vendor’s requirement that a condition of the sale of the Assets was the plaintiff’s requirement to sign a five year lease of the Premises with the Landlord and the Vendor’s assumption of an obligation to ensure the Premises and fixtures were in a good state of repair demonstrate the co-partnership of the corporate defendants as to the Premises. Nothing on the evidence prevented the Vendor’s sale of the Assets independent of the purchaser leasing the Premises owned by the Landlord. The Vendor undoubtedly inserted that requirement for the mutual benefit of both corporate defendants.

[64] This Vendor’s obligation in paragraph 6(d) of the APA to ensure the “state of good repair” of the Premises/leased premises and fixtures, does not contain the “on the day of closing” qualifier contained in the Vendor’s obligation therein to ensure the “good working order” of the equipment or the similar time qualifier as to the Landlord’s obligation in the Lease as to the Premises. The absence of that qualifying phrase as to the ensuring that the Premises and fixtures in the APA were in a good state of repair must be presumed to have been an intended difference.

[65] The point is the Vendor was undertaking to ensure the state of repair of the Premises it did not own and accepted that obligation without limiting it by similar wording to the date of closing in a contract as to the terms and conditions of its sale of equipment it owned and was selling.

[66] Independent of the linkage to the Premises, the Vendor’s assumption of that Premises’ obligation signals an intent of the parties in the APA, independent of the Landlord, to ensure the Premises’ good state of repair.

[67] That assumed responsibility by the Vendor to ensure the state of repair of the Premises is not contained in the representations and warranty provisions in section 9 of the APA, which like the other provisions of the APA, address the sale of the equipment and good will.

[68] The Vendor’s obligation to ensure the premises and fixtures are in a in a state of good repair accordingly appears to be an independent undertaking and obligation of the Vendor separate from the sale of Assets.

[69] Independent of the above, courts commonly imply a term that the goods sold will perform in accordance with their intended purpose. This court implies such a term to the APA, which at the election of the Vendor and the evidence of joint partnering as to the Premises, extends to and includes the Premises and its fixtures.

Equipment

[70] Mr. Ackerman acknowledges that the Vendor breached the above APA obligation to ensure all equipment was in good working order on the date of closing. The alcohol dispensing “guns” in the bar were broken on closing, had not been repaired and had to be replaced by the plaintiff at its costs.

[71] The plaintiff engaged Mr. Harkness to repair the Premise’s faulty air-conditioning equipment immediately after the May 18, 2013 closing, as indicated on his invoices:

(a) 02 bar air conditioner repair work – May 22, 2013 repairs;

(b) 02 bar air conditioning repair work – June 5, 2013; and

(c) repair to the air-conditioning – June 2 and 15, 2013.

[72] Mr. Harkness was unable to repair the air conditioning equipment. The plaintiff was required to:

(a) purchase and replace the furnace motor and its computer board related to the Premise’s air-conditioning on June 21, 2013 at a cost of some $1,200; and

(b) replace and install new air-conditioning equipment on July 3, 2013 at a cost of $4,943.

[73] The court is being asked to accept that the defendants on closing were unaware of the deteriorated condition of this equipment requiring repair, including replacement of the faulty furnace motor and computer board within 5 days of closing. Given the numerous deteriorated conditions in the Premises, I do not accept this to be the case.

[74] The plaintiff’s electrical contractor as part of the renovations conducted reported numerous overcharged electrical circuits which required repair. The extent of those overcharged electrical circuits indicate that some or all of them existed and were not repaired on closing as the Vendor had covenanted would occur.

Plaintiff’s Continuing Commitment To The Business

[75] There are numerous invoices paid by the plaintiff in the fall of 2013 and the spring of 2014 during its 11 month occupancy to electrical and equipment contractors such as McCann, Bryant, Upper Canada Electrical, Service in Motion, Copper Age and Van Dusen to repair and replace faulty Premises elements, restaurant and bar equipment, at a cost exceeding $10,000 during this 11 month occupancy.

[76] The plaintiff purchased and installed food preparation tables on September 4, 2013 at a cost of $2,757 and installed three ovens in the kitchen in February 2014 at an unknown cost.

[77] The plaintiff does not rely upon these repairs and replacements costs in support of the relief sought in this action, but points to those expenditures and upgrades as evidence of its continuing commitment to continue operating the Business.

[78] The plaintiff borrowed money to carry out several renovation projects to the Premises including conversion of the disco bar. Those bar renovations were underway in January 2014.

[79] The defendants’ argument given the above ongoing investments by the plaintiff is contradicted and illogical that the plaintiff’s motivation since January 2014, when the WESA Report is dated, was to unwind the Asset purchase and the Lease. The plaintiff continued to invest in repairing and replacing deteriorated and broken equipment and elements in the Premises and investing in new Premise projects throughout the spring of 2014.

[80] The ongoing expenditures and investments in the Business by the plaintiff evidences it remained committed to operating the Business on an ongoing basis and contradicts the defendants’ allegations that the plaintiff simply obtained the WESA and Belec reports as an excuse to abandon the Lease, the Assets and the Business because it had failed financially to operate successfully and wanted the return of the Asset purchase price paid.

Premises And Fixtures Elements Not Repaired

[81] Mr. Ackerman, and therefore the Vendor and the Landlord knew during negotiations at closing and thereafter that the Premises had several serious elements requiring repair and a history of operating issues which negatively impacted the operation of the Business which they did not disclose before or after closing and did not repair. Despite that knowledge, Mr. Ackerman and the Vendor made the Asset sale conditional upon the plaintiff signing the five year Premises lease (the “Lease”) in which the Business was to be operated.

[82] For the reasons hereafter stated, the Vendor at the direction of Mr. Ackerman breached its obligation to ensure that the leased premises and fixtures were in a state of good repair.

[83] The plaintiff encountered multiple instances of waste water discharge out of the second floor kitchen floor drain onto that floor which then escaped and dripped down into the restaurant dining room below on the first floor. The same result occurred with any larger quantities of water spilt onto the upper kitchen floor, which the court presumes is not an unusual event in a busy restaurant kitchen. That resulted in interruption in the use of that lower dining room and then having to clean up that discharge and its released into the dining room.

[84] The second floor kitchen waste water drain pipe under that kitchen floor was too narrow to accommodate waste water discharge simultaneously from more than one of that kitchen’s dishwasher and its four sinks. Simultaneous discharge by two or more of those elements would result in fountaining of waste water out of that waste water pipe through a floor drain onto the kitchen floor. The improper or inadequate slant of that kitchen floor directed that discharged water to the wall which would then drain down into the dining room below interrupting the operation and business of that facility.

[85] Such discharges onto that kitchen floor with the resulting draining down into the dining room below also occurred when the kitchen dishwasher backed up and discharged waste water onto that kitchen floor and when that under floor drain pipe became blocked with grease which would fountain discharged waste water onto the kitchen floor. Mr. Ackerman acknowledged that the dishwasher and/or the sinks in that kitchen lacked “catchers” used in other commercial kitchens to prevent grease and food particle release into the floor drain pipe. Some of Mr. Harkness’ prior invoices include work to unblock the second floor kitchen waste water drain pipe. This was a known issue requiring repair on closing, which the Vendor and Landlord did not disclose leaving the plaintiff to discover.

[86] The engineers for each party agree that the kitchen floor, at a minimum, lacked the appropriate slant towards the floor drain thereby directing discharged “fountained” water to the wall and then down into the dining room.

[87] These floor slant and floor drain fountaining conditions were known to the defendants prior to closing as such fountaining of waste water and its draining down into the dining room had occurred on numerous occasions before closing. The engineers both reported that the older wooden floor above the beam support in the ceiling of the dining room and below the upper concrete kitchen floor showed extensive water damage.

[88] The inadequate size of the waste water drain pipe below the kitchen floor, the lack of food and grease catchers and the lack of or inadequate slant of the kitchen floor towards the kitchen drain required repair and were not repaired.

[89] Mr. Ackerman made the above inadequacies and resulting interruptions to the plaintiffs dining room business worse by not advising the plaintiff of these inadequate conditions requiring repair. The plaintiff instead was forced to learn of these inadequacies through waste water spillages into the lower dining room. The plaintiff repeatedly reported and questioned Mr. Ackerman as to what was causing these water spillages into the dining room. She believed and told him the kitchen floor drain pipe must be leaking. Rather than divulging the above deficiencies which he was aware of, Mr. Ackerman had Mr. Harkness pour several pails of water down through the kitchen floor drain and then showed the plaintiff that none of that water poured into the pipe was leaking into the dining room, thus avoiding disclosure and discussion as to the above deficiencies which were causing the waste water discharges into the dining room.

Wood Facings And Eves

[90] The outside wooden facing or planks immediately below the third floor shingled roof and S-shaped wooden struts supporting the roof overhanging the exterior brick walls had not been painted and maintained for years resulting in water penetrating and rotting those wood elements.

[91] Exterior pictures of the Premises in April 2014 show sections of fallen eaves troughs at the front and the back of the Premises. Mr. Easterbrook, surprisingly, testified eaves troughs falling off this three-storey Premises was not unusual given the harsh winter conditions that year. With respect, eaves troughs properly attached to solid exterior surfaces of the three-storey Building do not fall off during winter due to heavy snow. Eaves troughs commonly fall off due to deteriorated, non-maintained wood surfaces to which they are attached, like those of this Premises which the Vendor had engaged to ensure would be in a good state of repair.

Windowsill

[92] Mr. Belec and Mr. Easterbrook reported a missing concrete windowsill on the third floor which was permitting water to penetrate behind the brick exterior. That condition pre-dated the APA and was not repaired.

Exterior Brick Load Bearing Wall

[93] The third floor east exterior brick wall was damaged and required repairs according to Mr. Belec and Mr. Easterbrook. The brick on this wall showed multiple locations of spalling which Mr. Easterbrook reported had occurred on prior occasions as a result of water penetrating into the brick wall, which then froze thereby popping off or spalling the brick face.

[94] A section of this same east brick wall had bowed or shifted outwards and had a lengthy diagonal crack in the brick face.

[95] Mr. Easterbrook opined that this load bearing brick wall had some years before shifted downwards causing other observed damage, required maintenance repairs but did not in his opinion need to be replaced as Mr. Belec reported. This brick wall as a result of it shifting down and outwards reduced its load bearing capacity and required repair.

[96] The brick wall deterioration was a long-standing condition and was not in a state of good repair as the Vendor had covenanted to ensure would occur in the APA.

[97] The defendants were aware of these deteriorated conditions requiring repair. Despite the specific or implicit contractual requirement to ensure the state of good repair to ensure their performance, the Vendor failed as to that obligation and withheld this information and issues from the plaintiff.

January 6, 2014

[98] Water infiltration into the Premises dramatically worsened on January 6, 2014 from several locations. That escalated the plaintiff’s existing concerns and resulted in its engagement of an engineer, Mr. Belec, to identify the causes and engagement of an air quality specialist, WESA, to identify whether mould was developing due to the continuing water discharges in the Premises.

[99] On January 6, 2014:

(a) the roof membrane above the second storey kitchen broke open which led to water entering in through that ceiling on to the kitchen floor which then drained, not through the floor drain, but down the wall into the first floor dining room/pub area and into the basement;

(b) a basement sewage pipe from the upstairs washrooms began leaking waste water into the basement;

(c) water pipes in the ceiling of the disco bar washrooms broke and discharged water into the disco bar which was then being renovated; and

(d) the main Premises sewage discharge pipe froze outside at its connection to the City’s sewer line which caused ongoing sewage discharge into the disco bar.

Basement And Main Sewage Pipes

[100] Mr. Ackerman did not fault the plaintiff for the basement sewage pipe break or the freezing of the sewage pipe adjacent to the City manhole. Mr. Harkness entered that outside City manhole and chipped away the accumulated ice and thawed the pipe to permit the Premise’s sewage pipe to discharge waste water into the City sewage system.

[101] Considerable time was expended during the trial as to whether the plaintiff was responsible for the broken roof membrane and the broken disco washroom water pipe. That issue is less important in this trial than the state of the Premises revealed during the subsequent examination by the each party’s engineer, by WESA and the City’s initial closure of the Premises.

Roof Membrane Tear Above Kitchen

[102] Mr. Ackerman acknowledged that the water entering through the roof had damaged ceiling tiles in the front pub and drywall in the kitchen. He ignored the inability of the second floor kitchen floor due to the slant of the floor, to collect and discharge the incoming water appropriately which then drained to lower areas in the Premises. He blamed the plaintiff for the membrane break in alleging it had failed to plug in the outside second storey roof edge electrical heating coils.

[103] Mr. Ackerman had not informed the plaintiff as to the presence and use of the rooftop heating coils to prevent ice accumulation on the membrane roof. The court takes judicial notice of the fact that two-storey buildings with slanted roofs in Canada do not normally have exterior roof heating coils.

[104] The Lease is silent as to the presence or requirement to use roof top heat coils.

[105] Section 10(3) of the Lease required the plaintiff to “heat the Premises to a sufficient temperature at all times so that the Premises or any part thereof will not be damaged by frost or cold”.

[106] There is no evidence beyond the speculation of Mr. Ackerman and Harkness that this separation in the roof membrane was caused by the accumulated ice they observed on that day. The evidence further indicates that roof snow melting was caused by interior heat loss from the Premises into the roof cavity due to the lack of a vapour barrier, inadequate roof cavity insulation and the absence of roof cavity ventilation which would have allowed for the escape of leaked heat into that cavity.

[107] The lack of adequate insulation, vapour barriers and roof cavity venting was recorded by Mr. Belec. Ms. Frenette observed Mr. Harkness’ removal of wet attic paper insulation on one occasion and its replacement with customary fiberglass insulation.

[108] The inadequacy of the above attic insulation also relates to the freezing of the water pipe in the ceiling of the disco bar washroom.

[109] Mr. Harkness testified he advised the husband of Ms. Frennette on two occasion of the need to plug in the coils during the winter, that he on his own plugged them in on one occasion during the 2013/2014 winter and that the roof coil was not plugged in on January 6, 2014. Such advice to the husband was not notice to the plaintiff.

