Fridays with Rogers Partners
At our weekly Friday meeting, Nasra Esak discussed the recent Ontario Court of Appeal decision in 2505243 Ontario Limited (ByPeterandPaul.com) v. Princes Gates Hotel Limited Partnership, 2022 ONCA 859. The Court of Appeal upheld a decision of Justice Gilmore in which a commercial landlord was found to have operated in bad faith against a restaurant operator.
FACTS
The appellant, Princes Gates GP (“PG”) was a commercial landlord who owned and operated Hotel X in Toronto. PG entered into a food and beverage service agreement (“FBA”) and two leases (“the Agreements”) with the respondents, restaurant operator 2505243 Ontario Limited (“250”). The respondents operated two restaurants in Hotel X, Petros and Maxx’s, and offered food and beverage services.
Hotel X and Maxx’s officially opened on March 20, 2018, and Petro’s opened in September 2019. Immediately after opening, PG and 250’s relationship became strained due to Hotel X’s low occupancy rates. PG became critical of 250’s management and food services, and unilaterally changed the way it paid its event deposits to 250. This led to serious cash flow consequences for 250.
In early 2020, contentious meetings were held between the two parties. On February 13, 2020, 250’s principal sent a letter to PG, stating that they would like to begin negotiations to dissolve their Agreements. Another letter was sent to PG, requesting that the parties negotiate an amicable exit. PG responded to 250’s letters on February 27, 2020, indicating that they would prefer 250 to remain an operator and tenant of the Hotel, but were open to negotiations if 250 insisted.
On March 2020, the pandemic began and PG shut down Hotel X and its restaurants, without consulting 250. PG also insisted that 250 continue to pay rent, despite their restaurants remaining closed.
On April 2020, PG began discussions with another food and beverage provider, Harlo Entertainment Inc. (“Harlo”), with the intention of replacing 250. PG then sent a Letter of Intent to Harlo on March 30, 2020, without informing 250 of their intentions. A signed Letter of Intent was circulated to the senior management of Hotel X and was kept confidential. The execution of the agreement with Harlo was conditional on the dissolution of PG’s Agreements with 250.
On July 2, 2020, PG’s Counsel informed 250 that PG has terminated their Agreements with them due to 250’s failure to pay rent.
AT TRIAL
250 pursued an action against PG for breach of contract. Following an 8-day trial, Justice Gilmore found that PG terminated their Agreements with 250 in bad faith, and provided the following reasons:
- The Hotel permitted 250 to believe that it was “business as usual” all the while negotiating with Harlo with a clear intention to replace 250.
- The Hotel terminated the Agreements without notice which had drastic and foreseeable consequences including compensation for 250’s 200 employees who were working at the hotel at the time.
- The Hotel’s reliance on 250’s lack of response to the February 27, 2020 letter to justify all of its actions was disingenuous.
Justice Gilmore awarded 250, now in bankruptcy proceedings, $7.124M in reliance damages and $2.063M in employee compensation damages. PG appealed Justice Gilmore’s decision.
ON APPEAL
On appeal, the Court of Appeal found no error in Justice Gilmore’s decision on liability or damages. The Court dismissed PG’s appeal, and addressed the following issues raised by PG in its decision.
Did the trial judge err by concluding that it was improper to terminate 250’s lease?
PG’s Position
PG submitted that it was not improper to have terminated 250’s lease because 250 refused to pay rent. They submitted that the lease was negotiated by sophisticated parties, and it clearly stated in the Agreements that if rent was not paid within 7 days of being due, default would occur, and could result in the termination of the lease.
Court of Appeal’s Analysis
The Court of Appeal found that Justice Gilmore was empathetic to the issue and held that PG contributed to 250’s financial difficulties, which lead 250 to be owed far more by PG than the value of the unpaid rent payments owed to PG. Especially in the context of a pandemic in which PG closed the Hotel and restaurants, the Court of Appeal held that PG’s actions contributed to 250’s inability to pay rent.
Did the trial judge err by concluding that, after the pandemic arrived and the hotel was closed, it was unreasonable for PG to refuse to assist 250 with a potential application for relief under the Canada Emergency Commercial Rent Assistance Program (CECRA)?
