Quebec Court Finds Competing Cafeteria Is Not a “Speciality Coffee Shop”

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Author: Robert Jones, Law Works P.C.
Editor: Ben Hanuka, Law Works P.C.

In Second Cup Ltd. c. 8702934 Canada Inc. (Café Vasanti), a May 14, 2018, decision of the Quebec Superior Court, the court dismissed a franchisor’s action to enforce an exclusive use clause in a lease against a landlord and its tenant restaurant.  The court concluded that the tenant’s restaurant was not a “speciality coffee shop” within the meaning of the exclusive use clause.

Key facts

In November 2012, Second Cup entered into a franchise agreement with Darmel Café inc. (“Darmel”), as franchisee, for the operation of a Second Cup franchise in a shopping centre.

8407305 Canada Inc. (“the Landlord”) was the owner of the shopping centre. In September 2013, Second Cup and the Landlord signed a head lease which contained an exclusive use clause. The exclusive use clause prohibited the Landlord from leasing space in the shopping centre to any other entity engaged in “the principal business of a speciality coffee shop selling coffees, speciality coffees and espresso-based drinks”.

In October 2013, Second Cup entered into a sublease agreement with Darmel. The sublease granted to Darmel the benefit of the exclusive use clause.

In November 2013, Darmel began operating its Second Cup franchised business.

In March 2014, the Landlord signed a lease agreement with 8702934 Canada Inc., operating as Café Vasanti (“Vasanti”). Vasanti’s lease expressly referenced the exclusive use clause in Second Cup’s lease and purported not to be in contravention of it.

In February 2015, Vasanti started operating its restaurant business in the shopping centre. Vasanti’s launch included a promotion about coffee. The restaurant offered a lunch and dinner menu and multiple varieties of coffee.  Darmel alleged that it suffered a significant loss in sales revenues after Vasanti’s restaurant opened.

In September 2015, Second Cup sought an injunction against both the Landlord and Vasanti for breach of the exclusive use clause. The Landlord argued that Second Cup’s nonpayment of rent prevented it from enforcing the exclusive use clause under the lease. Vasanti argued that its restaurant was not a “speciality coffee shop” and therefore did not infringe the terms of Second Cup’s lease.

Vasanti’s business is not a speciality coffee shop

The lease itself did not define “speciality coffee shop”. The court interpreted the meaning of “speciality coffee shop” and concluded that the Landlord did not breach the exclusive use clause in its lease with Second Cup by granting a lease to Vasanti.

The court placed some emphasis on the fact that Second Cup brought its injunction only after being sued by Darmel. The evidence showed that Second Cup’s representatives did not consider Vasanti to be a “speciality coffee shop” at the time it opened. There was a reversal in position which appeared opportunistic.

Second Cup relied on Vasanti’s opening promotion about coffee, its sale of numerous different varieties of coffee, and the fact that the name of the restaurant itself was “Café Vasanti”. In response, Vasanti raised the significant differences in its menu from that of Second Cup’s. It emphasized that the primary focus of Vasanti was not the sale of coffee and that the layout of the premises themselves had little resemblance.

The court found significant the multiple differences in the layout and menu offerings of Darmel’s Second Cup franchise and Vasanti. The Darmel franchise prominently displayed coffee and espresso beans, coffee-related signage and related products and ingredients. In contrast, Vasanti had an open kitchen space, a salad bar and a buffet. Vasanti’s café area was an isolated self-service part of the restaurant, not the entire theme as in Darnel’s Second Cup franchise.

The court also found it significant that Vasanti did not offer espresso and speciality latte-type drinks for sale. The significant overlap between the restaurants was in the sale of brewed coffee. It noted that Vasanti did not have the “general appearance” of a Second Cup.

For these reasons, the court concluded that Darnel’s Second Cup was a “speciality coffee shop” within the meaning of the exclusive use clause of the lease, while Vasanti was predominantly a cafeteria-style restaurant that also offered coffee for sale. It held that the principal business of Vasanti was not the sale of coffee.

Based on its conclusion that Second Cup’s action against the Landlord and Vasanti could not succeed, court declined to address the Landlord’s argument that Second Cup’s nonpayment of rent under the lease prevented it from enforcing the exclusive use clause.

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