Court File and Parties

COURT FILE NO.: 1725/18 DATE: 2018/11/13 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN: GoodLife Fitness Centres Inc. Applicant – and – Rock Developments Inc. and Rocco Tullio Respondents

Counsel: Michael Polvere, for the Applicant James Renihan, for the Respondents

HEARD: October 26, 2018

GEORGE J.

Introduction

[1] The Applicant seeks an injunction and a direction that the Respondent Rocco Tullio (“Tullio”) abide by the terms and conditions of the non-competition agreement (“NCA”) entered into between the parties. Tullio is the controlling mind of the Respondent Rock Developments Inc. (“RDI”).

Facts

[2] The Applicant operates health and fitness facilities across Canada. Tullio, as a principal of Lifestyle Family Fitness Centre, previously operated health and fitness facilities in Windsor. In June 2014 the Applicant agreed to acquire all shares in Tullio’s company, with the sale closing on November 30, 2014 upon the execution of the NCA. Since then, the Applicant has operated the Windsor facilities.

[3] Section 6 of the NCA provides that:

Without the prior written consent of the Purchaser, which consent may be arbitrarily withheld, the undersigned will not at any time during the Restricted Period, within the Restricted Territory, directly or indirectly, either individually or in partnership or jointly or in conjunction with any person as principal, agent, shareholder, partner, employee or in any other manner whatsoever: (i) carry on or be engaged in, or have a business or financial interest in, a business that is the same as or substantially similar to the Business or any separate aspect or component of the services or facilities of the Business, including, for greater certainty, a single business location or multiple business locations; or (ii) advise, assist, provide consulting or development services to, lend money to, or guarantee the debts or obligations of, any person engaged in or having a business or financial interest in a business that is the same as or substantially similar to the Business or any separate aspect or component of the services or facilities of the Business, including, for greater certainty, a single business location or multiple business locations, and further, for greater certainty, the restrictions in subclause (i) and (ii) shall include and extend to any business location or locations that focus on specific aspects or components of services of the Business, such as, for example, personal training facility or facilities, yoga studio or studios, or suntanning facility or facilities.

[4] The Restricted Period is five years. The Restricted Territory is Canada. The NCA expires on November 30, 2019.

[5] RDI owns the property municipally known as 650 Division Rd. (the “property”) in Windsor. RDI has negotiated a lease with Movati Athletic (“Movati”) for the construction of a health and fitness facility on the property.

[6] RDI and Movati signed a term sheet on July 30, 2018, and ultimately the twenty-year lease, that clearly sets out Movati’s intended use of the property as a “full service athletic, health and fitness club, including, but not limited to: swimming facilities, gymnasium facilities, outdoor running track and multi-purpose courts and all secondary uses related thereto (e.g. day care facilities, sandwich, juice and non-alcoholic bars; licensed lounge; rehabilitation services such as physiotherapy, chiropractic and registered massage therapy and medical weight and management services)”.

[7] Pursuant to the lease RDI is to provide these services:

-Prepare the site plan; -obtain the civil and electrical site plan approvals and other permits necessary to complete the work it has agreed to do; -provide site grading and a compacted pad with services to the building; -remove excavated material from the site; -remediate the lands to ensure it is clear of hazardous substances; -construct a parking lot; -install parking lot lighting; -landscaping; -construct curbs, islands and lighting; -cut and fill grading; -extend storm, sanitary and water services to the building, and, if this work does not meet Movati’s servicing requirements, to provide and install such additional services and infrastructure to satisfy those requirements; -install fire/domestic water service; -provide adequate communication cable; -ensure there is provision for natural gas service; -strip pavement and pave with asphalt; -provide traffic control lighting; -ensure there is provision for water service; -supply conduits for local utility service; -provide electrical services in accord with Movati’s requirements; -pay all parkland and regional municipal levies; and -pay all development charges.

[8] Tullio owns and controls another company, Windsor Commons Inc. (“WCI”), which owns land adjacent to the property. Shortly after execution of the NCA WCI agreed to a Restrictive Covenant that prevents it from allowing an easement or entering into a reciprocal access agreement that grants parking rights on WCI lands to any owner or tenant of the property, if used for a fitness facility. On the day after the term sheet was executed WCI granted an easement to RDI, registering a reciprocal easement agreement on title.

