Court File and Parties

COURT FILE NO.: CV-18-0238-00; CV-18-0319-00 DATE: 2018-11-05

ONTARIO

SUPERIOR COURT OF JUSTICE

B E T W E E N:

CV-18-0238-00

BRYFAM ENTERPRISES INC. J. Clark and M. Mikulasik, for the Applicant Applicant

• and -

HARBOUR CARRICK HOLDINGS INC. D. Waldman, for the Respondent Respondent

A N D B E T W E E N:

CV-18-0319-00

HARBOUR CARRICK HOLDINGS INC. D. Waldman, for the Applicant Applicant

• and -

BRYFAM ENTERPRISES INC. Respondent J. Clark and M. Mikulasik, for the Respondent

HEARD: August 27, 2018, at Thunder Bay, Ontario Mr. Justice W.D. Newton

Decision On Applications

Overview

[1] These two applications were heard together.

[2] Initially, Bryfam Enterprises Inc. (the “Tenant”) brought an application against Harbour Carrick Holdings Inc. (the “Landlord”) in May 2018 seeking a declaration that the Tenant’s use of the premises was a permitted use under the lease. In response, the Landlord brought an application in June 2018 for a declaration that the Tenant was in breach of the permitted use clause in the lease (the “Permitted Use Clause”) and for an order that the lease is terminated.

The Facts

[3] The Tenant owns and operates GameChanger Energy Drinks + Juicery (“GameChangers”), which operates out of a commercial strip mall plaza located in Thunder Bay (the “Shopping Plaza”). The Shopping Plaza consists of five units.

[4] The Landlord operates out of Mississauga and owns the Shopping Plaza.

[5] Following negotiations, the Tenant and the Landlord entered into a lease agreement on June 2, 2015, (the “Lease”) whereby the Tenant would occupy two units in the Shopping Plaza: units four and five. At the time, a Subway restaurant, First Choice Haircutters, and an A&W restaurant occupied the other units.

[6] The terms of the Lease include a Permitted Use Clause, which outlines what type of business the Tenant can carry on in the Shopping Plaza. The relevant sections read as follows:

Section 1.01 Summary of Basic Provisions

(i) Permitted Use: (Section 8.01(a))

The principal business of a quick service yogurt, smoothie, and waffle restaurant;

Section 8.01 Use of the Premises and Trade Name

(a) The Tenant will not use or permit any part of the Premises to be used for any purpose other than the Permitted Use set out in Section 1.01(i).

[7] The Lease also includes a Prohibited Activities Clause (s. 8.02) and an Entire Agreement Clause (s. 2.04). The Entire Agreement Clause mandates the exclusion of all extraneous negotiations or documentation when interpreting the terms of the Lease.

[8] From December 2016, the Tenant operated two businesses in units four and five of the Shopping Plaza: GameChangers and Flavours. GameChangers sold smoothies and other food items. Flavours, which opened in December 2015, sold frozen yogurt, bubble waffles, and other dessert foods.

[9] In January 2017, the Landlord ended its relationship with the operators of the Subway restaurant located in unit two of the Shopping Plaza. From January to June 2017, the Tenant and the Landlord discussed various ideas including the Tenant taking over operation of the Subway restaurant and opening a Chopped Leaf franchise. None of these ideas came to be.

[10] Instead, on July 26, 2017, the Landlord and the Tenant executed a lease amending agreement (the “Amended Lease”), and the Tenant moved GameChangers into unit two. As a result of the move, the Tenant acquired and eventually used much of the equipment Subway left behind.

[11] The Amended Lease incorporates the terms of the original Lease subject only to the specific amendments outlined in the Amended Lease. Amendments include an extension of the original Lease’s expiration date to November 30, 2019. Otherwise, the amendments generally relate to the change in unit and square footage. The original Permitted Use Clause remains effective under the Amended Lease, as does the Entire Agreement Clause.

[12] On November 5, 2017, following GameChangers’ move to unit two, the Tenant stopped operating Flavours.

[13] In April 2018, the Landlord approached the Tenant about moving to a new property unrelated to the Shopping Plaza. The Tenant agreed to look at new locations, and the Landlord hired a realtor, Michael Perlman (the “Realtor”), to look at options. Also in April 2018, the Ontario Cannabis Store announced that it would be opening a location in the Shopping Plaza. The announcement did not state when the store would open.

