[1]             When Marc Mesic applied for a Country Style Donut franchise in 1998, he had experienced good times as a Country Style franchisee. Indeed, he had first engaged the franchise world six years earlier, in 1992. Little did he know when celebrating his second franchise nuptials with Country Style that the "marriage" would end just over a year later, in a messy divorce.

[2]             This case deals with the aftermath of that unhappy break-up.

[3]             In the summer of 1998, Marc Mesic and his brother-in-law, Zeljko Vukovic, entered into a series of agreements to purchase a Country Style franchise restaurant to be located at 66 Overlea Boulevard, East York, Ontario (the premises). The cost of the franchise was approximately $300,000.

[4]             In July 1998, the franchisee entered into the following written agreements with the plaintiff and its related companies:

[5]             The franchisee is the defendant 1304271 Ontario Limited and the two named defendants are guarantors of the sublease. I will refer to them collectively as "the defendants" or the "franchisee". They seek damages by way of counterclaim against the franchisor and the landlord in this action.

[6]             By a lease agreement dated April 9, 1998, 1176847 Ontario Limited, as landlord, and Country Style Realty Limited (a wholly owned subsidiary of the plaintiff), as tenant, entered into a lease of the premises for a term of 10 years expiring on July 31, 2008 and including two five-year options to renew (the head lease). 

[7]             In accordance with the head lease, the landlord constructed a free-standing coffee and donut restaurant with a drive-thru. The premises are located in a shopping centre development which includes a free-standing Burger King restaurant and a proposed building with approximately 12,000 square feet of retail space, together with access roads and parking facilities.

[8]             I will refer to Country Style Food Services Inc., the plaintiff/defendant by counterclaim in this matter, as "the lessor" or as "Country Style"; and 1176847 Ontario Limited, defendant by counterclaim, as "the landlord". In doing so, I recognize that the franchisor was the tenant and a landlord for the same premises at the same time.

[9]             Attached as Schedule A to the head lease is a site plan for the shopping centre. The sublease incorporates the head lease by reference and a copy of the head lease together with the Schedule A site plan is attached as Schedule A to the sublease. Thus, both the head lease and the sublease contain schedules which encompass the proposed site plan for the development of the shopping centre.

[10]          It is the site plan which forms the crux of this case. It outlines the proposed layout of the shopping centre, including the location, size and shape of the buildings, the parking areas, the roadways and the entrances and exits.

[11]          The defendants declare that they carefully considered the layout in the site plan before agreeing to proceed with the purchase of the franchise. According to Mr. Mesic, prior to entering into the agreements with the franchisor, he examined the site plan and carefully considered:

[12]          The restaurant opened its doors for business in July 1998.

[13]          The original site plan called for the construction of an L-shaped commercial retail building at the southwest corner of the mall. It also contained an access road from the Thorncliffe Park entrance at the northwest corner of the mall that flowed directly into the Country Style drive-thru.

[14]          In July 1999, without prior notice or authorization, the landlord began to develop the mall pursuant to a new approved site plan. The Thorncliffe Park entrance was closed off completely for 4 to 6 weeks; the paving and curbs that had previously been constructed, were torn up. The new access entrance, placed to the south, stood four feet narrower than the original entrance and closer to the lights at Overlea Drive and Thorncliffe Park Road. The parking area (and thus access to the Country Style drive-thru) was altered to lead straight through the mall to the east side of the property. Instead of constructing the L-shaped building, two back-to-back convenience strip mall buildings were built to incorporate fast food and convenience-type stores at the northwest corner of the mall with parking in front of each.

[15]          The franchisor and franchisee knew that the landlord would be constructing the L-shaped building in Phase 2 of the development.  They did not know that the landlord had changed the configuration of the plaza according to a revised site plan. Mr. Vukovic described his initial surprise and reaction to the changes, as follows:

[16]          When the construction commenced, the defendants immediately protested. They claimed the alterations would harm Country Style's business, particularly the drive-thru business, and that the landlord's unilateral action represented a "breach" of the agreement. "That is not what I bought", stated Mr. Mesic. "I didn't want it." He lamented the negative impact of the changes from the franchisee's perspective, as follows:

[17]          Though the new configuration included one more parking spot for the mall, according to Mr. Mesic, even this "interfered with my area".