[9] In addition, the Applicant sought and received a right of first refusal (“ROFR”), which provides that, if a competing gym offers to lease the property the Applicant has the option to do so on the same terms. The ROFR further provided that if the Applicant declined the opportunity to lease the space, RDI could “thereafter lease the premises to the offeror”. The Applicant was offered the same lease and terms as Movati, which it declined.

Issues

[10] There are three issues. First, has Tullio breached the NCA? Second, what is the impact of the ROFR? Third, if there is a breach, what is the appropriate remedy?

Applicant Position

[11] The Applicant argues that RDI is violating the NCA by providing to Movati services that ready the site for its use as a gym. It further argues that Tullio is violating the restrictive covenant as the easement it granted effectively creates additional parking for Movati.

[12] The Applicant highlights the fact that each party to the NCA is sophisticated, was well informed at the time of execution, and had the assistance of counsel. There was no imbalance in bargaining positions. It points to the fact that this very property – 650 Division – is specifically what it was worried about at the time it purchased the facilities from Tullio, and that the consequences of a breach were clearly discussed and agreed to within para. 11 of the NCA which provides that, upon a violation, the purchaser (Applicant) would be entitled to specific performance of the agreement and to an injunction that would restrain Tullio and RDI from further breaches.

[13] The Applicant directs me to those parts of the record – including emails and transcripts – that clearly shows how it, throughout negotiations, stressed the importance and necessity of an NCA. It was an essential aspect of and prerequisite to the sale.

[14] It argues that, by virtue of the lease, RDI has a financial and business interest in Movati’s gym. It contends that a financial and business interest must be given a wide meaning and capture the services Tullio has agreed to provide in order to ensure the health facility is up and running. It argues that Tullio has in fact gone further as he is now allowing Movati to advertise on a trailer situate on the property and is, in effect, guaranteeing some of Movati’s debts and obligations by being responsible for development charges and parkland levies.

Respondent Position

[15] Tullio argues that the Applicant’s position is an unsupportable interpretation of the NCA, and that it conflicts with the plain language of the ROFR. In his view, even during the term of the NCA, if an offer is made by a competitor, he is free to lease to the offeror so long as he gives the Applicant first crack at the space, which he did.

[16] He further argues that to be Movati’s landlord does not mean he has a “financial interest” in its gym, and that providing the services set out in the term sheet and lease – which is essentially to ensure the site is usable with running utilities – has no specific relation to Movati. In other words, these are services it would have to provide to any tenant.

[17] Tullio contends that to accept the Applicant’s position would be bad public policy, and conflict with the ROFR. He advances these five arguments:

-That the ROFR permits the lease to Movati; -the NCA is unenforceable as a matter of law; -the NCA, properly interpreted, does not prohibit a lease to Movati; -the NCA does not prohibit landlord work under a lease; and that -even if there is a breach, injunctive relief is not appropriate.

Discussion

[18] Before I address the Respondent’s arguments in turn, I offer this general comment. Based on what I know about the negotiations that led to the Applicant’s purchase and the NCA, and having reviewed the email exchanges between the Applicant’s representatives and Tullio, I have no doubt that it was entirely understood that Tullio would play no role whatsoever in facilitating the start-up and operation of a fitness facility on the property.

[19] Consider this exchange between GoodLife representative David Patchell-Evans and Tullio. On October 9, 2013 Patchell-Evans writes:

We need to be really clear that this really stops you from doing any real estate dealings with a fitness competitor in any shape or form whether a contractor or partially owning. It means that you have to give up that one small part of the business in order to get rid of all these clubs it means you need to have an agreement with current partners not to rent or sell to Goodlife competitor and have the same agreement upfront with any new partners regardless of the percentage of ownership…the more key issue is a total agreement on the noncompetition aspect of the deal…essentially we have to be clear that you would not have any real estate transactions or rentals, contracting and or development of any kind with a fitness competitor of goodlife, in any shape or form, relative, business connection, etc. for any percentage.

[20] Tullio replies: “I get your point and understand”.

[21] Of course, Tullio wants me to give the NCA the narrowest possible interpretation - and I will ultimately have to determine what impact, if any, the ROFR has - but it is abundantly clear that as a condition for closing the sale Tullio agreed not to operate a gym, or allow one to be operated, on the property. That was the bargain. And this incontrovertible fact gives his current position the distinct odour of deception. Perhaps this characterization is too harsh, but Tullio’s goal here is clearly to skirt what he knows was his promise to not compete with the Applicant, and it is disingenuous (and in total conflict with the spirit of the agreement) to now draw a line between being the “owner” of a direct competitor and the “landlord” of one.

