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Daoust Vukovich LLP successful in strictly enforcing a use clause in a commercial lease

Nov 7, 2018

In a recent decision of the Ontario Superior Court of Justice, Daoust Vukovich successfully brought an application for a declaration that a tenant was in breach of the permitted use clause contained in its lease. In Bryfam Enterprise Inc. v. Harbour Carrick Holdings Inc., 2018 ONSC 6623, the Court held that a clear and unambiguous use clause must be strictly enforced and followed.  

 The Facts

In June 2015, Bryfam Enterprises Inc. (the “Tenant”) entered into a commercial lease agreement (the “Lease”) with Harbour Carrick Holdings Inc. (the “Landlord”).  Pursuant to the Lease, the Tenant agreed to operate a restaurant business from leased premises in a strip mall plaza (the “Shopping Plaza”) located in Thunder Bay.  The Landlord was the owner of the Shopping Plaza.

The Lease included a permitted use clause, which outlined the business the Tenant could carry on in its leased premises (the “Permitted Use Clause”). The permitted use was the “principal business of a quick service yogurt, smoothie and waffle restaurant”. 

The Lease also included an entire agreement clause, which mandated the exclusion of all extraneous negotiations or documentation when interpreting the terms of the Lease (the “Entire Agreement Clause”). 

Following the execution of the Lease, the Tenant occupied the leased premises and carried on a business called “Flavours”, which operated as primarily a yogurt and waffle restaurant.

A couple years later, the Landlord ended its relationship with the operators of a Subway restaurant located in another unit of the Shopping Plaza. The Landlord and the Tenant discussed various ideas for Subway’s unit, including the Tenant taking over operation of the Subway restaurant or the Tenant opening a different franchise in the unit, but none of these ideas came to fruition.

Instead, the Landlord and the Tenant executed a lease amending agreement (the “Amending Agreement”) whereby the Tenant would relocate its business to a new unit in the Shopping Plaza.  The Amending Agreement did not alter the Permitted Use Clause or the Entire Agreement Clause.  The Amending Agreement also stated that the Tenant would acquire much of the equipment that Subway left behind.

After relocating to the new unit in the Shopping Centre, the Tenant began operating a full-service health food restaurant called “GameChanger Energy Drinks + Juicery” (“GameChanger”) and expanded its menu to over 10 categories, most of which were not permitted by the Permitted Use Clause, including bowls, wraps, salads, soups, baked goods, coffee and tea.  Also, contrary to the Permitted Use Clause, GameChanger did not sell waffles or yogurt.

Although the Tenant continued to sell smoothies at GameChanger, smoothie sales made up considerably less than half of the Tenant’s revenues.  As such, most of the Tenant`s business came from the sale of items which were not included in the Permitted Use Clause.

In May 2018, upon the Landlord discovering the Tenant’s breach of the Permitted Use Clause, a default notice was sent to the Tenant stating that the Tenant was in breach of the Permitted Use Clause by virtue of the sale of prohibited items.  The Tenant failed to cure the default and the Landlord brought an application to terminate the Lease.  The Tenant also commenced a cross-application for a declaration that it had not breached the Lease.

The Tenant argued that its offerings conformed to the Permitted Use Clause and that its principal business was selling smoothies, even though the restaurant also offered wraps and other food items. The Tenant also argued that smoothies represented over 50% of the Tenant’s sales.

In the alternative, the Tenant claimed reliance to its detriment, arguing that the Landlord encouraged the Tenant to move units, to use the Subway equipment, and during the negotiations for the Amending Agreement, encouraged the Tenant to open a healthy food franchise. The Tenant argued that the Landlord was estopped from relying on the strict terms of the Lease because the Landlord knew that the Tenant was serving health foods and made no complaint.

The Landlord countered that GameChangers’ offerings fell outside the Lease’s Permitted Use Clause, and therefore, the Tenant was in breach of the Lease. It argued that, when the sales data was interpreted accurately, the Tenant’s smoothie sales did not represent the majority of the Tenant’s business.

The Landlord also argued that it had not waived its rights or represented to the Tenant that it could sell menu items outside of the Permitted Use Clause. The Landlord relied on the Entire Agreement Clause to refute the Tenant’s claim that the Landlord encouraged or accepted the Tenant’s addition of other food items to its menu.

The Court held that within the commercial context of a multiunit strip mall, use clauses are important and should be construed strictly if the terms are clear and unambiguous. The Court explained that this is because activities carried on by a tenant effect a landlord’s ability to lease other units within the same center.

It was held that the Permitted Use Clause was unambiguous and restricted sales to the principal categories of yogurt, smoothies and waffles. The Court held that while the case law shows that the word “principally” can mean the largest category of several categories, the Tenant had expanded the number of food categories well beyond any common-sense interpretation of the word.  Expanding the Permitted Use Clause to allow GameChanger’s business would therefore create a commercial absurdity.

Furthermore, the court was not prepared to reach the conclusion that the Landlord knew of the expanded use on the evidence before it.  Most notably, the Landlord and its business agent were not even located in Thunder Bay.

As a result, it was ordered that the Tenant was in breach of the Permitted Use Clause in the Lease and that the Lease was terminated.

The Takeaway

This case illustrates the importance and strength of a clear and unambiguous use clause. If a use clause is clear on its face, a tenant will not be given much leeway if it operates beyond the scope of the clause.

Gasper Galati and Daniel Waldman of Daoust Vukovich LLP acted for the Landlord in this case.

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