QUESTION: Comment on the possibility of piercing the corporate veil; good faith dealing in contracts; possibility of damages or duties/monies owed.

Plaintiff: 1802248 Ontario Ltd. c.o.b. as Anytime Fitness, Ryan Johnson and Tatiana Johnson

Defendant: 2487048 Ontario Limited, Mike Allen, Clark Kent and Orion Fitness Inc.

Facts:

The Franchise

Ryan and Tatiana Johnson purchased a franchise of Anytime Fitness and opened their club in Bradford, Ontario in March 2010.They incorporated a numbered company ("180") to operate it.

The Lease

180 entered into a lease agreement for space in a commercial plaza on the main thoroughfare through town.The lease was for just over 10 years, with a termination date of June 30, 2020.The Johnsons were required to personally guarantee the lease.The monthly rent payable in the first five years of the lease was comprised of a basic rent of $5,666.67 plus the tenant's proportionate share of operating costs and realty taxes.The basic rent rose to $6,000 per month in year six and after.

The Small Business Loan

The Johnsons made significant improvements to the leased premises and acquired training equipment commensurate with a fitness club.They funded the improvements and equipment acquisition by way of a business improvement loan advanced by the Bank of Nova Scotia under the provisions of the Small Business Financing Act, S.C. 1998, c. 36.The loan was in two parts:$91,800 for leasehold improvements; and $90,726.81 for equipment.

The Rent Deferment Agreement

In March 2015 the plaintiffs entered into an agreement with their landlord that allowed them to defer a portion of their monthly rent.In effect, the agreement provided for a reduction in the basic monthly rent equal to $2,460 per month.The term of the agreement was April 1, 2015 to March 31, 2016.

The deferment agreement provided that if the plaintiffs paid all of their rent owing during the term of the agreement, in a timely way, the landlord would waive the deferred amount altogether.On the other hand, if the plaintiffs defaulted in the payment of their rent under the deferment agreement, the rent would revert to the original rent provided for in the lease and the deferred amount would become due and payable.

The Asset Purchase Agreement

The plaintiffs entered into an agreement with 248 on October 30, 2015 - the APA - selling all of the assets of their Anytime Fitness franchise to 248.Of particular is section 3 of the APA which provided as follows:

A.Purchase Price:The purchase price for the Assets and the Assigned Contracts as well, ("Purchase Price") shall be (i) the sum of $1.00 plus (ii) the total of 2 loans/lease with respect to certain Equipment being assumed by the Buyer in the amount of approximately Fifty Eight Thousand Dollars ($58,000), with the exact amount to be determined by a current statement to be provided by the Seller at the Time of Closing.The purchase price shall be paid as follows:

(i) The sum of $1.00 shall be paid on closing;

(ii) The balance of the purchase price shall be paid by way of a promissory note, which promissory note will reflect the loan/lease payments being assumed.The payment of the monthly payments under the promissory note may be made to the seller or alternatively to the lender/lessor in the sole discretion of the Buyer.

At October 31, 2015, the amounts owing to the Bank of Nova Scotia were $40,114.19 for the leasehold improvements loan and $18,582.87 for the equipment acquisition loan.The total was $58,697.06.

The plaintiffs paid the loans out in full by the end of 2015.

The Lease Assignment

On November 12, 2015 the plaintiffs and 248 entered into an Assignment and Assumption Agreement and Consent to Assignment of Lease with the landlord (the "Assignment Agreement").The agreement had an effective date of November 1, 2015, which was the date that 248 went into possession of the Anytime Fitness premises.

The Assignment Agreement provided, amongst other things, that:

(a)The tenant's rights and obligations under the lease were assigned to 248.180 remained jointly and severally liable, however, for the obligations of the tenant for the remainder of the term of the lease;

(b) The payment of rent for the months of November 2015, December 2015 and January 2016 was restructured.It was fixed at $27,818.34, including basic and additional rent that was otherwise payable under the deferment agreement.It was to be paid over six months in equal instalments of $4,636.39 commencing November 1, 2015;

(c) The Johnsons, who guaranteed the obligations of 180 under the lease, were to be released from their personal liability, provided the six monthly payments were made in a timely way by April 2016.Orion Fitness Inc. - another company controlled by the principals of 248 - was to assume the Johnsons' place as an indemnifier (guarantor) under the lease;

(d) In the event of a default in payment of the amounts referenced in para. (b), the full balance owing under the deferment agreement would become due and payable and the Johnsons would remain personally responsible for that sum.

