Décision

9202-9131 Québec inc. c. 6943870 Canada inc.						2015 QCCS 1209
JH5439    SUPERIOR COURT
CANADA
PROVINCE OF QUEBEC
DISTRICT OF			MONTREAL
No:		500-17-064993-119
DATE:	March 30, 2015
______________________________________________________________________
PRESIDED BY:				THE HONOURABLE	STEPHEN W. HAMILTON, J.S.C.
______________________________________________________________________
9202-9131 QUÉBEC INC. and DAN DUMESNIL
Plaintiffs
v.
6943870 CANADA INC. and 6943837 CANADA INC. and MARK KANEB
Defendants
______________________________________________________________________
JUDGMENT
______________________________________________________________________

INTRODUCTION

[1]           The principal issue in this case is whether the operator of a pub located in a sports club had the right to abandon the leased premises and claim damages when its landlord (1) announced that the sports club would likely be closing and then (2) actually closed a substantial part of the activities of the sports club.

[2]           If the answer to that question is yes, then the Court will have to consider who are the proper plaintiffs and proper defendants, and how the damages should be calculated.

 

CONTEXT

[3]           At all relevant times, the defendant 6943837 Canada Inc. (the Owner) owned the building at 205 Alton Drive in Beaconsfield, and the defendant 6943870 Canada Inc. (the Landlord) operated a tennis, squash and health facility known as Le Club West Island in the building.  The Owner and the Landlord have the same shareholders and directors.[1]  The defendant Mark Kaneb is the sole director and controls both companies.[2]

[4]           Kaneb[3] acquired the building and the club (through the Owner and the Landlord) on April 1, 2008.  Prior to the acquisition, the club had been in operation in the building since approximately 1975.

[5]           The building is located in a residential area in Beaconsfield, Québec.  It is not on a main street.  The facilities included a racquet club with seven indoor tennis courts and five or six squash courts, a fitness centre with a number of gyms and other facilities (Le Club), and a physiotherapy clinic (Medi-Club).  The racquet club and the fitness centre were operated by the Landlord, and the physiotherapy clinic was operated by a third party which had a lease from the Landlord.

[6]           In the fall of 2008, there was a restaurant in the building known as Cheevzz operated by third parties primarily for the use of the members of the club.  It experienced financial difficulties and closed in November 2008.  Kaneb was looking to replace Cheevzz, and in the course of that process he met with Jim Beauchamp, who was part owner and general manager of an Irish pub style restaurant and bar in Ste-Anne de Bellevue called Cunningham’s since 2004.  Beauchamp was interested in expanding the operations of Cunningham’s to a second location and Kaneb thought that Cunningham’s would be a good fit with the club.

[7]           Beauchamp incorporated 9202-9131 Québec inc. (the Plaintiff) for the purpose of operating this second location.  Kaneb (through Mayford Canada) and Dan Dumesnil (who was working as a chef at Cunningham’s in Ste-Anne de Bellevue and would take over as chef in the new location) each held 37.5% of the shares of the Plaintiff, and 9139-3272 Quebec inc. (the company that owned and operated Cunningham’s in Ste-Anne de Bellevue) owned the other 25%.  Kaneb and Dusmesnil each contributed $60,000 to cover the opening costs and initial working capital requirements, and 9139-3272 contributed its expertise and the Cunningham’s brand, including the look of the pub, the signage, the menus and the uniforms.

[8]           The lease was signed December 1, 2008.[4]  After substantial work to renovate the premises, the pub opened on January 5, 2009.

[9]           There were a number of minor issues during the first year of operation.  The club or some of its members raised issues with the menu, the prices, the opening hours, the lack of pitchers of beer, and the tinting of the windows.  The Plaintiff addressed these issues as they came up.

[10]        For the first ten months of operation, the Plaintiff had a net loss of $179,694 on sales of $679,682.[5]  Kaneb injected a further $25,000 in August and September 2009 to help the Plaintiff meet its obligation to remit deductions at source.  Sales were higher and the net loss was lower in the second year of operation.[6]

[11]        The club was also encountering financial difficulties.[7]  Since acquiring the club and the building in April 2008, Kaneb had suffered losses and he started to explore other options for the club in the summer or fall of 2009.  Beauchamp was aware of this process and he introduced Kaneb to his contacts in the hockey business in October 2009 to explore the possibility of installing two ice surfaces where the tennis courts were located, but that option fell through.

[12]        In December 2009 or January 2010, Kaneb decided to pursue the development of a residential condominium project on the property.  This would necessarily entail the closure of the club and the demolition of the building, as well as the termination of the Plaintiff’s lease.  The Plaintiff was not informed of this decision.

[13]        The first step in the condominium project was the rezoning of the property.  Kaneb filed a rezoning application with the city of Beaconsfield on April 26, 2010.

[14]        On May 7, 2010, the general manager of the club sent a letter to the members of the club in response to “rumours that have been circulating”.  She confirmed that the application for rezoning had been filed and that the club “will most probably close” if the application is approved.  She also announced that the club was interested in relocating the fitness centre.[8]

[15]        Subsequent correspondence confirmed that the racquet club would close and that arrangements had been made with another club to accommodate the racquet members, and that an alternative location had been identified for the fitness centre.[9]

[16]        There was opposition to these changes, particularly to the closure of the racquet club.  A number of members opposed the rezoning application in the hopes of saving the racquet club, but Kaneb made it clear around June 1, 2010 that the racquet club would close regardless of the outcome of the rezoning.[10]

[17]        These developments had a negative impact on the pub.  On June 3, 2010, Beauchamp wrote to Kaneb to complain about the “very dire situation” because of “”the members rebelling against the closing of the club”[11] and Beauchamp sent a letter to the staff announcing that the pub would close on July 24, 2010.[12]

[18]        The threatened closure did not happen on July 24, 2010 because the parties negotiated a reduction in rent and new opening hours such that the pub was closed during the day and opened only in the evenings.[13]

[19]        On August 23, 2010, Beaconsfield city council refused the rezoning change, which ended the plan to develop residential condominiums on the site.  The racquet club nevertheless closed on August 31, 2010 as previously announced, but the planned relocation of the fitness centre was suspended.[14]

[20]        On September 13, 2010, the pub’s lawyer sent a demand letter to Kaneb asking for compensation and announcing that the pub would close in the first week of October.[15]  No compensation was paid and the pub closed on October 5, 2010.[16]  The present proceedings were instituted on July 29, 2011.

