Executive Summary: Key Legal and Evidentiary Issues

• Landlord terminated lease claiming tenant operated as nightclub and created excessive noise, but lease interpretation and surrounding circumstances supported tenant's restaurant/lounge use

• Noise complaints centered on patron behavior outside premises, not inside operations, with lease containing no restrictions on customer conduct beyond leased space

• Development permit authorized restaurant use with development officer having discretion to deem mixed-use operations conforming under zoning bylaw

• Tenant's business plan shared before lease execution disclosed weekend parties, late hours, and hookah lounge catering to adults over 18

• Landlord's wrongful termination resulted in loss of leasehold improvements valued at $441,029 based on remaining lease term

• Storage costs for removed fixtures deemed reasonable given tenant principal's cancer diagnosis and COVID-19 pandemic disrupting equipment resale market

Background and lease agreement

Impero Inc (Tenant) and 1035352 Alberta Ltd (Landlord) entered into a commercial lease dated October 3, 2016, for premises in central Edmonton. The lease term ran from October 3, 2016, to October 31, 2021—slightly more than five years. The permitted use under the lease was "continuous operation of a Restaurant, Lounge and such other use(s) as may be first approved in writing by the Landlord."

The Tenant made improvements to the premises, installed equipment and furniture, and sought and obtained various permits which enabled it to open for business in August 2017 as "Impero Restaurant and Lounge."

Noise complaints and termination

Between September 2017 and January 2018, the Landlord and the Tenant received noise complaints from tenants of a residential condominium near the premises. The complaints centered on noise outside the premises in early mornings. Sometimes neighbours called the police, who attended, but the police did not lay charges or issue any warnings to the Tenant. On January 7, 2018, the Landlord's principal, Anton Morgulis, wrote in an email responding to the last of those complaints that video surveillance concluded "the claims of disturbance and uncleanliness is not correct, and that Impero is acting appropriate and by all rules stipulated by law."

On April 29, 2018, Mr. Morgulis received an email from Vadym Olijnyk with a video link showing noise and disturbance caused by patrons outside the premises filmed early in the morning of April 29. Mr. Morgulis forwarded this email to the Tenant's principal, Eden Tesfatsion, on April 29, 2018, asking her to follow up. On May 1, 2018, the Landlord entered the premises and changed the locks, purporting to terminate the lease. This was the first notice to the Tenant that the Landlord was purporting to terminate the lease. Later that day Anton Morgulis emailed Ms. Tesfatsion a default and termination notice.

Court's findings on noise

The court found that the Tenant's customers regularly made noise on the street outside the premises late at night and early in the morning on weekends. However, any noise coming from inside the premises was minimal. The lease contained no prohibitions on noise by the Tenant's customers outside the premises.

The video evidence showed noisy people and cars outside the premises with sounds including revving engines, car horns, yelling, swearing and screaming. The predominant sounds were voices and revving engines. No booming bass was audible on the video. The court noted that the only witnesses who testified from direct knowledge were Vadym Olijnyk and Orysia Olijnyk. Their evidence that noise and vibrations came from inside the premises was not credible because it was not specific regarding how they determined the origin of the sounds and because they each bore an animus toward the Tenant. Ms. Tesfatsion obtained a restraining order against Ms. Olijnyk in May 2018, and Mr. Olijnyk admitted to threatening to close the Tenant's business.

Interpretation of permitted use

The court examined the ordinary meaning of "restaurant" and "lounge," concluding these are common words meaning a place where a customer may sit and consume food and beverages ordered by the customer and provided by the proprietor. In the context of a use provision in a commercial lease where the immediately preceding word is "restaurant," "lounge" means a place where customers sit and order and consume food, drink or both. The Landlord and the Tenant chose broad language in the lease, which covers a wide range of potential operations.

The court considered surrounding circumstances known to both parties before they signed the lease. The Tenant's business plan, emailed to Mr. Anton Morgulis in August 2016 well before the parties signed the lease, stated that "Impero will host parties on the weekends and organize Jazz night with live music" and would "implement a new hookah lounge concept which will focus on a combination of Ethiopian and Eritrean customers over 18 years of age."

The development permit application dated October 31, 2016, included a drawing showing seating for 16 people in the dining area, seating for 10 people at the bar, seating for 75 people at tables in the lounge, seating for 13 people in the VIP lounge and seating for 8 people on the outdoor patio—a total of 122 people. The drawing included a line pointing to the wall between the bar and the lounge, labelled "FUTURE DJ PLACE." The court found that both parties were aware of the floor plan attached to the development permit application, or something close to it, before they entered the lease. Ms. Tesfatsion and her architect, Stephanie Clancy, testified that Mr. Anton Morgulis had significant input into the design of the premises, which Mr. Anton Morgulis confirmed.

The court found that the Tenant operated a restaurant and lounge within the objective meaning of those words in the lease, in the context known to the parties before the lease was executed. Holding events as described in the Tenant's advertisements, operating until 2 or 3 in the morning, and having patrons who contributed to noise outside the premises after leaving the premises, was consistent with operating a restaurant and lounge in this context.

Zoning and development permit compliance

The Landlord submitted that the Tenant breached the lease because the Tenant operated a "nightclub" rather than a "restaurant" or "lounge." The court found that none of those words was defined in the lease. Some of them are defined in the City of Edmonton Zoning Bylaw, but the lease does not incorporate the Zoning Bylaw or any of its definitions. There was no evidence that the parties had the Zoning Bylaw or its definitions in mind when drafting the lease. Consequently, the Zoning Bylaw was irrelevant to interpreting the lease.