[18]          Country Style wrote to the landlord on July 9, 1999 and on several occasions thereafter, stating that the access route was not fit for use by customers; and that the proposed change to the drive-thru as well as the conduct of the landlord and its representatives were "unacceptable".

[19]          The background to the landlord's actions may be briefly summarized as follows:

[20]          As a result of the alterations, the franchisee began to withhold payments for rent, royalties and advertising contributions from Country Style. Sometime in 2000, the franchisor and franchisee reached an interim agreement by which the franchisee paid $147,800.56 into trust for the period to May 2000, pending resolution of the disputed issues.

[21]          In the meantime, Country Style was declared an insolvent corporation; however, a stay was ordered on December 13, 2001 pursuant to the CCAA (Companies' Creditors Arrangement Act). This gives the company the flexibility to restructure its operations and finances. At the time of trial, the reorganization was ongoing with a closure of over 102 of its 251 locations.

[22]          Pursuant to a notice of default, Gans J. gave Country Style judgment on February 5, 2002 for $147,800.56 but stayed execution of the judgment pending final disposition of the action. Country Style was also awarded $39,114 from the franchisee to cover its non-payment of rent from May 2001 to February 2002. A trial was directed in respect of the common area maintenance (CAM) and taxes allegedly overpaid by the franchisee and on the issue of the derogation of lease allegations raised by the franchisee by way of counterclaim.

[23]          In addition, Gans J. made the following order, terminating the lease and the franchise agreement:

[24]          The franchisee vacated the premises pursuant to the order of Mr. Justice Gans on February 5, 2002.

[25]          It is noted that the franchisee has no direct relationship with the landlord. Rent is paid by the franchisee to the franchisor who in turn pays rent to the landlord. The franchisee did not communicate directly with the landlord at any time. All communications passed through the franchisor.

[26]          All issues have been determined concerning Country Style's action against the franchisee except the alleged overpayment of CAM and taxes  by the franchisee. The initial amount charged for these expenses was approximately $1,850 per month, but this quickly rose to the monthly sum of about $4,500 once the franchisee moved into the premises.

[27]          Pursuant to the lease, the tenant is obliged to pay its proportionate share of common area expenses and realty taxes. It appears from the landlord's documents that the Country Style premises accounts for 13.747 percent of the entire shopping centre. The property was fully developed and the other tenants in possession by June 2000. Yet, the landlord continued to charge the franchisor 41.56 percent of some expenses (which were passed on to the franchisee). In addition, the franchisee was charged for services it did not require or use, for example, the landlord's fees included a waste removal charge though the franchisee paid for its own waste removal.

[28]          Once the alleged overpayment was brought to its attention, Country Style initially claimed a set off for CAM and taxes overpaid, as against the landlord. It now states, however, that it is satisfied with the landlord's reconciliation and does not contest the landlord's figures. The landlord asserts that the overpayment has not been proven. From the plethora of correspondence regarding this, I have no difficulty in finding that more likely than not, the franchisee ought to have paid 13.747 percent of the entire plaza's CAM and taxes for the year 2000 and following, and not close to 41 percent.

[29]          In making this determination, I accept the evidence of Mr. Mesic, clearly supported by the documentation, that the opening of the restaurant was delayed for 3 days until he received assurances, through his solicitor, that the CAM and taxes would be approximately $1,850 per month. I also accept Mr. Mesic's testimony that he met with Garry Macdonald, the president and CEO of Country Style at the time, who represented that those charges including taxes would be about $1,850 per month and that the payments would decrease once the other tenants moved in. Country Style's Rent Projection dated November 19, 1997 indicates CAM of $5,000 and taxes of $12,000 (though there is a handwritten notation added that this is "too low"). Prior to closing, the franchisee's solicitor wrote to Country Style requiring a breakdown of the common area maintenance cost. At the time, he noted that Albert Lam of Country Style had suggested the purchasers budget $17,000 for taxes notwithstanding that his experience in the area propelled the view that taxes would only approximate $11,000 or $12,000 per year.

[30]          In responding correspondence dated July 22, 1998 Country Style confirms that:

[31]          The Statement of Adjustments calculated CAM/Realty taxes on the basis of $2,000 per month.

[32]          The overpayment, rounded off, is found to be in the sum of $12,000 as claimed by the defendants. Subject to a final accounting, this sum is to be notionally offset against any amounts agreed to be owing by the franchisee to Country Style.

