Executive Summary: Key Legal and Evidentiary Issues

• Validity of the landlord’s default and termination notices under the commercial lease when they were misaddressed and not properly brought to the tenant’s attention
• Compliance with specific lease provisions (including the notice, default, re-entry and termination clauses) before a landlord can lawfully terminate a commercial tenancy
• Impact of delivering notices to a franchisee and its director, rather than to the named tenant, on the enforceability of lease remedies
• Role of a broader franchise dispute and the conduct of the franchisee and its principal in withholding critical information from the franchisor
• Judicial discretion in allocating costs where the tenant was successful on the application but had failed to pay rent
• Appellate review of both the substantive lease issues and the costs order, and whether any error justified intervening in the lower court’s decision

Factual background

Mr. Zagros Management Inc. (“Mr. Zagros MI”) is a franchisor that operates a chain of Mr. Zagros restaurants. It was the named tenant under a commercial lease for premises in a Newmarket, Ontario shopping centre (the “Leased Premises”), with Yulee Developments Inc. (“Yulee”) as landlord. Under the terms of this lease (the “Lease”), Mr. Zagros MI owed rent directly to Yulee.
The restaurant at the Leased Premises was operated day-to-day by 11254316 Canada Inc. (“112”), which was a franchisee of Mr. Zagros MI. There was no lease between 112 and Yulee. Instead, the franchise agreement required 112 to pay the rent for the Leased Premises directly to Yulee, even though the tenant of record remained Mr. Zagros MI.
The sole director of 112 was Shadi Zamani. In the franchise agreement, she was identified as the “Indemnifier” and signed an indemnity in favour of Mr. Zagros MI guaranteeing that 112 would promptly and punctually fulfill its obligation to pay rent. Separately, she also entered into an indemnity agreement with Yulee, guaranteeing “all amounts payable” under the Lease by Mr. Zagros MI, the tenant. Later, a new company controlled by her, 1000884194 Ontario Inc. (“194”), would become relevant when Yulee re-leased the premises to it.
Within this structure, 112 failed to pay the rent for March 2024 and did not inform Mr. Zagros MI about the missed payment. This non-payment set in motion Yulee’s efforts to enforce its rights under the Lease and ultimately to terminate the tenancy.

Lease provisions on default, re-entry and termination

The Lease gave Yulee powerful but structured remedies in the event of default. One key provision, s. 14.1(a), required that before Yulee could rely on a rent default, it had to give the tenant five days’ written notice of the tenant’s failure to pay any minimum or additional rent on the due date. This clause effectively built in a short grace and warning period in which the tenant could cure the arrears.
Section 14.2(a) addressed what Yulee could do after re-entry or taking possession. It allowed Yulee either to terminate the Lease or to relet the premises without terminating. Crucially, this section provided that re-entry or taking possession “will not be construed as an election” to terminate unless a written notice of that intention was given to the tenant. In other words, termination required a clear, written election delivered to the actual tenant.
The Lease also contained a notice provision, s. 17.11, which set out how notices were to be given and how they had to be addressed. While the landlord argued that delivering notices to the Leased Premises was sufficient, the courts focused on whether the notices were properly addressed to the tenant named in the Lease, Mr. Zagros MI, as required by that notice clause.