[21]        The club ultimately continued its operations.  It considered again the conversion of the racquet courts into two hockey rinks but that option was finally abandoned in January 2011 because of a lack of financing.  Instead, one part of the racquet courts was converted into a surface used for ball hockey and lacrosse, and the other into a turf surface used for indoor soccer, rugby, football and frisbee.  The renovations started in April 2011, and the ball hockey/lacrosse surface opened in September 2011 and the turf surface in October 2011.  A new restaurant operated by the club also opened in October 2011.

[22]        The Plaintiff has not resumed its operations because of its accumulated debt, but related companies continue to operate a pub under the Cunningham’s name in Ste-Anne de Bellevue and have opened new pubs in Hudson (opened December 2009) and Huntington, Quebec (opened June 20, 2014).

 

 

POSITION OF THE PARTIES

[23]        There are two plaintiffs, the Plaintiff and Dumesnil.  They allege that the application for rezoning represented a complete and total change in the destination of the property and caused a critical reduction in the revenues of the Plaintiff which rendered impossible the continuation of the Plaintiff’s commercial activities. 

[24]        The Plaintiff sued Kaneb, the Owner and the Landlord for a total of $400,273.35 in damages made up of the following heads of damages:

·                      $165,000 representing the present value of the Plaintiff’s future loss of net                     income or profits, based on the report of an expert business valuator;

·                    $168,273.35 representing suppliers that the Plaintiff was unable to pay;

·                    $37,000 representing close-up costs; and

·                    $30,000 for loss of reputation of the Plaintiff and of the Cunningham’s brand and for inconvenience and expenses incurred and to be incurred.

[25]        Dumesnil also sued the three defendants for $60,000 representing his lost investment in the pub.

[26]        The plaintiffs argue that the Landlord is liable contractually, that the Owner is liable delictually for applying for the rezoning and for inciting the Landlord to breach the lease, and that Kaneb is liable as a participant, by way of lifting the corporate veil or because of his assurances during the process that he would look after the pub.

[27]        The defendants argue that there was no obligation to maintain a minimum number of members or to maintain specific activities within the club, and that the Landlord acted reasonably, such that there was no fault.  They also allege that the Plaintiff was not justified in abandoning the premises.

[28]        The defendants also contest the damages claimed by the plaintiffs, presenting an expert report that concludes that the Plaintiff’s future loss of net income or profits was zero and arguing that the other damages claimed by the plaintiffs constitute double counting.  They also argue that there is no basis for any claim against the Owner or Kaneb, in that both acted in good faith throughout the process.

 

ISSUES

[29]        The Court will consider the following issues:

1.           Did the Landlord breach the lease?

2.            Are the Owner and Kaneb liable delictually or by lifting of the corporate veil or because of assurances given?

3.           If any of the defendants are liable, what were the damages?

 

ANALYSIS

1.    Did the Landlord breach the lease?

[30]        The principal issue in this case is whether the Landlord breached its obligations to the Plaintiff.  This issue can be divided into two questions: what were the Landlord’s obligations with respect to the operation of the club or the number of members, and did the Landlord breach those obligations.

What are the Landlord’s obligations with respect to the operation of the club and the number of members?

[31]        The lease does not impose any express obligation on the Landlord with respect to the operation of the club or the number of members.  The only provision of the lease dealing with changes to the operations of the club by the Landlord is Section 19.6, which provides as follows:

19.6      Changes to Building by Lessor

The Lessor may enlarge or modify the Building and add floors without such works constituting a change in the nature or destination of the Leased Premises.

[32]        Section 19.6 does not apply in the present circumstances, because the Landlord did not enlarge or modify the building or add floors to it.  As a result, the Landlord did not breach any express obligation under the lease.

[33]        However, there are also implied obligations.  Article 1434 C.C.Q. provides:

1434.    A contract validly formed binds the parties who have entered into it not only as to what they have expressed in it but also as to what is incident to it according to its nature and in conformity with usage, equity or law.

[34]        The Plaintiff pleads that the Landlord breached its obligation under Article 1856 C.C.Q., which provides as follows:

Art. 1856. Neither the lessor nor the lessee may change the form or destination of the leased property during the term of the lease.

[35]        This is a legal obligation which forms part of the lease, even if it is not expressly mentioned in the lease.  The legal obligation not to change the destination of the leased property can be modified by the express terms of the lease.  Section 19.6 of the lease, for example, declares that the Landlord enlarging or modifying the building or adding floors to it does not constitute a change in the nature or destination of the leased premises.  Other than Section 19.6, there is nothing in the lease to modify the legal obligation.

[36]        An obligation can also be implied because of the nature of the lease.  The nature of the lease is closely related to the destination of the premises, and the notions of change of destination and implied obligation often overlap.[17]

[37]        The issue in this case is whether closing down a substantial part of the building is a breach of the legal obligation not to change the destination of the leased premises or of an implied obligation resulting from the nature of the lease.

[38]        The Courts have been careful not to give too broad a scope to these unwritten obligations, particularly in the presence of a clause like Section 19.1 of the lease which stipulates that the lease and the schedules contain all of the undertakings and obligations of the parties.[18]  The Courts should not give the tenant the benefit of an obligation that it failed to negotiate for itself, unless it is clear that both parties contemplated such an obligation.

[39]        As a result, when the lease is silent, the Courts have dismissed claims by tenants complaining that the vacancy rate is too high,[19] that the landlord has undertaken renovations,[20] or that the construction of the shopping centre is not proceeding as the tenant understood it would.[21]  In those circumstances, the Courts have declined to find breaches of the legal obligation not to change the destination of the leased premises or of an implied obligation.  The Courts have considered whether the landlord has acted in accordance with the express language of the leases and have suggested that the tenant should have required a specific clause in the lease to deal with those specific issues.

