Jul 11, 2014

Case Digest of Esplanade Irish Pubs Inc v Greey Realty Holdings Ltd

Esplanade Irish Pubs Inc. v. Greey Realty Holdings Ltd., 2003 CanLII 18187 (ON SC)

In Esplanade Irish Pubs Inc. v. Greey Realty Holdings Ltd., [2003] Docket 02-CV-232369CM3 (Ont. S.C., Comm. List), the tenant franchisor, Prime Restaurants of Canada, brought an application against the landlord for:

(i) a declaration that the landlord’s consent was not required under an assignment clause in its two leases when the original tenant amalgamated with affiliated companies;

(ii) a declaration that the landlord’s notices of termination based on failure to obtain its consent have no force or effect; and,

(iii) if the landlord’s consent was required, a declaration that the landlord had no reasonable grounds to withhold its consents.

The applicable provision in the two leases stated:

The Tenant may not assign this Lease or sublet or licence or part with possession of the whole or any part of the Premises, without the written consent of the Landlord, such consent not to be unreasonably withheld or unduly delayed provided that the Tenant is not in default under this Lease. Nothing herein shall constitute, and the Landlord shall have no right to impose, any restrictions whatsoever over any transfer of shares in the Tenant.

Mr. Justice Cameron, sitting on the Commercial List, held that absent language in the leases to the contrary, an assignment does not include an amalgamation. An assignment involves an act by the transferor to convey the object of the assignment from one person to another and involves a divestiture of the assignor of the right assigned.

The court wrote that the application clause in both leases appeared to attempt to expand the definition of “assignment” to include an amalgamation. However, the court noted, the clause was ambiguous and badly drafted, and recited an assumption which was wrong in law. It contained no operative language deeming an assignment to include an amalgamation or defining an assignment in a manner which included an amalgamation. The inclusion of amalgamation in an assignment would constitute a further restriction on the tenant’s common law right to assign without consent. Consequently it must be interpreted strictly.

Under s. 179 of Ontario’s Business Corporations Act, the amalgamating corporations continue as one amalgamated corporation which possesses all the property, rights, privileges and franchises and is subject to all liabilities ... and all contracts, disabilities and debts of each of the amalgamating corporations. As such, an amalgamated corporation assumes all the liabilities and contracts of the amalgamating corporations.

In addition, the Court questioned why assignment of the lease to a pure affiliate of the Tenant required consent, while a transfer of control of the Tenant by transfer of shares to an unknown stranger did not require the landlord’s consent. Similarly, consent was not required if the assignee was acquiring a majority of the restaurants in Ontario operated under the same trade name; or if the assignee was a creditworthy franchisee of the tenant or of an associate or affiliate of the tenant. Still, the court went on to find, as a first step in its analysis, that the parties did in fact intend for an assignment to include an amalgamation.

The court then determined the next issue: whether the amalgamated entity was a franchisee of an affiliate or associate of the amalgamating corporations, since that would fall under the express exclusions to the requirement of consent. Cameron, J. observed that as of February 25, 2002, Prime Group operated the businesses under a licence from one of its affiliates Prime Restaurant Licensing Inc. Since “Franchisee” was not defined in the lease, and since the Arthur Wishart (Franchise Disclosure Act), 2000, was not passed until three years after the leases, the court adopted the definition in Black’s Law Dictionary, 1990, which defined a “franchise” as follows:

In its simplest terms, a franchise is a license from the owner of a trademark or trade name permitting another to sell a product under that name or mark. More broadly stated a “franchise” has evolved into an elaborate agreement under which the franchisee undertakes to conduct a business or sell a product or service in accordance with methods and procedures prescribed by the franchisor, and the franchisor undertakes to assist the franchisee through advertising, promotion and other advisory services.

The court held that there was nothing in the leases prohibiting the assignee from being a franchisee of an associate or an affiliate or requiring that the franchise agreement comply with a statute enacted after the date of the lease, and therefore the amalgamated corporation was a franchisee of an affiliate of the Tenant.

In the end result, Prime Group’s application was granted, and the court held that no request for consent or consent was required. The tenants gave notice on February 19 and later offered to sign an assumption agreement which would merely have duplicated the legal effect of an amalgamation.

Finally, in pure franchisor/franchisee cases, where many disputes involve a request by the franchisee for a rescission of all agreements entered into with the franchisor, including lease or sublease agreement, based on either (i) an alleged misrepresentation or (ii) disclosure document issues within the rescission or damages mechanisms of the Arthur Wishart Act (Franchise Disclosure), 2000, it should be noted that the Act defines a “franchise agreement” to include “any agreement relating to a franchise”.

As such, a “franchise agreement” under the Act includes a lease or sublease agreement, and a rescission or claim for damages based on one of the above two mechanisms in the Act need not necessarily distinguish between an actual franchise agreement or a deemed one. In other words, a rescission or claim for damages relating to one related franchise agreement, may carry with it a rescission or claim for damages with respect to all other related franchise agreements.