Court File and Parties
COURT FILE NO.: CV-16549245 DATE: 20190110
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
VARSITY INVESTMENTS INC. Plaintiff – and – 1666862 ONTARIO INC. MACKENZIES HIGH PARK and JIM MORRISON also known as JAMES MORRISON Defendants
Counsel: Oscar Strawczynski, for the Plaintiff Alan B. Dryer, for the Defendants
HEARD: October 24 and 25, 2018
L. A. Pattillo J.
[1] In January 2014, the Plaintiff, Varsity Investments Inc. (the Landlord) and the Defendant, 1666862 Ontario Limited (the Tenant) entered into a written lease effective the 21st day of January, 2014, which provided that 1666862 would lease from Varsity part of the ground floor and a portion of the basement at 469 Bloor Street West in Toronto (the “Premises”) for a five-year term from April 1, 2014 to March 31, 2019 (the “Lease”).
[2] The Lease provided that the Premises were not to be used for any purpose other than as a pub style restaurant/sports bar. The paragraph requiring that the Tenant carry on business in the Premises was intentionally deleted.
[3] At the same time as the Lease was entered into, the defendants Mackenzies High Park and Jim Morrison (“Morrison”), the owner and director of the Tenant, signed a guarantee addressed to the Varsity in respect of all of the Tenant’s obligations under the Lease (the “Guarantee”).
[4] Mackenzies High Park is the business name used by 2109922 Ontario Inc. (“2109922”) which is a company owned and controlled by Morrison. From 2008 to December 2017, 2109922 operated a bar and restaurant at 1982 Bloor Street under the name Mackenzies High Park.
[5] With the assistance of a bank loan, the Tenant proceeded to construct the restaurant/sports bar at the Premises which opened for business in April 2014. The restaurant/bar was called Mackenzies The Annex. While the business had a good clientele, it never made a profit.
[6] In the spring of 2015, Morrison decided to sell Mackenzies The Annex’s business. He found the business a lot of work for not a lot of return. He said that the business had lost its soul. He had also taken on a full-time job. In April or May 2015, Morrison listed the business for sale with an agent who specialized in the area but he received no offers.
[7] Given the continued lack of profitability, Morrison decided to stop operating Mackenzies The Annex, effective July 20, 2015. On that day, Morrison and his wife arrived at the Premises at around 9 am in a van. He advised the staff of the decision and paid them out in full. He placed signs in the window saying the business was closed and thanking the patrons for their support. He and his wife then collected the perishables, the liquor and beer and the point of sale machine, along with some personal items, and transported them to Mackenzies High Park. He estimated that they made less than a handful of trips, the last one around noon.
[8] Mr. Augustus Costa (“Costa”), the principal of Varsity, was on his computer between 11 am and 12 noon on July 20, 2015, checking the security cameras he had installed at 469 Bloor Street West. He noticed the chairs on the tables at the Premises which he felt was unusual as the restaurant opened at 11 am. He then noticed large boxes being removed from the Premises through the back door and being put in a van in the laneway. He got in his car and drove to 469 Bloor Street West which was only 10 minutes away and parked his car in the laneway behind the van. Morrison was in the alley and the two of them had a conversation.
[9] The evidence of Costa and Morrison as to what transpired when they met in the laneway on July 20, 2015 differs in certain key respects. They did agree on the following however: only the two of them were present for most of the conversation; there was a confrontation during which Costa became quite agitated; they discussed that Costa had the building at 469 Bloor up for sale; Morrison told Costa that he was removing food, liquor and beer; Costa told Morrison that he was not allowed back in the Premises without talking to him first; and Costa asked Morrison to put in writing what they discussed.
[10] Later on the afternoon of July 20, 2015, Morrison sent Costa the following email:
As per our conversation today, I am writing you to confirm that we have unfortunately come to the decision that we can no longer afford to operate Mackenzies The Annex at 469 Bloor St. West. Effective July 20, 2015 we have shut the doors and laid off all our employees. We are actively looking to find a new tenant that can take over the lease and operate in this location.