[40]        In 9142-9134 Québec inc. c. 9180-9293 Québec inc., Mr. Justice Mayer dismissed the tenant’s claim that the high vacancy rate constituted a change in destination.  He stated :

[155]         To begin, when synergies are an important aspect of a tenant's success, it is wise to negotiate a co-tenancy provision in a lease, which gives a tenant the right to terminate his lease or reduce his rent if a prescribed percentage of neighbouring tenants become vacant or anchor tenants leave the centre.  This type of clause will help ensure that a tenant will obtain a certain relief in the event that there is not sufficient customer traffic that enables his business to remain viable.

[156]         In the case at hand, there is no such provision in the Lease.[22]

[41]        However, the Courts have found that a landlord has breached the legal obligation not to change the destination of the leased premises or an implied obligation if it transforms a portion of a shopping centre into office premises[23] or if, with the intention of changing the vocation of a shopping centre, it ceases to lease space and encourages the vacating of premises.[24]

[42]        There are also a series of cases relating to the decision to transfer passenger traffic from Mirabel airport to Dorval airport.[25]  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 at Mirabel airport.  As Mr. Justice Dalphond stated:

[33]             Le contrat est la loi des parties et il est exact que dans le bail du 26 juin 1975 on ne retrouve pas de clause qui garantit expressément au locataire l'approvisionnement de l'hôtel par le maintien des vols. Toutefois, ce contrat d'ailleurs non négocié mais unilatéralement imposé par le locateur en 1975, comme tous les autres contrats, s'étend non seulement à ce qui y est spécifiquement prévu, mais aussi à tout ce qui en découle d'après sa nature et suivant les usages, l'équité ou la loi (art. 1024 C.C. au même effet, l'art. 1434 C.C.Q.).

[34]             Il me semble évident que l'une des considérations principales du bail est l'existence d'un achalandage à Mirabel suffisant pour couvrir l'investissement et faire un profit raisonnable. On ne peut, sans friser la pure argutie, sérieusement soutenir que quelqu'un accepterait d'exploiter un hôtel dans une zone inhabitée tout en pensant que, du jour au lendemain, son locateur peut impunément concentrer à Dorval les vols sur lesquels il compte pour rentabiliser son entreprise.

[35]             La lecture des termes mêmes du bail révèle clairement le lien nécessaire entre le trafic aéroportuaire et la disponibilité de l'hôtel. En effet, il impose une disponibilité prioritaire des chambres pour les passagers (art. 18b). C'est de plus le directeur de l'aéroport qui fixe les tarifs hôteliers (art. 18c). On oblige, en outre, le locataire à mentionner l'aéroport dans toute représentation promotionnelle (art. 39), etc.

[36]             En résumé, l'existence d'un achalandage suffisant à Mirabel constituait, sinon une considération principale de l'engagement du locataire, du moins une condition implicite mais claire du bail.[26]

(Emphasis added)

[43]        In the present case, the lease was also entered into in a specific context.  The pub is located within a sports club, which in turn is located in a residential area and not on a major street.  As confirmed by the various witnesses, it was clear that most of the customers of the pub would be the members of the club.

[44]        Various provisions in the lease refer to the link between the pub and the club and its members:

·                    The preamble of the lease:

WHEREAS the Lessor operates a tennis, squash and health facility (hereinafter the “Club”) within the building (hereinafter the “Building”) situated at […], Beaconsfield, Quebec […] (hereinafter the “Immovable”);

WHEREAS the Lessor previously had leased to a third party certain fully furnished and equipped premises within the Building and at which the said party operated a restaurant and bar largely for the benefit of the members, employees and guests of the Club;

WHEREAS Lessee is desirous of leasing from the Lessor the same premises, including certain furnishings, furniture and equipment as described below, the whole for the purpose of operating a restaurant and bar thereat primarily for the benefit of the members, employees and guests of the Club, and for the members of the public as well, and the Lessor is agreeable to leasing the said premises, furnishings, furniture and equipment to the Lessee upon and with such terms and conditions as are hereinafter set forth;

·                    Section 2.1:

2.1        Use

The Leased Premises shall be used solely for the purpose of a restaurant and bar, it being understood that the clientele whereof shall comprise largely the membership of the Club.

·                    Section 2.2:

2.2        Exclusive Use

There shall be no other restaurants or food services permitted in the Building other than vending machines for the use of the members of the Club. …

·                    Section 4.3.7:

4.3        Lessee’s right to make alterations

4.3.7    Any work that might generate noise or inconvenience members of the Club must be carried out as shall be agreed upon in writing between the parties.

·                    Section 4.5:

4.5        Continuous occupancy

The Lessee shall occupy the Leased Premises as of the commencement date of the Lease and shall thereafter continue to occupy the whole of the Leased Premises and operate its business in a normal, continuous, and energetic fashion during business hours, namely during the hours in which the Club is normally open, or as otherwise agreed to between the parties.  The Lessee acknowledges that the continuous and normal occupancy of the Leased Premises and their use for the purposes for which they were Leased are of utmost importance to the Lessor, namely to service the members of the Club.  It acknowledges that the Lessor will suffer serious and irreparable damage if the Leased Premises remain vacant after the commencement of this Lease, if they are abandoned during the Term of the Lease, or if the Lessee does not comply with this clause or Section 2.1 above, even if the Lessee continues to pay the required Rent.  Moreover, the Lessee acknowledges that, given the urgency in such a situation, the Lessor shall be entitled to protect its rights by injunction and/or to assume immediate occupancy of the Leased Premises.

·                    Section 8.1:

ARTICLE 8 - PARKING

8.1        The Lessee shall have the right to use the parking facilities adjacent to the Building on a first-come first-served basis, it being understood that there are no reserved spots and that such parking facilities are intended primarily for the use of the members of the Club.

·                    Section 11.1:

11.1     Inspection and repairs

During regular business hours, the Lessor shall, without being liable to the Lessee and without prior judicial authorization, have access at all times to the Leased Premises to examine them for the purpose of making the repairs, replacements, alterations, or improvements useful or necessary for the operation and proper maintenance of the Immovable and to ensure that the members of the Club are being properly serviced.  In that regard, the Lessor shall ensure that any repairs, replacements, alterations, and improvements are carried out with due diligence so as to minimize any disturbance of the Lessee’s or the Club members’ enjoyment of the Leased Premises.  Except in the event of an emergency, access by the Lessor to the Leased Premises outside business hours must be preceded by at least twenty-four (24) hours’ notice.

