IN THE SUPREME COURT OF NOVA SCOTIA
Citation: Movie Gallery Canada, Inc. v. 9070-7720 Quebec Inc., 2005 NSSC 61
Date: 20050321
Docket: 242853
Registry: Sydney
Between:
Movie Gallery Canada, Inc.
Applicant
v.
9070-7720 Quebec Inc.
Respondent
Judge: The Honourable Justice Frank Edwards
Heard: March 14, 18 & 21, 2005, in Sydney, Nova Scotia
Written Release of
Oral Decision: March 24, 2005
Counsel: Daniela Bassan, for the applicant
James R. Gogan, Esq., for the respondent
Ralph W. Ripley, Esq., for the Intervenor
By the Court (Orally):
[1] This is an application for an interlocutory injunction.
[2] Facts: The Applicant, Movie Gallery Canada Inc. (Movie Gallery) is in the business of selling and renting videos and video games. Movie Gallery stores such as those located in Nova Scotia are typically “neighbourhood stores” located in small towns or rural centres. The Respondent, 9070-7720 Quebec Inc. (Quebec Inc.) is wholly owned by the Fox Family Trust and Randy Fox is the sole trustee of the Trust. The Respondent was incorporated specifically for the purpose of acquiring and operating the premises in question.
[3] In or about August 2003, the Respondent approached Movie Gallery with a possible location for a new Movie Gallery store at 123 Main Street, Sydney Mines, Nova Scotia. The Respondent indicated that additional space could be added to the leased premises as required by Movie Gallery. Movie Gallery and Quebec Inc. entered into a real estate lease dated August 20, 2004, in respect of the leased premises.
[4] The term of the Lease is for five years with three options to renew for three years. The date by which the Respondent was to turn over the leased premises was November 15, 2004 (the “turn over date”). The leased premises size is 3,500 square feet. Construction by the Respondent was required to commence within 60 days of August 20, 2004.
[5] Paragraph 5 of the Lease which is entitled “Construction and Turn Over Date” provides as follows:
“5. Construction and Turn Over Date. In the event the Leased Premises are to be constructed or renovated, such construction or renovation shall be performed according to the terms stated in Exhibit “B” attached hereto and incorporated herein. As an inducement for Tenant to enter into this Lease with Landlord, Landlord represents and warrants that it shall begin and diligently pursue construction/renovation of the Leased Premises and/or the Center within sixty days of the Lease Date set forth on Page 1. Subject to events of force majeure (as defined in Paragraph 38K. below), if Landlord fails to begin such construction within such period to the reasonable satisfaction of Tenant, and has not obtained either (a) Tenant’s written consent for an extension or (b) a written waiver of such delay; then Tenant shall have the right to terminate this Lease upon ten (10) days written notice to Landlord. Landlord is expected to turn over the Leased Premises by the date shown on Page 1 Item I (the ‘Turn Over Date’). Subject to events of force majeure (as defined in Paragraph 38K. below), in the event that the Leased Premises are not ready fifteen (15) days after the Turn Over Date, then Tenant will be entitled to one day free rent for each day of delay until Leased Premises are actually turned over to Tenant. In the event the Leased Premises have not been completed and turned over to Tenant within forty‑five (45) days after the Turn Over Date, Tenant may elect to terminate this Lease with no penalty or further responsibility of Tenant. If Tenant elects not to so terminate this Lease after such forty‑five (45) day delay, then the free rent shall continue to accrue until such time as Landlord turns over the Leased Premises to Tenant in compliance with the terms of this Lease. Landlord may, one time only, adjust the Turn Over Date by providing Tenant with written notice at least sixty (60) days prior to the Turn Over Date and Landlord shall coordinate the adjusted Turn Over Date with Tenant to the reasonable satisfaction of Tenant (as such adjustment involves an amendment of the Lease). Landlord hereby acknowledges that Tenant orders the fixtures and equipment for the store, and schedules the various departments involved in Tenant’s opening for business, during the sixty (60) days prior to the Turn Over Date. Landlord further acknowledges that Landlord’s failure to meet the original Turn Over Date or to seek an adjustment to such date in a timely manner causes Tenant actual and consequential damages. To that end, if Landlord and Tenant execute this Lease and Landlord does not build the Center and/or the Leased Premises or does not commence and diligently work to complete Landlord’s work for any reason whatsoever or fails to turn over the Leased Premises to Tenant pursuant to this Lease; then Landlord shall pay to Tenant $25,000.00 as liquidated damages for the costs incidental to site selection; lease preparation and negotiation; and the time and expense incidental to the scheduling changes of the various departments so affected. Landlord further acknowledges that Tenant shall not be unreasonable to refuse to accept an adjusted Turn Over Date during Tenant’s peak sales seasons including, but not limited to, a holiday season or a holiday weekend and/or the Tenant’s turn over date schedule for other properties already on Tenant’s schedule. (Emphasis mine)
[6] In or about September, 2004, construction did begin at the Leased Premises. By October, 2004, Movie Gallery anticipated delays in construction due to observations of the construction site at the premises. On November 15, 2004, the designated turn over date, the Respondent, Quebec Inc. failed to turn over the Leased Premises to Movie Gallery. Quebec Inc. failed to provide written notice of the delay in the designated Turn Over Date, despite repeated advice to do so. Such written notice, of course, was required by the Lease. By January, 2005, the Respondent advised Movie Gallery that it would complete construction and turn over the leased premises by March 1, 2005.
