Friday, May 22, 2015
Is a sports club (the "Landlord") who leased space to a restaurant (the "Tenant") liable in damages for closing its business and depriving the Tenant of clientele? This was the issue before the Superior Court in 9202-9131 Quebec Inc et al. –vs- 6943870 Canada Inc, 2015 QCCS 1209.
The Lease was signed on December 1, 2008 for a term of 10 years and the Tenant opened its restaurant for business the following month. The Landlord however was losing money and began exploring other business options such as the installation of two (2) ice surfaces to replace the tennis courts.
At the beginning of 2010, the Landlord decided to pursue the development of a residential condo project on its property. This would necessarily result in the closing of the sports club, the demolition of the building and the termination of Tenant’s lease. Tenant was not informed of this decision.
Landlord filed a rezoning application and informed members of the sports club that it would most probably close. In the meantime, turmoil over the future of the sports club was having a negative impact on the Tenant’s sales. As a result, the parties agreed to a reduction of rent and of the restaurant’s opening hours. The rezoning application was eventually rejected by the municipal authority.
In September 2010, the Tenant sent a demand letter to the Landlord asking for compensation and announcing that the restaurant would close the following month. No compensation was paid.
The Court had to decide whether the Landlord was in breach of the lease and if so, what were the damages?
The lease did not impose any express obligation on the Landlord regarding the operation of the sports club or the retention of any minimum number of members. However, the Court pointed out that contracts in general, and leases in particular, have implied obligations. For example, Article 1434 of the Quebec Civil Code stipulates that the parties to a contract are bound by not only what is specifically expressed in it, but also what is implied by the nature of the contract, in conformity with usage, equity or law.
Article 1856 of the Quebec Civil Code stipulates that neither landlord nor tenant may change the form or destination of the leased premises during the term of the lease. The Court considered whether closing down a substantial part of the building would amount to changing the destination of the leased premises.
The Court noted that the courts have historically limited the scope of such implied obligations, particularly when in the presence of a clause similar to the one found in the lease between the parties stipulating that the lease and its schedules contain all of the undertakings and obligations of the parties. The Courts are reluctant to give a tenant the benefit of an obligation that it did not negotiate for itself.
For example, the courts have dismissed claims by tenants complaining that the vacancy rate is too high; that the landlord has undertaken disruptive renovations; or that the construction of a shopping centre is not proceeding as the tenant understood it would. In the absence of a specific clause in the lease to deal with such issues, the courts have often sided with the landlord.
The Court noted the series of cases relating to the decision to transfer passenger traffic from Mirabel to Dorval Airport which were on the whole, more favourable to the tenant. In those cases, the courts held that the reduction in the services offered at Mirabel Airport constituted a breach of an implied obligation to maintain sufficient traffic there.
In other cases, the courts have found that the transformation of a portion of a shopping centre into office premises or ceasing to lease space and encouraging the vacating of premises with the intention of changing the vocation of a shopping centre constituted a change in the destination of the leased premises and a breach of the landlord’s legal obligation.
The Court noted the specific context of the case at bar that the restaurant was located within a sports club which in turn, is located in a residential area and not on a commercial artery. It was reasonably expected that most of the customers of the restaurant would be the members of the Landlord’s sports club. The Court concluded that the Landlord had breached its obligations to the Tenant by announcing that it would shut down the sports club, thereby driving away a substantial number of members without having any plan to replace them.
The Court concluded that the Tenant was entitled to expected lost profits for the duration of the lease plus interest, notwithstanding that the Tenant never made a profit during its short lifespan. The Tenant was able to prove with the help of a business evaluator that had the Landlord decided not to close the sports club, in all probability, the Tenant would have become profitable after a few years and for most of the duration of the lease.
The key event was arguably the Landlord’s decision to enter into a 10-year lease at a time when its sports club was in financial difficulty. The financial statements of the Landlord showed a loss of $397,362 for the year ended August 31, 2009 and a similar loss for the 2010 fiscal year. It is understandable that the Landlord preferred to close the sports club rather than continue to lose money, but it could not legally do so without breaching its lease with the Tenant and incurring liability for the latter’s consequential damages.