[33]          The franchisor claims monies due and owing to it by the franchisee in the sum of $219,314, including $147,800 for which judgment was granted by Gans J. The defendants contend that Country Style's damages have been fully mitigated by its takeover of the restaurant operation.

[34]          In Toronto Housing Co. Ltd. et al v. Postal Promotions Ltd. (1982), 1982 CanLII 1982 (ON CA), 39 O.R.  (2d) 627 (C.A.), the tenant wrongfully repudiated a commercial lease and the landlord elected to terminate it, retaining the right to sue for rent accrued and damages for breaches of covenants to the date of termination. The sole issue on appeal concerned the landlord's right to the increased value of a subsequent lease without this being applied in mitigation of its damages. The Court of Appeal upheld the trial judge's holding that the re-letting was on the landlord's behalf so that rentals received from the new tenant were to be applied in mitigation of the landlord's claim. In doing so, Lacourciere J.A. enunciated the following principle at p. 629:

[35]          In this case, the franchisor's legal representative, Michael Cascone, valued the Overlea franchise as being worth at least $320,000. Country Style has the benefit of this asset previously paid for by the franchisee. The defendants vacated the premises in accordance with the order of Mr. Justice Gans and they left the premises clean, fully staffed and fully operational. Country Style took possession of the leased premises and is running the store as a corporate enterprise, pending its sale to another purchaser/franchisee.

[36]          The value of the franchise to Country Style fully covers the judgment and any further amounts reasonably found to be due and owing to it. Even when certain fees paid by the landlord are considered, there is a net surplus in its favour, of about $40,000, without taking into account the projected increase in the present value of the franchise or the overpayment of CAM and taxes discussed above. This places the franchisor in a better position than it would have been in had all of the covenants been performed by the franchisee. The franchisor has, in effect, been made whole. The reclaiming of the premises fully mitigates Country Style's claim against the defendants.

[37]          Accordingly, the stay of execution in the order of Justice Gans is hereby made permanent; and Country Style's claim for damages in the main action is dismissed.

[38]          The defendants' counterclaim forms the root or heart of this action. Damages are claimed in the amount of $1 million against both Country Style and the landlord on the basis of breach of contract, breach of duty and misrepresentation against Country Style; and allegations of deceit and misrepresentation against the landlord. Country Style denies liability and seeks contribution and indemnity for any proven damages from the landlord. The landlord denies that it was required to build the shopping centre pursuant to the original site plan or that the franchisee has sustained any damages.

[39]          I will briefly summarize some of the main areas of law that are relevant to this case. First, the tort of negligent misrepresentation is an established principle of Canadian tort law. The five general requirements for a successful claim are:

[40]          In the franchising context, the case law imposes a duty of utmost good faith on the franchisor though the relationship between the parties to a franchise agreement is not a fiduciary one. Jirna Ltd. v. Mister Donut of Canada Ltd., 1973 CanLII 31 (SCC), [1975] 1 S.C.R. 2. Fleury J. described the nature of the duty in Perfect Portions Holding Co. v. New Futures Ltd. [1995] O.J. No. 2113 (Ont. Gen. Div.) at p. 4:

[41]          Rescission is a remedy which effectively treats the contract as a nullity and its effect is to return the parties to their pre-contractual positions. In equity, it is well settled law that an innocent misrepresentation may provide a right to rescission. See Ballard v. Gaskill 1955 CanLII 274 (BC CA), [1955] 2 D.L.R. 219 (B.C.C.A.); Prather v. King Resources Co. (1972) 1972 ALTASCAD 89 (CanLII), 33 D.L.R. (3d) 112 (Alta. Sup. Ct. (A.D.)). At common law, an innocent misrepresentation will not enable a party to a rescission-like remedy unless the misleading statement can be regarded as a term of the contract.

[42]          The case of Goldstein v. Davison [1994] O.J. 1018 (Ont. Gen. Div.) involved the sale of land and the failure to disclose when it was discovered that the property was subject to a heritage designation. The court found that the failure to make the disclosure constituted a misrepresentation. Since there was no intention to deceive, the court termed the representation an innocent one, but quoted Lord Herschell in Derry v. Peek (1889), 14 App. Cas. 337 (H.L.) at page 359:

[43]          The franchisee also claims that the alterations derogated from that which was granted to it in the lease. In Langley Ltd. v. Lawrence Manor Investments Ltd. [1960] O.J. No. 288 (Ont. H.C.J.), the plaintiff successfully argued that alteration to a site plan by erecting a store on the parking area deprived it not only of the parking area on which the building stood, but it also decreased the parking facilities for Langley's customers. This constituted a breach of the lease provisions and a derogation of the lessee's rights.

