In the Province of Quebec, as in the rest of Canada, tenants are always looking to protect their market and ensure their success. One of the techniques frequently employed to accomplish the above goals is the use of “exclusive use” (or “exclusivity”) clauses in tenants’ leases. At its core, an exclusive use clause is a provision that prohibits, restricts or limits, in some way, others from carrying on the same business as that of the beneficiary of the clause. While both landlords and tenants place a lot of value on these clauses, it is very often the case that their drafting may not be thoroughly thought out. Differences in opinion as to the scope and interpretation of exclusivity clauses have resulted in Quebec courts, over the past few years, rendering many decisions on this issue. This article will discuss various principles enunciated by the Quebec courts in the course of their interpretation of exclusivity clauses.
Every contract governed by Quebec law is subject to the principles of good faith set out in articles 6, 7 and 1375 of the Civil Code of Quebec. As and from the time that the parties commence negotiating, the overarching obligation of good faith applies. In Riocan Holdings (Quebec) Inc v Summum Nutrition Inc (“EZ Games”), the Court of Appeal confirmed the Superior Court’s decision that the landlord had breached its obligation to act in good faith by attempting to convince the tenant that the premises leased to a third party did not form part of the shopping centre.
In drafting an exclusivity clause, it is important to ensure that the clause is clear, specific and precise. An exclusivity clause should be easily understood, and should not be overly broad. In 4039971 Canada Inc v Place Lasalle Property Corporation, the tenant’s exclusivity clause was for the operation of a “women’s fitness centre”. Accordingly, the Court of Appeal upheld the Superior Court’s decision that a “no frills” fitness centre serving both men and women did not violate the tenant’s exclusivity.
If an exclusivity clause is ambiguous, Quebec courts have been willing to hear evidence relating to the background and context of the clause, including any negotiations surrounding its inclusion or drafting, holding such information to be pertinent. In Immeubles Régime XV Inc v Indigo Books & Music Inc (“Indigo Books”), the Court of Appeal confirmed the Superior Court’s decision that Indigo could testify to the fact that it would not have leased the premises if it had known that the landlord would also lease space to Archambault (a francophone bookstore and one of Indigo’s major competitors).
In order to provide the landlord with the flexibility to attract a proper tenant mix to its property, exclusivity clauses tend to protect only a tenant’s “principal use”. The challenge then becomes one of defining exactly what constitutes the principal use. In Immeubles Robin Inc v 9072-6142 Quebec Inc, the exclusivity clause protected a type of business having as its principal use the sale of bulk, pre-packaged candies, nuts, biscuits, coffees and chocolate. The Court of Quebec held that a third party tenant who had been in the shopping centre for many years, whose principal activity was the sale of dairy products and ice cream, and who only sold chocolates during Easter, was not carrying on a similar type of business. In Indigo Books, Indigo’s lease contained an exclusivity clause in which the landlord undertook not to lease space to any other tenant whose principal use was the sale of books. The landlord tried to lease premises in the centre to Archambault, and, in determining what constituted principal use, the Superior Court judgment (upheld by the Court of Appeal) looked at a multitude of factors (including area, advertising, percentage of volume of gross sales, percentage of volume of net profits and internet profits) and determined that the exclusivity clause would indeed be breached, if the landlord would be entitled to allow Archambault to lease space in the centre.
In Second Cup Ltd v 8702934 Canada Inc, Second Cup’s exclusivity clause was for the “principal business of a specialty coffee shop selling coffees, specialty coffees and espresso-based drinks, such as, by way of example a Starbucks, Tim Horton’s, Dunkin Donuts, Café Depot, and AL Van Houtte.” Second Cup was unsuccessful in obtaining an injunction against a restaurant selling, inter alia, coffee, because Second Cup was unable to demonstrate to the Superior Court what its principal use meant.
In recent years, Quebec courts have determined that premises can have more than one principal use. In EZ Games, the exclusivity clause stipulated that the tenant would be the only tenant in the shopping centre authorized to operate a business whose principal use is the buying, selling and exchanging of video games. The landlord then proceeded to lease space in the shopping centre to Videotron, claiming that this did not violate the exclusivity clause as the sale of video games constituted only a small percentage of Videotron’s revenue and was not therefore a “principal use”. The Court of Appeal upheld the decision of the Superior Court in dismissing the landlord’s argument, holding that more than one principal use can exist within the same premises and that there is no automatic percentage of business activity that will qualify an activity as being “principal”.
Given that tenants require flexibility in the operation of their businesses, the distinction between a “primary use” (which benefits from the exclusivity clause) and any “ancillary uses” (which can be carried on by other tenants without constituting a violation of the first tenant’s exclusivity) becomes very important. In Corbeil Électrique Inc v Groupe Opex Inc (Ashley Meubles Homestore), Corbeil had negotiated an exclusivity clause for a store specializing in the sale of home appliances. When another tenant in the centre began to sell home appliances, Corbeil sued its landlord. While the Superior Court judgment noted that the area used for home appliance sales in the competitor’s store equated to only 25% of the floor space dedicated by Corbeil to the same use, the Court of Appeal stated that the qualitative difference between the businesses was the more significant factor and emphasized the distinction between a store specializing in the sale of home appliances (Corbeil) and a store which merely sells, as part of its overall product mix, home appliances (Ashley). The Court of Appeal therefore held that no breach of the exclusivity clause had occurred.
Exclusivity clauses pose challenges to both landlords and tenants as, very often, diametrically opposed positions must be reconciled to provide each party with the protection it believes it requires for the future success of its business. Each situation must be looked at on its own facts, the goal being to come up with the perfect match; neither too loose, nor too tight, the clause must fit the parties “just right”. As lawyers whose client base includes both retailers and landlords, we are well positioned to assist our clients in achieving their goals by providing experienced advice in the drafting of such clauses.