[110] Mr. Harkness throughout his testimony was an advocate of the defendants and generally lacks credibility. His testimony on occasion was contradicted by the testimony of Ms. Frenette, her husband and on occasion by Mr. Ackerman.

[111] Mr. Harkness testified this roof membrane was relatively new and implied that only the ice he observed on that roof membrane on January 6, 2014 caused this membrane separation. He omitted the evidence of the two engineers who each observed multiple and therefore prior patch repairs of this roof membrane prior to the plaintiff’s occupancy of the Premises.

[112] Ms. Frenette denies:

(a) she was advised as to the need to plug in the roof coils. She denies ever unplugging the roof coils; and

(b) denies she ever instructed staff to unplug the roof coil.

[113] Mr. Harter was asked in cross-examination why he never plugged in the roof coil upon observing it unplugged during the 2013/2014 winter. He responded Ms. Frenette had advised staff not to plug it in. It escapes me why this cook would be concerned about snow accumulation on this particular roof at the back of the Premises, would be aware of the coil on this particular roof and its need to prevent ice accumulation in order to prevent damage to the roof membrane, other than the fact that Ms. Frennette had demoted him from his previous position as kitchen/restaurant manager.

[114] Mr. Harkness and Mr. Harter’s alleged concern about the unplugged roof coil and the alleged risk that represented did not lead either of them to notify Mr. Ackerman of the fact, as testified by Mr. Ackerman. That suggests the requirement to use the coil and the risk its non-use represented did not appear to be as apparent as their testimony suggested.

[115] There were underlying unresolved deficiencies causing the ongoing breaks in this roof membrane

[116] As to the January 6 frozen/burst water pipe in the disco bar washroom ceiling, Mr. Ackerman wrote on or about January 9, 2014 that that broken pipe was caused by:

(a) the extreme weather temperature swings then occurring;

(b) the plaintiff’s plumber’s inadequate winterizing of that pipe;

(c) the plaintiff’s failure to adequately heat the disco room; and

(d) the plaintiff’s failure to leave the disco washroom doors open to allow the dance floor heat to circulate in that washroom.

[117] There is no evidence Mr. Ackerman had advised the plaintiff of a requirement that the washroom doors must be left open in winter to prevent freezing of the pipes in the washroom. Mr. Ackerman in this response:

(a) acknowledges that the dance bar washrooms were inadequately heated to prevent freezing of the pipe in the washroom ceilings;

(b) ignores the evidence, including that of Mr. Harkness, that the thermostat in that bar had historically been problematic; and

(c) ignores invoices from Mr. Harkness prior to the plaintiff’s Asset purchase and the Lease which included charges for water pipe issues including some he attributed to winter freezing.

[118] The Landlord pursues this argument in its counterclaim in alleging the plaintiff’s plumber failed to properly winterize the water pipes above the bar washroom ceiling which resulted in broken pipes and bathroom fixtures.

[119] The plaintiff filed its plumber’s invoice for such winterizing work and a written statement from that plumber to Mr. Ackerman denying that he had winterized incorrectly. Mr. Harkness testified his winterizing methodology would have prevented the pipe and fixture damages now sought in the counterclaim. His above prior invoices contradict his and the defendants’ allegation that the plaintiff’s plumber in October 2013 negligently winterized the Premises. Mr. Harkness acknowledged he did not observe or work on the piping and fixtures now claimed until after the defendants took over possession of the premises in April 2014. His testimony therefore that it was the plaintiff that caused this alleged damage on January 6, 2014 is post factum speculation.

[120] The evidence indicates that the 02 washroom ceiling lacked sufficient heating and/or insulation which caused the freezing of this pipe on January 6, 2014, just as had previously occurred before the plaintiff took possession.

[121] Ms. Frenette was concerned and obtained a quotation from D.D.D.G. Engineering to identify what was causing the ongoing water infiltrations in the Premises. Mr. De Groot’s inspected the Premises on February 20, 2014 and observed water damage to the ceilings in the kitchen, dining room, bar, washrooms and third floor offices. Mr. Easterbrook in his report states that the third floor office ceilings were damaged but not as a result of water infiltration.

[122] The photographs of water-stained ceiling tiles and large buckets in numerous locations to catch dripping water together with Mr. De Groot’s above quotation statements contradict Mr. Ackeman’s letter and testimony and corroborates Ms. Frenette’s evidence as to the extent of water infiltration from the ceilings and waste water back flows on January 6, 2014 and the resulting damages. That infiltration and waste water backups caused material damage to Premises elements and some business interruption.

[123] Ms. Frenette was concerned about the state of the Premises, what was the cause of the four prior incidents of internal waste water discharges and pipe blockages, the numerous water entries and sewage discharges on January 6, 2014, the impact of those events in public areas of the Premises and what risk that might represent. She accordingly sought advice from WESA in January, 2014 initially, D.D.D.G. Engineering in February 2014 and then from Mr. Belec in March, 2014.

[124] Given his personal relationship with Mr. Ackerman and his subsequent assistance of the defendants despite another engineer from his office being engaged by the defendants, it is fortunate the plaintiff did not accept Mr. De Groot’s offer to have someone from his office provide an opinion as to the cause of the water infiltration and sewage back-ups in the Premises. Mr. De Groot and Mr. Ackerman were friends and played hockey together.

Evidence Of Prior Water And Drainage Issues

[125] Mr. Ackerman at trial admitted there had been a problem and prior incidents of waste water back flows from the second storey kitchen floor pipes and that water then dripping down into the dining room below. He admitted that he did not advise the plaintiff of this condition. He stated that January 6, 2014 was the first occasion of water infiltrating through the roof into the Premises, but failed to address the numerous membrane patches on the roof observed by the two engineers.

[126] Invoices from Mr. Harkness and one from Houle Plumbing prior to the May 10, 2013 possession by the plaintiff, records the following ongoing water leakage, water pipes freezing, breaking and blockages, second storey floor drain backing up repairs over a lengthy period of time and obviously not repaired as required before closing. Those deficiencies continued during the plaintiff’s occupancy of the premises including winter related repairs:

(1) deck roof repairs in the winter prior to March 31, 2010;

(2) replacing pipes and leaking upstairs toilets – April 2010;

(3) repairs to broken pipes in the 02 bar and repairing leaking toilets – May 9, 2010;

(4) floor and drain repairs, brickwork repairs, and plumbing repairs – August 19, 2011;

(5) unplugging second floor kitchen floor drain and fixture and plumbing issues in the summer terrace washrooms and the 02 bar at the end of winter – March 17, 2012;

(6) floor drain backing up (Houle Plumbing) – March 22, 2012;

(7) repairs to upstairs plumbing caused by freezing – May 24, 2012;

(8) washroom leaks, plumbing repairs in the basement and men’s washrooms – June 18, 2012;

(9) plumbing repairs and plugged floor drains – July 13, 2012;

(10) plumbing repairs in basement – October 12, 2012;

(11) repairs to leaking beer fridge main floor – May 12, 2013; and

(12) repairing leaks inside upstairs women’s washroom above dining room – May 15, 2013.

[127] Wastewater backflow had long been an issue on the floor of the second storey kitchen.

WESA Report

[128] WESA was engaged by the plaintiff to conduct an occupational hygiene and safety analysis of the premises on January 16, 2014. WESA inspected the Premises on January 17, 2014 and identified in its January 22, 2014 report evidence of multiple incidents of water infiltration in the Premises.

[129] WESA concluded that air sample results for fungal spores did not identify elevated concentrations or abnormal fungal spores in areas where water intrusion was identified. The front dining area however had higher concentrations of fungal spores including Aspergillus/Penicillium-like (“A/P”) spores and Stachybotrys (“S”) spores. The spore trap count in that area was elevated at 3,800.

[130] The A/P spores in this front dining area were not considered “normal” and were reported as indicating a source of active mould/fungal spore growth. The S spores are hydrophilic and indicative of water intrusion, and in this instance, indicated a source of active mould/fungal spore growth. If there was no water penetration in this area since May 2013, present spore count suggested a source of active mould growth that should be further investigated and remediated.

[131] WESA identified the following obvious areas of water penetration inside the Premises, which corroborates the observations of Mr. Belec on March 5, 2014 prior to the April 16, 2014 inspection of Mr. Easterbrook and recommended the following repairs:

1^st Floor

(1) Mens and womens disco w/c damage was 1) tiles of the dropped ceiling were damaged and removed, 2) 14X10 ft and 18X10 ft portions of drywall ceiling and 3) the shared wall between them, each side, from ceiling then down 2 feet. Replace drywall ceiling and wall portions and any affected fiberglass.

(2) In the disco bar 1) damaged dropped ceiling tiles 2) 10X30 ft of drywall above the dropped ceiling tiles. Replace drywall ceiling and wall portions and any affected fiberglass. Investigate for water penetration and replace any damaged drywall behind the wall to the bar.

(3) Water damaged areas tween disco and 1^st floor kitchen – 1) drywall walls water damage ceiling to 2.5 feet down 2) 10X8 ft portion of drywall ceiling above drop ceiling 3) no vapor barrier tween fiberglass insulation and upper drywall ceiling. Replace damaged drywall ceiling, walls and any damaged fiberglass.

(4) 1^st floor kitchen and fridge room – 1) water penetration along drywall ceiling patch 2) 3X5 ft drywall ceiling water damage 3) water penetration along drywall patch area. Replace water penetrated drywall areas and any affected fiberglass.

3^rd Floor

(1) Office ceiling – past water damage – 3X12 ft along joint tween wall and ceiling and 2) 2X6 ft along angles of vaulted ceiling. No evidence current water penetration. No repairs required.

(2) Storage room – ceiling has 1) a crack 2) evidence of past water damage, 5X2 ft of joint between the wall and ceiling and 3) water damage below and along window well. Replace drywall below the window wells and any affected insulation.

2^ndFloor

(1) Kitchen Prep Room – evidence of 1) drywall crack and water damage along seam down middle of the length of room being a 3X16Ft area 2) 8X8 ft area of the wall. Replaced the patched area with larger 7X6ft patch and any affected insulation. Replace drywall ceiling and wall areas with 3X17 and 9X9 areas and fiberglass insulation if damaged.

(2) Dining Room to left of bar – 1) water damage to wood beams above drop ceiling over a 8X10 ft area.

Basement

(1) Water leaked 1) under the stairs and 2) into far corner and penetrated the wood beam.

[132] Items 1 to 3 appear to relate to the January 6, 2014 broken water pipe in the disco washroom. Items 4, 7, 8 and 9 may be water entry on January 6 and/or prior thereto. Items 5 and 6 are prior to January 6, 2014.

Belec Engineering Report

[133] Mr. Belec after an examination of the Premises in March 2014 provided his engineering report and opinion that the Premises had multiple long standing deficiencies requiring examination and repair and that some of those were structural deficiencies which represented a risk to Premises occupants. The Premises Division of the City of Brockville on April 15, 2014 read Mr. Belec’s report, conducted its own inspection and then issued an order closing the Premises and requiring repairs identified as needed.

[134] The court qualified Mr. Belec to provide engineering opinion evidence as to the issues regarding the Premises. I found his testimony credible, fair and balanced.

[135] Mr. Belec inspected the Premises at the request of the plaintiff on March 5, 2014. His report is dated March 15, 2014. He admitted his review and recommendations must be considered in light of his limited ability to inspect without removal of building elements to confirm his observations and opinions.

[136] The Belec Report states:

(a) extended structural and architectural damages was observed;

(b) recurrent water infiltrations and repairs were clearly visible mostly on the roofs and ceilings located directly below the roofs in an attempt to fix wafer infiltrations;

(c) the upper roof facia and roof gutter have fallen off due to the rotten wood structure;

(d) eighty percent (80%) of all the observed infiltration problems inside this Premises are directly linked to the total absence of ventilation. The absence of ventilation creates condensation in insulation and ceilings below as well as humid structural members which will decay rapidly leading to ceiling falls, mould formation, airborne spores and important structural failures;

(e) condensation from attic runoffs has infiltrated behind the original brick wall which is leaning dangerously toward the lower roof with significant cracks;

(f) the hipped roofs lack proper ventilation as there are no air stream exits provided against the brick wall. The absence of weep holes under the first row of bricks prevents ventilation behind the brick wall. Deflection of the roof and the caving of the wall indicates the advanced decayed condition of the wooden wall frame;

(g) the hipped roof lacks soffit ventilation, contains rotten wood and is caving in. Its continuous deflection is associated with the redundant cracks on ceilings in the second floor kitchen and dishwashing area;

(h) the wooden structure inside the attic is falling apart because of extensive damages due to moisture. Nails are no longer holding due to the structure softness;

(i) the old roof structural members and its old ceilings have suffered extensive deterioration and decay with a risk of caving in unless immediate conservation and replacement measures are undertaken;

(j) replacement of the upper roof structure and back portion of the exterior wall with proper ventilation is the best solution to repair the extended damaged structure;

(k) the deflection of and the cracks in the exterior brick wall could cause it to become very unstable and collapse under its own weight;

(l) the interior reappearing cracks in the third floor office ceiling indicate the caving of the roof structure due to extended moisture damage;

(m) reoccurring water infiltration is occurring due to condensation and the absence of the roof cavity ventilation in the second floor dishwashing and upper kitchen areas;

(n) the floor drain in the upper kitchen is not functional due to the reverse slope of the floor away from the drain which leads water on the floor draining down to the ground floor dining room. The reverse slope of the kitchen floor is caused by deflection of an undersized beam beneath the kitchen floor which is clearly visible from the dining lounge. The beam deflection can accentuate with time. The undersized beam should be replaced or reinforced. The kitchen floor should be re-done;

(o) the roof cavity above the extended first floor dining area is not ventilated. The absence of such ventilation will eventually lead to moisture damage to that roof structure as well as the brick wall above it as weeping holes are no longer effective;

(p) the absence of vents in the roof of the night club is responsible for water infiltration and condensation as well as the interior ceiling tiles which have fallen off due to dampness and high humidity;

(q) the terrace washroom floors are not insulated. Ceiling tiles below that terrace floor are falling off because of dampness, water infiltration and cons condensation; and

(r) sustained growth of microbial contamination and airborne spores is considered to be directly associated with water infiltration problems and Premises material decay under moisture conditions.