[22] Does the ROFR grant to Tullio the right to lease to Movati?

[23] Tullio say it does. I do not agree. At least not unless the Applicant consents, or until after the NCA’s expiry. Given the clear paramountcy of the NCA – which was understood by Tullio to be a deal breaker for the Applicant – and given the proximity between the signing of each agreement, the only logical interpretation is that the ROFR was intended to supplement the NCA by adding an additional layer of protection for the Applicant. In other words, for the first five years the two agreements were to work together to prevent anyone other than the Applicant from operating a fitness facility on the property (unless the Applicant provided its written consent), and that the ROFR would survive the NCA’s expiry which would continue to allow the Applicant to have a measure of, albeit not total, control over who would occupy the property.

[24] Tullio argues that the plain language of the ROFR allows him to lease the property to Movati. However, when you read the two agreements together what the ROFR does, at least for the first five years, is allow the Applicant to build a fitness facility on the property and prevent anyone else from doing so until the NCA’s expiry.

[25] Had the NCA referenced or specifically reduced the ROFR’s scope, my view might be different. But to adopt Tullio’s interpretation would be to render the NCA ineffective and without meaning.

[26] The Movati lease is not permitted by the ROFR.

[27] Is the NCA unenforceable? Tullio argues that its territorial scope is too wide and represents an unreasonable restraint on trade. While it is true that such a covenant should be limited to the area in which the business being sold carries on its trade or activities at the date of the transaction, Tullio’s argument must fail.

[28] I realize that just because Tullio - a sophisticated party who bargained for this with his eyes wide open - thought this was a reasonable restriction does not mean it is in fact reasonable and enforceable. This is a public order question. However, if Tullio were attempting to lease property somewhere other than Windsor I may be sympathetic to his position. But context is everything, and this is precisely the property that concerned the Applicant during negotiations and is the very property that motivated it to seek the NCA. Bad public policy would be to, in these circumstances, allow Tullio to bargain for this in good faith and then immediately turn around and say it is unenforceable.

[29] Even if I am wrong and the territorial scope does render the NCA invalid, and even though such a step should be taken cautiously, this is the type of case where I should read down the provision and make it valid and enforceable. The parties’ intentions were clear and Tullio is now transparently attempting to breach at least the spirt of the NCA. If this is not an appropriate case to reduce the scope of an offending provision it is hard to imagine what would be.

[30] If necessary, I would have notionally severed s. 6 and limited its scope to Windsor.

[31] Does the NCA prohibit the work required under the Movati lease?

[32] Tullio draws parallels between this and employer/employee relationships arguing that to find he has a business or financial interest in Movati would be tantamount to finding that every landlord has such an interest in their tenant’s business.

[33] While Tullio is correct that a financial interest should be given a fairly narrow meaning and that a landlord does not necessarily have a financial interest in a tenant’s enterprise, a business interest is a different matter altogether and should be defined more broadly. Tullio does not have a financial interest in the sense that neither he nor RDI are shareholders of Movati and do not share in its profits.

[34] He, however, has a business interest, which is broader in scope and captures more than an ownership stake or the receipt of funds that depend on the success of the business. Tullio is not just collecting rent or simply doing those things any other landlord would do. He is directly involved in preparing a fitness facility to compete with the Applicant. He is influencing the schedule of preparations and the speed at which the space will become operable as a fitness facility. He is allowing Movati (at no cost) to advertise on the property assisting with Movati’s promotion and marketing, and he has guaranteed Movati’s development charges beyond a capped amount.

[35] Tullio argues that since the terms ‘financial interest’ and ‘development services’ are not defined in the NCA that I should interpret them in “light of the overall purpose of the transaction”. I agree, and in the result find that the overall purpose of the NCA was to prevent, for five years, a competitor from operating a fitness facility on the property. The only sensible conclusion is that while the NCA does not preclude Tullio from leasing the property, it does prevent him from leasing to the Applicant’s competitors.

[36] I also find that that Tullio is providing development services to Movati. Just because it is common for a landlord to provide services such as grading, installing sewer and drainage systems, landscaping, paving etc., does not mean they are not development services. They are, and they are prohibited under the NCA when the purpose is to prepare the space to be a fitness facility.

[37] The NCA prohibits both the lease and the work to be completed under it.