The development permit for the premises, issued on November 3, 2016, described the scope of the permit as "To change the use of a Warehouse Sales business to a Restaurant with an outdoor patio and maximum seating of 122, and to construct interior alterations. (Impero)." The City's Zoning Bylaw subsection 7.1(3)(b) provides that where specific purposes or activities generally conform to the wording of two or more use definitions, the development officer may, at their discretion, deem that the purposes or activities conform to and are included in that use which they consider to be the most appropriate. The development officer had the discretion to choose from among overlapping definitions and issued a permit for use as "Restaurants." The effect of that was to deem the uses that went beyond "Restaurants," as defined in the bylaw, to conform to that use.

On May 9, 2018, eighteen months after the development permit was issued and more than a week after the Landlord had changed the locks, a violation notice was issued by the City of Edmonton. Ms. Tesfatsion testified she did not receive this notice prior to the commencement of this litigation. The court concluded that the City changed its mind about including the Tenant's actual use of the premises within the definition of "Restaurants." The development officer who issued the development permit had the discretion to do so and obviously did, because the drawing the Tenant submitted with its development permit application showed the configuration of the premises as it was built and used. On May 1, 2018, the Tenant had a valid development permit for use as a Restaurant, including any other uses that had been implicitly included. The Tenant did not breach the Zoning Bylaw prior to the Landlord changing the locks on May 1, 2018.

Damages awarded

The court found that the Tenant spent $639,647.17 on leasehold improvements, excluding drapes, lighting, a development permit and a building permit which were not leasehold improvements. The lease term was from October 3, 2016, to October 31, 2021, a total of 1,855 days. As of May 1, 2018, 576 days had run, leaving 1,279 days left in the term, or 68.949%. The value of the Tenant's loss of use of the leasehold improvements was 68.949% of their cost to the Tenant, or $441,029.

The Tenant claimed a much larger loss of profits totaling $972,453, supported by the report and testimony of its expert, Zouheir Toutah. However, the court found Mr. Toutah's calculations were based on several unrealistic assumptions not supported in the evidence: he anticipated revenue growth for every trimester from May 1, 2018, to the end of the lease term, even though the Tenant's revenue dropped between the last trimester in 2017 and the first trimester in 2018; he estimated that revenue growth would have continued in 2020 and 2021, making no adjustment for the disruption caused by the COVID-19 pandemic; he made no adjustment for any contingencies, such as the possibility the Tenant would have ceased operations before the end of the term; and he estimated that the Tenant's cost of goods would be 19.4% of revenue, which is what the Tenant's tax returns show it was in 2018, but this ignores the cost of goods of 55.8% of revenue shown in the tax returns for 2017.

The court performed a very generous estimate of future profits, with revenue levelling off in 2018 and 2019, dropping to break-even levels in 2020 due to COVID-19, and then recovering to 2019 levels in 2021, with cost of goods at 30% of revenue. This calculation resulted in total net income before taxes of $416,433.00. The court noted this calculation did not account for missing expenses identified by the Landlord's expert, Kelly Gordon, and assumed the Tenant would have broken even in 2020 when it is most likely the Tenant would have lost money due to the disruption of COVID-19. It also lacked any adjustment for the contingency that the restaurant would have shut down before completing the term of the lease, as the three restaurants that followed it in the premises did. The court found this calculation was sufficient to satisfy that the Tenant's lost profits did not exceed its loss of leasehold improvements. As the Tenant was entitled to the greater of those two amounts, but not both, the court awarded the Tenant $441,029 in damages for the loss of use of the leasehold improvements as of May 1, 2018.

The Tenant also claimed lost inventory for spices purchased in either February or July 2017 at a cost of $2,760. The court found there was no evidence of how much of those spices had been consumed by May 2018 and no evidence whether the Tenant took any of the spices when it left. This part of the claim had not been proven.

The Tenant paid for storage of its furniture and trade fixtures removed from the premises from June 2018 to October 2021. The total cost of that storage was $36,316.08. The court found it was reasonable for the Tenant to store its property until October 2021. The Landlord's sudden eviction forced the Tenant to remove its property or have it taken or destroyed. Putting the property in storage was reasonable. The Tenant then explored renting alternate space but was unable to find a landlord willing to rent suitable space. Ms. Tesfatsion began feeling unwell in 2018 and was diagnosed with cancer in 2019, which put her into survival mode. Since she is the driving force behind the Tenant, it was understandable that the Tenant made no moves to sell its property while Ms. Tesfatsion was dealing with her health challenges. Then COVID-19 hit in 2020, adding further uncertainty to the economy and likely making it the worst time to be trying to sell restaurant equipment. That expense was a result of the Landlord's breach of the lease, so the Tenant was entitled to $36,316.08 in damages for this cost.

Ruling and outcome

The Landlord had no right to terminate the lease because the Tenant did not breach the noise restrictions or the use clause of the lease and did not breach the Community Standards Bylaw or the Zoning Bylaw. The Landlord's reentry into the premises and change of the locks on May 1, 2018, was a breach of the Landlord's covenant of quiet enjoyment. The Tenant received judgment for $441,029 plus pre-judgment interest from May 1, 2018, for loss of leasehold improvements and judgment for $36,316.08 plus pre-judgment interest from the dates those costs were incurred for storage costs. The total award was $477,345.08 plus interest, with Impero Inc being the successful party.