[137] The Belloc Report in conclusion states:

(a) the situation inside different parts of the Premises is now critical because of airborne fungal spores and mould growth, the heightened risk of structural failures and health hazards. These problems cannot be associated with business operations since observed details related to structural and architectural conditions confirm that water infiltrations due to condensation and lack of proper ventilation have been ongoing for a number of years; and

(b) clean and healthy environment inside several parts of the complex cannot be achieved without extensive repairs and replacements which will disturb the normal business operation.

[138] The Belec Report states immediate interventions required include:

(a) replacement of the hipped roof structure;

(b) replacement and/or restoration of the third floor ceilings with proper vapour barrier, insulation and attic ventilation;

(c) installation of new ventilated soffits to hipped and flat roofs;

(d) replacement of the second floor wall of the main Premises and restoration of brick walls;

(e) replacement of the second floor hipped roof structure above the second floor kitchen and replacement or restoration of the second floor ceilings with new vapour barrier, insulation and proper attic ventilation;

(f) replacement or reinforcement of the undersized beam above the main floor dining lounge;

(g) replace the floor tiles and redirect drainage towards the floor drain in the second story kitchen;

(h) repair plumbing system downstream from the second floor kitchen;

(i) disconnect improper plumbing connections to basement;

(j) provide airstream ventilation to flat roof cavities and cathedral ceilings;

(k) insulated floor and cavities under terrace washroom above the night club area; and

(l) isolate and seal ceilings and floor cavities contaminated with mould growth.

[139] The cost estimate obtained by the plaintiff to repair the Belec-identified deficiencies from Hunt Construction Co. Limited on March 21, 2014 is $320,000.

Easterbrook Engineering Report

[140] Mr. Easterbrook begins his report by stating his engagement and mandate as follows:

D.D.D.G. Engineering Services have been asked….to review and counter claims made in… the Belec Report. (emphasis added).

[141] The stated purpose of his report was not to evaluate and provide an objective engineering opinion. The mandate as stated was to provide a contradictory opinion.

[142] This articulated objective seriously undermines Mr. Easterbrooks professional objectivity and credibility.

[143] Mr. Easterbrook focussed on the structural integrity of elements addressed by Mr. Belec and did not address numerous other elements in the WESA and Belec reports which are relevant in this trial as to whether the premises and fixtures were in a state requiring repair on March 18, 2013. Mr. Easterbrook limited his responding report to structural elements because Mr. Caskenette in his April 16, 2014 email to Mr. De Groot stated it was structural issues that prompted the City’s unsafe and closure order.

[144] Mr. Easterbrook stated it was difficult to determine exactly what Mr. Belec’s concerns were or the location thereof. That is incorrect as the Belec Report is clear as to both aspects.

[145] Mr. Easterbrook acknowledged that the inspections of the Premises by himself and Mr. Belec were limited as each of them could not damage the Premises which therefore required some speculation supported by logical, historical information or evidence.

[146] As to the reported reoccurring water infiltrations and visible repairs, Mr. Easterbrook stated the ceilings in the washroom had no sign of leakage or prior water damage.

[147] Mr. Easterbrook recorded:

(a) there was some damage to eaves troughs which did not surprise them given the winter that year. He failed to address the reported deteriorated wood facings which caused the eaves troughs to fall off and the repairs required; and

(b) no signs of condensation, but inspected the Premises on April 16, 2014, beyond the winter conditions which Mr. Belec observed and reported is when condensation forms.

[148] Mr. Easterbrook does not address Mr. Belec’s opinion as to the lack of roof cavity air vents and the resulting condensation as a result of water penetration into that cavity as evidenced by the multiple roof membrane repairs and the impact of that trapped condensation on internal roof structures, beyond his statement that he saw no evidence of such impact during his limited inspection.

[149] Mr. Easterbrook stated that there was some insulation in the ceiling of the dance bar washrooms and under the floor of the terrace washrooms he inspected. This statement:

(a) does not speak to the adequacy of insulation in this cavity, which Mr. Belec reported was insufficient and needed repair; and

(b) does not address Mr. Belec’s finding that the pipes in this area lacked insulation which would cause condensation in the cavity.

[150] The alleged winter freezing of these uninsulated pipes in this area is the basis of the Landlord’s counterclaim for damages.

[151] Mr. Easterbrook states that he did not see evidence of rotted roof rafters, condensation leaking out of cavities, damp or soft drywall in Mr. Belec’s pictures. The issue was what he observed, not his interpretation of copies of small pictures in the Belec report.

[152] He states he found no instances of falling drywall but admits that the third floor staff office ceiling, although renovated earlier, is drooping because the ceiling drywall thickness was inadequate and was insufficiently attached to the frame above it. The issue was the dropping drywall ceiling and repeated repairs and well as the reported lack of ventilation above that ceiling leading to condensation originated damages, including whether there was a risk of the ceiling and roof collapse and the need to have repaired those conditions prior to May 18, 2013.

[153] He acknowledged finding one spot in the interior third floor ceiling that evidenced water infiltration but stated the surrounding ceiling drywall on his inspection was firm, dry and showed no sign of mould. This confirms the plaintiff’s allegations of water penetration on the third floor.

[154] Mr. Easterbrook stated that the roof was sound and there was no basis in support of Mr. Belec’s recommendation that the hipped roof structure be replaced or that the roof structure membrane is rotten and giving way.

[155] Mr. Easterbrook acknowledged that the exterior brick wall on the second storey was spalled, had diagonal cracks and the outward deflection of that wall. He speculated that the diagonal cracks indicate the brick wall had previously lost support and therefore sagged and caused the brick to crack but states this diagonal crack was repaired. By repair, he is referring to adding mortar to fill the diagonal crack cavity. The diagonal crack is very apparent in the photographs.

[156] Mr. Easterbrook in response to the alleged absence of weep holes to drain moisture from inside the brick wall cavity states it was common in a Premises of this age to not have weep holes. Common or not, Mr. Belec was of the opinion that the absence of that draining mechanism was a contributing cause of the deteriorated condition of this wall and interior roof cavity which required repair.

[157] He agreed that the roof in this area of deteriorated brick had dropped because of the drop of the brick wall below it. He states, however, that those facts do not mean the above roof will fall down.

[158] Mr. Easterbrook indicated that there may be several reasons for the outward deflection of the exterior brick wall, including a previous fire in the Premises which could have cracked the brick mortar and caused the brick wall and roof above it to drop. He attached pictures which show two burnt interior roof heavy timber beams which no longer support the brick wall. Mr. Belec strongly disputes this statement and states every structural engineer would recommend replacement or repair of the two burnt beams. The extent of the fire damage to the wood beams apparent in the photographs and Mr. Easterbrook’s acknowledgment that this fire damage reduced the support level of the bricks above these damaged beams, coupled with the lack of cavity ventilation and resulting condensation and wood deterioration, supports Mr. Belec’s recommended repairs required of these elements. Given the estimated age of the fire damage, this was another area which needed repair on May 18, 2013.

[159] The same fire according to Mr. Easterbrook burnt or charred the first two roof rafters or joists above the second storey dishwashing area. The function of the rafters is to support the roof. He stated the extent of damage in that area was unknown without removal of the drywall under that roof but stated this was immaterial because he speculated the fire repairs would have been “under the watch of the Premises Department” of the City. The evidence is that there remained two charred roof joints which do not fully support their function of supporting the above roof at this location which Mr. Belec reasonably included in the areas needing repair.

[160] Mr. Easterbrook concluded that the reported need to replace this exterior brick wall was unnecessary as it remained stable, however “it could use some maintenance to deal with the current spalling by replacing the concrete windowsill and redoing the caulking”, as the wall despite its defects had withstood reported seismic events in the area in 2010 and 2013. Mr. Belec replied that this stability despite seismic events is misleading and incorrect. He states:

(a) the 5.0 magnitude of these earthquakes are important but not destructive; and

(b) the center of the 2010 quake was in a town in Quebec, north of Ottawa and several hours drive from Brockville.

[161] This spalled, outward deflected brick wall which lacked weeping holes and the absence of a window sill which was allowing water entry into the wall cavity was a long standing prior May 2013 deteriorated condition which had not been repaired by closing.

[162] As to the dining room ceiling beam being undersized as reported by Mr. Belec, Mr. Easterbrook relied upon the statement of Mr. Harkness that engineers were involved in placement of this beam. Mr. Easterbrook further stated that all such beams deflect and a summer inspection of it absent the weight of winter snow may show that the bulkhead is straight. This is unsupported speculation as the reverse was equally possible and lends support to Mr. Belec’s recommendation that additional support of the beam at a minimum was required. Mr. Belec explanation appears more reasonable. He points to the location of this beam or girder as being directly below the upper kitchen concrete floor which does not slant or slants insufficiently towards the floor drain. Mr. Belec states that this beam has excessive deflection due to improper design or inadequate support, which caused the inadequately supported concrete floor above it to loose slope towards the floor drain.

[163] Mr. Easterbrook confirms that the floor of the kitchen on the second story is insufficiently sloped towards the floor drain and that water on the floor could drain at the edge of the wall down into the dining room, as Ms. Frennette testified happened on five occasions.

[164] Mr. Harkness told Mr. Easterbrook his practice had been to clean this wastewater pipeline monthly in order to dislodge the accumulated food particles and grease waste build-up. The court doubts this testimony as Mr. Harkness did not so report such monthly clearing of this floor pipe on his invoices dating back to 2010.

[165] Pursuant to his opening stated objective of providing an opinion to contradict Mr. Belec’s report, Mr. Easterbrook concludes his “engineering” report in stating:

“The original Premises is 138 years old and has multiple changes in use, additions, renovations, changes in businesses, repairs and maintenance by multiple owners … residents and patrons.”… “You would expect a Premises of this age to have a few ‘wrinkles’, but wrinkles are skin deep.”

[166] This is not a fair or accurate description of the areas of this Premises requiring repair.

[167] Mr. Easterbrook in summary states:

(a) the structural integrity of the Premises does not require immediate intervention;

(b) the roof structural members are not rotten and do not need to be replaced and therefore the new roof ventilation design is not required as the current ventilation of the roof has proven sufficient;

(c) the second floor exterior brick wall has been maintained;

(d) the beam in the ceiling of the dining room has been engineered and appears sound;

(e) the floor and its drain in the second storey kitchen are a maintenance and not a structural issue;

(f) the Premises in his opinion is sound and does not require structural remediation; and

(g) there are some maintenance issues that he was sure the owners would take care of in a timely, responsible manner.

[168] The above subparagraph (a) as worded suggests structural integrity intervention is required, just not immediately. This admission supports Mr. Belec’s opinion that his identified structural issues required repair.

[169] Mr. Easterbrook’s report fails to address historical areas of repair required including:

(a) insulation of water pipes in the ceiling above the dance bar;

(b) sufficient insulation in the dance bar ceiling cavity; and

(c) the rotten wood eaves’ rim joist casing the eves troughs to fall.

[170] The 2014 practice and need to vent roof cavities contradicts subparagraph (b). Roof venting should have been previously installed to provide air passage, to prevent condensation build up during winter and its deterioration of adjoining elements.

[171] The second storey east brick wall clearly is in a deteriorated condition. It should have been repaired.

[172] The acknowledged insufficient slope of the upper kitchen floor supports Mr. Belec’s interpretation that the condition of the supporting beam under that floor shows excessive deflection and requires additional support or replacement.

[173] Common logic and the Belec Report support the determination that continued waste water spillage and overflow events in that kitchen leaking down into the main floor dining area will with time deteriorate and damage the interior of those walls, are inappropriate in a public dinning lounge and can encourage the development of bacteria, mould and spores. The lack of food and grease catchers, the insufficient slope of the kitchen floor and the apparent excessive deflection of the beam under that floor should have been repaired.

[174] Overall, the court prefers the more balanced opinions of Mr. Belec over the contradictory opinions of Mr. Easterbrook.

[175] The premises and fixtures on May 10, 2013:

(a) were not “in a state of good repair” which the Vendor undertook to ensure pursuant to paragraph 6(d) of the APA;

(b) were not then and continued to not be in “ in good working order” in accordance with that obligation of the Landlord pursuant to paragraph 9 of the Lease; and

(c) deprived the plaintiff of its right to quiet enjoyment of the premises.

[176] The extent of important deficiencies requiring repair, the estimated cost of such repairs and the repetitive interruption in the business operations of the plaintiff support Ms. Frenette’s testimony that she would not have purchased the Assets and entered into the Lease knowing the state of disrepair and the breach of the Vendor and Landlord to or ensure the repair of.

[177] A number of those elements requiring repair would not have been detectable by the plaintiff in a typical, as in non-destructive, inspection of the Premises pre-closing.

The Lease

[178] The Lease limited the use of the premises to the operation of a restaurant business only and solely by the plaintiff. That restricted use to the plaintiff links the Lease to the plaintiff’s purchase of the Assets.

[179] The condition of the Premises is addressed in s. 9 in which the plaintiff acknowledges it is renting the premises on an “as is” basis and that there are no promises, representations or undertakings binding on the Landlord with respect to any repair, alteration, remodelling or decorating of or installation of equipment or fixtures on or in the premises. That “as is” limitation is then qualified.

[180] S. 9 then states that the Landlord agrees, however, to provide the premises and fixtures on the commencement date in good working order and that the premises is not in violation of Premises or fire code and is not subject to any work orders. The Landlord’s obligation to provide the premises in “good working order on the commencement date” as stated is more restrictive than the Vendor’s obligation in the APA to ensure “that the lease premises and fixtures are in a state of good repair”.

[181] The Lease obliged the plaintiff:

(a) to keep the Premises in good order and condition;

(b) to keep the equipment and fixtures in good working order and to replace such items if damaged during the term;

(c) to heat the premises to a sufficient temperature at all times so that it will not be damaged by frost or cold;

(d) to repair any damage caused to the premises by the wilful or negligent conduct of the plaintiff or anyone permitted on the premises by the tenant;

(e) to give prompt notice to the Landlord of any accident or defect in the water pipes, heating apparatus, wiring or to any other part of the premises;

(f) to pay the cost for any damage caused to the water, drainage or heating pipes; and

(g) to shut off and drain any outside water outlet to prevent it from freezing and causing damage to any pipes and connections and pay the cost to repair the same.