[44]          In such circumstances, the often-cited words of Mr. Justice Falconbridge in the case of Ellis v. White, O.W.R., 1908, are apt:

[45]          In his publication on franchising, Edward N. Levitt describes the rationale underlying the commercial lease arrangements in a typical franchise, in part , as follows:

[46]          The learned author proceeds to explain some of the complexities of the tripartite contractual model, particularly when disputes arise between the franchisee and the landlord:

[47]          Turning to the five requirements for a claim based on negligent misrepresentation, the first issue is whether the franchisee was owed a duty of care by the franchisor and/or the landlord. The relationship of franchisor to franchisee is a complex one. The franchisor's duty of care, the duty to act in good faith, while not elevated to the status of a fiduciary, speaks to concepts of loyalty, respect and fair dealing.

[48]          Initially, both Country Style and the franchisee articulated a firm resolve against the landlord's unilateral changes to the site plan. In fact, Country Style wrote to the landlord on July 9, 1999, demanding that all construction and addition to the development be completed according to the site plan. This appears to have influenced the landlord to take certain steps to ameliorate some of the effects of the construction, such as reopening the west entrance to make the roadway passable during construction. But, this occurred at the embryonic stage of the development; and Country Style never followed through on its threats to commence legal action in the event the landlord did not comply with its other reasonable requests. In an attempt to explain this, Country Style says that injunctive proceedings would have been unsuccessful. That is not at all clear on the record. It then says that its indignation related only to the matter of the construction phase of the development and not to the actual alterations in the site plan. What then did Country Style mean by its demand that all construction and addition to the development be completed according to the site plan?

[49]          It appears that somehow the franchisor changed its position in mid-stream and decided to side with the landlord. In my view, in its dealings with the franchisee, Country Style resembled a wolf dressed in sheep's clothing. Its actions displayed a superficial seductiveness. It says it remained supportive of the franchisee and open to all eventualities. At the same time, it asserts that "it was not incumbent on or the responsibility of Country Style to gather evidence on behalf of the franchisee". Maybe not, but its actions displayed a perplexing array of contradictory messages. In the end, it failed to support the franchisee and it attempted to walk the fence between the franchisee and the landlord.

[50]          Indeed, the totality of the evidence propels the conclusion that Country Style turned its back on the franchisee when the latter needed it most. For whatever reason, it did not deal with its own franchisee in good faith.

[51]          What was the landlord's  part in all of this? Despite the lack of contractual bonds between them, was there a duty of care owed by the landlord to the franchisee?

[52]          The Supreme Court of Canada set out the proper analysis for this determination in Hercules Management Ltd. v. Ernst & Young, 1997 CanLII 345 (SCC), [1997] 2 S.C.R. 165 adopting the two-part test enunciated in Anns v. Merton London Borough Council, [1978] A.C. 728 (H.L.) and restated in Kamloops (City) v. Nielson, 1984 CanLII 21 (SCC), [1984] 2 S.C.R. 2 at pp. 10 and 11. The first issue is whether there was a sufficiently close relationship between the parties that in the reasonable contemplation of the defendant, carelessness on its part might cause damage to the plaintiff. The second issue revolves around the considerations, if any, which might negate or limit the scope of the duty.

[53]          In Hercules Management Ltd., supra, at p. 200, La Forest J. elaborated on the first branch of the Anns/Kamloops test, as follows:

[54]          In addressing the second or policy considerations branch of the test, the learned judge stated, at p. 192:

[55]          In this case, the landlord possessed special and unique knowledge of the circumstances underlying the proposed changes. As early as 1997, concerns had been expressed about the viability of the site plan for the development of the property. As a result, the landlord solicited a proposal for a revised site plan with a new and "more saleable" configuration of the property. Armed with this knowledge, it, nevertheless, forged ahead and finalized the head lease in accordance with the initial site plan drawings. All the while, the landlord knew that the premises would be sublet to a franchisee; and moreover, that the sublease would incorporate the provisions in the head lease, including the drawing of the site plan.