[7] On February 28, 2005, Quebec Inc. indicated for the first time that it would refuse to turn over the leased premises on the basis that construction costs were too high and free rent had accrued to Movie Gallery due to the delay in the turn over date. The Respondent, through Randy Fox, also indicated that the proposed “notching” of the beam, to which I will refer later, also presented it with an insurmountable problem. The Respondent took the position for the first time that Quebec Inc. would be “better off” if it paid Movie Gallery the $25,000 called for in Clause 5 with no further obligation under the Lease.
[8] On March 1, 2005, Movie Gallery received unconfirmed information that another retailer known as “Great Canadian Dollar Store” was apparently moving inventory items into the leased premises. That same day, Movie Gallery demanded that Quebec Inc. turn over the Leased Premises to Movie Gallery, and by March 3, 2005, a sign posted on the leased premises stated: “Opening Soon The Great Canadian Dollar Store”.
[9] As it turns out, Quebec Inc. had signed a Lease for the premises on October 22, 2004, with M.J. Melenchuk Limited, a franchisee for the Great Canadian Dollar Store. Michael Melenchuk is a shareholder/officer/director of M.J. Melenchuk Limited. Clause 19 of the Melenchuk Lease allowed Quebec Inc. to terminate the Lease in its “sole and unfettered discretion” at any time prior to the commencement of the tenants work provided for in the lease.
[10] The Respondent did not disclose the existence of the Melenchuk Lease to Movie Gallery. Instead, as noted, Quebec Inc., through its principal Randy Fox, led Movie Gallery to believe that it would honour the Lease right up until February 28, 2005.
[11] For his part, Melenchuk had no knowledge of the Movie Gallery Lease. He states that in October 2004 he had been told by Fox that there had been negotiations with Movie Gallery but they had fallen through. I am satisfied that Melenchuk proceeded in good faith with no knowledge of the Movie Gallery Lease. He says, and I believe him, that he was not told that Movie Gallery was asserting an interest in the premises until he was advised by Fox on either March 9 or 10, 2005. By that time, Melenchuk was preparing for his store opening.
[12] In that regard, I refer to paragraphs 33 and 34 of Mr. Melenchuk’s affidavit which read as follows:
“33. In addition, as a result of signing Lease on October 22, 2004, I entered into a Franchise Agreement with Great Canadian for a franchise in Sydney Mines and paid $10,000.00 for same. I also paid the Company that installed my “fixtures” approximately $2,300.00 for storing and transporting and assembling those items.
34. The shelving/fixtures that we obtained, I purchased for approximately $80,000.00. I have paid approximately in total for training, salaries, etc. for staff (let alone employer share of remittances), $12,000.00. My Company has $150,000.00 in inventory purchased and stored of which $10,000.00 of it is for seasonal items (primarily Easter), for which there is some time sensitivity with respect to its marketability. All of that is paid in addition to the $10,000.00 franchise fee and my time, effort, travel costs, etc. with respect to developing this project.”
[13] The Law: The three-part test for the granting of an interim injunction is set out on page 6 of the Applicant’s brief and reads:
(1) whether there is a serious issue to be tried;
(2) whether there is or will be irreparable harm to the applicant not compensable in damages; and
(3) whether the balance of convenience as between the parties favours a granting of the remedy sought by the applicant.
RJR MacDonald Inc. v. Canada (Attorney General), [1994] 1 S.C.R. 311 at 335‑343
[14] Serious Issue: Here there is obviously a serious issue to be tried. That issue revolves around the interpretation of the above-cited Clause 5 of the Movie Gallery Lease. Does that Clause give the landlord an out by paying $25,000.00 as liquidated damages or, as Movie Gallery argues, does the Clause deal only with liquidated damages for delay?