Costa never responded to the email.
[11] On July 24, 2015, Associated Bailiffs & Co. Ltd. changed the locks on the Premises and placed the following notice on the door addressed to the Tenant:
Take notice that Associated Bailiffs & Co. Ltd. agents for the Landlord have taken distress against your goods and chattels located at the above mentioned premises pursuant to the provisions of the lease between you and the Landlord and pursuant to sections 14.02 (v) and (ix) and section 16 which give rise to accelerated rent in accordance with section 14.01 (b) and 16 for the balance of the month and 3 months hence, the computation of which can be obtained by the Landlord.
And further take notice that it has been necessary for the protection of your goods and chattels and for the protection of the Lessor’s right of distress that the lock on the entry to the said premises be changed, but not withstanding the change of lock by the Landlord for the purpose of protection of the said goods and chattels take notice that the Landlord has not terminated the lease and your rights as tenant to the said premises continue to be recognized and you may upon request to the Lessor re-enter the leased premises and continue to occupy same and use same subject to the Landlord’s right of distress as set out herein.
And take notice that if you wish to replevy the goods and chattels as aforesaid or if you wish to obtain any further information in respect to this matter you may contact the Landlord or Associated Bailiffs & Co. Ltd., agents for the Landlord.
[12] Morrison attended at the demised premises a few days after July 24, 2015 to obtain some invoices for his accountant. He saw the notice and was surprised. He did not try to enter the Premises. He spoke with his parents and then with a lawyer about the matter. He also called Costa on two separate occasions to discuss the matter but did not reach him. He left voice-mails on both occasions but Costa never returned the calls.
[13] At the end of July, Morrison stopped payment on the August 2015 rent cheque and arranged for the cancellation of the insurance on the premises effective July 20, 2015.
[14] Costa started to release the Premises in August. He did not list the property with an agent. Instead he placed a “For Rent” sign in the window of the Premises with his phone number on it. He received two or three of what he termed serious offers. He entered into a lease with a new tenant effective February 1, 2016.
[15] On August 28, 2015, Varsity obtained two valuations of the contents and chattels remaining on the Premises in the amounts of $7,280.00 and $6,850.00 respectively.
[16] Varsity was unable to sell any of the content and chattels in the Premises. Because the new tenant did not want any of them, Varsity arranged with a restaurant equipment company to have them all removed and taken away for no cost.
The Issues
[17] The issue for determination in this action is whether the events on July 20 followed by the bailiff’s actions on July 24, 2015 entitled Varsity to distrain or resulted in its termination of the Lease.
The Position of the Parties
[18] Varsity submits that on July 20, 2015, the Tenant was in default of the Lease in three different ways. It submits that the Tenant was in default under the Lease by virtue of breaches of paragraphs 14.01 (a)(v) and (ix) of the Lease. As a result of those breaches and pursuant to paragraph 14.01(b) of the Lease, the “full amount of the current month’s rent and the next three (3) months’ installments of Minimum Rent and Additional Rent and Sales Taxes” became due and payable. Accordingly, on July 24, 2015, Varsity was entitled to and did distrain for arrears of rent (and lock the doors to protect the chattels on the Premises). Further, Varsity submits that as a result of the discussion between Costa and Morrison on July 20, 2015, the Tenant repudiated the Lease entitling the Landlord to enter into possession and re-let the Premises, which it did.
[19] Varsity claims a total of $207,943.32 in damages made up of the rent owing from August 1, 2015 to the date it entered into a new lease for the Premises, the subsequent shortfall in rent to the end of the term of the Lease and incidental expenses arising from the Tenant’s breach and the re-leasing of the Premises.
[20] Finally, Varsity submits that both Morrison and 2109922 are liable for any amounts found owing to Varsity pursuant to the Guarantee entered into by them at the time that the Lease was entered into.