[182] The equipment in the premises belonged to the Vendor and then the plaintiff after closing. The above obligation to keep equipment in good working order is another example of each defendant corporation contracting as to assets owned by the other defendant corporation.

[183] Events of default defined in the Lease include:

(a) non-payment of rent after three days’ notice from the Landlord;

(b) the plaintiff’s failure upon notice to remedy the breach of its obligations in the Lease; and

(c) abandonment of the premises by the tenant or the premises becoming vacant for a period of five consecutive days or the movement by the plaintiff of its trade fixtures, chattels or equipment out of the premises.

[184] Upon any such default, the Landlord had the right to terminate the Lease by notice or to re-enter and repossess the premises and remove and store any property therein or sell such property.

[185] Unlike the APA, the Lease contains an “entire agreement” provision by which the terms of the Lease supersede any previous agreements or representations.

[186] The premises and fixtures on May 10 to, 2013 were operational but contained numerous latent defects known to the defendants as evidenced in the Belec and Easterbrook Reports and not known ot the plaintiff until those latent defects demonstrated themselves or were identified by the two engineers.

Chronology of Events

[187] The plaintiff obtained a written estimate from a construction company on March 21, 2014 which states the cost to repair the issues identified in the Belec Report is approximately $320,000.

[188] The plaintiff sent the WESA and Belec Reports and to the defendants on March 26, 2014 and indicated that:

(a) the continued operation of the Business was impossible without significant repairs to the Premises due to water infiltration and concern that the premises were no longer safe for the continued operation of the Business;

(b) the Premises’ problems complained of and their ineffective repair had existed prior to the commencement of the Lease which were not discoverable upon reasonable inspection by the plaintiff;

(c) the Landlord was obliged to disclose such issues to the plaintiff prior to entering into the Lease and failed to do so;

(d) the Vendor had falsely represented in the APA that the Premises and fixtures were in a good state of repair despite knowing that the water infiltration problems and their ineffectual repair predate the sale of Assets;

(e) the plaintiff was deprived of its entitlement to quiet enjoyment of the Premises which could no longer be safely occupied unless immediate steps were taken to remedy the issues at identified in the enclosed reports;

(f) in the absence of the defendants’ proposal to remedy the issues identified, the plaintiff would not continue to pay rent effective April 1, 2014; and

(g) the defendants misrepresentation regarding the Business, the Assets and the Premises had caused the plaintiff damages including the loss of its investment, loss of revenue, the cost of repairs not properly its responsibility, the cost of replacement equipment and the cost of honouring coupons issued and not disclosed by the Vendor prior to the purchase of Assets. The plaintiff accordingly on April 15, 2014 would cease making monthly payments under the promissory note as to the balance of the purchase price of the Assets.

[189] This was not a notice repudiating the Asset purchase or the Lease.

[190] The defendants failed to respond to the plaintiff’s above March 26, 2014 letter or the enclosed engineering and air analysis reports.

[191] The plaintiff by letter dated April 2, 2014 advised the three defendants that:

(a) their silence indicated refusal to the plaintiff’s March 26, 2014 request to conduct the repairs required to correct the unsafe conditions;

(b) continued operation of the Business was unsafe and could not continue without such repairs;

(c) the Business accordingly would be closed on April 6, 2014 due to the unsafe conditions, unless it received a comprehensive plan to address the identified issue; and

(d) the plaintiff intended to send its reports to Health authorities.

[192] This notice indicates the plaintiff’s wish to continue operating the Business pursuant to the Lease. The plaintiff was not thereby repudiating the Asset purchase contract or the Lease.

[193] Mr. Ackerman and the defendant corporations again refused to respond.

[194] It would have been irresponsible and negligent for the plaintiff to have continued operation of the Business in the Premises in the face of the health and safety risks reported by its experts. The defendants knew or should have known that, but remained determined in their attempt to force the plaintiff to do exactly that.

[195] On April 7, 2014, two weeks after having received them, Mr. Ackerman sent the plaintiff’s WESA and Belec Reports to Mr. De Groot, a friend of his, who is an engineer and asked him to read them. He was seeking an engineering report to contradict the WESA Report and the Belec Report in particular. Mr. Ackerman did not address the issues raised with the plaintiff nor inform the plaintiff he was retaining an engineer.

[196] The plaintiff on April 8, 2014 forwarded the Belec and WESA Reports and a complaint to the premises division of the City of Brockville (the “Premises Division”).

[197] Mr. Ackerman on April 9, 2014 told Mr. De Groot that he needed a report to contradict the WESA and Belec Reports. Mr. Ackerman engaged Mr. De Groot’s firm, D.D.D.G. Engineering, for that purpose.

[198] On April 15, 2014 the Premises Division’s inspectors, Messrs. Scott and Turner, conducted a scheduled property standards inspection of the Premises in response to structural concerns highlighted in the Development Report. Miss Frenette was present in the parking lot. The inspectors were provided access into the Premises by the wife of Mr. Ackerman, Mr. Harkness, Mr. Harper who had been the restaurant manager until demoted by Ms. Frenette and Ms. Ackerman’s father.

[199] Following this inspection, Messrs. Scott and Turner reported their observations to Mr. Caskenette, head of the Premises Division, who then consulted with the City’s solicitor and was advised that he should follow standard procedure with regards to a report from an engineer identifying structural deficiencies and potential imminent failure. Mr. Caskenette thereupon directed his staff to issue and post an unsafe Premises order and restrict Premises occupancy at that time. That order declared the Premises unsafe, its closure and directed the Landlord to undertake repairs to comply with the structural deficiencies as identified by the plaintiff’s March 15, 2014.

[200] Mr. Ackerman immediately notified Mr. De Groot of the unsafe and closure order by the Premises Division. Mr. De Groot wrote to Mr. Caskenette in the Premises Division and stated that his firm, subject to its inspection of the Premises, may choose to refute the Belec Report. He asked:

(a) the Premises Division to identify what issues in the Belec Report caused issuance of the closure order;

(b) what would occur if his firm refutes the Belec Report, how does the Premises Division determine which conflicting report/opinion to rely upon; and

(c) what information and details would help the Premises Division in this determination.

[201] On April 17, 2014, Mr. Caskenette replied and stated:

(a) the principle concerns of the Premises Division were the structural issues in the Belec Report which resulted in the closure order which needed to be addressed;

(b) the Premises Division could request a third party engineer peer review in the case of two conflicting engineering reports; and

(c) the D.D.D.G. engineering report should not simply state it refuted the Belec report but should give reasons for any disagreement.

[202] Mr. De Groot enlisted Mr. Easterbrook, another engineer in the D.D.D.G. firm, to respond to the Belec Report due to his personal relationship with Mr. Ackerman. Mr. Easterbrook inspected the Premises on April 16, 2014, together with Mr. Ackerman and Mr. Harkness, without notice to the plaintiff or Mr. Belec.

[203] Mr. Ackerman in an email to Mr. De Groot on April 19, 2014 asked about Mr. Easterbrook’s progress with producing a report as he needed to re-open the Business by the following weekend. Mr. Ackerman by then had not communicated any response to the plaintiff for almost one month. He did not want the plaintiff to continue with the Business in the Premises and made no effort to pursue that result. He and the defendants had decided to retake the Assets, re-open and operate the Business in the Premises and retain the $275,000 of the Asset purchase price paid and the elevated rent paid since May 2013.

[204] Mr. Easterbrook sent his draft report to Messrs. De Groot and Ackerman on April 20, 2014. Mr. De Groot edited the draft report. He put aside his previous recognition that his personal relationship prohibited his involvement. The Easterbrook Report was then finalized and issued on April 21, 2014.

[205] The Easterbrook Report disagreed with the findings, analysis and repair recommendations in the Belec Report.

[206] Mr. De Groot sent the Easterbrook Report to Mr. Caskenette on April 21, 2014 but did not send it to the plaintiff or Mr. Belec.

Withholding Of The Easterbrook Report

[207] The Easterbrook Report disagrees with the risk assessment and many of the observations in the Belec Report. Considerable trial time involved these experts debating the validity of their opinions. That interesting debate ignores, however, the events and opinions as they occurred.

[208] One would have thought that the defendants now having an engineering opinion to counter the Belec Report would send it to the plaintiff in support of a request that the APA and Lease obligations be met. The defendants instead kept and communicated nothing about the Easterbrook Report to the plaintiff then, after the City lifted the closure order and somehow continued to refuse to produce that report until shortly before trial. The Premises Division subsequently refused to disclose the Easterbrook Report.

[209] The defendants’ denial of this relevant information at the critical time in April 2014 prevented the plaintiff and its experts the opportunity to consider and respond to the Easterbrook Report’s opinions and conclusions.

[210] The defendants thereby forced the plaintiff at the time to decide whether to continue operating the Business in the Premises and expose its employees and the public to the risks identified in the Belec and WESA Reports, being the only expert opinions available to it. The plaintiff would have been negligent to ignore and simply carry on the Business based on the findings in the reports of its experts.

[211] So why deny the plaintiff this relevant available information in April 2014? The answer to that question includes at least the following factors.

[212] The Vendor having by then received $275,000 of the Asset purchase price, with the resulting reduction of Mr. Ackerman’s potential liability as guarantor of the Vendor’s debts and the Landlord’s receipt of 11 months of the much higher increased rent, were each in a much better financial position in April 2014 compared to 11 months earlier. The Vendor had a general security agreement over the Assets and the Lease entitled the Landlord to possession in the event of default.

[213] Mr. Ackerman previously expressed frustration due to the frequent complaints and calls for assistance by Ms. Frenette.

[214] These are at least some of the reasons why the defendants refused to disclose the Easterbrook Report to the plaintiff in April, 2014. These same reasons are why Mr. Ackerman did not reply upon being provided with the WESA and Belec Reports and why the defendants never offered to do any remedial repairs.

[215] The defendants also knew that fixtures attached to the reality, including those purchased and installed by the plaintiff such as furnace motors, air conditioning equipment and food preparation cabinetry could not legally be removed for use elsewhere. Brockville is an extremely small community with an even smaller commercial area.

[216] The defendants were quite happy if the plaintiff without disclosure of the Easterbrook Report departed out of frustration and silence by Mr. Ackerman, even after the City lifted the safety closure order. There undoubtedly were other future purchasers and tenants who might, yet again, financially benefit the defendants.

Second Inspection by City’s Premises Division

[217] Mr. De Groot emailed Mr. Caskenette on April 23, 2014 stating he had learned the Premises Division intended to inspect the Premises on April 24 and stated he would arrange for Mr. Easterbrook to be present. Mr. Caskenette replied requesting Mr. Easterbrook not be present to avoid it being “construed by either party that there has been any undue influence by said parties” and should the Premises Division “have any questions or concerns regarding either report, we will contact” the engineer(s).

[218] Mr. Caskenette and three Premises inspectors, one of whom was an engineer, inspected the Premises on April 24, 2014 as to its structural integrity as Mr. Caskenette had previously indicated, including:

(a) the structural integrity of the purported undersized beam above the dining room ceiling; and

(b) the purported imminent collapse of the roof structure.

[219] The Belec and WESA reports identified these two but also numerous other issues.

[220] The Premises Division examiners inspected the Premises in the presence and with the participation of Mr. Ackerman, his wife, Mr. Harkness, the long term handyman used for the Premises, Mr. Harper, who had been demoted by the plaintiff as manager of the restaurant and bar and Mr. Shields. The plaintiff and Ms. Frenette were not present or aware of this inspection. Mr. Caskenette’s April 23 stated goal of avoiding any appearance of influence as between the plaintiff and the defendants no longer seemed relevant as to Mr. Ackerman and three other property and Business representatives participating during the inspection, notwithstanding that the plaintiff was unaware of that inspection, unaware of the Easterbrook report and was not present at this inspection.

[221] Mr. Caskenette, Mr. Wood and Mr. Scott each prepared a File Note dated April 24, 2014 as to their observations during their 55 minute inspection of the Premises. Combined, those notes state:

(a) no critical roof issues were noted that would confirm collapse regarding the flat membrane portions, the gable and the hip style portions of the roof. Seasonal weathering of the roof was noted. Roof areas did not indicate evidence of weak points. No noted roof deflection was apparent. Shingled areas were weathered and in fair condition. The two fire charred structural roof members as reported by the engineers were noted as to the support of the second floor roof structure. The other structural roof members at that location were as originally constructed. The membrane roof appeared intact, but showed evidence of various previous repairs;

(b) the wooden eves, soffits and fascia areas evidenced lack of maintenance, painting with some evidence of water penetration into the wood, were deteriorated but generally in reasonable condition;

(c) the contractor (Mr. Harkness) removed portions of the interior third floor ceiling drywall to permit interior inspection of that portion of the third floor hip roof. No critical issues were found. Little or no previous attempt had been made to access the interior of the hipped roof structure. The hip roof portions examined were dry, firm and did not indicate water damage. Junction points between adjoining hip structure members were even with no signs of deflection;

(d) the purported undersized beam above the dining room ceiling was inspected as to its structural sufficiency. No deflection of this ceiling beam was noted. It was consistent with standard construction and installation practices. No water staining on the girded truss or any structural components associated with its installation were noted;

(e) the floor system or original wooden floor above that dining room truss beam showed significant water damage. Maintenance staff (Mr. Harkness) indicated that the dishwashing equipment in the kitchen above the dining room truss had been leaking and was a source of moisture in this area; and

(f) the East third floor exterior brick wall has cracks, spalling and has shifted however the crack has been sealed, the brick appears to be solid but requires maintenance to prevent further deterioration.

[222] The Premises Division withdrew its Premises closure order on April 25, 2014 without:

(a) engagement of a third party engineer to review the two opposite opinions of Messrs. Belec and Easterbrook as to what level of risk if any the Premises posed and what level of repairs were required to remedy those deficiencies; and

(b) without obtaining a review and critique of the Easterbrook Report by Mr. Belec, similar to the one Mr. Easterbrook had performed.