[15] It is not my place nor my intention to resolve that question at this stage. The Applicant in this case is effectively seeking a mandatory rather than a prohibitive injunction. The effect of an injunction would be to order Melenchuk’s eviction as he is obviously clearly already in possession of the premises.
[16] The law is clear that, in such cases, the threshold for an interlocutory mandatory injunction is higher than that for an interlocutory prohibitive injunction. In this circumstance, the Applicant must show that it has “a strong prima facie case” or that it is “clearly in the right”. (Canada (Attorney General) Maritime Harbour Society (2001) 197 N.S.R. (2d) 322; and Hardman v. Alexander, 1998 Carswell NS 506 (NS.S.C.)).
[17] The Clause in question is lengthy and complex and drafted by Movie Gallery. On the other hand, Fox had dealt with Movie Gallery in the past and has been engaged in the property management business for 18 years. As such he was very familiar with leases and, as Clause 19 of his lease with Melenchuk demonstrates, he was well aware of the type of clause needed to readily extract himself from an unwanted lease.
[18] I am satisfied that Fox realized that he may not have been able to buy his way out of the Movie Gallery Lease for $25,000.00. For that reason, he deceived Movie Gallery into believing that he would honour his company’s commitment under the Movie Gallery Lease. Of course, he had no intention of doing so and finally on February 28, 2005, he so advised Movie Gallery.
[19] Fox says he did not tell Movie Gallery about the Melenchuk Lease in the hope that he could arrange for a suitable alternate location and avoid the default charges payable under the Movie Gallery Lease. In fact, he negotiated an option on such a property on February 17, 2005. This property has since been rejected by Movie Gallery as not being suitable for its purposes. Fox’s conduct is inexcusable. He ought to have been forthright with both Movie Gallery and Melenchuk. Instead, he waited until Melenchuk’s business was a fait accompli, a circumstance which Fox knew would complicate Movie Gallery’s efforts to enforce its rights under the Lease.
[20] Though I find Fox’s conduct distasteful, I am mindful that this case will eventually turn on the Court’s interpretation of Clause 5 of the Movie Gallery Lease. While I am inclined toward Movie Gallery’s interpretation, I am unable to say at this stage that Movie Gallery is “clearly in the right”. It is conceivable that a full trial of the issue could result in an interpretation favouring a $25,000.00 buyout. I conclude, therefore, that the Applicant has fallen short at the first stage of the threshold test.
[21] Irreparable Harm: Movie Gallery also argues that it will suffer irreparable harm because there is no other location in Sydney Mines that meets Movie Gallery’s criteria for size, parking, location and visibility.
[22] In her brief on page 8, Counsel for Movie Gallery cites the critical part of the 1252668 Ontario Inc. v. Wyndham Street Investments Inc., [1999] O.J. No. 3188 (S.C.J.), supplemental reasons [1999] O.J. No. 3443 (S.C.J.), leave to appeal granted [1999] O.J. No. 3937 (S.C.J.), appeal dismissed [1999] O.J. No. 5423 (C.A.); and John E. Dodge Holdings Ltd. v. 805062 Ontario Ltd. 223 D.L.R. (4th) 541 (Ont.C.A.) paras. 38 to 42.) decision where the Court stated:
“¼It is enough, in my view, for the plaintiff to demonstrate that the Premises have a quality that makes them especially suitable for the proposed use and that they cannot be reasonably duplicated elsewhere. This, in my opinion, the plaintiff has done, sufficiently to overcome this second hurdle [of irreparable harm].
I conclude therefore, that for the purposes of this interlocutory injunction application, the plaintiff has satisfied me that the loss of the Premises will deprive it of a location for which it bargained and which it will not be able to duplicate elsewhere in the city of Guelph. The word ‘unique’ may not have been used but in my view, the plaintiff’s evidence amounts to a functional definition of uniqueness in the context of the plaintiff’s business.”
[23] It is with reference to that case and that reasoning that Movie Gallery advances its argument that it will suffer irreparable harm if it is deprived of access to the building in question.
[24] It is clear that Movie Gallery is fairly stringent insofar as its building specifications are concerned. It initially specified that a 10 foot ceiling height would be required. When the Respondent advised that the best it could do was 9 feet 6 inches, Movie Gallery agreed to this one-time change in its requirements and that it would not accept any further deviation from the original specifications.