[21] In response, the Tenant submits that it has no liability under the Lease. There was no repudiation of the Lease on July 20, 2015. It submits that the Landlord’s distraint on July 24, 2015 was illegal because no rent was owing by the Tenant as at that date. It was not in breach of the Lease either on July 20 or July 24, 2015. The July rent had been paid and it had not abandoned the Premises. Further, the Tenant had been given no notice of the alleged breaches. As a result of the illegal distraint, it submits that by changing the locks on July 24, 2015, the effect and intent of the Landlord was to terminate the Lease and accordingly, the Tenant was released for all further liability under it.
[22] In the event that the Tenant is found liable under the Lease, both Morrison and 2109922 deny that they have any liability pursuant to the Guarantee.
[23] Finally, the Tenant has brought a counterclaim against Varsity for damages arising from its wrongful termination of the Lease.
Analysis
[24] As noted, the evidence of Costa and Morrison differs as to what they discussed in the alley behind the Premises on the morning of July 20, 2015. Having considered the evidence of both of them as a whole, where their evidence conflicts, I prefer Morrison’s version of what was said over that of Costa. I have reached that conclusion for a few reasons. First, Costa’s evidence on an important point changed from discovery to trial. On discovery, he said that he instructed the bailiff not to carry out a distress but to change the locks and put a notice on the door because he considered that the Tenant had abandoned the Premises. At trial he testified that there was nothing in the bailiff’s notice that was inconsistent with what he told him, effectively confirming that he instructed the bailiff to distrain. Costa also said that the topic of Morrison selling the business never came up during their discussion on July 20 but Morrison said it did and he put that fact in his email summarizing what was said which Costa requested and never responded to.
[25] Paragraph 14.01 (a) of the Lease sets out a number of events of default which can give rise to either the three months accelerated rent or, at the option of the Landlord, termination of the Lease.
1. Paragraph 14.01(a)(v)
[26] Paragraph 14.01(a)(v) deals with the circumstance where the Tenant becomes bankrupt or insolvent or takes the benefit of any statute for bankrupt or insolvent debtors.
[27] Varsity submits that the Tenant’s actions in shutting its doors on July 20, 2015 coupled with Morrison’s evidence that the restaurant was not profitable and the defendants’ failure to produce financial information is sufficient to draw the inference that the Tenant was insolvent. I disagree. The Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 2 defines an “insolvent person” as one who has liabilities in excess of $1,000 and who is unable to meet his obligations as they fall due or has ceased paying current obligations in the ordinary course of business as they come due.
[28] Costa testified that on July 20, 2015, he did not believe that the Tenant was in default under paragraph 14.01(a)(v). Further, there was no evidence that the Tenant was unable to meet its obligations as they fell due or that it had ceased paying current obligations as at July 20, 2015. In fact, the evidence was just the opposite. The Tenant had paid the July rent at the beginning of July and Varsity was holding post-dated cheques for the balance of the year. Further, Morrison testified that all of the employees and trade creditors had been paid all of the amounts owing by the Tenant. Finally and while failure to produce financial information in answer to undertakings is troubling, Varsity had its remedies to obtain the information and chose not to pursue them. The Tenant’s failure to produce is not sufficient in the face of the other evidence which I accept to support an inference of insolvency.
[29] I find, therefore that the Tenant was not in breach of paragraph 14.01(a)(v) of the Lease on July 20, 2015.
2. Paragraph 14.01(a)(ix)
[30] Paragraph 14.01(a)(ix) of the Lease provides:
14.01 (a) An “Event of Default” occurs when
(ix) the Leased Premises are vacant or unoccupied for five (5) consecutive days or the Tenant abandons or attempts to abandon the Leased Premises or sells or disposes of property of the Tenant or removes it from the Leased Premises so that there does not remain sufficient property of the Tenant on the Leased Premises free and clear of any lien, charge or other encumbrance ranking ahead of the Landlord’s lien to satisfy the Rent due or accruing for at least twelve (12) months.
