COURT FILE NO.: CV-20-651668 DATE: 20230602

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: COFFEE TIME (2015) CORPORATION, Plaintiff AND: 1685247 ONTARIO LIMITED and KHURSHEED A. CHOWDHRY also known as KHURSHEED CHOWDDHRY, Defendants

BEFORE: Cavanagh J.

COUNSEL: James Quigley, counsel for the Plaintiff Khursheed A. Choudhry, in person and representing the Defendant 1685247 Ontario Limited

HEARD: May 1, 2023

ENDORSEMENT

Introduction

[1] The Plaintiff Coffee Time (2015) Corp. is the assignee of the rights of Coffee Time Donuts Incorporated (“CTDI”) under a franchise agreement (the “Franchise Agreement”) made with the Defendant 1685247 Ontario Limited (the “Franchisee”). Under the Franchise Agreement, the Franchisee was granted a franchise to use Coffee Time Donuts’ uniform business format, designs, know-how, experience, goodwill and trademarks in connection with the operation of a “Coffee Time Donuts” business.

[2] CTDI, as sub-landlord, entered into an Agreement of Sublease (the “Sublease”) with the Franchisee, as subtenant, to sublease certain business premises located at 1046 Pape Avenue in East York, Ontario for the purpose of carrying on the Franchisee’s business as a Coffee Time Donuts franchise.

[3] The Defendant Khursheed A. Choudhry, the principal of the Franchisee, gave a personal guarantee for the due and punctual payment of all amounts owing by the Franchisee under the Franchise Agreement and under the Sublease.

[4] The Plaintiff moves for summary judgment for payment of amounts claimed as owing under the Franchise Agreement and the Sublease. The Plaintiff claims $241,382.18 inclusive of interest to May 1, 2023.

[5] Mr. Choudhry is self-represented. At the hearing of this motion, he was granted leave to represent the Franchisee.

Background Facts

[6] The Franchise Agreement required the Franchisee to pay certain amounts for royalties and advertising contributions (together, the “Franchise Fees”). The Franchise Agreement provides that amounts in arrears bear interest at the fixed rate of 24% per annum calculated and payable monthly.

[7] The Sublease required that the Franchisee pay rent for its occupation of the premises.

[8] The Franchise Agreement was renewed by a renewal agreement dated April 2013 for a renewal term expiring on August 30, 2017. The Sublease was renewed for a renewal term expiring on August 17, 2017.

[9] On March 30, 2015, CTDI assigned its interest in the Franchise Agreement and the Sublease to the Plaintiff.

[10] When the Franchise Agreement expired by its terms on August 30, 2017, the parties continued their business relationship. The Franchisee continued to hold itself out as a Coffee Time branded restaurant and to receive the benefits of being a franchisee.

[11] The Sublease expired on August 17, 2017, without being renewed for an additional fixed term. The Franchisee continued in occupation of the subleased premises and paid rent.

[12] In August 2018, the Plaintiff terminated the franchise relationship due to, among other things, the Franchisee’s default in payment of Franchise Fees. At the time the franchise relationship was terminated, the Plaintiff took possession of the subleased premises.

Analysis

[13] The Plaintiff brings this motion for summary judgment for payment of Franchise Fees under the Franchise Agreement and rental arrears under the Sublease including accelerated rent for three months from September 2018 to November 2018 when the Plaintiff surrendered the head lease.

[14] I am satisfied that this is a proper motion for summary judgment. The evidence is such that I can make necessary findings of fact.

[15] I am satisfied that the Franchise Agreement continued after the expiry of its term under the written agreement by the conduct of the parties. When the term of the written Franchise Agreement ended, the Franchisee did not surrender the subleased premises but continued to operate as a franchisee of the Plaintiff. I am satisfied that the Franchisee continued to occupy the subleased premises after expiry of the term of the Sublease as a monthly subtenant. See Coffee Time Donuts Incorporated v. 2197938 Ontario Inc., 2022 ONCA 436, at para. 8.

