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Ontario Superior Court rules on the interplay between Unique Covenants for a Commercial Landlord

Jan 10, 2019 | Blawg 

A recent decision of the Ontario Superior Court of Justice examined the interplay between non-competition agreements and rights of first refusal in the context of commercial leasing.  In GoodLife v. Rock Developments et al., the court refused to provide any leeway to a landlord who tried to thwart a broad-reaching non-competition agreement.

The Facts

In June 2014, Rocco Tulio (“Rocco”) sold a fitness centre that he owned in Windsor, Ontario, to GoodLife Fitness Centres Inc. (“GoodLife”).  Rocco was an owner and director of Rock Developments Inc. (“RDI”), that owned other commercial properties in the Windsor area.  

When Goodlife purchased the fitness centre from Rocco, it took steps to ensure Rocco would be prevented from operating other competing fitness clubs in the Windsor area.  These measures included having Rocco sign a non-competition agreement (the “NCA”) and having RDI sign a right of first refusal (the “ROFR”).

The NCA prohibited Rocco from (1) maintaining a business or “financial interest” in another fitness facility; or (2) providing “development services” to another fitness facility. The NCA applied throughout Canada for a period of five years, expiring on November 30, 2019.

Through the ROFR, GoodLife obtained the first right to lease property in Windsor owned by RDI (the “Windsor Property”) in the event of a competing offer to lease from another fitness club. The ROFR provided RDI the right to lease the Windsor Property to the other party if GoodLife declined to lease it.

On July 30, 2018, RDI leased the Windsor Property to Movati Athletic (“Movati”) for the construction of a fitness facility. Pursuant to the ROFR, GoodLife was given the first opportunity to lease the Windsor Property, which it declined.  Subsequently, in accordance with the lease between RDI and Movati, Rocco prepared he Windsor Property for use as a fitness facility, by providing services including grading and landscaping.

GoodLife sought injunctive relief to prevent Rocco from providing services to Movati and to have the Movati lease declared void.  GoodLife argued that Rocco had a business interest in Movati and the services constituted “development services”, with the result that Rocco was in breach of the NCA.  

In interpreting the terms “business interest” and “development services,” the Court considered the overall purpose of the NCA: to prevent Rocco from leasing to a GoodLife competitor. It was held that a “business interest,” unlike a financial interest, is more than an ownership stake or the sharing of profits. By performing grading, landscaping and other similar services for Movati, Rocco was found to be involved in preparing a fitness facility to compete with GoodLife, resulting in Rocco having a business interest in Movati. Furthermore, the services Rocco agreed to provide to Movati, despite being services that landlords commonly provide tenants, qualified as “development services”, as their purpose was to prepare the space as a fitness facility. Rocco was therefore found to be in breach of the NCA.

Rocco argued that a Canada-wide NCA was unenforceable as it unreasonably restricted trade. The Court agreed that such a broad reaching restriction would normally be against public policy; however, it noted that Rocco knew that the Windsor Property was the reason GoodLife acquired the NCA. As such, Rocco was not permitted to lease the Windsor Property to a GoodLife competitor before the NCA expired, and attempt to declare the covenant unenforceable.  The Court held this to be duplicitous. It rejected Rocco’s argument and found the NCA to be enforceable.

Rocco also argued that RDI was entitled to lease to Movati during the term of the NCA, provided it abided by the ROFR. Again, the Court disagreed.  It held that due to the NCA’s paramountcy and the proximity between the signing of the two agreements, they were to be read together to effectively prevent anyone except GoodLife from building a fitness facility on the Windsor Property until the NCA expired. Upon the expiry of the NCA, the ROFR survived, with the result that Goodlife continued to exert some control over who could occupy the Windsor Property.

The Court concluded that the NCA was in full force and effect.  GoodLife was granted injunctive relief to require Rocco and RDI to abide by the terms of the NCA and Movati’s lease was declared void.

The Takeaway

This case demonstrates that, when entering into non-competition agreements, parties should be mindful of their potential broader application.  Although some non-competition covenants have been narrowly interpreted because they impose restraints on trade. In this case, the court ​accepted a broader interpretation of the covenant and gave it a far-reaching application.