The Statement of Adjustments

There are some strange aspects to the way this deal progressed.Most peculiar is the fact that there was no particular fixed closing date.It seems the transaction rolled out incrementally.

The APA was signed on October 30, 2015 and 248 went into possession of the business virtually immediately.At the time they took possession, the landlord had not yet consented to the assignment of the lease.The plaintiffs had not received a penny for the assets of the business and the secured promissory note they were to receive had not yet even been drafted.

Essentially, 248 began to operate the business as of November 1, 2015 - and to realize an income stream from it - while the plaintiffs remained liable for a number of the ongoing expenses.

Tatiana Johnson said that she understood that the various costs she and Ryan Johnson were incurring in relation to the operation of the business after November 1, 2015 would be reflected in a Statement of Adjustments that would be completed on the date of the execution of the assignment of the lease.

She also stated that there was an agreement between the plaintiffs and the defendants that 180 would remit payment to the landlord for the months of November and December 2015 and the defendants would remit payment for the month of January and thereafter.This agreement does not appear to have been reduced to writing.It is not clear on how this arrangement was to be reflected in the six equal instalments to be paid to the landlord between November 2015 and April 2016.

In any event, Ms. Johnson went on to say that she understood that any rent the plaintiffs paid after November 1, 2015 would be reflected in the Statement of Adjustments.Without a particular closing date, it is unclear when accounts were to be adjusted.

According to Ms. Johnson, the Statement of Adjustments went through a number of iterations until it reached its final form on December 8, 2015.As of that date, it reflected a sum of $14,941.04 as owing from 248 to 180.

The adjustments are not entirely clear.For instance, the statement makes reference to a rental deposit of $6,300 which should have been a credit to the vendor, but it was not included in the calculation for some reason.There is a credit to 180 for the payment of rent in December 2015, in an amount equal to two of the six instalments provided for in the Assignment Agreement.This entry is consistent with Ms. Johnson's evidence that any rent was to be the ultimate responsibility of 248 after November 1, 2015.On the other hand, a short schedule attached to the Statement of Adjustments appears to reflect that rent for November and December 2015 was to be paid by the plaintiffs.

On December 31, 2015, 248 provided 180 with a cheque in the amount of $14,941.04 in accordance with the Statement of Adjustments prepared by the Johnsons.Both parties agree that 248 asked, however, that the cheque not be cashed immediately.According to Ms. Johnson, the reason was that 248 was awaiting proof that the Scotiabank loans to be assumed by 248 actually related to the operations of Anytime Fitness.According to Mr. Kent, however, he asked that the cheque not be cashed until he had a chance to review the Statement of Adjustments with his lawyer.

Mr. Kent said that he received advice from his lawyer that the adjustments were not justified under the agreement.He did not elaborate on why that was, nor did he give any indication as to what items on the Statement he agreed with and what items he disputed.

Mr. Kent went on to say that it was the responsibility of the plaintiffs to pay rent for the months of November 2015 through to and including January 2016 under the Assignment Agreement.He did not explain why that was, other than to say, "it was the intention of the parties that the vendor would pay three months' rent and the purchaser would be responsible for the balance of the lease term."No such provision appears in the APA or the Assignment Agreement.

The Default Under the Lease

248 put a stop payment on its cheque for $14,941.04.It paid no rent for the months of November 2015 through January 2016.It did not execute a promissory note as required by the APA, nor did it make any payments on the loans referenced in the APA.

Tatiana Johnson said the plaintiffs provided the landlord with six post-dated cheques.Two were honoured, but they did not have the funds to honour the third or subsequent cheques.The lease agreement went into default in January 2016.In the result, the landlord triggered the default clause in the deferment agreement.

The landlord subsequently commenced a claim against the Johnsons on their guarantee.The Johnsons settled the claim for the rental arrears plus $10,000 in costs, for a total of $52,259.25.