[38] Is injunctive relief appropriate? There is some dispute over which test is to be applied. The Applicant advances the common-law test for an interim injunction which requires the Applicant to prove the following:

-That the case presents a serious question to be determined; -that if an injunction is not granted the Applicant will suffer irreparable harm that cannot be compensated by damages; and -where a doubt exists as to the adequacy of remedies and damages, the balance of convenience favours the Applicant in granting injunctive relief.

[39] Tullio references the test in RJR-MacDonald noting that I am being asked to grant a permanent injunction. This test requires that the Applicant establish:

-It’s legal rights; -that damages are an inadequate remedy; and -that there is no impediment to the court’s discretion to grant an injunction.

[40] As I have already found, Tullio has breached and is now breaching the NCA. The Applicant has established its rights.

[41] Are damages an adequate remedy? Tullio focused on the fact that the Applicant did not lead evidence showing it will suffer harm and that when cross-examined the Applicant’s representative refused to answer any questions about whether it has or will suffer damages. The Applicant counters that Tullio has agreed that non-compliance would constitute irreparable harm and that it would be entitled to an injunction upon a breach; see s. 11 NCA.

[42] I find that, in the unique circumstances of this case, it would be impossible for the Applicant to meaningfully speak to the issue of harm. The only way it could is if I permitted the breach to continue, allowed Movati to begin operations, and then at some later date had the applicant report on the impact to its bottom line. This cannot be the proper way to enforce an NCA.

[43] When addressing a negative covenant damages must be presumed inadequate. To apply the traditional injunction test to this fact-set, would be to essentially say that the Applicant cannot seek to enforce the NCA unless and until Movati is operable and sufficient time has passed to allow for an assessment of its impact on the Applicant. This makes little sense.

[44] Courts have weighed in on this including the British Columbia Court of Appeal in Montreal Trust Co. v. Montreal Trust Company of Canada, [1988] B.C.J. No. 410 (B.C.C.A.) which quotes Lord Cairns in Doherty v. Allman, (1878), 3 App. Cas. 709:

My Lords, if there had been a negative covenant, I apprehend, according to well-settled practice, a Court of Equity would have no discretion to exercise. If parties, for valuable consideration, with their eyes open, contract that a particular thing shall not be done, all that a Court of Equity has to do is to say, by way of injunction, that which the parties have already said by way of covenant, that the thing shall not be done; and in such case, the injunction does not7hhing more than give the sanction the process of the Court to that which already is the contract between the parties. It is not then a question of the balance of convenience or inconvenience, or of the amount of damage or of injury – it is the specific performance, by the Court, of that negative bargain which the parties made, with their eyes open between themselves.

[45] To rigidly apply the traditional test for an injunction (either temporary or permanent) would effectively render negative covenants meaningless and allow offending parties to breach with impunity. Consider the court’s comments in Hampsted v. Diontedous, (1969), 1 Ch. 248, [1968] 3 All E.R. 545:

Where there is a plain and uncontested breach of a clear covenant not to do a particular thing, and the covenantor promptly begins to do what he has promised not to do, then in the absence of special circumstances it seems to me that the sooner he is compelled to keep his promise the better.

[46] I acknowledge that the court in Hampsted was deciding whether to grant interim injunctive relief, but the same logic applies. If, as the court in Hampsted says, there is no reason to allow “a covenantor who stands in clear breach of an express prohibition to have a holiday from the enforcement of his obligation until the trial”, why would it be okay to allow Tullio to have his holiday until Movati is up and running and the Applicant is able to prove its customers have been pried away or that its growth has slowed.

[47] Injunctive relief is the only adequate remedy in these circumstances.

Conclusion

[48] The application is granted. Order to issue as follows:

(i) A declaration that the NCA is valid and in full force and effect. (ii) A declaration that the respondents have breached s. 6 of the NCA by entering into the Movati lease. (iii) That the Movati lease is void ab initio. (iv) Injunction requiring the respondents to abide by the terms and conditions of the NCA, until its expiry, and to refrain from doing any further work that violates s. 6.

[49] As agreed, the Applicant is entitled to its costs fixed at $20,000 all inclusive.

“Justice Jonathon C. George” Justice Jonathon C. George Released: November 13, 2018

COURT FILE NO.: 1725/18 DATE: 2018/11/13 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: GoodLife Fitness Centres Inc. Applicant – and – Rock Developments Inc. and Rocco Tullio Respondents REASONS FOR DECISION Justice J.C. George Released: November 13, 2018