[223] The plaintiff upon learning the closure order had been withdrawn asked the City to see the documentation relied upon in support of that decision. Mr. Caskenette responded that the plaintiff would have to file an access to information request, which the plaintiff filed.

[224] Mr. Caskenette or one of his inspectors notified Mr. Easterbrook that the plaintiff was requesting production of documentation including his report related to its withdrawal of the closure and repair order. Mr. De Groot was alerted and stated his belief that they could advise the Premises Division that it could justifiably refuse to release the Easterbrook Report. Mr. De Groot contacted Mr. Ackerman who emailed in response, in capital letters, that no information should be released to the plaintiff.

[225] Mr. Ackerman had no wish for the plaintiff to resume operation of the Business.

[226] Mr. Easterbrook wrote a lengthy email with reasons for opposing production of his report to the plaintiff. He then at trial obtained qualification as an expert to provide fair, objective and non-partisan engineering opinion evidence. In retrospect, Mr. Easterbrook should not have been qualified as an expert.

[227] Messrs. De Groot and Easterbrook were advocates for Mr. Ackerman and the corporate defendants.

Analysis

Failure to Convey All Assets Used In Business

[228] The Vendor’s failure to convey title or assign its rights as to the ATM machine and the jukebox to the plaintiff breached its obligation in paragraph 1 of the APA.

[229] These two pieces of equipment are not included amongst the list and categories of assets excluded in paragraph 2 of the APA.

[230] These two pieces of equipment are relatively minor in the context of the quantity and value of the assets sold. The Vendor’s breach of contract as to this equipment does not therefore go to the heart of the agreement. The appropriate remedy for this breach is damages, which are not claimed in the alternative.

[231] This breach in isolation does not entitle the plaintiff to rescind the APA.

Nature and Extent of Obligation to Ensure Equipment’s and the Premises’ Good State of Repair

[232] Paragraph 6(d) of the APA provides the Vendor shall ensure that:

(a) all equipment is in good working order on the day of closing; and

(b) that the lease premises and fixtures are in a state of good repair.

[233] Paragraph 6 of the APA is entitled “Conditions Precedent to Closing” and begins with the phrase that the “closing of this transaction is subject to the following conditions precedent”.

[234] The defendants without legal authority submit that in proceeding to close the APA transaction, the plaintiff thereby acknowledged that the paragraph 6(d) conditions were satisfied and paragraph 6 did not create an ongoing warranty with respect to the equipment or the premises. This is an oversimplification of the nature and extent of paragraph 6 and is legally inaccurate.

[235] The court agrees that the Vendor’s obligation that the equipment be in good working order on the date of closing and that the premises and fixtures are in a state of good repair was not a continuing obligation in the sense of equipment breaking or newly developed elements of the premises requiring repair which developed after May 10, 2013. The issue is the status of the equipment and elements as of May 10, 2013.

[236] The court in Gladu v. Robineau, 2017 ONSC 37, paras. 272 to 274:

(a) cites the obligation on contractual parties as determined by the Supreme Court in Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, para 86, to act honestly in relation to the performance of the contract;

(b) cites the duty of a vendor to act in good faith and to take all reasonable steps to complete the sale transaction, pursuant to Dynamic Transport Ltd. v. O.K. Detail Ltd. [1978] S.C.R. 1072, at p. 1084; and

(c) concludes that vendors are under a positive duty to not lie and to not conceal (para 274).

[237] The party who is reasonable for satisfying a contractual term including a condition has a duty to act in good faith by taking all reasonable steps to complete the transaction as contracted for and exercise any discretion it has in good faith (Marshall v. Bernard Place Corp. (2002), 2002 CanLII 24835 (ON CA), 58 O.R. (3d) 97 (C.A.), at para. 26).

[238] The Vendor ignores:

(a) its failure to ensure that the air-conditioning system in the Premises was in a state of good repair on May 10, 2013;

(b) its failure to ensure the state of good repair of the sewer drain pipe below the floor in the second storey kitchen, the incorrectly slanted kitchen floor, the spalled and extruding portion of the exterior brick wall on the second storey, the overcharged electrical circuit board in the basement, the absence of ventilation of the roof cavities and its impact as to condensation during the winter, the absence of vapour barriers, the inadequate insulation including that of water pipes, a malfunctioning thermostat in the disco bar and the charred roof support membranes on May 10, 2013 (the “Unrepaired Elements”);

(c) the fact that by paragraph 6(d), it contractually incorporated and undertook to ensure the state of good repair of the premises and fixtures as a condition into the APA contract of the sale of business chattels and business name;

(d) paragraph 6(c) required the plaintiff to lease the Premises, which contained the chattels to be sold in the APA; and

(e) the requirement of the associated Landlord in the Lease that the premises be used for the same and continuing purpose for which the chattels were located in the Premises.

[239] The APA, in requiring a five year lease with the Landlord and obligating the Vendor to ensure the state of good repair of the Premises and fixtures, was not simply a contract of sale of chattels.

[240] The defendants rely upon the different remedies available in tort versus for breach of contract. They submit that the plaintiff’s cause of action at its best alleges breach of the APA contract for which rescission is not an available remedy. The court for the reasons indicated below disagrees with this submission as to the availability of rescission in the case of breach of contract.

[241] The defendants are correct in their general categorization that:

(a) terms of a contract are different than representations;

(b) terms are contractual. Breach of a promise contained in a term gives rise to an action for breach of contract;

(c) representations are non-contractual and consist of a statement or assertion made by one party to the other before or at any time of the contract of some matter or circumstances relating to it;

(d) representations may become terms of the contract, in which event they will have effect as such;

(e) damages for breach of contract are compensatory and based on the value of the contractual right requiring the party breaching the contract to compensate for the loss caused by the breach which is measured by the value of the performance promised (see S.M. Waddams, The Law of Damages, loose-leaf (consulted on 8 December 2016), (Toronto: Canada Law Book, 2015), at p. 5-1; and Simpson v. Hatzipetrakos, [2009] O.J. No. 3728, at para. 24);

(f) this differs from damages for the tort of fraudulent misrepresentation, which seek to put the plaintiff in the position it would have been in had the misrepresentation not been made (see Waddams, at p. 5-19); and

(g) if a representation is untrue, the appropriate remedy is not an action for breach of contract, but the avoidance or rescission of the contract entered into in consequence of the representation, and, possibly, a tort action for damages (Gladu paras 294-298).

[242] A plaintiff in a successful action for breach of contract is entitled to compensation for the pecuniary loss flowing from the breach: Fridman, p. 730.

[243] The complexity in this case is the condition requiring the lease of the Premises and the insertion and interplay of the Vendor’s obligation to ensure the state of good repair of the Premises and fixtures in the APA contract.

[244] The above general legal principles do not include consideration of the difference between condition and warranty contractual provisions.

Contractual Conditions and Warranties

[245] G. Fridman states:

The term “condition” in the past and currently referred to requirements that had to be satisfied in order to produce a binding contract. The expression “root of the contract” with generally accepted as the distinction between conditions and the lesser terms such as warranties. Courts determined whether a clause went to the root of the contract in the light of whether it’s non-compliance would entitle a party to repudiate or an action for damages by the aggrieved party (Fridman p. 479).

Older English cases differentiated between conditions precedent and other conditions, namely conditions were terms of the contract or as conditions precedent was something to be satisfied before the contract comes into operation or something basic to its continuing operation (Fridman p. 480).

Warranty refers to determine the contract which is not the root of the agreement and expresses some lesser obligation, the failure to perform of which can give rise to an action for damages but never to the right to repudiate the contract. Conditions and warranties have different meanings according to the context in which they are used (Fridman p. 486).

[246] A condition precedent is a contract term that the parties intended to be fundamental to its performance, meaning that its non-performance can be construed as a substantial failure to perform the contract at all. This can be contrasted with a mere warranty, which is a less important term that often relates to the quality of the subject. A breach of warranty survives closing and entitles the purchaser to damages: Springhill Gardens Developments Inc. v. Kent, [2004] O.T.C. 8 (S.C.), at paras. 9-11. The Vendor’s obligation in paragraph 6(d) accordingly was fundamental to performance of the APA of a level of importance which exceeded the warranties in paragraph 9.

[247] A distinction exists between a true condition precedent and other types of conditions. A “true” condition precedent arises where the rights and obligations of the parties depend on a future uncertain event beyond the parties’ control and dependant entirely on the will of a third party. However, if the condition’s fulfilment only depends on the actions of one or both of the parties, it is not a true condition precedent. Failure to satisfy a condition that is not a true condition precedent does not automatically render the contract void (Coghlan v. Unique Real Estate Holdings Inc., 2016 ONSC 6420, at paras. 33-37, 48).

[248] The effect of closing on the condition depends on the facts and the parties’ intentions. The manner in which the parties have labelled a particular provision is not necessarily determinative. Rather, the court should look to the essential nature of the contractual provision on the facts of each case (Gelakis v. Giouroukos (1991), 18 R.P.R. (2d) 161 (Ont. Gen. Div.) pg. 49).

[249] The Vendor’s direct engagement for itself to ensure:

(a) the good working order of the equipment; and

(b) the state of good repair of the Premises and fixtures.

[250] Traditionally, a condition in a contract of sale of goods was a term which was so important that the failure to perform it entitled the other party to treat the contract as at an end and pursue whatever remedies became available, whereas breach of a warranty was considered less important entitling the injured party to sue for damages however the parties remained bound to perform obligations under the contract. The traditional distinction between condition and warranty involved determining whether the provision that went to the root of the contract were conditions therefore and not true conditions precedent.

[251] That a condition in some cases can mean that it’s a non-fulfilment goes to the very existence or life of the contract, namely a condition precedent, being a term in the contract, yet outside of it in relating to the life or existence of the contract (Fridman, p. 478 and 479).

[252] While the simple distinction between a condition and a warranty in many cases is sufficient to determine the respective obligations and consequences of a breach, that distinction in other situations is insufficient to permit a court to arrive at a proper and just conclusion in order to prevent injustice to one of the parties (Fridman p. 487 to 489).

[253] The paragraph 6(d) obligation to ensure the state of good repair of the premises and fixtures is a condition of and related to the core of the APA.

[254] Paragraph 6(d) of the APA creates two things, namely:

(a) it establishes the Vendor’s obligation to ensure the good working order of the equipment on the date of closing and to ensure the good state of repair of the premises and fixtures; and

(b) it grants a right to the plaintiff to not close the transaction upon knowledge that the Vendor has failed to fulfil its above obligations.

[255] It is illogical and an inappropriate interpretation of paragraph 6(d) to hold that a court will relieve a vendor from its obligation to ensure the repair of non-apparent latent Premises elements known to it, because the plaintiff failed to observe the same and proceeded to close the transaction.

[256] It is not contradictory and the logical interpretation of paragraph 6(d) is that the plaintiff’s right thereunder to refuse to close expired on closing, however the Vendor’s breach to ensure the repair of existing latent defective premises’ and fixture elements remained actionable upon their subsequent disclosure. A contrary interpretation encourages default by a party which contracted to ensure the repair of known defects and then ignored that obligation in order to gain the immediate financial gain of closing.

[257] The plaintiff was entitled to assume that the Vendor would take all reasonable measures to comply with its obligations as to the state of the equipment and the premises pursuant to paragraph 6(d) of the APA.

[258] The court in Gladu as to patent versus latent defects stated:

292. The distinction between patent and latent defects is described in Halsbury's Laws of England, at para. 51:

Defects of quality may be either patent or latent. Patent defects are such as are discoverable by inspection and ordinary vigilance on the part of a purchaser, and latent defects are such as would not be revealed by any inquiry which a purchaser is in a position to make before entering into the contract for purchase.

293. A home inspection is not intended to find latent defects.

[259] The fact the plaintiff did not have a Premises inspection conducted prior to closing must also be considered in light of the fact it was leasing and not buying the premises, which is when an inspection of the Premises would normally be conducted.

[260] The APA does not state that the obligations of the Vendor such as those in paragraph 6(d) do not survive closing.

[261] Paragraph 9 of the APA lists numerous representations and warranties by the Vendor.

[262] Subparagraph 9(1)(e) addresses the enforceability of obligations and states that “this Agreement constitutes a valid and binding obligation of the Vendor or enforceable against it in accordance with its terms”. The enforceability of the Vendor’s obligations are not thereby limited to the representations and warranties in paragraph 9 and extend beyond that paragraph to the full contract which includes the Vendor’s obligations in paragraph 6(d). Paragraph 9(1)(e) accordingly supports the conclusion that the Vendor’s paragraph 6(d) obligations survived closing.

[263] The Vendor under paragraph 9(e) represents and warrants that its obligations in paragraph 6(d) are valid and binding terms of the contract enforceable against it, thereby identifying that those obligations, as to the state thereof as of May 10, 2013, survived closing and remained enforceable.

[264] The court concludes that the Vendor breached its obligations in paragraph 6(d) to ensure that its equipment being sold was in good working order on May 10, 2013 and that the Premises and fixtures were in a state of good repair. That obligation as of May 10, 2013 regarding the state of non-repair of the Premises and fixtures survived closing and remained actionable thereafter as to the latent elements which the Vendor knew required and were not repaired.

Whether Rescission Is Available For Breach of APA Condition

[265] Waddams addresses the conflicting jurisprudence as to the availability of the remedy of rescission in the case of breach of contract, reconciles those authorities and states:

Some courts have held that rescission in the case of sale of goods is not available if the misrepresentation is a term of the contract (Waddams, paras. 427 and 428).

The obvious remedy, in the face of the conflicting case law, is prevention of enrichment, either by setting aside the transaction or by a monetary adjustment of equivalent economic effect (Waddams, paras. 427 and 428).

[266] The author then addresses unjust enrichment in the context of a contract induced by an innocent but false statement, which would include a statement to ensure the state of repair, as follows:

Innocent misrepresentation is a sufficient reason to deny the enrichment, namely the benefit of a contract induced by a false statement (Waddam, paras. 428 and 429).

[267] The above goal of preventing enrichment to a contractual party knowingly breaching its undertaking to ensure the repairs were carried out, combined with the equitable jurisdiction of this court, constitutes jurisdiction in contract to set aside the APA by way of rescission or to grant judgment in the amount of the purchase price paid thereunder.