Chronology of the default and notices

After 112 failed to pay the March 2024 rent, Yulee first contacted Ms. Zamani. On March 8, 2024, it emailed her a letter addressed to “112 o/a Mr. Zagros”, for her attention. The letter asked for payment of the March rent within five business days “to avoid further escalation to a Notice of Default under the terms of the Lease”. This was effectively a warning directed to the franchisee company and its director, rather than to the tenant, Mr. Zagros MI.
On April 3, 2024, Yulee took the next step and delivered a formal notice of default (the “Default Notice”) to the Leased Premises by courier. The Default Notice required payment of the March 2024 rent by April 8, 2024. It was addressed to “Mr. Zagros Management Inc. o/a Mr. Zagros, Attn: Shadi Zamani” and was also emailed to Ms. Zamani. This notice again focused on delivery through the franchisee’s principal, even though she was on the franchisee side of the relationship and not the principal of the tenant company.
The next day, on April 4, 2024, counsel for Ms. Zamani emailed counsel for Yulee to advise that neither the March 8 letter nor the Default Notice had come to the attention of Mr. Zagros MI. This meant the party legally on the hook under the Lease, the tenant, still did not know it was being treated as in default and at risk of termination.
On April 9, 2024, Yulee mailed a letter addressed to the head office of Mr. Zagros MI. When that letter eventually reached Mr. Afzal, the principal of Mr. Zagros MI, he tried to contact Ms. Zamani but could not reach her. The March rent remained unpaid.
On April 24, 2024, with arrears still outstanding, Yulee posted a notice on the Leased Premises purporting to terminate the Lease (the “Termination Notice”). That notice was addressed to “112 o/a Mr. Zagros”, once again naming the franchisee rather than the tenant. A little over a month later, on May 27, 2024, Yulee entered into a new lease for the same premises with 194, Ms. Zamani’s new company.
For convenience, the courts referred to 112, Ms. Zamani and 194 together as the “Zamani Parties”. The pattern of addressing and delivering notices through them, instead of directly to the tenant, lay at the heart of the later application and appeal.

The broader franchise dispute

This lease fight did not occur in isolation. It was part of a larger franchise dispute between Mr. Zagros MI and 112. In that broader conflict, Mr. Zagros MI alleged that 112 and other franchisees had joined forces to withhold payments intentionally so they could take over the head leases and operate independently from the franchisor’s system.
Within that context, the Zamani Parties’ handling of the notices and their failure to promptly inform Mr. Zagros MI about the rent arrears and default notices were seen as strategic conduct. The application judge found that they had “kept the notices from” Mr. Zagros MI and that their actions were part of the broader dynamics of the franchise dispute, which included motions that unnecessarily complicated the litigation.

The application: validity of the default and termination notices

In response to the attempted termination, Mr. Zagros MI brought an application in the Superior Court of Justice. It sought declarations that the Default Notice and the Termination Notice were void and of no effect because Yulee had not complied with the Lease’s notice, default and termination provisions.
The application judge focused on ss. 14.1(a) and 14.2(a) and the notice clause. She held that Yulee had not complied with the requirement to give five days’ written notice of the rent default to the tenant and had not given a proper written notice of election to terminate to the tenant. Although Yulee argued that notices were to be delivered to the Leased Premises, and the judge accepted that as a general proposition, she found the actual notices failed because they were improperly addressed.
The Termination Notice was addressed to 112, not to the named tenant, Mr. Zagros MI. The Default Notice, though it used the corporate name of Mr. Zagros MI, was addressed to the attention of Ms. Zamani rather than to the tenant in a way that would reliably bring it to the tenant’s actual mind. The judge held that this addressing did not meet the requirements of s. 17.11 of the Lease and, in practice, failed to bring the notices to the attention of Mr. Zagros MI, as the subsequent correspondence confirmed.
On that basis, the application judge declared both the Default Notice and the Termination Notice void and of no effect. The landlord’s re-entry and attempt to terminate were therefore not legally valid under the Lease.

Costs at first instance

On costs, the application judge considered which parties should bear the financial consequences of the application. She treated Mr. Zagros MI as the entirely successful party and acknowledged that, under the usual rule, costs would “follow the event”, giving it costs against all three opposing interests: Yulee and the Zamani Parties.
However, she carefully differentiated between the roles of Yulee and the Zamani Parties. She found that the Zamani Parties had actively kept the critical notices from Mr. Zagros MI and had taken steps that exacerbated and complicated the dispute. She ordered them—112, Ms. Zamani and 194—to pay Mr. Zagros MI’s costs of the application on a partial indemnity basis, fixed at a specific amount, on a joint and several basis.
By contrast, she declined to order costs against Yulee and directed that Yulee bear its own costs of the application. She reasoned that, even though Yulee’s notices were defective, the application itself had been necessitated by Mr. Zagros MI’s failure to pay rent and its failure to cure the arrears once it learned of them. She also rejected Yulee’s attempt to invoke an indemnity clause in the Lease to recover its expenses from Mr. Zagros MI, holding that the circumstances—driven by Yulee’s own defective notices—did not fit the scope of an indemnity for loss or expense “occasioned by any act or omission of the tenant”.