 

 

·                    Section 13.3.5:

13.3       Justified refusal

Without limiting the generality of the foregoing, the Lessor shall be justified in withholding its consent [to an assignment or subletting of the leased premises] in the following events, in particular,

13.3.5   where the proposed sub-lessee or assignee does not, in the opinion of the Lessor, have the qualifications to properly serve the best interests of the Club and its members.

(Emphasis added)

[45]        Most of these provisions impose obligations on the Plaintiff to operate the pub for the benefit of the members.  However, these provisions only make any sense if there is a club and if it has members.  There were some discussions about the number of members prior to the execution of the lease, but there is nothing in the lease.  A specific provision in the lease could have required the Landlord to maintain the facilities as they existed or to obtain the Plaintiff’s consent before making any changes, or could have required the Landlord to maintain a certain level of membership.  In the absence of any such language, the Court concludes that the Landlord had the right to make changes to the club and that fluctuations in the membership do not constitute a breach of the lease.  However, the Landlord breaches its obligation to the Plaintiff if it makes changes to the club that result in a substantial decrease in membership that was more than temporary.

            Did the Landlord breach that obligation?

[46]        In answering this question, the Court must look at the series of events from the decision to look at alternatives in 2008 and 2009 through to the closure of the racquet club on August 31, 2010, and even the events subsequent to that closure.  It is important to distinguish between the conduct of the Landlord and the conduct of the Owner.

Exploration of alternative sports facilities in 2008 and 2009

[47]        The club was suffering losses and Kaneb started to explore other options for the club in the summer or fall of 2009, such as putting in two hockey rinks.  This is an act of the Landlord as the operator of the club.

[48]        The Landlord was entitled to make changes to the sports facilities, provided that it respected the Plaintiff’s rights.  It was certainly entitled to explore options.  This exploration of options did not result in anything concrete and was never made public, and therefore cannot in any event be the source of any liability.

The residential condominium project

[49]        In December 2009 or January 2010, Kaneb decided to pursue the development of a residential condominium project on the property, which would necessarily entail the closure of the existing sports club and the demolition of the building.  He filed a rezoning application with the city of Beaconsfield on April 26, 2010 and sent letters or had letters sent to the members in May 2010 informing them of these developments.  Ultimately, the rezoning application was refused by the city on August 26, 2010 and the condominium project fell through as a result.

[50]        The Plaintiff nevertheless alleges that the rezoning application and the letters to the members had a negative impact on the pub even if the condominium project fell through.

[51]        At the outset, it should be noted that the residential condominium project is very different in nature than the alternative sports facilities:

·                   It involved the closure of the sports club and the demolition of the building, not just changes to the facilities offered;

·                   Concrete steps were taken, namely the application for rezoning and the process with the City; and

·                   The process was public and letters were sent to the members.

[52]        The other difference is that the condominium project was undertaken by the Owner and not the Landlord.[27]  The potential liability of the Owner will be considered in the next section.  The Landlord’s involvement in the condominium project was limited.  It sent letters to the members confirming that the Owner was proceeding with the condominium project.  Further, based on the letters it sent the members, the Landlord was prepared to go along with the condominium project and it was looking to relocate the tenants, including the pub.

[53]        Can the Plaintiff sue the Landlord because (1) the Owner applied for rezoning, (2) the Landlord did not take steps to block the Owner, and (3) the Landlord sent letters to the members informing them of its plans to relocate the sports club? 

[54]        Clearly there is no recourse against the Landlord simply because the Owner applied for rezoning.  The Landlord had no control over that decision.

[55]        The Landlord could have taken the position with the Owner that the rezoning was a breach of its lease with the Owner, because it meant that the Landlord could not continue to operate a sports club in the building.  Moreover, the rezoning would require the Landlord to breach its lease with the Plaintiff.  The Landlord chose not to take that position but instead started to explore alternatives for relocation for itself and for the Plaintiff.  Given the common control of the Owner and the Landlord by Kaneb, it is hardly surprising that the Landlord did not oppose the Owner’s plans.

[56]        The Landlord’s failure to oppose the Owner’s rezoning application is not a breach of the lease.  The rezoning application might be refused.  The Plaintiff might agree to be relocated and to be compensated for its expenses, or it might agree to have its lease terminated and be compensated for the loss.  There were many ways for the situation to be resolved.  Further, there is no evidence that the rezoning application in and of itself caused any loss to the Plaintiff.

[57]        The third potential fault is the communications by the club with its members.

[58]        The first such communication is the letter dated May 7, 2010.[28]  In that letter, the club informs the members of the rezoning application.  It says that the club will most probably close if the rezoning application is granted, but that the owners are interested in relocating the fitness centre and that it is business as usual until the city makes its decision on the rezoning application.

[59]        There is a second letter dated May 17, 2010[29] in which the club tells the members that it met with another racquet club which is preparing an offer to the racquet members to join their club, and that it has found space to move the fitness centre.  This letter has to be read with the first letter, namely that all of this is conditional on the rezoning application being approved and that it is business as usual until then.

[60]        Although these letters were intended to be reassuring, there appears to have been an impact on the Plaintiff’s sales.  The weekly sales data shows sales peaking the week of May 1, 2010, and a serious decrease in sales from the week of May 15, 2010 forward.[30]

[61]        The Landlord did not commit a fault in sending those letters.  They inform the members about something which is already public (the rezoning application) and which is the subject of rumours, and they attempt to reassure the members that they will be looked after if the rezoning application goes through and the club closes.

The decision to close the racquet club

[62]        Shortly after the initial reassuring letters, Kaneb decided to take a different approach.  He announced around June 1, 2010 that the racquet club would close permanently on August 31, 2010 regardless of whether the rezoning is granted.[31]  The announcement appears to have been made in an effort to blunt opposition to the rezoning application by members who hoped to save the racquet club.  The racquet club closed, as announced, on August 31, 2010.