[56]          When asked about these matters, Barbara Barkin, the landlord's leasing manager, engaged in this exchange:

[57]          In my view, the landlord ought to have foreseen that the franchisee would reasonably rely on its representation contained in the original site plan for the development of the property. A special relationship of proximity existed between the landlord and the franchisee. The landlord must have known that carelessness on its part in the withholding of relevant information might cause damage to the franchisee. I find in the circumstances that the landlord had a duty to the franchisee that obliged it to be accurate regarding the site.

[58]          The scope of the landlord's liability is circumscribed by the class of persons seeking to lease or sublease the premises. No collateral considerations arise which would limit the scope of its duty.

[59]          It is common ground that the examination of the site within which franchised premises will operate constitutes  an essential component of a franchising decision. Unfortunately, the information provided to the franchisee did not portray the true picture of the proposed development sufficient for the franchisee to make an informed decision. The information contained in the site plan was inaccurate, untrue and misleading.

[60]          The wheels were set in motion for the new development of the property at the same time negotiations were being conducted with the franchisor and months before the franchisee entered into the sublease. Consultants, planners and architects were retained. The necessary plans, documents and approvals were ordered. By attaching the initial site plan as a schedule to the head lease without advising the franchisor (and through it, the franchisee) of its intention to revise the plan, the landlord acted carelessly and in a negligent manner.

[61]          The franchisor was unaware of the inaccurate and misleading nature of the site plan attached as Schedule A to the sublease. Nevertheless, this formed a critical element of the commercial lease, making the misrepresentation, though innocent, significant.

[62]          In determining that the franchisees placed reliance on the site plan, I take particular note of the following:

[63]          The defendants, Marc Mezic and Zeljko Vukovic, each gave their testimony in a consistent and forthright manner. I found them to be exceptionally credible witnesses. I accept their testimony which, in many respects, remains undisputed. I find that they relied on the initial site plan and further, that they would not have entered into the franchise or lease agreements had they been shown a copy of the revised site plan at the relevant time.

[64]          The final element in a claim based on negligent representation is that of detrimental relevance. Did the franchisee sustain damages as a result of the representation?

[65]          During the first six months of operation, sales at the Overlea location began to escalate. According to the franchisee, a large portion of business had emanated from truckers who generally entered the plaza from the Thorncliffe Park entrance at the northwest corner of the property. Mr. Vukovic testified that three or four trucks were constantly parked in the lot behind the restaurant. His motto in managing the business was to be "clean, outgoing and get to know the customers".

[66]          When Tim Hortons opened in December 1998 about a kilometre away, Country Style's sales reduced slightly and then began to recover. In the first year of operation, sales approximated $570,000 in line with expectations and the defendants' previous experience. Inspection reports from the Ministry of Health and Country Style's head office consistently rated the store as exemplary in all categories of quality, service, cleanliness and operational standards.

[67]          The construction began in July 1999 and lasted about 9 months. Both defendants described in detail the inconvenience, congestion and chaos it caused. "It's like a zoo," they complained. More importantly, the franchisee's sales failed to increase as had been expected. Sales "froze" and then remained flat after the construction until the franchisee's sublease was terminated in February 2002.

[68]          The franchisor and the landlord take the position that there were no long-term detrimental effects to the defendants' business as a result of the changes to the site. Howard Weinberg assisted in the development of the new plan and surmised that the changes would not impact on the business of Country Style.  According to Clifford Korman of Kirkor Architects & Planners, who amended the plan, the new route was "straighter, more identifiable and safer"; and it better exposed the Country Style drive-thru location.

[69]          Geri Kozorys-Smith, transportation engineer and planner, expressed the view that the changes would not be detrimental to the franchisee's business. However, in cross-examination, she observed that generally a wider road is more conducive to the manoevring of cars, and that in a strip mall, the tenants themselves generate traffic and increase congestion.

[70]          Myrlene Boken, retail planner and research consultant, confirmed the defendants' contention that one cannot see the Country Style restaurant upon entering the shopping centre from the Thorncliffe entrance. Though the traffic studies she obtained from the City demonstrated "low truck volume" in the area, she was unaware of the definition of "truck" or what was included in this category. In cross-examination, she agreed that a good portion of the coffee shop business would emanate from the industrial area to the north of the plaza -- the very area the defendants claim was closed off and most affected by the changes.