The appeal and cross-appeal to the Court of Appeal

Yulee appealed to the Court of Appeal for Ontario. It argued that the application judge erred in declaring the Default and Termination Notices void and that the notices were, in substance and form, compliant with the Lease. It sought to restore the effectiveness of its termination.
At the same time, Mr. Zagros MI sought leave to appeal the costs order. It contended that the application judge had erred in principle or had made a plainly wrong decision by failing to order any costs against Yulee despite its loss on the merits. If granted leave, it asked the Court of Appeal to make Yulee jointly and severally liable with the Zamani Parties for the costs awarded below.
The Court of Appeal heard argument from Yulee first. After doing so, the panel concluded that it did not need to hear from Mr. Zagros MI on the substantive lease issues, signalling that Yulee’s appeal would fail. The court then granted Mr. Zagros MI leave to appeal the costs order but, after hearing both sides on costs, dismissed that cross-appeal as well.

Appellate reasoning on the lease and notice issues

On the main appeal, the Court of Appeal endorsed the application judge’s approach and findings. It noted that she had accepted Yulee’s submission that notices were to be delivered to the Leased Premises, but emphasized that this was not enough by itself. The notices still had to comply with the Lease’s specific notice provision, s. 17.11, including being properly addressed to the tenant.
The Termination Notice was defective because it was addressed to 112 rather than to Mr. Zagros MI, the tenant. The Default Notice, while mentioning “Mr. Zagros Management Inc. o/a Mr. Zagros”, placed the focus on “Attn: Shadi Zamani”, who was associated with the franchisee and had already demonstrated a willingness to withhold information from the franchisor. The Court of Appeal held that the application judge did not err in treating these addressing problems as failures to comply with the Lease’s notice requirements.
As a result, the landlord had not properly given the five days’ written notice of rent default required by s. 14.1(a), nor had it given a valid written notice of its intention to terminate to the tenant under s. 14.2(a). Because those contractual preconditions were not met, the Default and Termination Notices were invalid, and the attempted termination could not stand. Yulee’s appeal was therefore dismissed.

Appellate reasoning on costs and discretion

Turning to the costs cross-appeal, the Court of Appeal began from the same general principle the application judge applied: a fully successful party is presumptively entitled to costs against all unsuccessful parties. It agreed that this would normally include Yulee, given that it had lost on the core issue of the validity of the notices.
However, the court underscored that costs are always a matter of judicial discretion. It considered the application judge’s reasons and found that she had clearly explained why she exercised her discretion to depart from the usual rule as far as Yulee was concerned. She concluded that “the Application was necessitated by [Mr. Zagros MI’s] failure to pay rent” and that, by around April 9, 2024, Mr. Zagros MI knew the March rent had not been paid and that Yulee would be taking steps to terminate, yet had still not cured the default by April 24, 2024.
On those facts, the Court of Appeal held that the application judge’s view was reasonably open to her and that her allocation of costs—imposing them on the Zamani Parties but not on Yulee—did not involve any error in principle or plainly wrong assessment. The cross-appeal on costs was therefore dismissed, even though leave to bring it had been granted.

Final outcome and monetary award in favour of the successful party

In conclusion, the Court of Appeal upheld the application judge’s ruling that Yulee’s Default Notice and Termination Notice were void and of no effect, confirming that the Lease had not been validly terminated under its own terms. It dismissed Yulee’s appeal on the lease and notice issues and, having granted leave, also dismissed Mr. Zagros MI’s cross-appeal on the costs order from the application. For the appellate proceedings, the court ordered Yulee to pay costs of the appeal to Mr. Zagros MI in the agreed amount of $25,000, all-inclusive, with no additional costs awarded on the cross-appeal. As a result, the overall successful party on appeal is Mr. Zagros Management Inc., and the total quantified amount ordered in its favour at the appellate level is $25,000 in costs.