[16] The Defendants oppose this motion on the following additional grounds:

a. The Defendants submit that the limitation period for the Plaintiff’s claim has expired. b. The Defendants submit that they did not receive written notice of the assignment of the Franchise Agreement and the Sublease to the Plaintiff and that the assignment is ineffective. c. The Defendants submit that the amount claimed for Franchise Fees is excessive and does not consider the actual sales upon which the Franchise Fees are to be calculated. They submit that the correct amount of royalty fees for the months of June, July and August (20 days) is $2,801.71 and that the correct amount of advertising fees for these months is $1,120.67. The Defendants accept that payment of these amounts would include additional HST. d. The Defendants submit that the amount claimed for rent under the Sublease ($7,287.82 per month) exceeds the amount properly due. The Defendants submit and that during the period from September 2017 to August 20, 2018 (when the Plaintiff terminated the franchise relationship and took possession of the subleased premises) the Franchisee was overcharged for rent. The Defendants submit that the amount claimed for rental arrears is excessive. e. The Defendants submit that the Plaintiff is not entitled to payment of accelerated rent. f. The Defendants assert that the Plaintiff has not accounted for the value of inventory and furniture and equipment left on the leased premises on August 20, 2018.

Are the Plaintiff’s claims statute barred?

[17] The limitation period for the Plaintiff’s claim for Franchise Fees is two years from the date the claim is discovered. The Plaintiff points to the suspension of the basic limitation period under the Emergency Management and Civil Protection Act by which the running of limitation periods from March 16, 2020 to September 14, 2020 was suspended. The result is that the Plaintiff is able to claim amounts for Franchise Fees due and owing from and after May 21, 2018.

[18] With respect to the claim for rental arrears and accelerated rent under the Sublease, the Plaintiff relies on s. 17(1) of the Real Property Limitations Act, R.S.O. 1990, c. L. 15 which provides for a six-year limitation period for claims for payment of rent from when the rent has become due or any acknowledgement in writing of same has been given to the person entitled thereto. The rents under the Sublease fell into arrears in January 2018. The Plaintiff’s claim for overdue rent and accelerated rent is not statute barred.

Effect of failure to give written notice of assignment of the Franchise Agreement and Sublease

[19] The Defendants submit that they were not given express written notice of the assignment of the Franchise Agreement and the Sublease from CTDI to the Plaintiff. They submit that under s. 53 of the Conveyancing and Law of Property Act, absent such notice, the assignment is ineffective as against the Defendants.

[20] The Plaintiff relies on the Notices of Default sent to the Defendants dated November 1, 2015 and August 10, 2018 which identified the Plaintiff as the franchisor and sub-landlord. The Plaintiff submits that if the assignment is not effective as a legal assignment, it is effective as an equitable assignment which does not require notice: Landmark Vehicle Leasing Corp. v. Mister Twister Inc., 2015 ONCA 545, at para. 10.

[21] The assignor was not joined as a party to this action as required by rule 5.03(3) of the Rules of Civil Procedure. As held in Landmark, at para. 14, the joinder requirement is intended to guard against a possible second action by the assignor and to permit the debtor to pursue any remedies it may have against the assignor without initiating another action. I am satisfied that the failure to join the assignor as a party does not prejudice the Defendants and I relieve against the requirement of joinder as permitted by rule 5.03(6).

[22] I conclude that the assignment is effective as an equitable assignment, and that the Plaintiff is entitled to bring this action as assignee.

What amounts are due for Franchise Fees?

[23] At the hearing of this motion, the Plaintiff agreed that the unpaid Franchise Fees are in the amounts set out in the Defendants’ factum, that is, $2,801.71 for royalty fees and $1,120.67 for advertising fees, a total of $3,922.38. This amount, with HST added, is $4,432.29.

What amount is due for unpaid rent to August 20, 2018?

[24] Under the Sublease the Franchisee agreed to pay rent during the term of the Sublease at the times and in the manner provided for in the head lease. The Sublease provides that Mr. Choudhry as guarantor covenants and agrees that he shall be considered as primarily liable to the sublandlord for the obligations of the subtenant.

[25] The Plaintiff’s evidence is that the monthly rents due under the Sublease in 2018 were in the total amount of $7,287.82 which included minimum rent and additional rent. The minimum rent (excluding HST) under the Third Renewal Agreement (between the landlord and CTDI as tenant) made August 28, 2012, for the period from September 1, 2014 to August 31, 2017 is $3,262.50 (excluding HST) or $3,686.62 (including HST). Based on monthly rent of $7,287.82 (including HST), the additional rent for the period ending August 2017 (including HST) is $3,601.20.

[26] The Plaintiff sent monthly invoices to the Franchisee for $7,287.82 (including HST) although the invoices themselves are not in evidence.

[27] The Defendants rely on a Lease Amending Agreement made as of the 20th day of April 2017 between the head landlord and the Plaintiff which provides that in the event that the Plaintiff exercises its option to extend the lease during a fourth renewal term, the minimum rent shall be $1,750 (excluding HST). The Defendants say that monthly rent under the Sublease was reduced as a result of the Lease Amending Agreement, but the Plaintiff continued to charge the same amount of rent.

