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Dec 10, 2019

Careful drafting of the use clause – Ice Cream v. Frozen Yogurt – A ‘sweet’ result for consumers

Published December 12th, 2019    Renx.ca

Typically, tenants seek as broad a use as possible for their product/services, including the ability to change or expand those products/services over time. Conversely, landlords want a very narrow use to allow maximum flexibility to lease out other space as it becomes available without breaching existing tenant exclusives or needing to get approval from existing tenants with broad use language.

The November 12, 2019 Supreme Court of Nova Scotia decision in Second Cup Ltd. v. OPB Realty Inc. demonstrates the importance of the need for careful drafting of permitted uses in a lease.

The Facts:

Second Cup was the tenant in the Halifax Shopping Centre owned by OPB Realty Inc. pursuant to a 2012 lease. The Use clause was as follows: “Tenant shall use the Store only for the sale at retail of specialty coffees, coffee, espresso based beverages, teas, other hot, cold and blended beverages, gourmet coffee products, coffee in bean or bulk form and as ancillary thereto the sale of non-perishable food products, including, but not limited to, desserts, pastries, baked goods, dessert squares, muffins, croissants, danishes, scones, tarts, rolls, cakes, donuts, biscotti, bagels, cookies and premade specialty sandwiches all for on or off premises consumption. …”

Since May 2017, Second Cup has offered soft-serve frozen yogurt for sale (yogurt mixed with flavouring) in stores across Canada and wanted its Halifax Shopping Centre store to offer it for sale.

The tenant sought an order against OPB, allowing Second Cup to sell frozen yogurt and yogurt parfait – at its franchise location in the Halifax Shopping Centre.

Issue:

Whether frozen yogurt is permitted under the Use clause as a type of “non-perishable food product”.

The Decision:

The Tenant was successful and was permitted to sell its frozen yogurt as a “dessert” under the Use clause.

The Reasons:

1. The Court confirmed/held that the interpretation of contracts “has evolved towards a practical, common-sense approach not dominated by technical rules of construction” (Sattva Capital Corp. v. Creston Moly Corp.) and “is an exercise in determining and giving effect to the parties’ objective intentions at the time the contract was formed”.

2. Contractual interpretation involves:

a. reading the words in their plain and ordinary meaning;

b. then making sure that reading is consistent with the whole agreement; and

c. considering the “factual matrix”, or the context surrounding the contract. This may involve considering factors external to the contract itself, such as the purpose of the contract.

3. Based on the three-step approach, the Court focused on:

a. the dictionary meanings of “non-perishable” and “dessert”, and found that the former must include some degree of perishability and form of preservation as almost all food decays over time without some preservation; and the latter being a broad category of foods that range in degree of perishability.

b. reading the lease as a whole to try to harmonize any ambiguity or inconsistency with the words used in the Use clause. In particular, the Court said that parties “may intentionally signal to the reader that certain words or phrases assist in defining other parts of the contract. One way of doing this is using a list of examples; another way is qualifying general terms with specific terms”. In this case:

i. the meaning of “non-perishable” could be clarified by the “non-exhaustive list of foods [that followed], many of which are conventionally considered perishable. … Therefore, ‘nonperishable’ means ‘food that is at least as non-perishable as these other food items’, which all require some form of preservation, notably refrigeration”.

ii. “dessert” is more general than the specific types of items that are listed after it. Therefore, “dessert” must refer to some food item, at least as non-perishable as the other items listed, but must mean something other than those listed items. Frozen yogurt falls into this category. The parties would not have used the word “dessert” if they did not intend some unlisted, uncontemplated sweet items might eventually be sold by Second Cup. The parties to the contract could have used narrower language, but did not.

c. with respect to considering the “factual matrix”, the Court found:

i. the “contract serves to facilitate Second Cup in selling its products at HSC and restrict Second Cup from engaging in certain activities that may harm the HSC’s operations. This is consistent with the reading that harmonizes the terms in the Use Clause. … The Use Clause is not so open-ended that Second Cup could sell any frozen food. The foods must be at least similar to the enumerated foods and be ancillary to beverage sales”.

ii. that soft serve ice cream and smoothies that contained frozen yogurt, which were served by other tenants in the Centre, are “distinctly different from frozen yogurt” and no evidence was presented that the items were in “direct competition”.

iii. there was little to no evidence that the landlord wanted to limit competition among its tenants.

The Lessons:

1. Use clauses and the words used in such clauses require very careful attention to take into account current uses and potential future uses as a business may evolve.

2. Generic words like “dessert” should be avoided unless carefully clarified by and limited to a list that follows.

3. Even if exclusives are not given to other tenants, consider whether there should be express use prohibitions to avoid direct competition with other tenants and to evidence that intent.

4. The result may have been different if the matter involved a local shopping mall as opposed to a regional mall where there is less of a need to limit direct competition.

Disclaimer: This article is for general information purposes only and not intended as or to be relied upon for legal advice. Consult with a lawyer for your unique situation.


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