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Ontario Court Upholds Franchisee’s Obligation to Pay Percentage Rent

Published: 01/27/2017

By Derek Ronde

In Mr. Lube Canada Limited Partnership v. 2070778 Ontario Ltd., the Ontario Superior Court of Justice examined whether a franchisor was entitled to charge percentage rent to its franchisee under the terms of renewal of the parties’ franchise agreement. The Court ultimately held that the obligation to pay percentage rent had been properly disclosed and was permissible under the terms of the parties’ contracts, and required the franchisee to pay the amounts owed to the franchisor.

In this case, the parties, Mr. Lube (the franchisor) and 207 (the franchisee) originally entered into a franchise agreement in 2005 in respect of the operation of an automotive maintenance franchise. As part of the arrangement, the parties executed a capital asset purchase agreement wherein Mr. Lube was not permitted to charge 207 “any additional franchise licence fee on account of a renewal” for 20 years. The sublease and the franchise agreement extended to September 2014.

In 2014, the franchise agreement and sublease were up for renewal. Mr. Lube provided a franchise disclosure package, which included a new franchise agreement and sublease. The new agreement and sublease were executed in September 2014. The franchise agreement did not impose a franchise renewal fee in accordance with the capital asset purchase agreement. However, the sublease included the imposition a new rent rate, which included an amount that was 2% of the franchisee’s gross sales (or “percentage rent”).

Subsequent to executing the lease and franchise agreement, the franchisee refused to pay the percentage rent and sought to have the declaration from the court that it was entitled to ignore the provision. In response, Mr. Lube sought to compel the franchisee to pay the amounts owed.

207 attempted to argue that there had been a breach of section 5 of Ontario’s franchise legislation, the Arthur Wishart Act (Franchise Disclosure), 2000 (the Wishart Act) in that the requirement to pay percentage rent was not disclosed in the franchise disclosure package. The Court dismissed this allegation outright, finding that the Franchise Disclosure Document “clearly disclosed” the requirement for percentage rent.

207 also submitted that the percentage rate was a sort of franchise fee and thus prohibited under the capital asset purchase agreement. The Court, relying on earlier Ontario Court of Appeal jurisprudence, held that “an ongoing payment in the nature of percentage rent is ... not a franchise fee.”

The Court dismissed an allegation that there had been previous representations from Mr. Lube regarding percentage rent, noting that the franchise agreement between the parties had contained an effective entire agreement clause. Lastly, given that the franchisee had executed the sublease without reading the franchise disclosure document or the sublease, the Court held that the franchisee was not permitted to rely on the legal principle of non est factum as a means of escaping its contractual obligations as there was no fundamental misunderstanding between the parties.

The decision is a helpful example of Ontario courts obliging franchisees to stand by their contractual obligations and taking a practical approach to franchisors’ statutory disclosure obligations. Further, the holding that percentage rent is not a franchise fee will likely be a helpful precedent for future franchise litigation in the province.

A copy of the Mr. Lube Canada Limited Partnership v. 2070778 Ontario Ltd. decision can be found here.