[63]        The closure of the racquet club had a dramatic impact on club membership.  The number of members of the club, divided between the fitness centre and the racquet club, for the period from January 2009 to September 2010, is as follows:[32]

 

 

	MEMBERSHIP
MONTH	FITNESS	RACQUET	TOTAL
2009 January	1043 (56.7%)	797 (43.3%)	1840
February	978 (55.3%)	790 (44.7%)	1768
March	1032 (56.8%)	784 (43.2%)	1816
April	1014 (64.3%)	562 (35.7%)	1576
May	988 (64.2%)	550 (35.8%)	1538
June	1043 (63.6%)	598 (36.4%)	1641
July	1061 (63.9%)	600 (36.1%)	1661
August	1014 (60.2%)	670 (39.8%)	1684
September	1027 (60.0%)	686 (40.0%)	1713
October	955 (59.7%)	646 (40.3%)	1601
November	992 (58.9%)	693 (41.1%)	1685
December	1015 (59.2%)	700 (40.8%)	1715
2010 January	963 (58.6%)	680 (41.4%)	1643
February	1181 (60.8%)	762 (39.2%)	1943
March	1099 (59.8%)	738 (40.2%)	1837
April	1112 (65.3%)	591 (34.7%)	1703
May	1061 (65.8%)	551 (34.2%)	1612
June	1058 (66.4%)	535 (33.6%)	1593
July	1076 (67.9%)	509 (32.1%)	1585
August	941 (68.4%)	434 (31.6%)	1375
September	1000 (100%)	0 (0%)	1000

[64]        The racquet club members represented approximately 40% of the club’s total membership prior to the announcement that the racquet club would close.[33]

[65]        Further, although there is no data on the subject, the evidence suggests that the racquet club members were better customers for the pub than the fitness centre members, because they tended to go to the pub for a drink or a meal before or after their games, and because there were leagues in the evenings which tended to finish in the pub.

[66]        As a result, the closure of the racquet club and the loss of the racquet club members had a serious impact on the pub.

[67]        Beauchamp wrote to Kaneb and the general manager of the club on June 3, 2010 as follows:[34]

 

 

Good Morning;

Mark & Christine;

We are in a very dire situation at the Club.  Since the letter went out and basically since the news has been issued about the Club closing, we have dropped in daily sales to $75 per day for the last 10 days.  Our nights are still below average but it is still feasible to stay open.  There are absolutely NO members coming in during the day.

Taking this into account, we are forced to close days and open from 4pm-1am.  We are in a very, very tough [financial] situation and we [feel] that a large part of it has to do with the members rebelling against the closing of the club.

I would like to meet with you ASAP regarding this situation.

Thank-you

Jim Beauchamp

[68]        This observation is supported by the actual sales numbers, which show a dramatic drop after peaking in May 2010:[35]

MONTH	SALES
May 2010	$ 93,658.30
June 2010	$ 53,046.22
July 2010	$ 41,556.63
August 2010	$ 31,749.27
September 2010	$ 31,392.27

[69]        Sales between June and September 2010 were 35.5% lower than sales in the same months in 2009,[36] and the average monthly number of customers was 33.5% lower.[37]

[70]        This is also consistent with newspaper articles published in the summer of 2010 that refer to “The bitterly contested battle between Le Club owner Mark Kaneb and members of the tennis and fitness club plus local citizens”.[38]

[71]        The parties did work together in the summer of 2010 to try to improve the situation for the Plaintiff:

·                   The Landlord agreed to allow the pub to close during the day;[39]

·                   The Landlord agreed to reduce the rent starting in July 2010 to 5% of sales; and

·                   The Landlord showed the Plaintiff two premises into which the Plaintiff could relocate.

[72]        These measures clearly show the Landlord’s good faith.  However, they had limited effect.  The first two measures reduced the Plaintiff’s expenses, which helped to reduce its losses, but they did not make up for the lost sales and did not resolve the Plaintiff’s problems.  The alternative premises were not acceptable to the Plaintiff.  But the Landlord was clearly trying to help the Plaintiff get through this difficult period.

[73]        As discussed above, the Landlord had the right to shut down the racquet club if it was not sufficiently profitable.  The Plaintiff was aware of the possible conversion of the tennis courts into ice surfaces in the fall of 2009 and not only did Beauchamp not object but he encouraged and facilitated it.  The problem is that when the Landlord announced around June 1, 2010 that the racquet club would close August 31, 2010, it did so on the assumption that the rezoning application would be granted and that the club would be torn down.  It had no plan B in the event that the rezoning application was not granted.  As a result, when the rezoning application was refused on August 24, 2010, the Landlord had no plan on what to do with the half of the building that used to be the racquet club.  Beauchamp testified that no one knew what would happen.  In fact, half of the building sat vacant for one year from September 2010 until September 2011.  The new restaurant that replaced the Plaintiff did not open until October 2011.

[74]        The Landlord breached its obligations to the Plaintiff in announcing that it would shut down the racquet club and driving away those members without having any plan to replace them.  In September 2010, the Plaintiff was faced with a situation where its business was dramatically down and there was no prospect for an improvement.  In those circumstances, the Plaintiff was entitled to abandon the premises and sue the Landlord for the damages it had suffered.

2.           Liability of the Owner and Kaneb

[75]        The Owner’s role in this matter was limited.

[76]        The Owner was responsible for the residential condominium project.  It made the application for rezoning.  If the condominium project had gone forward, the racquet club, the fitness centre, the physiotherapy clinic and the pub would be either relocated or closed.  The Owner recognized its responsibilities in that event, because the business plan for the condominium project included a budget item of $950,000 for Tenant Relocation Costs,[40] which included either the cost of relocating the tenants or compensating them for terminating their leases.  These matters would have been the subject of negotiation if the condominium project had gone forward.

[77]        However, the condominium project fell through.  The Owner did not terminate the Landlord’s lease or cause the Landlord to terminate the Plaintiff’s lease.  That the Landlord decided to close the racquet club regardless of whether the rezoning application was granted is not something for which the Owner can be held responsible, unless there is evidence that it incited, encouraged or caused the Landlord to take that step.  There is no such evidence.

[78]        As a result, the action against the Owner will be dismissed.