PG’s position
It was PG’s position that 250 was not eligible for the CECRA because their income was above the $20M threshold. They insisted that 250 obtain an independent CPA opinion to assess their revenue.
Court of Appeal Analysis
The Court of Appeal held that the CECRA provided a golden opportunity for substantial economic relief for both parties. Under the CECRA, PG would have received 75% of the required rent, which would have reduced the concern that 250 would not pay their rent once the pandemic began and the restaurants closed. Furthermore, the Court found that PG’s insistence on an independent CPA opinion was grossly unfair, especially considering 250’s T2 filing statement stated that their revenue was under the $20M requirement.
Did the trial judge err by making findings of bad faith?
PG’s Position
PG submitted that they did not mislead 250, either actively or passively, about their continuing obligation to pay rent. They claimed that they consistently asserted that 250 was required to make their monthly rental payments.
Court of Appeal Analysis
The Court disagreed with PG’s submission and held that PG misrepresented their intention to continue the parties Agreements. They relied on the decision in Callow Inc. v Zollinger, which held that “where the failure to speak out amounts to active dishonesty in a manner directly related to the performance of the contract, a wrong has been committed and correcting it does not serve a benefit on the party who has been wronged[1].”
At the underlying trial, Justice Gilmore stated the following regarding PG and Harlo’s interactions when finding that PG acted in bad faith:
“It is clear in this case that the Hotel knew that 250 intended to stay on and continue with its contract. Despite this, it continued with serious negotiations with Harlo even to the point of making staff introductions (Mr. Laksmono). The process was kept entirely secret from 250. The fact that the Hotel continued to communicate with 250 as late as the morning of July 2, 2020 as if nothing had changed was, I find, a breach of the duty of good faith in contract by way of misleading by inaction.[2]”
The Court of Appeal agreed with this reasoning and found it to be consistent with the principles in Callow.
Did the trial judge err in finding that 250 suffered financial failure, even if PG wrongfully terminated their relationship?
PG’s position
PG accepted that Justice Gilmore did not err by awarding reliance damages, instead of expectation damages. However, PG submitted that due to 250’s lack of assets and trade debt, even if 250 would have financially survived until the end of their Agreements with PG, it would have never made a profit. They considered it an error of law on Justice Gilmore’s part and that 250 was put in a better position than if it had completed their Agreements.
Court of Appeal Analysis
The Court found no fault in Justice Gilmore’s methodology in awarding reliance damages to 250, and that she applied the appropriate amount of caution in her calculation of damages.
The Court of Appeal relied on PreMD v Ogilvy Renault LLP when considering the award for reliance damages and affirmed that in cases where an injured person cannot prove an expectation of damages, loss of profit, or that a contract has not been profitable, the Court can recognize that a person has changed their position in reliance of a contract. In these circumstances, the Court can try to put the injured party in the position they would have been had they not entered the contract[3].
Did the trial judge err in awarding $2.063M in employee compensation damages?
PG’s position
PG argued that the trial judge erred in awarding $2.063M in damages for claims to be potentially and consequently made against 250 by their former employees who lost their jobs when PG terminated their Agreement with 250.
Court of Appeal Analysis
The Court of Appeal rejected this submission and held that Justice Gilmore had purely set up a potential process to consider these claims by providing a separate head of damages that formed part of the overall compulsory damages claimed, along with a cap on the potential total award.
Did the trial judge err by not declaring a mistrial?
PG’s position
PG argued that Justice Gilmore erred by not declaring a mistrial when it became known that three of the respondent’s proposed witnesses had been watching the trial unfold through Zoom in one of its law firm’s boardrooms.
Court of Appeal Analysis
Justice Gilmore considered this issue and found that it was not too egregious as to require the extreme remedy of a mistrial. The Court of Appeal noted that the trial judge was in the best position to make the decision, especially considering that neither party sought an order to exclude witnesses.
CONCLUSION
The Court of Appeal held that the trial judge’s analysis & conclusion were consistent with the law, and no errors had been made in awarding 250 $7.124M in reliance damages and $2.063M in employee compensation damages. As such, the appeal was dismissed.
[1] 2020 SCC 45, para 81
[2] 2021 ONSC 4649, para 369
[3] 2013 ONCA 412, para 66