[14] By May 2018, the Tenant and the Landlord had exchanged offers contemplating the costs of moving the Tenant to a new location, but the Landlord ultimately declined the Tenant’s counter-offer.

[15] On May 10, 2018, the Tenant received notice that they had committed both a monetary and non-monetary breach of the Lease. While the Tenant paid the total amount of the rental arrears claim as alleged, the notice also stated that the Tenant was operating outside the Permitted Use Clause by selling sandwiches, wraps, health foods, and coffee, and subsequently, the Landlord requested that the Tenant cease all business activities that were in breach of the specific terms of the Lease. The Landlord alleges that it only became aware of the Tenant’s breach of the Permitted Use Clause from the Realtor, that it had no knowledge of any breach prior to May 2018, and that, upon learning of the breach, sent the Tenant immediate notice.

[16] Currently, GameChangers is still operating out of unit two and serves fruit and vegetable smoothies and juices, wraps, salads, soups, energy balls, and other miscellaneous items including coffee, tea, and water.

The Positions of the Parties

The Tenant’s Position

[17] The Tenant’s central argument is that GameChangers’ current restaurant offerings conform to the Lease’s Permitted Use Clause. The Tenant maintains that GameChangers’ principal business is selling “smoothie[s]” despite the fact that the restaurant offers wraps and other food items. Smoothies represent over 50 percent of GameChangers’ sales.

[18] The Tenant submits that, since the Lease does not define the term “principal,” relevant case law and the general dictionary definition of the word are essential to interpreting the Permitted Use Clause. According to the Tenant, the word principal is not synonymous with exclusive, nor does it necessarily mean over 50 percent. All restaurants sell multiple food items, and it is commercially reasonable to expect that a restaurant that principally sells smoothies will sell other food items as well.

[19] In the alternative, the Tenant is claiming reliance to its detriment given that the Landlord encouraged the Tenant to move to unit two, to use the Subway equipment, and during the Amended Lease negotiations, encouraged the Tenant to open a Chopped Leaf franchise. The Tenant argues that the Landlord is estopped from relying on the strict terms of the Lease because the Landlord knew that the Tenant was making wraps, salads, and other foods and made no complaint. Any breach of the Permitted Use Clause, the Tenant argues, was as a result of the Landlord’s representations, waiver, and/or acceptance.

The Landlord’s Position

[20] The Landlord’s central argument is that the Tenant’s current restaurant offerings fall outside the Lease’s Permitted Use Clause, and therefore, the Tenant is in breach of the Lease. The Landlord submits that, under a common sense interpretation of the Lease, GameChangers’ current menu is so diverse that it is commercially unreasonable to describe GameChangers as being principally in the business of selling yogurt, smoothies, and waffles. In addition, when the sales data is interpreted accurately, the Landlord argues, the Tenant’s smoothie sales do not represent the majority of GameChangers’ business.

[21] The Landlord also submits that it never waived its rights or represented to the Tenant that GameChangers could sell menu items outside of the Permitted Use Clause. The Landlord relies on the Lease’s Entire Agreement Clause to disregard the Tenant’s claim that, during the Amended Lease negotiations, the Landlord encouraged or accepted that the Tenant would be adding wraps and other food items to GameChangers’ menu. The Landlord maintains that there was no agreement outside of the Lease terms and that the Tenant provides no evidence that the Landlord was aware of the Tenant’s breach prior to the Realtor informing the Landlord of the Tenant’s new menu items.

The Law

Contractual Interpretation

(a) General Interpretive Principles

[22] The Lease, as a contract, must be read according to the proper principles of contractual interpretation. In Creston Moly Corp. v. Sattva Capital Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 47, the leading case from the Supreme Court of Canada, Rothstein J. notes:

... the interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction. The overriding concern is to determine “the intent of the parties and the scope of their understanding” … To do so, a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract. Consideration of the surrounding circumstances recognizes that ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning:

No contracts are made in a vacuum: there is always a setting in which they have to be placed.... In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating. (Reardon Smith Line, at p. 574, per Lord Wilberforce) [Emphasis added]

[23] In conjunction with the above noted principles, a commercial contract must also be interpreted “in a fashion that accords with sound commercial principles and good business sense, and that avoids a commercial absurdity:” Ventas Inc. v. Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205, 85 O.R. (3d) 254, at para. 24.