[25] In October 2004, the Respondent, and specifically Mr. Fox, learned that because of the main structural beam in the building, the maximum ceiling height in the area of the beam could only be 9 feet 2 inches. This would result in a 4 inch by 6 inch bulkhead being visible in the ceiling from one side of the proposed store to the other. Movie Gallery advised that it would not accept the visible bulkhead. At this stage, Fox and Movie Gallery’s construction manager did agree that the beam could be “notched” so that the bulkhead would not be visible. Fox says he subsequently learned that “notching” the centre beam was not feasible. He also learned, and he outlines this in some detail in his affidavit, that eliminating the centre beam would involve major structural change and prohibitive cost. I accept his evidence on these points. Unfortunately, Fox did not advise Movie Gallery of the problem but instead continued to allow Movie Gallery to believe that their specifications would be met.
[26] The result is that the building, as it exists today, does not meet Movie Gallery’s specification on ceiling height. I have no evidence that Movie Gallery would accept the building without the required structural change. As the evidence stands, I have to assume that it would not. I am therefore not inclined to order at the interlocutory stage that the Respondent deliver a building to the Applicant that it might not accept barring significant alteration and expenditure by the Respondent.
[27] It is debatable whether the Applicant could require such alteration under the Lease. Consider the nature of Movie Gallery’s grievance. The ceiling would be the required 9 foot 6 inch height everywhere save for one strip 6 inches wide at 9 foot 2 inches. In addition there would be, of course, the support columns going floor to ceiling at regular intervals along the beam. That is irrelevant given Movie Gallery’s agreement to the notching, under which agreement the support columns would have remained in place. So what we are talking about is a visible 4 inch by 6 inch strip between the support columns being visible in the ceiling. I doubt whether many, if any, patrons wishing to rent a movie would even take notice of the bulk head or the support columns. It is difficult to appreciate how the bulk head would have any impact upon Movie Gallery’s operation.
[28] In any event, as far as the Applicant is concerned, the premises are not presently suitable for the proposed use. I therefore conclude that my failure to order that the premises be made available to the applicant will not cause the applicant irreparable harm.
[29] Under “irreparable harm”, Movie Gallery also argues the following on page 9 of its brief:
“(a) If Movie Gallery were prevented from opening its store, Movie Gallery would suffer a loss of reputation and goodwill due to the perception that would be created that Movie Gallery somehow failed to obtain the Leased Premises.
(b) This negative perception would permanently harm Movie Gallery’s reputation among other landlords in the region who may be reluctant to deal with Movie Gallery in the future.
(c) Due to the attractive and viable nature of the market in Sydney Mines, Movie Gallery will suffer a permanent loss of opportunity and market share if it were prevented from taking possession of the Leased Premises under the Lease.”
[30] These arguments are without merit. At present, Movie Gallery has no visibility or market share in the Sydney Mines area. At most, it will experience a delay in realizing a business opportunity. I am also unable to see how this experience will negatively affect its relation with other and future landlords. To the extent that it does suffer any loss, such loss is quantifiable and therefore cannot be described as irreparable harm.
[31] Balance of Convenience: As the Applicant has not demonstrated that it is clearly in the right or that it will suffer irreparable harm if I do not grant the injunction, I do not have to weigh the balance of convenience. Were I to do so, however, the scale is heavily tipped in favour of the status quo. Melenchuk is an innocent third party who would suffer significant financial loss if I ordered him to relinquish possession. The loss suffered by the Applicant would be slight compared to that of Melenchuk. I am therefore dismissing the application.
[32] Costs: Normally the successful party is entitled to his costs. In this case, the opposite is true. (Fox is the successful party as between the Applicant and Respondent.) Both the Applicant and the Intervenor, Melenchuk, have been dragged into this litigation by the Respondent’s deception. Had Mr. Fox been forthright with Movie Gallery and Melenchuk, this application would not have been necessary. The Applicant acted reasonably in bringing the application and, although unsuccessful, cannot be criticized for doing so. The Respondent’s conduct left Movie Gallery with only one realistic option and that was to apply for injunctive relief. This application has consumed one and a half days of court time, not counting today. There was also required, particularly with respect to the Applicant, the preparation of extensive affidavits and a brief and, with Mr. Melenchuk, preparation of his own affidavit which is also extensive and a brief by his Counsel.
[33] The Respondent will therefore pay both the Applicant and Intervenor their costs and reasonable disbursements. I fix costs at $4,500.00 for the Applicant and $3,000.00 for the Intervenor payable in the event forthwith.
Order accordingly.
J.