[31] As noted, paragraph 14.01(b) of the Lease provides that upon the occurrence of an Event of Default which has not been cured as provided for in the Lease, the full amount of the current month’s rent and the next three months of rent become due and payable. Further, the Landlord has the option of terminating the lease.
[32] Varsity submits that Morrison’s removal of the perishables and the beer and wine from the Premises on July 20, 2015, was a clear breach of paragraph 14.01(a)(ix) thereby triggering the requirement for three months accelerated rent.
[33] The Tenant submits that paragraph 14.01(a)(ix) of the Lease applies to abandonment of the Premises and to protect the Landlord’s right to distrain for unpaid rent. It submits in accordance with s. 19(2) of the Commercial Tenancies Act, where the events set out in the paragraph occur, the landlord must give notice of the default and provide a time to cure before exercising a right of reentry into the Premises. In this case, Varsity did neither.
[34] In my view, when the words of s. 14.01(a)(ix) are read as a whole, what is prohibited is abandonment of the Premises and/or removal of property in circumstances of abandonment. It makes no commercial sense to interpret the paragraph to provide that removal of tenant’s property, no matter how small, in circumstances where there is no intention of abandonment constitutes an Event of Default. The purpose of the paragraph is to protect the landlord’s rent. Where there is no intention of abandonment, such protection is not required.
[35] As noted, as at July 20, 2015, the Lease was in good standing. The Tenant had paid the July rent in full at the start of the month. The Tenant had always paid its rent on time and Varsity held post-dated cheques for the remainder of the year. Further, Costa was aware both before July 20 but also on that date as a result of his conversation with Morrison and the subsequent email he received that Morrison was actively trying to sell the business. That required the Lease to remain in place. Nor is there any evidence that prior to July 24, the Tenant had the phone disconnected, cancelled the insurance or took any other step that would indicate it was abandoning the Premises.
[36] Further, while Morrison and his wife took the food, beer and liquor, they left everything else connected with the business at the Premises. This included the glasses, plates, cutlery, all the cooking equipment and fixtures and the tables and chairs. That fact corroborates Morrison’s evidence that he was trying to sell the business and was not abandoning the Premises.
[37] Accordingly, I find on the facts that the Tenant had no intention of abandoning the Premises prior to July 24, 2015. While the Tenant did remove some of its property on July 20, 2015, it was only the perishable food and drink items (the point of sale system was leased) which were moved to its related company, Mackenzies on the Park. They would have been destroyed if left on the Premises. They were not removed to defeat any right of Varsity under the Lease. The balance of the Tenant’s property, which was significant, remained on the premises. Further, the removal of the items was not done in a clandestine or fraudulent manner but rather during working hours, in broad daylight and in plain view of Varsity’s security cameras.
[38] For the above reasons, therefore, I find that the Tenant was not in breach of s. 14.01(a)(ix) of the Lease between July 20 and 24, 2015.
3. Repudiation
[39] Varsity submits, relying on Costa’s testimony that on July 20, 2015, Morrison told him that he was done and did not intend to spend any more money and don’t bother cashing the August rent cheque, that the Tenant repudiated the Lease, thereby entitling Varsity to take the actions it did. Morrison denied that he said any such thing to Costa.
[40] I accept Morrison’s evidence on this point. Further, and even if Morrison told Costa that he didn’t intend to spend any more money, in the circumstances, it is likely that comment did not include the rent given his intention to sell the business.
[41] Costa admitted that he knew that the Tenant’s business was for sale before July 20, 2015. Further, Morrison said that it came up during their discussion on July 20. It is corroborated by the email that Morrison sent Costa later on the 20th summarizing their discussion. Notably, Costa did not respond to say that was never discussed. Because Morrison was looking for a buyer to purchase the business and take over the Lease, it made no sense for the Tenant to not continue to pay the rent.