(b) The Factual Matrix

[24] Rothstein J.’s reference to the surrounding circumstances of the contract’s formation is often referred to as the factual matrix. In Primo Poloniato Grandchildren's Trust (Trustee of) v. Browne, 2012 ONCA 862, 115 O.R. (3d) 287, at para. 67, Feldman J.A. notes that “it is well established that in interpreting a contract, the court may consider the ‘factual matrix’ surrounding the contract, even where there is no ambiguity.” Later in Primo Poloniato, at para. 71, Feldman J.A. cautions that:

While the scope of the factual matrix is broad, it excludes evidence of negotiations, except perhaps in the most general terms, and evidence of a contracting party's subjective intentions. As the cases above suggest, the factual matrix includes only objective facts known to the parties at or before the date of the agreement, and what is common to both parties. [W]hile the factual matrix can “be used to clarify the parties’ intentions as expressed in a written agreement, it cannot be used to contradict that intention, create an ambiguity which otherwise does not exist in the written document, or have the effect of making a new agreement." Ultimately, the words of the agreement are paramount. [Citations ommitted.]

(c) Contra Proferentum

[25] In 2249778 Ontario Inc. v. Smith, 2014 ONCA 788, 247 A.C.W.S. (3d) 197, at para. 22, the Ontario Court of Appeal repeats the well-established principle that “the rule of contra proferentum applies in cases where the contractual terms are ambiguous: Consolidated-Bathurst Export Ltd. c. Mutual Boiler & Machinery Insurance Co. (1979), [1980] 1 S.C.R. 888 (S.C.C.), at p. 900 and Manulife Bank of Canada v. Conlin, [1996] 3 S.C.R. 415 (S.C.C.), at pp. 425-426.”

(d) Restrictive Covenants

[26] In R.A. Keane Enterprises Ltd. v. Drago’s Place Ltd., [1990] 20 A.C.W.S. (3d) 842 (Ont. Dist. Ct.), the Ontario District Court considers the validity of a permitted use clause that allows the tenant to operate “a donut/waffle and muffin restaurant including the sale of ice cream and desserts in general, beverages and such other similar products:” at para. 4. Both parties agreed that, sometime after entering into the lease, the landlord had let the tenant operate outside the permitted use clause by oral agreement. Gautreau J. rules that, because the restrictive covenant does not define what a donut/waffle restaurant is and the clause includes the words “and other similar products,” the tenant is allowed to operate a full scale restaurant beyond the strict terms of the permitted use. The court notes that, “[b]ecause of the vagueness, I think that for the landlord to succeed on this point, the clause would have to say something along the lines that the restaurant sales are to be restricted to donuts, waffles, muffins and desserts, but it does not:” (emphasis added) R.A. Keane Enterprises, at para. 17.

[27] When considering the overall validity of the permitted use clause, Gautreau J. states the following, R.A. Keane Enterprises, at para. 19:

The use clause is in essence a restrictive covenant and a negative covenant and I think it is fair to say that the law does not like restrictive or negative covenants because they interfere with normal freedoms of use and enjoyment. As a result, the law will avoid enforcing them if at all possible unless there is a reason for doing so. This is to be seen from the cases which hold that such covenants will be presumed to be released if there has been, over the years, a use that is inconsistent with the covenant; or if the person entitled to the benefit has acquiesced in a changed use of the property; or if the character of the neighbouring lands has so changed as to make the enforcement useless; or if there has been delay and acquiescence, etc. In such cases equity will not enforce the restrictions unless there is a reason and good purpose for doing so. [Emphasis added.]

(e) “Principally” Defined

[28] In McDonald’s Restaurants of Canada Ltd. v. West Edmonton Mall Ltd. (1994), 159 A.R. 120, at para. 2, Mason J. of the Alberta Court of Queen’s Bench interprets a restrictive covenant in a lease agreement where “a fast food restaurant” was defined as “any restaurant primarily engaged in the sale of hamburgers” etc. Mason J. takes the word “primarily” to mean “chiefly” or “principally” and clarifies that “‘primarily’ … means the largest category of several categories, but not necessarily more than 50 per cent of the total volume of business:” McDonald’s Restaurants, at paras. 61-62.

(f) Ancillary Use

[29] Both Parties rely on ancillary use cases in their material. Smith is of note given that the Ontario Court of Appeal interprets a permitted use clause in a lease agreement involving a fast-food restaurant. Pepall J.A., speaking for the court, finds that the use of an ATM is a permitted ancillary use to running a restaurant and that it “is open to parties to a commercial lease to specifically include the installation and operation of an ATM as a prohibited activity in the lease:” Smith, at para. 28.