[28] At the hearing of this application, I asked the Plaintiff to provide additional written submissions addressing three issues. One of these issues was with respect to the basis for the Plaintiff’s claim for accelerated rent. In its supplementary written submissions, the Plaintiff states that it exercised the “Fourth Extension Term” referred to in the Lease Amending Agreement dated April 20, 2017. As a result, the end of the term for the head lease was extended to August 31, 2022. The Plaintiff exercised its right to early termination of the head lease and it was terminated on November 30, 2018.

[29] The Plaintiff requests leave to include in evidence the fact that the renewal option was exercised to support its claim for accelerated rent.

[30] Although the Plaintiff does not explain why this fact (and the related documents) were not originally included in the evidence filed in support of the Plaintiff’s motion, I grant leave to the Plaintiff to include as part of the record on this motion the agreed fact that it exercised the Fourth Renewal Term provided for in the Lease Amending Agreement. This fact is not contentious, and the Defendants also rely on this fact in response to the Plaintiff’s motion.

[31] The minimum monthly rent under the renewal agreement for the head lease for years three to five of the renewal term ended in August 2017 is $3,262.50. ($39,150/12). After exercise of the option to extend the term of the lease for a fourth extension term, the minimum rent payable during the fourth extension term is reduced to $1,750 ($21,000/12) pursuant to the 2017 Lease Amending Agreement.

[32] According to records put into evidence by the Plaintiff, the rent charged to the Franchisee for August 2017 was $7,287.82. This would have included minimum rent of $3,262.50. Although the minimum rent for September 2017 was reduced to $1,750, according to the Plaintiff’s records the Plaintiff sent an invoice for rent under the Sublease for September 2017 in the same amount, that is, $7,287.82. The Plaintiff continued to send monthly invoices to the Franchisee in this amount to November 2018 when the head lease was surrendered.

[33] The rent properly due under the head lease and the Sublease excluding HST (based on the reduced minimum rent pursuant to the Lease Amending Agreement) beginning in September 2017 is $1,750 (minimum rent) plus $3,186.89 (additional rent (no changes are shown by the evidence)), a total of $4,936.89. I find that the monthly rent with HST is $5,578.68 beginning September 2017.

[34] The Plaintiff claims rent arrears for the period January 2018 to August 2018 (excluding its claim for accelerated rent) in the amount of $51,417.78 (based on unpaid monthly rent charged of $7,287.82 for March to August 2018 and partial arrears for January and February 2018). The Plaintiff, in its supplemental written submissions, accepts that this amount must be reduced to account for the rent deposit of $6,405.68.

[35] Through the affidavit of Joe Di Savino, the Plaintiff’s Director of Operations, the Plaintiff put into evidence (Exhibit “P”) a statement attached to the Plaintiff’s Notice of Termination dated August 17, 2018 of rent owing under the sublease as of August 17, 2018. This statement shows that there was a zero balance on June 30, 2017. The statement includes charges for rent for the months of July 2017 through August 2018 (fourteen months). The charges for rent are at a monthly rent of $7,287.82 (a total of $102,029.48). Because the minimum rent was reduced after exercise of the option for a fourth extension term, the rent that should have been charged for this fourteen-month period is $81,519.80 (2 months at $7,287.82 and 12 months at $5,578.68).

[36] The Defendants also rely on the statement appended as Exhibit “P” to Mr. Di Savino’s affidavit. It shows that the Franchisee made payments of rent during this fourteen-month period of $50,224.60 (this excludes credits shown on the statement of $442.02, $7,287.82 (rent improperly charged and reversed by this credit memo dated August 1, 2017), and $1,003). In addition, the Franchisee is entitled to credit for the rent deposit of $6,405.68. The rent payments and deposit credit total $56,630.68.

[37] This statement for the fourteen-month period from July 1, 2017 to August 2018 shows that the amount of unpaid rent under the Sublease as of August 17, 2018 is $24,889.52 ($81,519.80 less $56,630.28). I so find.

[38] There is no evidence that the Defendants were informed of the rent reduction. The Plaintiff continued to charge rent after August 2017 without giving effect to the reduction in minimum rent. I find that the Plaintiff never told the Defendants that the rent was reduced beginning September 2017. The Plaintiff continued to claim arrears of rent in this action based on monthly rental of $7,287.82 even after August 2017.