[79]        As for Kaneb, the claim against him is based on three separate grounds:

1.            He was the directing mind of the Owner, the Landlord and Mayford (the 37.5% shareholder in the Plaintiff), and as such had knowledge of, failed to prevent and actively participated in the actions of the Owner and the Landlord that caused the damage;

2.            The corporate veil should be lifted; and

3.            He personally undertook to pay $300,000 compensation to the Plaintiff in December 2010.

[80]        Dealing with the corporate veil argument first, there is no basis for lifting the corporate veil under Article 317 C.C.Q.:

317. The juridical personality of a legal person may not be invoked against a person in good faith so as to dissemble fraud, abuse of right or contravention of a rule of public order.

[81]        The Plaintiff recognizes that there is no basis for arguing fraud or contravention of a rule of public order, but argues that Kaneb’s conduct constitutes an abuse of right.

[82]        This sets the bar too low.  For the corporate veil to be lifted, the abuse of right must relate to the use of the corporation.  One cannot lift the corporate veil every time there is an allegation of an abuse of right by a corporation.  The plaintiffs did not pursue this argument vigorously.

[83]        Similarly, accepting the directing mind argument would mean that personal liability would be imposed on the directing mind of a corporation on too regular a basis.

[84]        With respect to the personal undertaking to pay, the two issues are whether Kaneb undertook to pay, and if so, whether the undertaking was intended to be personal or corporate.

[85]        Beauchamp testified that Kaneb continuously said that “I’ll take care of you” in the period when the condominium project was live.[41]  Kaneb acknowledged in his examination out of court that he had reached an agreement with Beauchamp to pay $300,000 for the cancellation of the Plaintiff’s lease in the event that the condominium project went ahead.[42]  However, there is no evidence of an undertaking to pay after the condominium project fell through and particularly after the Plaintiff abandoned the premises.

[86]        The plaintiffs produced some correspondence between the parties:[43]

●          email dated February 10, 2010 about getting “the full funds back” - this is prior to the rezoning application and is not relevant;

●          emails dated July 29, 2010 relating to “the lease buy out” - this related to the lease termination payment and is not relevant;

●          email from Kaneb dated September 15, 2010:

You don’t do this to friends you & met two weeks ago I thought we agreed on a formula you wearer to get me the numbers, when you wearer down I came to the fight and supported you with understanding and money, I can’t believe you of all people would do this.[44]

            This appears to be a response to the Plaintiff’s announcement on September 13, 2010 that it would abandon the premises in the first week of October 2010.[45]  The reference to a formula must be for compensating the Plaintiff for the closing of the racquet club, but in the context where the pub stays open.  That is not relevant to the current situation.

●          emails in December 2010 and January 2011:

            Kaneb refers to his intention to “keep Dan whole” and to “doing his share” in terms of “paying creditors, and other bills”.  It is not clear which hat Kaneb is wearing - personally or on behalf of the Owner, the Landlord or the shareholder in the Plaintiff.  Specifically, there is an offer to settle for $300,000 from Beauchamp on December 30, 2010 expiring January 3, 2011.[46]  However, there is no agreement, no undertaking to pay, and no admission of liability.

[87]        As a result, the action against Kaneb will be dismissed.

            3.         Damages

[88]        The Plaintiff claims the following damages:

●          $165,000 representing the present value of the Plaintiff’s future loss of net income or profits;

●          $168,273.35 representing suppliers that the Plaintiff was unable to pay;

●          $37,000 representing close-up costs; and

●          $30,000 for loss of reputation of the Plaintiff and of the Cunningham’s brand and for inconvenience and expenses incurred and to be incurred.

[89]        Dumesnil also claims $60,000 for his lost investment in the pub.

Lost profits

[90]        The principal part of the claim relates to the Plaintiff’s lost profits for the rest of the lease.  In matters of breach of contract, damages are intended to put the plaintiff in the position that it would have been in if the contractual breach had not occurred.  The plaintiff is entitled to claim “the amount of the loss he has sustained” and “the profit of which he has been deprived”.[47]  This means that the Plaintiff is entitled to the difference between the profits it would have realized from the date of the breach for the duration of the lease minus the profits (or plus the losses) it actually realized during that period.

[91]        The Plaintiff and the defendants have both filed expert reports which estimate the lost profit.  Both experts testified at the trial.  Tom Strezos, the Plaintiff’s expert, concluded that the present value of the lost profits was $165,000.  Gerald Blackman, the defendants’ expert, concluded that the present value of the lost profits was nil because the future losses outweighed the future profits.

[92]        After the hearing, the Court put additional questions to the experts, and received answers from both experts.[48]  Those answers helped clarify certain issues and will be referred to in the Court’s analysis.

[93]        As Justice Wery stated in relation to the calculation of lost profits in one of the cases related to Mirabel airport:

[143]      Aucune des méthodes des experts n’est parfaite. Il est, en effet, impossible de prévoir avec une certitude mathématique absolue ce qu’auraient été les profits nets de Leasehold Construction pour les années 1998 à 2003 n’eut été de l’entrée en vigueur des nouvelles règles d’assignation. Mais, comme on le sait, les règles de preuve civile n’exigent pas une certitude; elles se satisfont d’une probabilité. Or, le Tribunal estime que la méthode avancée par Richter donne des résultats plus probants. Cette méthode est, en effet, la plus susceptible de rendre justice à Leasehold Construction puisque, comme nous le verrons, c'est celle-ci qui s’est révélée la plus fiable.[49]

[94]        In the present case, both experts used the same basic methodology, which is to project the future performance of the Plaintiff and then calculate the present value of the income stream.  Although there may appear to be a very substantial difference between the experts, the different results arise from relatively small differences in the assumptions that they used to build their models:

·        Period: Strezos’s model covers the period from August 1, 2011 to January 2, 2018, and Blackman’s model covers the period from November 1, 2010 to October 31, 2018.  The Court requested that the models be extended from June 1, 2010 to January 2, 2019, as explained below;

·        Sales: Strezos assumes that sales will increase 5% per year from 2011 to 2015 and 3% per year from 2016 to 2018, and Blackman assumes 2.5% per year throughout the period;

·        Cost of sales: Strezos assumes that the cost of sales will decrease by 1% per year, from 44% in 2011 to 37% in 2018, while Blackman assumes it will remain at 44% throughout the period;

·        Payroll costs: Strezos assumes that the payroll costs will decrease from 33.9% of sales in 2011 to 31% in 2016 and will remain at 31% in 2017 and 2018, while Blackman has them decrease to 33% by 2014 and maintains them at 33% for the balance of the period;

·        Discount rate: Strezos used a discount rate of 15.9% to 16.9% to calculate the present value of the future net income.  Blackman concluded that there would be losses every year going forward and therefore did not use a discount rate.  He testified that if he were to choose a discount rate for this business, it would be at least 23% to 25%;

[95]        The Court must review each of these issues and determine what it considers to be a reasonable assumption based on the available evidence.  It will then insert those assumptions into the model in order to obtain an estimate of the present value of the profits for the period.