[268] The Vendor’s representation in the APA to ensure the premises and fixtures owned by the Landlord were in a state of good repair goes to the heart of the APA sale contract which required the plaintiff to agree to a five year lease with the Landlord of the premises in which the Assets were to be used in the Business to therein be carried on.

Party’s Unilateral Mistake

[269] A party induced to enter into a contract by reason of fraud or essential error of a material kind is entitled to seek rescission of the contract and restoring the parties to their original position (Guarantee Co. of North America v. Gordon Capital Corp. 1999 CanLII 664 (SCC), [1999] 3 S.C.R. 423, para 39 and Abram Steamship Co. v. Westville Shipping Co., [1923] A. C. 773 (H.L.), p. 781).

[270] The inability to conduct business within the premises in utilizing the Assets purchased was the reasonable and probable consequence of the Vendor’s breach of its contractual obligation in the APA to ensure the good state of repair of the Premises, resulted in the plaintiff’s loss as in the case of Eastwalsh Homes Ltd. v. Anatal Developments Ltd., 1993 CanLII 3431 (ON CA), 12O.R. (3d) 675 (C.A.), at p. 687.

[271] The Supreme Court in Guarantee Co. of North America v. Gordon Capital Corp., 1999 CanLII 664 (SCC), [1999] 3 S.C.R. 423 addresses a party’s decision to rescind a contract and determined the availability of rescission as a remedy in contract.

[272] The Supreme Court in Guarantee stated:

39. A fundamental confusion seems to exist over the meaning of the terms "rescission" and "repudiation". This confusion is not a new one, as it has plagued common law jurisdictions for years. [page440] Rescission is a remedy available to the representee, inter alia, when the other party has made a false or misleading representation. A useful definition of rescission comes from Lord Atkinson in Abram Steamship Co. v. Westville Shipping Co., [1923] A.C. 773 (H.L.), at p. 781:

Where one party to a contract expresses by word or act in an unequivocal manner that by reason of fraud or essential error of a material kind inducing him to enter into the contract he has resolved to rescind it, and refuses to be bound by it, the expression of his election, if justified by the facts, terminates the contract, puts the parties in status quo ante and restores things, as between them, to the position in which they stood before the contract was entered into.

See similarly G. H. L. Fridman, The Law of Contract in Canada (3rd ed. 1994), at p. 807.

42. However, merely clarifying the distinction between rescission and an accepted repudiation does not end the discussion. Since "rescission" has frequently been used to describe an accepted repudiation, courts must be sensitive to the potential for misuse. To that end, courts must analyse the entire context of the contract and give effect, where possible, to the intent of the parties. If they intended "rescission" to mean "an accepted repudiation", then the contract should be interpreted as such. For example, in Mills v. S.I.M.U. Mutual Insurance Association, [1970] N.Z.L.R. 602 (C.A.), the court held that a clause stating that in the event of false statements the policy "shall be void", was in fact a repudiation clause. Crucial to the court's reasoning in that case was the fact that the clause in question provided for forfeiture of premiums. Turner J. therefore concluded, at p. 609, that

the policy does not provide that the consequences of an untrue statement shall be that the policy shall be deemed void ab initio, as if it had never come into existence, for the premium is to be forfeited... . I therefore construe the clause to mean that an untrue statement shall entitle the respondent to repudiate liability under the policy, while keeping the premium.

Of course, contrary to the facts in this appeal, the actual term "rescission" was not used in Mills. Nonetheless, we must always examine whether the use of the word rescission is indeed consistent with the parties' intent.

43. Before turning to the issue of intent, however, one must determine whether rescission is even available. As Treitel notes regarding the law in England, supra, at p. 347:

Before the Misrepresentation Act it was clear that a person could rescind a contract for a misrepresentation which did not form part of the contract; but it was doubtful whether this right to rescind survived where the misrepresentation was later incorporated into the contract as one of its terms. [Emphasis in original.]

However, the Misrepresentation Act 1967 (U.K.), 1967, c. 7, s. 1, cleared up that question in England, providing that "a person shall be entitled to rescind notwithstanding that the misrepresentation has become a term of the contract" (Treitel, supra, at p. 347).

44. In Canada, the issue is somewhat less clear. The state of the law is best summarized by Waddams, supra, at para. 427:

If the [misrepresentation] is a term of the contract ... the mistaken party is entitled to damages as for breach of contract. Whether the party is further entitled to set aside the transaction and demand restitution of the contractual benefits transferred will depend upon ... whether the breach is "substantial" or "goes to the root of" the contract.

A breach that is "substantial" or "goes to the root of" the contract is often also described as a material breach; see, for example, Fridman, supra, at p. 293: "A misrepresentation is a misstatement of some fact which is material to the making or inducement of a contract"….

The question, in light of the law as stated in Waddams, supra, and Fridman, supra, is whether the misrepresentation is "substantial", "material", or "goes to the root of" the contract. This brings us back to the issue of the parties' intent, for whether the rescission is warranted is at least in part a question of intent.

47. In summary, a misrepresentation, even one that was incorporated into the contract, gives the innocent party the option of rescinding the contract, i.e. to have

it declared void ab initio.

[273] In summary, rescission is an equitable remedy available to the court in an action for breach of contract where the representation is incorporated in the contract, as contained in paragraph 6(d) of the APA in this case.

[274] On the facts of this case, rescission of the APA is the appropriate and fair remedy with an accounting by the Master as to the use of the chattels and name during the 10 to 11 month period of their use.

Deposit

[275] Rescission of the APA results placing the parties back to their position immediately prior to that transaction including repayment of the purchase price paid for the Assets subject to an accounting for the value of the use thereof.

[276] The $15,000 deposit paid pursuant to the APA requires consideration. The plaintiff paid that money upon submission of its offer to purchase pursuant to the APA.

[277] The APA provides that the plaintiff shall pay the sum of $15,000 “as a deposit to be credited towards the purchase price on closing.” The clause then continues in stating that if the plaintiff “fails to complete this transaction for any reason other than the non-fulfillment by the Vendor of any of the conditions set forth in Section 6, the Vendor shall be entitled to retain the deposit as liquidated damages”.

[278] Money paid as a deposit must be paid on some terms implied or expressed. Relevant to that issue is whether the word deposit is used in the contract. If money is paid as a deposit, it is not recoverable if the payor abandoned the contract (Palma v. The Runnymede Iron & Steel Co. 1949 CanLII 73 (ON CA), [1950] O.R. 1 (C.A.)).

[279] If a deposit has been paid under contract which does not provide for its return to the purchaser and the contract has gone off by default of the purchaser, the Vendor is entitled to retain the deposit (Thagard v. Edminston (1925) M. J. 25 (Man. C.A.), p. 3).

[280] On the basis that the plaintiff:

(a) did not fail to close the transaction; and

(b) did not abandon or repudiate the APA and the Lease nor cause those contracts to not proceed for the reasons stated above and for the reasons set forth below;

there is no basis to consider or treat the deposit differently from the other $260,000 of the purchase price paid by the plaintiff under the APA.

Quiet Enjoyment

[281] Whether there has been a breach of the covenant of quiet enjoyment is a question of fact. The nature and extent of the right to quiet enjoyment will depend on the purposes for which the premises are being used (Watchcraft Shop Ltd. v. L & A Development (Canada) Ltd. (1996), 8 O.T.C. 4 (Gen. Div.), at para. 29).

[282] The covenant for quiet enjoyment includes any act that is a substantial, non-trifling interference with the tenant’s ability to use the premises for the intended purpose, in this case as a public restaurant and bar (Watchcraft, at paras. 30-31).

[283] Ongoing roof leaks or fire damage, which have a significant impact on the tenant’s ability to carry on its business, can constitute a breach of the covenant of quiet enjoyment: DMX Plastics Ltd. v. Misco Holdings Inc. (2008), 76 R.P.R. (4th) 300 (Ont. S.C.), at para. 75 and Bassiouny v. Lo (2008), 79 R.P.R. (4th) 179 (Ont. S.C.).

[284] Several of the Premises elements requiring repair such as the inadequate kitchen floor pipes, the inadequate kitchen floor slant to the floor drain, the lack of adequate insulation of pipes in the ceiling of the disco bar, the lack of proper heating of the disco washrooms, the defective thermostat in the disco bar, the need of support of the disco ceiling support beam and the risk of collapse of the exterior brick wall were latent in nature, not apparent to the plaintiff, rendered the premises unfit for the business purpose intended, posed risk of harm to occupants and fundamentally denied the plaintiff’s right to quiet enjoyment.

Lease and Availability of Rescission

[285] The Lease provides that the Landlord shall provide the premises and fixtures on the commencement date in good working order. This contractual provision is not identified as a condition or as a representation or warranty. That, however, is not determinative of the issue.

[286] Unlike the APA, the Lease contains no clause identified as representations or warranties by the Landlord.

[287] The Lease contains a covenant by the Landlord to provide the plaintiff with quiet enjoyment.

[288] Given that entering into the Lease was a condition as to the APA purchase of the Assets and not the reverse and that the purpose of the plaintiff’s purchase of the Assets was to carry on the business of BOTB in the Premises and given the identical level of knowledge by the Landlord and the Vendor regarding the elements in the Premises requiring repair, this contractual condition in the Lease constituted a condition and not a warranty.

[289] The action and inaction by the two corporate defendants is identical.

[290] A tenant will not be able to treat the lease as terminated unless the breach is a fundamental breach, in which the tenant is deprived of substantially the whole benefit of the lease: Chevalier Automobiles Inc. v. Francis (1996), 1 O.T.C. 368 (Gen. Div.), at para. 68; see also 1723718 Ontario Corp. v. MacLeod, 2010 ONSC 6665, at paras. 86-97.

[291] “Constructive eviction” is another scenario in which the tenant may walk away from the agreement. Constructive eviction occurs where:

(a) the breach is intentional or the probable consequence of intentional conduct;

(b) the interference has the character of permanence or wrongfulness; and

(c) the inference is so substantial or intolerable as to make it reasonable for the tenant to vacate: Arangio v. Patterson, [1993] O.J. No. 448 (Gen. Div.), at para. 23.

Where there is constructive eviction, the tenant is entitled to vacate the premises, no longer pay rent, receive damages for consequential loss (such as loss of profit, moving expenses, or damages to growth of business), and potentially receive punitive or exemplary damages (Arangio, at paras. 24-31).

[292] The case of Shun Cheong Holdings B.C. Ltd. v. Gold Ocean City Supermarket Ltd., 2000 BCSC 574, aff’d 2002 BCCA 451, cited with approval in Ontario in MacLeod and Bassiouny v. Lo (2008), 79 R.P.R. (4th) 179 (Ont. S.C.), involved an alleged fundamental breach of the covenant of quiet enjoyment and the remedies available for that.

[293] The trial judge in Shun Cheong found that the covenant for quiet enjoyment had been fundamentally breached when the tenant grocery store suffered repeated leaks of noxious water given that the business was one in which health and safety standards were important (para. 78). The Court found that the breach arose when the landlord failed to repair the leaks, the landlord was notified by the tenant that he considered this a fundamental breach, and the landlord, by re-entering for distraint, foreclosed any negotiation for damages with the tenant and crystalizing into fundamental breach (paras. 78, 91).

[294] The Court found that the landlord was therefore responsible for all proven damages flowing from the fundamental breach of quiet enjoyment (para. 92). The tenant sought return of the entire purchase price of the grocery store business. The court appeared willing to entertain that remedy but held the tenant had failed to prove any particular quantum of damages or provide evidence that he had lost the whole of the investment or income. The Court terminated the lease and ordered return of the tenant’s security deposit but held that further damages lacked a proper evidentiary foundation (paras. 93-99).

[295] Rescission of the Lease and requiring repayment of the rent is not an appropriate remedy in the present case. The plaintiff is not claiming repayment of the rent paid.

[296] The plaintiff occupied the Premises until April 6, 2014 and would be accountable for rent for that period of time. It would be inappropriate to now conduct a hearing before the Master as to the appropriate level of rent when the parties negotiated and agreed upon that as contained in the Lease.

[297] The appropriate remedy given the impact of the latent elements not repaired which materially impaired the operation of the Business is termination of the Lease effective April 6, 2014.

Alternative – Implied Term

[298] In the alternative, if the above interpretation as to the nature of paragraph 6(d) and its enforceability after closing as to the state of the Premises and fixtures as of May 10, 2013 is incorrect, the court in the alternative would imply the same paragraph 6(d) obligation of the Vendor as a condition into the APA contract which remained enforceable as to the latent Unrepaired Elements of the Premises upon discovery by the plaintiff.

[299] A court may imply a term to a contract if the parties intended it, for example for the purposes of business efficacy. A term may not be implied simply on the ground of fairness. The court may determine that everything that was agreed to between the parties is not contained in the written contract and that it is justifiable to imply an additional term to establish the scope of the contractual obligations binding the respective parties. Instances for implying a term include where it is reasonably necessary having regard to the surrounding circumstances (Fridman pages 463 and 464).

[300] Given the nature of the latent Unrepaired Elements in the premises, including their impact on operation of the Business and their potential risk, combined with the Vendor’s undertaking to ensure those elements were repaired, leads to the inescapable conclusion that the plaintiff as testified would not have proceeded with the purchase of the Assets which required it to the lease and carry on business in the premises had it known the state of disrepair and the Vendor’s failure to ensure the state of good repair on May 10, 2013. This provision is reasonably necessary having regard to the surrounding circumstances.

[301] The court would grant rescission of the APA based upon this implied condition for the same reasons as stated above.

Repudiation

[302] The defendants submit the plaintiff repudiated the APA which the Vendor in response accepted with the result of then terminating the APA and the Lease which results in the Vendor’s entitlement to retention of the Assets and the portion of the Asset purchase price paid.

[303] A purchaser’s repudiation or abandonment of the contract thereby terminates and does not rescind such contract. Repudiation or abandonment prevents the purchaser from claiming recovery of the money paid (Rudd v. Balaz 1940 CanLII 404 (MB KB), [1940] M. J. No. 27Man. K.B.) at para 22).