[71]          The reports submitted on behalf of the franchisor and the landlord posed inconsistent theories and often exhibited confusion about what was good for the landlord in general and what was good for this particular tenant and the Country Style enterprise.

[72]          I prefer the evidence of the defendants' expert, Richard Talbot, real estate consultant, to that of the other experts who testified at trial. Mr. Talbot gave his evidence in a more thorough, detailed and consistent manner He viewed the site from a people-oriented perspective and discussed issues of visibility and access from the consumers or shoppers' point of view. Noting that the change in demographics and the tighter turn made it more difficult for large cars or trucks to manoevre, he termed the new configuration created by the back-to-back strip malls as  "potentially dangerous" and the northwest corner of the mall as "chaos corner". The decrease in visibility to Country Style from the Thorncliffe entrance and the placement of the retail stores with their parking facilities combined to severely impede access to Country Style's drive-thru and restaurant from the Thorncliffe Park Drive entrance. The new configuration, he stated, "almost screens the access through the drive-in", making it less attractive for Country Style customers.

[73]          Moreover, the detrimental effect of this was reflected in the sales records for the store. "I have never seen a sudden stop in sales at the end of the first year of operation and then go totally flat." After conducting a rolling 12-month sales analysis of the drive-thru and other Country Style sales at the Overlea location, he concluded that the construction carried out by the landlord "has had a significant negative impact on the growth of the Tenants' business both during and after construction. This impact was so severe that the Tenants were unable to make their location economically viable."

[74]          Mr. Talbot's expertise in the area was self-evident. He presented as an able and knowledgeable witness. I accept his evidence and find in all the circumstances that the changes made to the site plan and then to the shopping centre mall had a serious detrimental effect on the defendants' business both during and after the construction phase.

[75]          The franchisee also alleges that the actions of the franchisor and the landlord constituted a derogation of grant and a breach of contract on the part of the franchisor.

[76]          Counsel for the landlord cited a number of cases involving breaches of the covenant of quiet enjoyment which have marginal, if any, relevance to the facts here. According to the landlord "nothing in the lease requires the landlord to build in accordance with the site plan" and thus, there can be no derogation of grant. The franchisor joins in this submission. I respectfully disagree. In a real sense, the lessee leased not only the restaurant premises but the premises in the context of the entire mall as outlined in the site plan. If the landlord wished to retain the right to change its configuration of the site, it was incumbent upon it to reserve that right in the lease.

[77]          As it is, the head lease defines the "Leased Premises" as "the Land and Building"; and "Lands" includes,

[78]          The part of the site plan outlined in blue encompasses the entire shopping centre.

[79]          In passing, I note the incongruity for the landlord to charge additional rent to the lessee based on its percentage of the entire shopping centre; and then to argue that the changes to the site plan which directly affect the defendants' drive-thru, do not comprise part of the demised premises. In my view, the overall configuration of the shopping centre premises as shown in the initial site plan was endemic and integral to the grant. It provided the contextual underpinning for the lease transactions.

[80]          I find that the various elements of the new configuration – the change in access, the narrower entrance, the strip malls as opposed to the L-shaped retail commercial building, the nature of the new tenancies, the increase in the traffic and congestion, the decrease in visibility to Country Style, individually and collectively constituted a derogation from the grant. The fact that the franchisee made a valiant attempt to continue its business after the breach, is irrelevant. It never at any time endorsed the landlord's actions or waived its right to claim damages.

[81]          By its counterclaim, the defendants claim for lost profits and the alleged diminution in the value of the franchise. The franchisor and the landlord deny that the franchisee sustained any damages; or, if they did, these were not, they contend, causally connected to the site plan revisions.

[82]          The starting point for the assessment of the defendants' losses is Exhibit 8 in which the franchisee's bookkeeper and accountant, Albert Schwartz of Schwartz and Company, Chartered Accountant, with the input of Mr. Mesic, estimated the projected financial losses to the business over the years the franchise operated. In doing so, the franchisee's experience at the Country Style Donut franchise located at the airport (the Airport location) was used as a template to assess the amount of sales that would likely have enured to the business, absent the reconfiguration of the plaza.

