In a recent Ontario Court of Appeal decision, the court found that a tenant was entitled to damages for the loss of share value in her corporation after the landlord locked her and her business out of the premises.
Tenant Lock-Out and Loss of Share Value
In 2006, the tenant’s sister entered into a lease with the then-owner of a building in Toronto. The lease was for premises on the ground floor of the building and contemplated that the premises would be used as a restaurant. It required payment of “Minimum Rent” and “Additional Rent” for the tenant’s share of taxes, utilities and services to the building.
In 2010, the tenant’s sister assigned the lease to her. An agreement with the then-landlord made amendments to the amount of Minimum Rent and also specified the square footage of the leased premises (1,120 square feet). The other terms and conditions of the lease remained unchanged.
From December 1, 2010 to April 1, 2014, the tenant’s corporation, of which the tenant was the sole shareholder, operated a restaurant on the leased premises.
The building was purchased by a new landlord in March 2014.
On April 1, 2014, the new landlord demanded the payment of increased amounts of Minimum Rent and Additional Rent, based on an architect’s evaluation that the leased premises covered a larger area than stated in the original lease. The tenant opposed this increase in rent.
On April 25, 2014, the landlord terminated the tenant’s tenancy for her failure to pay the increased amounts demanded. The locks on the premises were changed, and other than being allowed a brief period to retrieve property from the premises, the tenant was denied the benefit of the premises for the balance of the term of the lease.
As a result, the tenant’s corporation’s restaurant business ceased to operate.
Claiming that the termination of her lease was wrongful, the tenant sued the landlord for the return of her deposit and for damages arising from the breach of the lease.
Motion Judge Sides with Tenant
The motion judge found in favour of the tenant, finding that the landlord had wrongfully terminated the lease when it locked the tenant out of the premises.
The motion judge then turned to the issue ofwhether the tenant could claim for the loss of value of her shares. The motion judge found that the termination of the lease caused the restaurant to close, as a result of which the tenant’s shares in the corporation became worthless. He rejected the landlord’s argument that the tenant was not entitled to damages for that loss based on the rule in Foss v. Harbottle. He held that there was an exception to that rule when the company suffers a loss but has no cause of action to recover the loss; in such circumstances the shareholder may sue for the loss of the value of the shares.
The motion judge awarded the tenant damages of $145,702, made up of the lost share value ($140,614) and a deposit that the landlord was holding ($5,088).
The landlord appealed.
Foss v. Harbottle Rule
The rule in Foss v. Harbottle prevents shareholders from suing for a loss in the value of their shares brought about by a wrong done to the corporation. The rule, which is well-entrenched in Canadian law, is a consequence of the separate legal personality of the corporation. Just as shareholders (subject to limited exceptions) cannot be sued for acts, debts, defaults or obligations of the corporation, only the corporation has a cause of action for wrongs done to it.
Issue on Appeal
The primary issue in the appeal was whether the Foss v. Harbottle rule should have been applied to deny the tenant’s claim for the diminution in the value of her shares in the corporation.
The landlord submitted that the rule in Foss v. Harbottle is part of Ontario law and barred the tenant’s claim for diminution in share value.
Ontario Court of Appeal Sides with Tenant
The court dismissed the appeal, finding that the wrong had not been done to the corporation, but to the shareholder personally. Only she was a tenant under the lease and only she had a cause of action for its wrongful termination. In such circumstances, the court explained that neither the rule in Foss v. Harbottle nor its rationale applied, stating:
“The rule in Foss v. Harbottle does not preclude an individual shareholder from pursuing a claim for harm done directly to her, assuming the shareholder can make out all the elements of her own cause of action.”
As a result, the court found that the motion judge did not err in allowing the tenant’s claim for diminution in share value.
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