[304] The Supreme Court in Guarantee Co. of North America v. Gordon Capital Corp., 1999 CanLII 664 (SCC), [1999] 3 S.C.R. 423 at 445 stated the following as to repudiation:

40. Repudiation, by contrast, occurs "by words or conduct evincing an intention not to be bound by the contract. It was held by the Privy Council in Clausen v. Canada Timber & Lands, Ltd. [1923] 4 D.R.L. 751], that such an intention may be evinced by a refusal to perform, even though the party refusing mistakenly thinks that he is exercising a contractual right" (S. M. Waddams, The Law of Contracts (4th ed. 1999), at para. 620). Contrary to rescission, which allows the rescinding party to treat the contract as if it were void ab initio, the effect of a repudiation depends on the election made by the non-repudiating party. If that party treats the contract as still being in full force and effect, the contract "remains in being for the future on both sides. Each (party) has a right to sue for damages for past or future breaches" (emphasis in original): Cheshire, Fifoot and Furmston's Law of Contract (12th ed. 1991), by M. P. Furmston, at p. 541. If, however, the non-repudiating party accepts the repudiation, the contract is terminated, and the parties are discharged from future obligations. Rights and obligations that have already matured are not extinguished. Furmston, supra, at pp. 543-44.

41. So much is relatively clear. Problems have arisen, however, from misuse of the word "rescission" to describe an accepted repudiation. In Keneric Tractor Sales Ltd. v. Langille, 1987 CanLII 29 (SCC), [1987] 2 S.C.R. 440, at p. 455, Wilson J., writing for the Court, addressed the distinction as follows:

The modern view is that when one party repudiates the contract and the other party accepts the repudiation the contract is at this point terminated or brought to an end. The contract is not, however, rescinded in the true legal sense, i.e., in the sense of being voided ab initio by some vitiating element. The parties are discharged of their prospective obligations under the contract as from the date of termination but the prospective obligations embodied in the contract are relevant to the assessment of damages: see Johnson v. Agnew, [1980] A.C. 367, [1979] 1 All E.R. 883 (H.L.), and Moschi v. Lep Air Services Ltd., [1973] A.C. 331, [1972] 2 All E.R. 393 (H.L.). [Emphasis added.]

47 … Repudiation, by contrast, occurs when one party indicates its intention not to fulfill any future obligations under the contract. If the other pa y accepts the repudiation, the contract is terminated, not rescinded. To use "rescission" and "accepted repudiation" synonymously can lead only to confusion and should be avoided. Where there is some doubt as to whether repudiation or rescission is intended, courts should look to such factors as the context of the contract, particularly the intent of the parties. For sophisticated parties, it will take strong evidence to displace the meaning suggested by the parties' choice of language in the contract itself. In this case, because both parties agreed to the word "rescission".

[305] If the innocent party to a repudiated breach or an anticipatory repudiation wishes to be discharged from the contract, its election to disaffirm the contract must be clearly and unequivocally communicated to the repudiating party within a reasonable time. Actual notice of acceptance or adoption of the repudiation is not necessary. Adoption or rejection of the repudiation may be reasonably inferred from all the circumstances (Brown v. City of Belleville, 2013 ONCA 148, para 42 to 457).

[306] The defendants allege that the plaintiff repudiated these two contracts because of the decreased profitability of the Business during the winter of 2013/2014. The evidence indicates revenue materially decreased during the winter season which had also been the case during the Vendor’s prior operation of the Business which included Mr. Ackerman’s closure of the disco bar for months which only opened two weeks prior to May 18, 2013, just as occurred during the plaintiff’s operation. The plaintiff was aware on April 6, 2014 that the Business and its revenue stream were about to dramatically increase in approximately one month. The lower winter revenue levels were not a motivation to repudiate these contracts.

[307] Correspondence from the plaintiff’s lawyer dated March 26 and April 2, 2014 seek action by the corporate defendants to remedy the Unrepaired Elements to permit the plaintiff’s continued ownership and operation of the Business.

[308] These letters make it clear that the plaintiff was not repudiating or abandoning the purchase and lease contracts. The defendants refused to respond then and subsequently, even after the Premises Division’s temporary closure of the premises and later when that closure order was lifted.

[309] Faced with this continuing refusal to communicate, counsel for the plaintiff accordingly caused issuance of the claim in this proceeding on April 3, 2014 in which the plaintiff seeks rescission of the APA.

[310] The plaintiff did not repudiate the APA or the Lease.

Failure to Mitigate

[311] The defendants submit that the plaintiff failed in its duty to mitigate its damages which thereby prevents the recovery thereof. The defendants point to the APA chattels purchased which the plaintiff left in place but could have removed and used elsewhere or sold.

[312] The duty to mitigate prevents a plaintiff from recovering compensation that could have been avoided or lessened by taking reasonable steps: Gladu, para 389, relying upon Toronto Industrial Leaseholds LTD. v. Posesorski, (1994) 1994 CanLII 7199 (ON CA), 21 O.R. (3d) 1 (C.A.), at p.10.

[313] A plaintiff in an action for breach of contract has a duty to take all reasonable steps to mitigate the loss occasioned by the breach and prevents recovery in respect of any part of the damages caused by the plaintiff’s failure to take such steps (Fridman, p. 730).

[314] The defendant has a heavy onus to prove that the plaintiff has failed to mitigate. The plaintiff will be relieved of its duty to mitigate if it was unreasonable for it to do anything or if what the defendant alleges it ought to have done was totally unreasonable (Fridman, p. 731).

[315] Removal of the chattels purchased would contradict the plaintiff’s original call that the defendants remedy the elements of the Premises requiring repair to allow it to continue the Business. It in addition would defeat the plaintiff’s claim for rescission of the APA. The duty to mitigate does not supersede or obligate a party to abandon a legal remedy and did not require the plaintiff to relocate or sell the chattels which had not become fixtures.

Alternative Claims for Fraudulent and Negligent Misrepresentation

[316] Having determined the plaintiff’s entitlement under contract to rescission of the APA, it is not therefore necessary to determine its alternative cause of action in tort for fraudulent misrepresentation. For the benefit of another court’s review, this Court will proceed to determine this claim for fraudulent misrepresentation.

[317] A party may sue in tort when the relationship between the parties was governed by a contract: Canadian Pacific Hotels Ltd. v. Bank of Montréal, (1987) 1987 CanLII 55 (SCC), 40 D.L.R. (4^th) 385 (SCC) at p. 455.

[318] This court, in the alternative to its determinations of rescission in contract, notes that although incorporated as a term in the APA, paragraph 6(d) therein arises as a result of a representation to that effect by the Vendor thereby entitling the plaintiff to sue in tort for fraudulent misrepresentation. This contractual provision requiring the Vendor to ensure the state of good repair of the premises and fixtures based on logic did not come into existence out of the air. Although there is no evidence on the point, either the plaintiff asked for and the plaintiff agreed, or the Vendor proposed and the plaintiff agreed that the Vendor or would ensure the good state of repair of the premises and fixtures as then incorporated and reflected in the wording of the subparagraph.

Representation as to Future Conduct

[319] A false representation as to future conduct can be treated as a misrepresentation. Waddams states:

Similarly, although a promise as to the future conduct of the promisor or a third party is not a misrepresentation, it has been held that such a promise implies a statement that the present intention of the promisor is to carry out the promise, or that the promisor’s belief is that the third party will act as stated, and this statement of fact, if false, can be treated as a misrepresentation (Waddams para 421).

Fraudulent Misrepresentation and Rescission

[320] A fraudulent misrepresentation is a statement known to be false or made not caring whether it is true or false. A person is induced to enter into a contract by such a statement is entitled, prima facie, to damages for fraud … and to rescission (Waddams para 419).

[321] A fraudulent misrepresentation consists of a representation of fact made without any belief in its truth, with intent that the person to whom it is made shall act upon it and actually causing that person to act upon it (Fridman page 285).

[322] The elements to be established in a case of fraudulent misrepresentation are:

(1) that the representations were made by the defendant and were false;

(2) that the wrongdoer either knew that the statements were false or made them recklessly without knowing whether they were false or true;

(3) that the victim was thereby induced to enter into the contract; and

(4) the plaintiff’s actions resulted in a loss: Hryniak v. Mauldin, 2014 SCC 7, para 87 and Fridman p. 285.

[323] The above four elements are proven in this case.

[324] The Vendor had knowledge of the Unrepaired Elements prior to entering into the APA. The Vendor represented it would ensure the good state of repair of the premises and fixtures.

[325] The Vendor on the evidence had no intention of repairing but represented it would ensure the repair of the Premises which includes the Unrepaired Elements. The Vendor accordingly falsely made this representation.

[326] The Vendor knew that its requirement that the plaintiff, as a condition for the purchase of the Assets, was to sign a five year lease of the Premises in which the Business was to be carried on, would rely upon its representation to ensure the Premises and fixtures were in a good state of repair.

[327] The plaintiff, relying upon the Vendor’s above representation, entered into the APA and the Lease.

[328] Rescission is an equitable remedy available to a representee when the other party has made a false or misleading representation. Where rescission is based on misrepresentation, it must be “material”, “substantial”, or “go to the root of” the contract (Guarantee Co. of North America v. Gordon Capital Corp., 1999 CanLII 664 (SCC), [1999] 3 S.C.R. 423, at paras. 39, 47).

[329] Waddams states a false promise to take future action may treated as a misrepresentation: para 421:

Where fraud is discovered after the closing of a transaction, the purchaser can elect to sue for rescission or damages (Halsbury’s Laws of Canada (online), Real Property, “Sale of Land: Physical and Title Defects: Representations: Fraudulent Misrepresentation” at HRP-183 “Rescission”).

[330] Fridman as to equitable rescission states the following principles relevant to the facts in this case:

In contrast with the common law idea of rescission, it is sometimes possible for a party to seek the equitable remedy of rescission, by applying to the court for relief from a transaction in respect of which it would be inequitable to hold the applicant bound. Rescission is a remedy, not a cause of action. It is sometimes possible for a party to seek the equitable remedy of rescission by applying for relief from a transaction in respect of which it would be inequitable to hold that the applicant bound (p.761).

The court’s jurisdiction to grant rescission on economic grounds extends beyond the common law circumstances which permitted a party acting unilaterally to treat the contract as a legal nullity (p. 761).

Although there is a degree of overlap between the common law right to rescind for fraud and the equitable jurisdiction of the court to grant rescission of a contract which has been entered into as a consequence of a false representation or some other fraud, the equitable power to order rescission is wider in scope. Indeed, the limits of this jurisdiction have not been fixed (p. 761).

Wherever a court considers, on general equitable grounds, that a contract should not be allowed to stand and that the plaintiff’s request that it be annulled should be granted, the Court has power to do so. A Court of equity can do what is “practically just” (p. 761).

Rescission may be granted even where the contract is not susceptible of attack at common law. Rescission may be granted despite title having passed…. (based upon) the inequitable conduct of the other party (p. 762).

Most frequently the jurisdiction to rescind a contract on equitable grounds is invoked in three main instances. The first is where the contract resulted from some fraud which induced a mistake on the part of the defrauded party. The second is where the mistaken question was the result of innocent non-fraudulent misrepresentation. The third is where the contract was procured without fraud but as a consequence of what in equity is regarded as fraud, namely by the use of undue influence or some unconscionable conduct which renders the bargain questionable on equitable grounds, even though it may be perfectly valid at common law (p.762).

Rescission may be invoked where the contract was brought about by undue influence or unconscionable conduct (p.766).

… The court can rescind an agreement because of the unilateral mistake of one party if the mistake is brought about by the inequitable conduct or equitable fraud on the part of the other party (p.767).

The equitable power (to rescind) is to give relief in cases involving unconscionable transactions … (p.767).

[331] Damages in a tort action for misrepresentation is the amount of money required to put the plaintiff in the position if the statement had not been made. It’s an action for a wrong done in which the plaintiff was tricked out of its. In that case, the highest limit of the plaintiff’s damages was determined to be the full extent of loss which is measured by the money that was in its pocket and is now in the possession of the defendant. That level of out-of-pocket loss is the measure of damages in tort action for fraud and for negligent misrepresentation (Seith v. Dawne, 2002 ABQB 736, para. 66).

[332] The Vendor, with knowledge, falsely deceived the plaintiff into believing by its misrepresentation to ensure the state of good repair of the Premises and fixtures and then requiring and contracting for the lease of the Premises in which the purchased Assets to be used in the operation of the Business.

[333] The plaintiff has established fraudulent misrepresentation by the Vendor. The appropriate remedy for that fraudulent misrepresentation is the equitable remedy of rescission of the APA for all of the reasons previously stated above.

Negligent Misrepresentation

[334] Queen v. Cognos, 1993 CanLII 146 (SCC), [1993] 1 S.C.R. 87, at p. 110 lays out the 5-step test for negligent misrepresentation established in Hedley Byrne & Co. v. Heller & Partners Ltd., [1964] A.C. 465 (H.L.):

(1) there must be a duty of care based on a “special relationship” between the representor and the representee;

(2) the representation in question must be untrue, inaccurate, or misleading;

(3) the representor must have acted negligently in making said misrepresentation;

(4) the representee must have relied, in a reasonable manner, on said negligent misrepresentation; and

(5) the reliance must have been detrimental to the representee in the sense that damages resulted.

[335] A “special relationship” existed in the present case as the Vendor knew or should have known that the plaintiff would foreseeably rely upon its representation to ensure the good state of repair of the premises and fixtures. The Vendor through Mr. Ackerman knew from experience as to the foreseeability of damage to the Premises, the plaintiff’s likely reliance upon the representation to ensure the state of repair. Given the Vendor’s knowledge of the latent nature of the repairs required and the representation to ensure repair of any such elements, a proximate relationship existed (Cognos, para 46).

[336] The evidence establishes the other four elements.

[337] A failure to divulge highly relevant information can be a pertinent consideration in determining whether a particular misrepresentation was negligent (Cognos, at pp. 123-24). An omission can be considered negligent when considered in the context of other express positive misrepresentations – in contrast with situations where no representations have been made at all (Lysko v. Braley (2006), 2006 CanLII 11846 (ON CA), 79 O.R. (3d) 721 (C.A.), at para. 45.)