[83]          The resulting analysis of the financial statements demonstrated the percentage of wages to sales at the Airport location for the years 1998, 1999, 2000 and 2001 as being 21.1%, 24.5%, 18.5% and 15.9%, respectively, with net profit ranging from $94,270 to $176,955. For the Overlea location, Mr. Schwartz started with sales in the first year of operation totalling $570,673 and added 20% the following year and a 10% increase each year thereafter. According to Mr. Schwartz, in comparison with the Airport location, this is a fair and reasonable projection. It indicates a conservative approach to the determination of loss.

[84]          The defendants' damage claim is categorized under three heads of loss: actual losses to October 31, 2001, loss of capital and lost profits.

[85]          Taking the Airport location as a benchmark, the cumulative deficit to October 31, 2001 amounted to $207,341. The net book value of the depreciated capital assets and other assets (the franchise fee), totalled $158,669 and $29,065 respectively. Accordingly, the first two components of actual loss and loss of capital to the franchisee approximate the sum of $395,075.

[86]          In addition, the projected loss of profit based on exhibit 8 for the years 2000 to 2002, was the sum of $243,624. The defendants also contend that since a franchise is valued by Country Style at 60% of gross sales, if the sales had increased as expected to $800,000, they actually sustained an additional notional loss of $160,000. Their claim totals the approximate sum of $800,000, including the alleged loss in the value of the franchise.

[87]          As previously noted, the franchisor took possession of the premises in 2002 and has been operating the Overlea franchise as a corporate enterprise since that time. It has entertained two offers to purchase the franchise but the transactions were aborted for various reasons. By all accounts, the franchise as an asset has either retained or increased its value since July 1998 when the defendants purchased it.

[88]          The franchisor and the landlord table three main arguments to support their joint submission that damages have not been proven. In general, they attribute the less than expected sales performance of the restaurant to the corporate problems of Country Style and to the Tim Hortons and Wendy restaurants which opened in December 1998. They also deny that there is a nexus or causal connection between the losses and the reconfiguration of the plaza.

[89]          In conjunction with Country Style's corporate insolvency, a number of undesirable franchised locations were shed as part of a restructuring plan in order to save the core business and make Country Style a more profitable enterprise. Each franchise constitutes an independent business. By all accounts, the Overlea location was amongst the strong and desirable store locations. There is no evidence that the CCAA application, in itself, caused or contributed to the franchisee's loss of profits.

[90]          It is not disputed that Tim Hortons dominates about 50% of the Canadian coffee market. The expert evidence called by the landlord demonstrated that, at the location in question, its sales escalated to $1.8 million over the period between 1999 and 2001.

[91]          By contrast, the annual sales for the Overlea franchise were as follows:

[92]          Country Style's monthly sales figures, however, display what was described as a "slight negative impact" on sales when the Tim Hortons store first opened in December 1998, followed by a recovery in sales on a fairly steady basis until July 1999. As noted by Mr. Talbot, Country Style was building sales from a local area customer base. The real decline in sales took place in 2001 after the site was modified and the other leased businesses were operational, rather than after the opening of Tim Hortons.

[93]          Tim Hortons is not visible from Thorncliffe Park Drive or from the Overlea mall site. It is located about 1 kilometre west of the site along Overlea Boulevard. In the circumstances, the entire decline or "flattening" in the franchisee's sales in 1999 and following cannot be attributed to the competition. If that were the case, there would have been no increase in Country Style's sales in the months after the opening of Tim Hortons and prior to the commencement of the construction at the Overlea mall.

[94]          Finally, the position that there is no nexus between the construction and the losses does not hold water. The evidence demonstrated a consistent and steady rise in monthly sales with some interruption, to July 1999. After the construction commenced in July 1999, sales became flat. In fact, the business was never able to surpass the $600,000 level of sales. By all accounts, this would be "irregular" and not in accordance with the reasonable expectation of the parties. In Mr. Talbot's view, but for the construction which negatively impacted the one-third component of the business emanating from the industrial park to the north, Country Style's sales would have increased by another $200,000 to $300,000. As it was, the sales, after being disrupted by the construction, "never came back".

[95]          There is, in my view, a direct nexus between the "loss" in sales, that is, the failure of sales to incur a steady incline, and the substantial changes made to the site. Those changes may have enured to the benefit of the landlord and the other tenants, but they had a clear and detrimental impact on the franchisee's business.