[42] Accordingly, I find that Morrison and hence the Tenant did not repudiate the Lease during the discussion in the laneway with Costa on July 20, 2015.
[43] Based on my findings that the Tenant was not in breach of either paragraphs 14.01(a)(v) or (ix) of the Lease, it follows that the provisions of s. 14.01(b) of the Lease in respect of accelerated rent do not apply. As a result, there was no rent owing by the tenant under the Lease on July 24, 2015 when the bailiff purported to distrain for arrears of rent. The distress was therefore illegal.
[44] Varsity’s act of having the bailiff change the locks of the Premises on July 24, 2015, had the effect and was done with the intent to deny the tenant possession of the Premises. As a result, it had the effect of terminating the Lease. I do not accept that it was done to protect the goods and chattels on the Premises. There was no evidence that the goods and chattels at the Premises were in any danger. Apart from Varsity, Morrison was the only person who had a key to the Premises. He left the goods and chattels because he was actively trying to sell the business. Costa spoke about protecting the leased machines on the Premises such as the electronic games, the jukebox and an ATM machine but he could not distrain against leased equipment. In any event, the tenant remained liable for any damage to the leased equipment.
[45] In light of my conclusion that the Tenant was not in breach of the Lease and did not repudiate it, but rather Varsity terminated the Lease by changing the locks and purporting to improperly distrain on July 24, 2015, Varsity’s action is dismissed and the Tenant’s counterclaim is allowed.
[46] The Tenant is entitled to damages arising from Varsity’s actions. In that regard, based on the evidence, I assess the Tenant’s damages in the total amount of $25,626.58 made up as follows:
i. $4,490.83 in respect of 8 days rent for the period of July 25 to August 1, 2015; ii. $7,065.00 being the average value of the two appraisals obtained by Varsity for the chattels which remained on the premises; and iii. $13,870.75 being the Tenant’s deposit for the last months’ rent of $12,275.00 plus HST.
[47] In light of my decision dismissing Varsity’s action, I do not have to decide the issue of whether the guarantee signed by both Morrison and 2109922 is operable given its terms. I am, however, required to assess Varsity’s damages.
[48] As noted, Varsity’s damage claim is for $207,943.32 and is comprised of the following items less a credit for the last months’ rent of $13,870.75:
i. $190,666.39 for the balance of rent due under the Lease (full rent between August 2015 and January 2016 of $104,412.00; shortfall of rent under the new lease from February 2016 to March 2019); ii. $ 16,724.00 for commission to re-let; iii. $ 10,154.03 for legal fees; iv. $ 500.00 bailiff fees; v. $ 101.41 phone charges; vi. $ 101.41 to preserve the liquor license; and vii. $ 327.70 for the locksmith.
[49] The defendants took no issue with the amounts claimed by Varsity save and except that they submitted that the rent owing should be reduced on the basis that Costa did not hire a real estate agent at the outset and accordingly took longer to re-lease the Premises than he should have. The problem with that submission is that there is no evidence to support it.
[50] Accordingly, I assess Varsity’s damages as claimed at $207,943.32.
Conclusion
[51] For the above reasons, Varsity’s action is dismissed and the defendants counterclaim is allowed and the Tenant is awarded damages of $25,626.58.
[52] I encourage the parties to discuss and agree on costs. In the absence of agreement, the defendants shall file brief written cost submissions of no more than three pages together with a Costs Outline within 21 days of the release of these reasons. Varsity shall file its responding cost submissions, also no more than three pages together with a Costs Outline, within 14 days following receipt of the defendants’ cost submissions.
L. A. Pattillo J.
Released: January 10, 2019
COURT FILE NO.: CV-16549245 DATE: 20190110
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
VARSITY INVESTMENTS INC. Plaintiff – and – 1666862 ONTARIO INC. MACKENZIES HIGH PARK and JIM MORRISON also known as JAMES MORRISON Defendants
REASONS FOR JUDGMENT
L. A. PATTILLO J.