Tuesday, April 28, 2015
EXCLUSIVITY CLAUSES IN A COMMERCIAL LEASE
An interesting case involving an exclusivity clause in a commercial lease can be found in Laplante v. Les Immeubles Robin Inc., 2014 QCCS 97.
The Tenant operated a video rental store. He signed the lease in a strip center for forty-eight (48) months, expiring on October 31, 2008. The lease included an exclusivity clause precluding the Landlord from leasing space to any business whose principal activity is the rental of videos.
On or about January 31, 2006, the Landlord informed the Tenant that the IGA supermarket intended to exploit a Vidéoself business annexed to or within the supermarket. Vidéoself is a franchise of automated DVD and video game rentals through distribution machines.
In view of the Landlord’s refusal to prevent Vidéoself from operating, the Tenant sued the Landlord for damages in the amount of $50,000.00; reduction in rent in the amount of $37,864.00; and punitive damages in the amount of $10,000.00 based on the allegation that the breach of the exclusivity clause was intentional and abusive. The Landlord argued that the exclusivity clause did not apply because the video rental business did not constitute the principal activity of the IGA supermarket. Moreover, only a small area of the total space occupied by IGA was being used for the Vidéoself business. In addition, the Landlord argued that the business concept, including its layout, customer service, prices, the consumer focus group, and the hours of operation were completely different than that of the Tenant.
The Court summarized the issues in dispute as follows:
1. Had the Landlord breached the exclusivity agreement?
2. If so, did the Tenant prove that it suffered any damages?
An exclusivity clause in a contract should be interpreted restrictively since it constitutes an infringement on commercial freedom and competition.
The Court concluded that the Landlord was clearly in breach of the exclusivity clause.
In the Court’s view, the Vidéoself business directly competed with the Tenant’s video rental business. The Court considered that the Vidéoself business occupied a well-defined area in the shopping centre. The role of the Court is to determine the true intention of the parties when they agree to an exclusivity clause.
According to the evidence, the Tenant signed a new lease on November 6, 2008 for the same rent but with a modified exclusivity clause. It is compelling that when the parties signed the new lease in 2008, the Landlord agreed to include the exclusivity clause but insisted that it be clarified so that it would not apply to Vidéoself. From this the Court concluded that the Landlord’s interpretation of the exclusivity clause was substantially similar to that of the Tenant namely, that the Vidéoself business was a direct competitor of the Tenant and was therefore prohibited by the terms of the original exclusivity clause.
Although the Tenant succeeded in convincing the Court that the Landlord was in breach of the exclusivity clause, it fared less well when it came time to prove that it had suffered damages as a result of the breach. The burden of proof being with the claimant, the evidence provided by the Tenant in the form of unaudited financial statements was ambiguous and did not satisfy the Court. In the circumstances, the Court awarded only a nominal sum of damages.
Since the Courts will interpret exclusivity clauses restrictively as being contrary to the general principles of freedom of trade and commerce, it is important that such clauses be drafted in such a way so as to survive innovations and new technology that are becoming more and more frequent. Considering that the key concern of the Tenant is limiting potential competition, the drafter should pay particular attention to clearly define the parameters of the Tenant’s protection and the Landlord’s obligation. In addition, considering the practical difficulties of proving damages, drafters of such clauses should consider incorporating a liquidated damage clause which would establish the quantum of damages in advance and need not be supported by any evidence, under reserve of course of the Tenant’s recourse for injunctive relief.