Rescission and Accounting

[338] Fridman in the Law of Contract as to rescission and accounting states:

Rescission may be granted even where the contract is not susceptible of attack at common law. When it is, the purpose of the court is to produce restitutio in integrum. This has two major consequences. ……. Second, there may have to be, and the court is the power to order adjustments, perhaps involving monetary payments by way of compensation for use of property, or reimbursement of expenses so as to ensure that, so far as it is within the capability of the court, the parties are restored to their original situations before the contract was ever concluded between them (p. 762).

Piercing Corporate Veil and Personal Liability

[339] The plaintiff seeks personal judgement against Mr. Ackerman for the $275,000 claimed by recession.

[340] The court in Sing v. Trump 2015 ONSC 4461 (SCJ) as to this issue stated:

38. At common law, the owners and management of a corporation are not liable for what they do within their authority and on behalf of their corporation, but they are liable if there is some conduct on their part that is either tortious in itself or is independent misconduct from that of the corporation. Corporate actors can be separately liable if they have engaged in their own tortious conduct for their own purposes independent of the purposes of the corporation: Normart Management Ltd. v. West Hill Redevelopment Co. (1998), 1998 CanLII 2447 (ON CA), 37 O.R. (3d) 97 (C.A.); ScotiaMcLeod Inc. v. Peoples Jewellers Ltd. (1995), 1995 CanLII 1301 (ON CA), 26 O.R. (3d) 481 (C.A.). leave to appeal to S.C.C. ref'd, [1996] S.C.C.A. No. 40; Schembri v. Way, 2012 ONCA 620; Hogarth v. Rocky Mountain Slate Inc., 2013 ABCA 57.

39. In the case at bar, in my opinion, there was no conduct on the part of Messrs. Shnaider or Levitan that was independent from that of the corporation and there is no basis for personal liability.

[341] The court in Wandinger v. Lake et al. 1977 CanLII 1339 (ON SC), 16 O.R. (2d) 362 (HCJ) on this issue stated:

I have no difficulty in finding that the defendants, Donald and Audrey Lake, deliberately and knowingly concocted and falsified the financial statements in ex. 1 covering the fiscal year ended October 31, 1974, and the period from November 1, 1974, to March 31, 1975. This was done with the intention to mislead a prospective purchaser and eventually to mislead the plaintiff and her husband, i.e., to represent that the Lakefern Motel and Restaurant business was a profitable, thriving business. On the contrary, to the knowledge of the defendants, Donald and Audrey Lake, it had been in operation 17 months prior to the plaintiff's purchase. These defendants were also well aware that the plaintiff and her husband were relying on these financial statements and Donald Lake's false representations when they purchased this restaurant and motel business.

In any event I find that they (personal defendants who were officers of defendant corp) were the agents of the corporate defendant. (p.3)

An agent is personally liable in tort for his own fraudulent misrepresentations: 26 Hals., 3rd ed., p. 867, para. 1610; Eaglesfield v. Marquis of Londonderry (1878), 26 W.R. 540 at p. 541 (H.L.). In Goldrei, Foucard & Son v. Sinclair et al., [1918] 1 K.B. 180 (C.A.), the plaintiffs alleged that they were induced by false and fraudulent misrepresentations made to them by the personal defendant, acting as the agent of the corporate defendant, to enter into an agreement. They claimed damages for fraud against both defendants and for rescission against the corporate defendant and for damages. It was held that they were entitled to recover as there were two causes of action, one against the company for rescission and repayment of their payments on the agreement and, secondly, against the personal defendant for damages for fraud.

In Yost v. Int'l Securities Co. Ltd. et al. (1918), 1918 CanLII 346 (ON CA), 42 O.L.R. 572 at p. 585, 43 D.L.R. 28 at p. 40 (C.A.), the personal defendant, with the intention of inducing the plaintiff to purchase lots so that he might earn a commission, recklessly and without knowing whether they were true or false, made statements upon which the plaintiff acted. As the statements turned out to be false, the agent was responsible to the same extent as if he had asserted what he knew to be untrue. (p. 6)

In the result, the plaintiff is entitled, as against the defendant Lakefern, to rescission and to recover the moneys that she paid pursuant to the agreement of purchase and sale: Clough v. London & North Western R. Co. (1871), L.R. 7 Ex. 26 at p. 34. She is also entitled to recover moneys subsequently expended as consequential damages for the defendants' deceit. As stated in Clark et al. v. Urquhart [1930] A.C. 28 at p. 68, the measure of damages should be "based" on the actual damage directly flowing from the fraudulent inducement. The plaintiff is to return the goods and chattels obtained pursuant to that agreement and the value of those not returned.

Turning to the defendants, Donald and Audrey Lake, their personal liability rests on the premise that they were the persons who committed fraud against the plaintiff for their own benefit by means of the corporation which they controlled: Parna et al. v. G. & S. Properties Ltd. et al., 1968 CanLII 289 (ON SC), [1968] 1 O.R. 626, 67 D.L.R. (2d) 279 (Ont. H. C.); affirmed 1969 CanLII 28 (ON CA), [1969] 2 O.R. 346, 5 D.L.R. (3d) 315 (C.A.) [affirmed 1970 CanLII 25 (SCC), [1971] S.C.R. 306, 15 D.L.R. (3d) 336]. The plaintiff is therefore entitled to recover damages against them for the tort of deceit. (p. 8)

[342] There is no evidence that Mr. Ackerman as to the conduct under review acted beyond his capacity as an officer of the two defendant corporations or that he personally misrepresented the state of repair of the premises and fixtures. Based on the above authorities, there is accordingly no basis to find him personally liable.

Caveat Emptor

[343] The defendants allege this action should be denied on the basis of caveat emptor.

[344] The court in Gladu v. Robineau, 2017 ONSC 37 as to caveat emptor stated:

269. The doctrine of caveat emptor will not be displaced by silence about defects, unless the silence relates to some material fact, which there is a duty on the silent party to disclose to the other. Put another way, mere silence, without more, on the part of a vendor regarding a defect subsequently discovered by a purchaser, will not normally found a cause of action for misrepresentation or for fraud: see Alevizos v. Nirula, 2003 MBCA 148, 180 Man. R. (2d) 186, at para. 19.

[345] The court in McGrath v. MacLean et al., [1979] 20 O.R. (2d) 784 (C.A.) stated: “where the action sounds in fraud or misrepresentation, the defence of caveat emptor will be of no avail”.

[346] The court in Swayze v. Robertson [2001] 0.T.C. 186 (S.C.) para 39, held the vendor lost the protection of caveat emptor upon determination of its negligence or fraudulent misrepresentation.

[347] Once the vendor breaks its silence in stating the status of an element, the doctrine of caveat emptor is not available as a defence: Krawchuk v. Scherbak, 2011 ONCA 352, 2011 O.N.C.A. 352, para. 77.

[348] The Vendor’s obligation in the APA to ensure the state of good repair survived closing. The Vendor thereupon was bound by the principles in Bashin, namely the imposition under common law to perform their contractual obligations honestly and in good faith, paras 65 and 86. The Vendor failed to act accordingly before or after closing regarding its obligation to ensure the good state of repair of the premises and fixtures.

[349] Caveat emptor is denied as a defence on the facts in this case.

[350] The Vendor and Landlord in this case were not silent. The Landlord covenanted to provide the premises and fixtures in good working order on the commencement date. The Vendor contracted to ensure that the leased premises and fixtures are in a state of good repair, in the case of the Vendor.

[351] The Vendor in paragraph 6(d) of the APA did not limit its undertaking to ensure the premises and fixtures were in a state of good repair to the date of closing, as it did regarding the equipment sold, thus indicating those categories of Premises assets were to be treated differently.

[352] The Vendor in paragraph 6 of the APA obliged the plaintiff to enter into a five year lease of the Premises and made that a condition to the Asset sale and the plaintiff’s operation of the Business. The Vendor knew or should have known that the plaintiff would not have agreed to lease the Premises in order to purchase the Assets for $359,000 to be used in operating the Business under the name of BOTB had it known the Vendor would not honour its representation and undertaking to ensure the Premises was in a state of good repair.

[353] The Vendor on the evidence knowingly failed to ensure those premise and fixture repairs were done.

Counterclaim

[354] The Landlord seeks judgment of $123,955 to repair damage to the Premises allegedly caused by the plaintiff. Those claimed damages are the total of two estimates and not evidence as repair work performed.

[355] The first estimate is undated from Mr. Harkness in the amount of $90,500. The second is a July 1, 2015 estimate from Houle Plumbing in the amount of $33,955.

[356] To succeed, evidence is required as to:

(a) which of the Premises elements were damaged, including where they are located;

(b) the nature and extent of that damage;

(c) when the damage occurred and the cause thereof;

(d) the plaintiff’s action or inaction caused the damage; and

(e) the cost to repair the damage caused by the plaintiff.

[357] The evidence as to this claim is limited to the two estimates and the testimony of Messrs. Ackerman and Harkness.

[358] Mr. Ackerman testified the plaintiff failed to properly winterize the outside patio washrooms which caused those toilets to shatter. The evidence does not indicate whether all those toilets were shattered or how many were shattered. This repair work has not been conducted during the subsequent 3 years and winters. He estimates the cost to repair the same will likely cost between $20,000 and $30,000. This testimony is not proof of damages.

[359] Mr. Ackerman testified that repairs were conducted in 2014 to repair hairline cracks to water pipes in the ceiling of the washrooms in the disco bar however those pipes subsequently continued to develop further hair line cracks. Despite his re-possession of the Premises and the use of Mr. Harkness, those pipes continued over time to develop new leaks.

[360] As a result of the reoccurring new leaks in these water pipes, Mr. Ackerman decided to stop doing repairs. He instead had Mr. Harkness in 2016 replace and install new pipes in this area. He testified that work cost between $70,000 and $80,000. He also testified, however, that that he converted the disco bar into a pizza restaurant between January and April 2016 and converted everything in doing so.

[361] There is no evidence as to what was causing the reoccurring new leaks in this area of pipes in 2014 and 2015, namely after the plaintiff ceased operating on April 6, 2014. It also is unclear if this 2016 pipe replacement was part of the total conversion of “everything” in 2016 on transition to a pizza restaurant.

[362] No one from Houle Plumbing testified. The Houle estimate is to redo the “south washrooms” which was part of the conversion to a pizza restaurant and “on the patio” which is work that has not been carried out. The description of work includes redoing all drains, vents, replacing all water pipes and to “insulate water lines as required” and provide and install a new gas fired water heater. It is unclear how any of this work is related to the plaintiff. The insulation of the water pipes is what was noted as missing in January, 2014.

[363] The Houle estimate includes supplying and installing 8 toilets, 7 basins, 2 floor drains and 2 urinals. It is unclear why the plaintiff would be responsible for the cost of new floor drains, urinals and basins. The estimate provides a total price with no break down between the different elements.

[364] Mr. Ackerma testified the total conversion of the disco bar space to the pizza restaurant occurred in the spring of 2016. The undated estimate from Mr. Harkness is work he testified he did in the spring of 2015. There would be no need for the July 2015 Houle estimate, if Mr. Harkness as he testified did the work in the spring of 2015.

[365] Mr. Harkness admitted he never issued an invoice for the work identified in his estimate so there is no invoice evidence as to what was done and charged.

[366] The Harkness’ $90,500 estimate consists of two categories of work, plumbing and fixtures for $37,500 as well as $53,000 of Premises repairs with no breakdown as to individual items in those categories.

[367] The Harkness plumbing estimate, like the $33,955 Houle plumbing estimate, includes the supply and installation of 7 toilets, 3 urinals, 4 vanities and basins, replacing new floor drains and 7 sets of faucets and taps. His testimony that he did this work in the spring on 2015 is contradicted by the Landlord obtaining the July 2015 Houle estimate for essentially the same plumbing work. These two plumbing estimates duplicate much of the same plumbing work and fixtures in this counterclaim.

[368] The Harkness estimate of $53,000 is for unspecified work identified as “structural, electrical drywall, tile insulation, vapor barrier, painting, flooring”. There is no cost breakdown per element and appears unrelated in any event to the conduct of the plaintiff.

[369] These two duplicate estimates are not evidence of what work was done, by whom and whether the plaintiff is liable for such work.

[370] The Landlord has failed to establish the damages it alleges were caused by the plaintiff’s breach of the Lease to properly heat the Premises. This counterclaim has not been proven and is dismissed.

Conclusion

[371] The plaintiff is granted judgment against the Vendor:

(a) for rescission of the APA on the basis of breach of contract or alternatively based on fraudulent and negligent misrepresentation; and

(b) judgment against the Vendor in the amount of $275,000 constituting return by rescission and payment of the purchase price, plus prejudgment interest after May 1, 2014, less any deduction as determined by the Master on the accounting as provided below.

[372] The plaintiff is granted a declaration terminating the Lease effective April 6, 2014.

[373] A reference in the form of an accounting is ordered to proceed before the Master in Ottawa to determine the following:

(a) the amount paid by the plaintiff for the repair and replacement of the air conditioning equipment in the capital Premises, which shall constitute a credit in favour of the plaintiff; and

(b) the monetary market value of the plaintiff’s use of the Assets between May 18, 2013 and April 6, 2014, with consideration as to the level of profitability of the Business before and during that period of time.

[374] The Master shall offset the amount determined under (a) against (b). The residual balance if any, together with prejudgment interest, shall be deducted from the judgment by rescission of the $275,000, thereby resulting in the adjusted judgment amount granted against the Vendor in favour of the plaintiff.

[375] The action against Mr. Ackerman is dismissed.

[376] The Landlord’s counterclaim against the plaintiff is dismissed.

Costs

[377] Any party seeking costs is to provide the court with written submissions, including a summary of the services, dates thereof, rates and time expended, within 30 days from the date of this decision.

[378] Any reply to the cost requested by party shall be submitted in writing within the following 30 days.

Mr. Justice P. Kane

Released: March 7, 2018

COURT FILE NO.: 14-60497

DATE: 2018/03/07

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

846-6718 Canada Inc

Plaintiff

– and –

1779042 Interior Ltd, 1447735 Interior Inc. and John Ackerman Defendants

REASONS FOR JUDGMENT

KANE J.

Released: March 7, 2018