[96]          The defendants committed themselves to the Country Style Donut franchise family with energy, loyalty and commitment. Mr. Vukovic, who managed the business on a day-to-day basis, was an exceptionally hard worker. He kept the restaurant open for long hours; he ensured that it was spotless and welcoming. He sat and "schmoozed" with the customers; in the first year of operation, he came to know many of the truckers and the restaurant's regular customers on a first-name basis. In this way, he cultivated a steady clientele. He was, therefore, well positioned to observe first-hand, the effect of the alterations to the site and the franchised business. He reported in detail the sudden stagnation of business, the loss of truckers and the chaos caused by the construction and the new configuration of the plaza. I found his evidence to be consistent and compelling.

[97]          In all of the circumstances, I find that the franchisee would likely have realized a reasonable level of profit if it were not for the unilateral changes made by the landlord. As it was, the landlord's actions had a serious detrimental impact on the franchised business.

[98]          I also find that the misrepresentation pertaining to the site plan, whether innocent or negligently made, represented an essential term of the franchise and sublease agreements; and that the defendants would not have entered into the agreements had they known about the revised site plan. This entitles them to rescission - like remedies in order to make them "whole"; more specifically, they may claim damages for all amounts expended or lost in connection with the franchised business. The case of Highway Properties Ltd. v. Kelly, Douglas & Co. Ltd., 1971 CanLII 123 (SCC), [1971] S.C.R. 562 at 576 and many cases since, specifically preserve for the parties to a commercial lease the "full armoury of remedies ordinarily available to redress repudiation of covenants". The measure of damages is not limited by the election of remedy.

[99]          However, in calculating the loss to the franchisee, certain contingencies must be taken into account, as practical elements of reasonable commercial reality. First, some degree of business disruption may have resulted from the construction of the L-shaped building in any event. Second, consideration must be given to the impact of Tim Hortons and other market variables, even where proven not to be substantial or directly attributable to the loss. Third, the effect of Country Style's reported insolvency on the business cannot be totally discounted.

[100]      Moreover, I reject the franchisee's claim for the alleged lost value of the franchise. The evidence to support its contention of an increase in the value of the underlying asset, is weak. Once the franchisee lost possession of the premises, it lost the right to claim for future increases. The franchisee cannot claim both the loss of value of the franchise and loss of profits.

[101]      Assessing damages in this situation is hardly an exact science. The practical purpose of a damage award must be to restore the aggrieved party to the position it would have been in had the breach not occurred or the misrepresentation been made. Taking all of the circumstances into account with an eye to the jurisprudence, I assess the defendants' damages in this case, at the sum of $400,000.

[102]      When Edward Levitt observed that the head lease/sublease arrangements in the franchising model permitted a franchisor to "gain some advantage in any possible dispute with the franchisee", he knew whereof he spoke.

[103]      This is one of those situations in which both the franchisor and the landlord used the tripartite arrangement to gain an advantage over the franchisee. The landlord surmised that it could act unilaterally to its own benefit with total disregard for the franchisee and the effect that its misleading, inaccurate information and unauthorized actions would likely have on it.

[104]      When the ship began to sink, the franchisor left its charge afloat in turbulent waters, without a life jacket. In response to the franchisee's initial desperation, and with a spasm of energy, Country Style did extend a helping hand, but it failed to pull the floundering swimmer to safety.

[105]      Due to its own tenacity, the franchisee managed to survive the flood and reach the shoreline. It was, however, left in a shivering state, vulnerable and uncertain about its future. The resulting divorce has not been a pleasant experience for any of the parties.

[106]      The claim of the plaintiff/franchisor is dismissed. The stay of execution of the judgment rendered by Gans J. on February 5, 2002 is hereby made permanent.

[107]      With respect to the counterclaim, Country Style and the landlord, defendants by counterclaim, are jointly and severally liable to the franchisee/plaintiff by counterclaim in the amount of $400,000. The monies held in trust may be returned to the franchisee in partial satisfaction of this judgment.

[108]      The defendants/plaintiffs by counterclaim are entitled to their costs of the claim and counterclaim on a partial indemnity scale subject to further submissions, if so advised. If unable to agree, I will entertain counsel's written submissions on costs within four weeks of the release of these reasons.

[109]      May I take this opportunity to express my appreciation to all three counsel for their thorough and able presentations.