In a recent Ontario decision, a company running two restaurants in a Toronto hotel sued the hotel after it terminated the parties’ relationship during the COVID-19 pandemic shutdown.
Hotel Signs Agreements to Open Two Restaurants on Premises
In 2017, an Ontario company signed a Food and Beverage Services Agreement (the “FBA”) and two leases with a hotel located in Toronto. The purpose of the FBA and the leases was to open and operate two restaurants within the hotel.
In March 2018, the hotel officially opened and the company began operating two restaurants on the premises.
However, on March 17, 2020, the hotel closed to the public due to the COVID-19 pandemic and the Ontario government’s declaration of a state of emergency. The hotel demanded that the company continue to pay rent during the shutdown, which it failed to do.
On July 2, 2020, the hotel terminated the FDA and the leases with the company. Unbeknownst to the company, the hotel had signed a letter of intent with another restaurant on June 3, 2020, which was conditional on the dissolution of these agreements.
The hotel reopened to the public on July 14, 2020 and has remained open ever since.
On July 20, 2020, the company commenced a court action against the hotel.
Parties Claim Against Each Other
Among its claims, the company sought damages against the hotel in the amount of $12,758,000 for lost profits. It also sought punitive and aggravated damages of $10 million for breach of certain agreements and a breach of the duty of good faith and honest performance. The company further alleged that the hotel had acted in bad faith by insisting that it pay rent while the hotel was shut down during the COVID-19 pandemic. It further claimed employee termination damages for close to $2 million. Finally, the company stated that it had spent millions of dollars on leasehold improvements with the expectation of running two profitable restaurants within the hotel and the hotel had benefitted and would continue to benefit in the future from those improvements. Thus, the hotel should be required to compensate it for its capital outlay with adjustments for a total of $8,965,542.
In response, the hotel denied entitlement to damages of any kind and counterclaimed for $2,000,000 for unpaid rents and services charges. Among its claims, the hotel alleged that the company had failed to provide the services it had said it would and had not paid rent as required. As such, the hotel stated that the company had breached numerous provisions of the FDA and it had been entitled to terminated the agreement and leases.
Court Rules That Hotel Was Not Entitled to Terminate Agreements
After reviewing all the evidence, the court ruled that the hotel’s termination of the FDA was unlawful. Among other reasons, the court found that the hotel’s own actions had contributed to the company’s inability to pay rent and the breaches alleged by the hotel in the termination letter were groundless.
In addition, the court held that the termination of the FDA and leases had been done in bad faith, in part because the hotel had allowed the company to believe that it was“business as usual” all the while negotiating with another restaurant with a clear intention to replace the company.
Court Awards Damages
In the result, the court therefore ordered the hotel to pay the company $7,124,524 in reliance damages, from which the sum of $735,879 owed by the company for unpaid rent was to be deducted. The court further ordered the hotel to pay the company just over $2 million in employee compensation damages.
However, the court refused to award punitive damages, stating:
“Although I have found bad faith on the part of the Hotel in the manner in which they terminated the Agreements, their actions do not reach the high threshold of reprehensible or egregiously objectionable conduct in the employment law cases cited by [the company]. This is, therefore, not a case for punitive damages. If I am wrong, I would have awarded $1.00 in punitive damages to [the company].”
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Due to the very specific nature of the hotel industry and the day-to-day realities of running a hotel, financing a hotel purchase or project can be complicated. If you are building, buying or selling a hotel, it is important to retain a team of lawyers who are familiar with the hospitality industry and who are tuned in to the unique requirements of hotel owner-operators.
A good lawyer with experience in hospitality properties will be able to save you more money than you will spend on legal fees. The opportunities to win or lose in hotel transaction negotiations is almost endless; it is one area of the law where having experienced counsel is especially important.
At Baker & Company, our highly skilled Toronto hotel lawyers have been advising clients on hotel financing for more than 30 years. We have helped prospective buyers and current owners of hotels of all sizes.
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