Address Versus Addressee, Franchisor Versus Franchisee: Lessons Learned From The Ontario Court Of Appeal's Decision In Yulee Developments Inc. V. Mr. Zagros Management Inc.

The tenant and landlord relationship is one dictated by contract (e.g. the lease) and legislation (the Commercial Tenancies Act). It is typically a two-party relationship and while each lease is unique, it is also predictable in custom and form, as there is a certain cadence that often arises between landlord and tenant as they navigate the life cycle of the lease. The introduction of a third party, such as a franchisor, brings an additional level of nuance which, if disregarded, can result in detrimental results for an unwary landlord.

Context for the Dispute

The initial dispute that spurred Yulee Developments Inc. v. Mr. Zagros Management Inc.¹ was simple. Rent was not paid on time. The Landlord sent a warning, a notice of default, finally a notice of termination. On its face, it sounds like a straight-forward matter, but the devil is in the details, as they say, and in this case, the details are as follows:

1. Yulee Developments Inc. (the "Landlord") entered into a lease with Mr. Zagros Management Inc. (the "Franchisor") for a certain premises to be operated as a Mr. Zagros restaurant (the "Lease").
2. 11254316 Canada Inc. (the "Franchisee") entered into a franchise agreement with the Franchisor, pursuant to which, the Franchisee was required to pay rent directly to the Landlord (the "Franchise Agreement").
3. Shadi Zamani ("Ms.Zamani"), the sole director of the Franchisee, entered two separate indemnity agreements in favour of the Franchisor and the Landlord, guaranteeing the obligations of the Franchisee, under the respective and corresponding agreement.
4. Importantly, there was no direct agreement between the Franchisee and the Landlord.
5. The Lease provided:
   1. In order to for an event of default to arise as a result of non-payment of rent, the Landlord must first give "five (5) days' written notice to the Tenant of the Tenant's failure"² .
   2. The Lease could not be terminated merely by the Landlord exercising its right of re-entry, a written notice of the Landlord's intention to terminate the Lease must be given to the Tenant.
   3. The notice provision required written notice to be delivered to the Tenant (and not to the occupant of the leased premises).

The Franchisee's Defaults and the Landlord's Notices

In March 2024, the Franchisee failed to pay rent to the Landlord and was thus in default of the Franchise Agreement and caused the Franchisor to be in default under the Lease.

The Franchisee did not inform the Franchisor of its failure to pay rent. The Landlord issued a series of notices, including a warning letter, a formal notice of default, and ultimately a notice of termination posted at the leased premises. While the notices were sent/posted to the leased premises, they were addressed generally to the Franchisee and Ms. Zamani.

Interestingly, one day after the notice of default was delivered (to the wrong addressee), Ms. Zamani's counsel informed the Landlord's counsel that neither the warning letter nor the notice of default had come to the attention of the Franchisor³ . Five days later, the Landlord sent a letter by mail to the head office of the Franchisor and shortly thereafter, the Landlord delivered the notice of termination, again addressed to the Franchisee.

Were the Landlord's notices deficient?

The provisions regarding monetary default and termination were clear: both required written notice to be delivered to the Franchisor. The Franchisor brought an application for a declaration that the notices were void, as the notices delivered by the Landlord were not delivered and addressed to the Franchisor. The application judge found that:

1. the Landlord did not comply with the provisions regarding monetary default and termination;
2. the Landlord did not bring or address the notices to the attention of the Franchisor; and
3. the notices were deficient as "they had not been properly served on"⁴ the Franchisor, and thus null and void.

The Court of Appeal agreed.

The Question of Costs

Following the termination, the Landlord entered into a new lease for the same premises with a new company owned by Ms. Zamani. The application judge ordered Ms. Zamani and her new company to pay the Franchisor's costs of the application in the amount of $60,000, on the basis that they withheld the notices from the Franchisor.

The Landlord was ordered to bear its own costs of the application. While the Franchisor cross-appealed the cost order, the Court of Appeal held that the application judge exercised discretion in denying costs against the Landlord, and the Court of Appeal was not inclined to intervene with the application judge's finding on the basis that the Franchisor became aware of the rent default and did not cure the arrears before the termination notice was subsequently posted at the leased premises.

Lessons Learned

There are many advantages to leasing to a franchised business, but there is also nuance involved in navigating a three-party relationship. A clear, well-drafted lease which sets out the expectations of each party is beneficial to all involved; however, each party must also protect their own, and sometimes conflicting, best interests. To that end, Yulee v Mr. Zagros imparts the following lessons:

For landlords, tenants, franchisors, and franchisees, the lessons are clear – follow the wording of the lease, communicate transparently, and never assume that other arrangements override formal obligations. In commercial leasing, technicalities are not simply technical, they are the difference between valid and void.

Footnotes

1 2025 ONCA 852 ("Yulee v Mr. Zagros")

2 Ibid at para 19.

3 Ibid at para 9.

4 Ibid at para 24.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.