[30] Similarly, in 877867 Ontario Ltd. v. Centura Restaurant Ltd. (1994), 45 A.C.W.S. (3d) 750 (Ont. Ct. Gen. Div.), at para. 3, the court considers whether playing mah-jongg is an ancillary use to operating “an oriental style restaurant.” The court rules that mah-jongg games are an integral part of the operation of a Chinese restaurant and are, therefore, an ancillary use that do not breach the permitted use clause: Centura Restaurant, at para. 32.

Waiver

[31] In Technicore Underground Inc. v. Toronto (City), 2012 ONCA 597, 220 A.C.W.S. (3d) 333, Gillese J.A outlines the necessary legal components to proving waiver by summarizing the principles set out in Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., [1994] 2 S.C.R. 490 (S.C.C.). At para. 63 of Technicore Underground, Gillese J.A writes:

Waiver occurs when one party to a contract (or proceeding) takes steps that amount to foregoing reliance on some known right or defect in the performance of the other party. It will be found only where the evidence demonstrates that the party waiving had (1) a full knowledge of the deficiency that might be relied on and (2) an unequivocal and conscious intention to abandon the right to rely on it. The intention to relinquish the right must be communicated. Communication can be formal or informal and it may be inferred from conduct. The overriding consideration in each case is whether one party communicated a clear intention to waive a right to the other party.

Proprietary Estoppel

[32] In Cowper-Smith v. Morgan, 2017 SCC 61, [2017] 2 S.C.R. 754, at para. 15, McLachlin C.J. outlines the acknowledged test applicable to making out a claim for proprietary estoppel as follows:

An equity arises when (1) a representation or assurance is made to the claimant, on the basis of which the claimant expects that he will enjoy some right or benefit over property; (2) the claimant relies on that expectation by doing or refraining from doing something, and his reliance is reasonable in all the circumstances; and (3) the claimant suffers a detriment as a result of his reasonable reliance, such that it would be unfair or unjust for the party responsible for the representation or assurance to go back on her word.

[33] In the recent Ontario Court of Appeal decision, Wittington Properties Limited v. Goodlife Fitness Centres Inc., 2018 ONCA 52, 288 A.C.W.S. (3d) 562, at para. 12, the court highlights the following:

The applicability of the doctrines of promissory estoppel and waiver depended on proof by the appellant of a course of conduct over an extended period that showed an intention by the respondent not to rely on the strict terms of the lease with respect to the reporting requirements and geographic non-compete prohibition… As the application judge correctly concluded, there was no evidence to support the appellant's waiver argument. In particular, there is no evidence that the respondent knew about the problems with the appellant's manner of calculating and reporting its gross revenue before receipt of its accountant's report, nor that it was aware that the appellant was operating a club in contravention of the geographic non-compete provisions of the lease. The same considerations apply to the promissory estoppel argument.

Analysis and Disposition

[34] The term of the Amended Lease expires November 30, 2019.

[35] Within the commercial context of a multiunit strip mall, permitted use clauses are important and should be construed strictly if the terms are clear and unambiguous. Activities carried on by a tenant effect a landlord’s ability to lease other units within the same premises.

[36] In this case, the Permitted Use Clause is unambiguous and restricts sales to the principal categories of yogurt, smoothies, and waffles. While the case law shows that the word “principally” can mean the largest category of several categories, the Tenant has expanded the number of food categories well beyond any common sense interpretation of the word. To interpret the Permitted Use Clause as if it allows this type of expanded use would create a commercial absurdity. I conclude that the permitted use does not extend to the tenant’s current activities (the sale of wraps, salads, and soups), and also I conclude that these new activities are not ancillary.

[37] While it might be inferred that the Landlord knew of the expanded use because of the Tenant’s access to the Subway equipment, I am not prepared to reach that conclusion on the evidence before me especially given that the Landlord and its business agent are not located in Thunder Bay. Accordingly, I am not prepared to find that either waiver or estoppel apply.

[38] Given the practical realities of this situation, that both the Landlord and the Tenant will require time to give effect to this order, I order that the lease is terminated effective December 31, 2018.

[39] With respect to costs, the Landlord shall deliver its costs submissions within 30 days, and 20 days thereafter, the Tenant shall deliver its costs submissions. Each submission is limited to 5 pages plus costs outline plus any supporting authority.

“Original signed by”

The Hon. Mr. Justice W.D. Newton

Released: November 5, 2018