Period

[96]        The fault occurred on or about June 1, 2010 when the club announced that the racquet club would close on August 31, 2010, whether or not the rezoning occurred, and without any plan as to what the club would do to replace the racquet club if the rezoning did not occur.

[97]        The Plaintiff is therefore entitled to its lost profits for the period from June 1, 2010 until the expiration of the lease on January 2, 2019.  The Plaintiff was in operation until October 5, 2010.  The damages are therefore made up of two components - the difference between the actual performance and the expected performance from June 1, 2010 to October 5, 2010, and the expected performance from October 6, 2010 to January 2, 2019.  Alternatively, the damages can be seen as the expected performance from June 1, 2010 to January 2, 2019, minus the actual profits (or plus the actual losses) for the period from June 1, 2010 to October 5, 2010.

[98]        The Plaintiff has claimed its lost profits from August 1, 2011 to January 2, 2018.

[99]        The Plaintiff is entitled to renounce to its lost profits for the period from June 1, 2010 to July 31, 2011.  However, if it suffered losses in that period, those losses must be included in the calculation of damages, because the Plaintiff had to incur those losses in order to later earn profits. 

[100]     As for the end date, the date of January 2, 2018 used by Strezos is a manifest error because the lease expired January 2, 2019.

[101]     The Court will therefore calculate the present value of the net income for the period starting June 1, 2010 and ending January 2, 2019, and will deduct the present value of the actual profits (or add the present value of the actual losses) for the period starting June 1, 2010 and ending October 5, 2010.  The Court asked both experts to extend their models for the period from June 1, 2010 to January 2, 2019.

Sales

[102]     The Plaintiff’s actual sales were $679,682 for the ten months ended October 31, 2009,[50] and $676,053 for the year ended October 31, 2010.[51] 

[103]     In the year ended October 31, 2010, the Plaintiff had “normal” operations from November 1, 2009 to May 31, 2010; operated under the notice of termination from June 1, 2010 to October 5, 2010; and ceased operations on October 5, 2010.  To simplify matters, the Court will treat this as seven months of normal operations and five months of operations affected by the notice of termination.

[104]     The first step is to estimate the sales for 2010 in the absence of the termination notice.  Strezos took the sales for the seven months of normal operations (which he said were $489,088) and annualized them to $838,436.[52]  Blackman seems to accept this figure.[53]

[105]     The figure of $489,088 is not consistent with the evidence.  Rather, the evidence shows that the actual sales for the period from November 1, 2009 to May 31, 2010 were $509,337.56.[54]  Annualizing that figure gives estimated 2010 sales of $873,150.[55]

[106]     From the 2010 sales, Strezos assumes annual increases of 5% from 2011 to 2015 and 3% per year from 2016 to 2018.  Blackman used 5% for 2011 and then assumes 2.5% per year throughout the rest of the period.

[107]     The Court accepts that the increase in sales will be higher in the first years of operation before settling down to something closer to the inflation rate.  The evidence shows an increase in sales of the pub between 2009 and 2010 (using the estimated sales for 2010) of 28.5%, which is consistent with the increases in Ste-Anne de Bellevue:[56]

 

YEAR	SALES	ANNUAL INCREASE
2005	$  556,715
2006	$  748,626	34.4%
2007	$  884,926	18.2%
2008	$  938,827	6.1%
2009	$1,056,232	12.5%
2010	$1,086,008	2.8%
2011	$1,179,240	8.6%
2012	$1,217,427	3.2%
2013	$1,231,436	1.2%
2014	$1,243,349	1.0%

[108]     The only information with respect to Hudson is that sales increased by 8.8% comparing its first year of operation to its annualized sales based on the first seven months of its second year of operation.[57]

[109]     Blackman suggests that the sales increases should be less dramatic for the Plaintiff and should not last as long, because 85% to 90% of its sales are internal sales to a captive market, namely the members of the club, and only 10% to 15% come from external sales or sales to the public.  He suggests that there will likely be less growth on the internal sales because those customers are there on day 1, and therefore the overall sales increase should be lower.  Although there was no proof to support this argument directly, it appears reasonable.

[110]     The Court will therefore assume that the sales in 2010 would have been $873,150 and that those sales would have increased by 5% each year from 2011 to 2013, 3% each year from 2014 to 2016 and 2% each year from 2017 to 2019.

Cost of sales

[111]     The actual cost of sales for the pub in 2009 and 2010 was 43.6%.[58]

[112]     Strezos assumes that the cost of sales will be 44% in 2011 and that it will decrease by 1% per year, from 44% in 2011 to 37% in 2018, while Blackman assumes it will remain at 44% throughout the period.

[113]     The argument put forward by Strezos is that operations will become more efficient with time, and that the multiple locations will lead to bulk purchases from suppliers.

[114]     Blackman does not believe that such savings could be achieved because of the small size of the three locations, and he suggests that any savings would be offset by inflation.

[115]     The Court rejects the inflation argument.  The Court is assuming that the sales increase from year to year in part because of inflation, and the cost of sales, expressed as a percentage of sales, already increases at the same rate as the sales even if the percentage remains constant.  As a result, there is no justification for increasing the percentage because of inflation.

[116]     The evidence with respect to the cost of sales in St-Anne de Bellevue is as follows:[59]

YEAR	COST OF SALES (%)
2005	42.6%
2006	46.1%
2007	44.8%
2008	45.7%
2009	46.1%
2010	45.2%
2011	45.9%
2012	43.9%
2013	42.2%
2014	42.3%

[117]     It therefore appears reasonable to provide for a decrease in the cost of sales from 44% to 42% over the first three years of the projection.  The 42% is a bit lower than what Ste-Anne de Bellevue has achieved, to reflect that the operators have some experience and may achieve some efficiencies of scale.  However, the Court does not have any evidence to justify the reduction to 37% and it will therefore assume that the cost of sales will remain at 42% for the balance of the period.