Is this Plaintiff entitled to three months rent for the period September 2018 to November 2018?

[39] The Plaintiff claims accelerated rent from the Defendants for the months of September, October and November 2018 (a period after the Sublease was terminated and until the head lease was surrendered).

[40] The Plaintiff’s evidence is that the Sublease expired on August 17, 2017, without being renewed and was subsequently continued as a monthly tenancy, with the Franchisee remaining in possession of the premises until August 20, 2018, when the Sublease was terminated.

[41] The Sublease provides in section 6.04 that the “Sublandlord shall have the right to accelerate the rental due hereunder in the event of termination for default, so long as the Sublandlord remains liable under the Head Lease”.

[42] At the time of the Plaintiff’s termination of the Sublease, the Franchisee was under a month-to-month tenancy. The Franchisee did not have an obligation to pay rent for any fixed remaining term. Under sections 4.01 and 4.02 of the Sublease, the Plaintiff covenanted to pay rent reserved “during the term” of the Sublease at the times and in the manner provided for in the head lease. The last month of the term of the month-to-month Sublease was August 2018, the month when it was terminated. There were no further rentals due under the Sublease and no remaining term. Therefore, the Plaintiff is not entitled to recover accelerated rent from the Franchisee.

Are the Defendants liable for interest on unpaid Franchise Fees and rent arrears at the rate of 24% per annum pursuant to the Franchise Agreement?

[43] Article 7.4 of the Franchise Agreement provides that all amounts which are from time to time owing by the Franchisee to the Franchisor under the Franchise Agreement and which are not paid when due shall bear interest at the rate of two per cent per month (twenty-four per cent per annum) calculated and payable monthly.

[44] The Plaintiff contends that this provision also applies to arrears of rent. The Plaintiff relies on section 4.01 of the Sublease which states that the Franchisee will pay as rent the royalty and advertising fees reserved at the times and in the manner provided for in the Franchise Agreement. The Plaintiff’s evidence (paragraph 67 of the affidavit of Mr. Di Savino) and submission are that this provision of the Sublease has the effect of making the interest rate set out in the Franchise Agreement applicable to rent arrears.

[45] I disagree. This provision has the effect of making the Franchise Fees payable as rent under the Sublease. It does not provide that rent arrears are payable under the Franchise Agreement as Franchise Fees. They are not so payable.

[46] Interest is payable on the outstanding Franchise Fees ($4,432.29) at the rate of 24% per annum in accordance with the Franchise Agreement.

[47] The Sublease does not provide for payment of contractual interest on rent arrears.

Are the Defendants entitled to a reduction of the amount claimed to account for the value of furniture, equipment and inventory left on the subleased premises?

[48] In his affidavit affirmed on December 12, 2022, Mr. Choudhry states that when the Plaintiff re-entered the premises of the Franchisee on August 20, 2018, there were furnishings and equipment of a value of $50,000, inventory valued at $5,000 and other personal belongings and business records. Mr. Choudhry states in his factum that the Franchisee paid $2,980.22 for inventory during the first three weeks of August 2018 in the amount of $2,980.22. The Defendants submit that they are entitled to credit for the value of furnishings, equipment and inventory.

[49] Mr. Di Savino’s evidence is that based on his review of the Plaintiff’s business records, he has found no evidence to support the contention that the Defendants abandoned property of value at the subleased premises. He states that the Plaintiff did not profit by the sale of any personal property owned by the Defendants.

[50] Other than the declaration made by Mr. Choudhry in his affidavit about the value of furnishings and equipment, there is no evidence of what was taken, whether it had any value, or the value of such property. It was open to the Defendants to describe the furnishings and equipment and provide evidence of their value. In the absence of such evidence, I do not accept that the Defendants should be given credit for any furnishings, equipment or inventory.

Disposition

[51] For these reasons, I grant summary judgment in favour of the Plaintiff and against the Defendants for:

a. Payment of $4,432.29 for advertising fees and royalty fees under the Franchise Agreement; b. Payment of interest on this amount pursuant to the Franchise Agreement at the rate of 24% per annum from the dates of non-payment of such fees; and c. Payment of rent arrears under the month to month Sublease in the amount of $24,889.52.

[52] If any of the parties seeks costs, such party may make written submissions within 10 days (not longer than three pages, excluding costs outline). If a party makes submissions seeking costs, the opposing party may make responding written submissions (also not longer than three pages) within 10 days thereafter. No reply submissions are to be made without leave.

Cavanagh J. Date: June 2, 2023