Franchisee Cannot Escape Paying Additional Rent Under Sublease

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Author: Gleb Matushansky, Student-at-Law, Law Works P.C.          
Editorial Committee: Law Works P.C.
Editor: Ben Hanuka

Overview

On December 8, 2016, the Ontario Superior Court of Justice released a decision in the case of Mr. Lube Canada v 2070778 Ontario Limited (2016 ONSC 7707), about whether a franchisor may be barred from charging additional rent based on the percentage of the franchisee’s revenues where disclosure of this charge was allegedly not fulsome.

Facts

Mr. Lube Canada Limited Partnership (“Mr. Lube”) is a franchisor operating a network of automotive maintenance stores across Canada.  In May 2005, Mr. Lube and 2070778 Ontario Limited (“207”) signed a franchise agreement and a sublease for an existing store in Oakville.  Mr. Lube was the franchisor and sub-landlord.  207 was the franchisee and subtenant.

Under another agreement that Mr. Lube and 207 signed at that time, Mr. Lube was not permitted to charge 207 any additional franchise fee at the time of a future renewal.

In 2014, when the franchise agreement was up for renewal, Mr. Lube sent a disclosure document to 207, which stated that Mr. Lube might at its discretion charge certain additional rent of two percent of gross sales, depending on various factors such as the age of the store.

Under the disclosure document and the new sublease agreement, the rent that 207 owed was a combination of base rent and additional rent. The two percent component of the additional rent was to apply at Mr. Lube’s discretion as indicated above.

Mr. Lube and 207 signed a new franchise agreement and a new sublease agreement.

After the renewal was in effect, 207 refused to pay that additional rent. The parties brought court applications to determine whether 207 was required to pay this additional rent.

Analysis

207 took the position that Mr. Lube did not sufficiently disclose information about the additional rent in the disclosure document and sublease agreement, and alternatively that the additional rent was in effect a franchise fee.

207 did not seek rescission under section 6 or damages under section 7 of the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Act”).  It essentially relied on common law principles but tried to augment its position using the Act.

The court held that Mr. Lube did not breach the disclosure requirements under section 5 of the Act on the basis that it clearly disclosed the requirement to pay the additional rent.  It held that Mr. Lube fully disclosed the additional rent requirement and was entitled to charge it.

The court distinguished the case from other cases were previous drafts were exchanged, where a franchisor may be required to inform a franchisee about changes from earlier drafts.

The court held that 207’s claim was a non est factum argument – a legal principle designed to assist a party who did not know what contract it entered into.  It held that 207 signed the agreements and was bound by them, even if it did not read them.

The court also considered 207’s argument that the additional rent at issue was in effect a franchise fee and therefore prohibited because of the original agreement prohibiting a renewal franchisee fee.  The court dismissed this argument based on the decision of the Ontario Court of Appeal in TA & K Enterprises Inc. v Suncor Energy Products Inc. (2011 ONCA 613), which held that payments for goods and services, such as the ongoing payment of the additional rent, are not a franchise fee.

Summary and Commentary

Mr. Lube was entitled to define the rent charged to a franchisee in any contractually permissible way that it chose, including an amount based on gross sales.  207 was not entitled to ignore a provision in an agreement, especially when it was properly disclosed.

The court re-affirmed the underlying contractual nature of the franchise relationship, and that parties will be held to their bargain.  Despite the power imbalance between franchisors and franchisees, Mr. Lube was not required to highlight any changes between the old agreement and the new agreement.  It disclosed the obligations.  Whether 207 read the documents or not, it had to comply with the agreement that it signed.

For more information about Law Works’ expertise and how we may be able to help you, please contact Ben Hanuka at https://www.lawworks.ca/book-a-consultation or by phone at (855) 978-5293.

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