Payroll costs

[118]     Actual payroll costs were 42.4% in 2009 and 34.6% in 2010.

[119]     Strezos assumes that the payroll costs will continue to decrease, from 33.9% of sales in 2011 to 31% in 2016, and will remain at 31% in 2017 and 2018, based on comparisons to Ste-Anne de Bellevue and Hudson. 

[120]     Blackman suggested that payroll costs will increase as minimum hourly wage rates increase, and he reduced them from 33.9% in 2011 to 33% by 2014 and maintained them at 33% for the balance of the period.

[121]     The evidence with respect to Ste-Anne de Bellevue is as follows:[60]

 

 

 

YEAR	PAYROLL COSTS (%)
2005	35.5%
2006	38.7%
2007	31.0%
2008	29.6%
2009	29.9%
2010	30.4%
2011	31.7%
2012	31.4%
2013	32.6%
2014	34.9%

[122]     Although this evidence does support a decrease in payroll costs as the operation becomes more efficient, it also shows that the costs have increased in the last two years.  As a result, the Court accepts Blackman’s projections and will not have the payroll costs drop below 33%.

Discount rate

[123]     Strezos used a discount rate of 15.9% to 16.9% to calculate the present value of the future net income.  The discount rate used by Strezos includes a company specific risk of 0.5% to 1.5%.[61] 

[124]     Blackman concluded that there would be losses every year going forward and therefore did not use a discount rate in his report.  He testified that if he were to choose a discount rate for this business, the company specific risk for a start-up company in the restaurant business should be much higher and the total discount rate would be at least 23% to 25%.

[125]     The Court agrees with Blackman that the company specific risk of 0.5% to 1.5% is too low for a start-up company in the restaurant business, particularly where the previous operator of the restaurant in the same premises failed.  However, the members of the club were captive customers for the restaurant, which lowers the risk.  The Court will set the discount rate at 20%.

Conclusion

[126]     Using the model prepared by Strezos and adjusting the figures as set out above, the Court finds that the Plaintiff would have suffered losses in 2010 and 2011 but then would have been profitable for the balance of the term of the lease.  The present value of the Plaintiff’s anticipated profits and losses over the term of the lease is $48,000.[62]

[127]     Instead of realizing that amount, the Plaintiff suffered a loss of $17,442.93 for the months of June 2010 through September 2010.[63]  The present value of that loss is $16,792.[64]

[128]     The damages to which the Plaintiff is entitled for its lost profits are therefore the sum of $48,000 and $16,792, for a total of $64,792.

Unpaid suppliers

[129]     The Plaintiff also claims $168,273.35 representing suppliers that the Plaintiff was unable to pay.

[130]     The failure to pay those suppliers was not due to any fault by the Landlord.  Those suppliers are unpaid because the Plaintiff suffered losses of $222,432 in its first two years of operation prior to June 1, 2010.[65]  If the events described above had not occurred, the Plaintiff would have generated profits in the future, which would have served in part to pay those debts.  The Court will order the Landlord to pay the value of those future profits which the Plaintiff can then use to pay the debts, but the Court will not order the Landlord to pay both the future profits and the past debts.

[131]     This claim is dismissed.

Close-up costs

[132]     The Plaintiff also sues for $37,000 representing the close-up costs, made up of legal fees ($15,000), bank fees ($2,000), accounting fees ($5,000), and unforeseen closing costs ($15,000).[66]

[133]     The Plaintiff’s counsel acknowledged during the argument that he had not proven this part of the claim.  It will be dismissed.

            Loss of reputation / inconvenience and expenses

[134]     The Plaintiff claims $30,000 for loss of reputation of the Plaintiff and of the Cunningham’s brand and for inconvenience and expenses incurred and to be incurred.

[135]     The Plaintiff is a numbered company and its only operations were the pub.  It was never intended to have any other operations.  There was no proof that it suffered any damage to its reputation.

[136]     Further, the Plaintiff has no right to claim damages for loss of the Cunningham’s brand because it does not own the Cunningham’s brand.  In any event, no such damages were established.

[137]     The plaintiffs did not establish any inconvenience and expense beyond the loss of future profits.

[138]     This claim will be dismissed.

            Dumesnil’s claim for his lost investment

[139]     Finally, Dumesnil claims $60,000 for his lost investment in the pub.

[140]     According to the financial statements of the Plaintiff, Dumesnil’s investment was a loan to the Plaintiff.  The proper recourse is for the Plaintiff to sue for the losses that it suffered and then to pay its creditors, including Dumesnil, to the extent that it is able to do so, and not for Dumesnil, as a creditor of the Plaintiff, to sue the defendants directly.

[141]     This claim will be dismissed.

 

CONCLUSION

[142]     The Plaintiff is entitled to $64,792 representing its lost profits for the duration of the lease, with interest from June 1, 2010 because the damages are calculated as of that date.

[143]     The Plaintiff is also entitled to its costs, including the fees of Strezos.  The Court did not consider the report of Michael Lewis to be of assistance and will not award those fees.

[144]     The action by Dumesnil will be dismissed without costs.

 

FOR THESE REASONS, THE COURT:

[145]     MAINTAINS in part the action instituted by 9202-9131 Québec inc.;

[146]     CONDEMNS 6943870 Canada Inc. to pay to 9202-9131 Québec inc. the sum of $64,792, with interest at the legal rate together with the additional indemnity from June 1, 2010;

[147]     WITH COSTS, including the fees of Tom Strezos;

[148]     DISMISSES the action instituted by Dan Dumesnil;

[149]     WITHOUT COSTS.

 

		__________________________________ Stephen W. Hamilton, J.S.C.
Me Robert W. Lord
Polisuk, Lord
For the Plaintiffs
Me Leon J. Greenberg
Sternthal Katznelson Montigny s.e.n.c.r.l.
For the Defendants
Date of hearing:	December 8, 9, 10 and 11, 2014