• Commercial Leases and the Trojan Horse
  • June 23, 2015 | Author: Edmundo P. Guevara
  • Law Firm: Singleton Urquhart LLP - Vancouver Office
  • Commercial landlords who, for one reason or another, consider taking over the business operations of a tenant which has defaulted on or abandoned its lease might first consider the cautionary tale of the Trojan Horse. We are told that one day, after ten fruitless years of war with Troy, the Greeks pretended to give up, packed their bags, and sailed away. They left behind a wooden horse, which the Trojans accepted as a gift despite their chief priest’s warning: "Beware of Greeks bearing gifts."

    The chief priest was eaten by giant sea serpents immediately after delivering his warning. For this, and other obvious reasons, he wasn’t around to share his sage advice with Spirit Ridge Resort Holdings Ltd. in the summer of 2011 when its tenant, the Passa Tempo restaurant—operated by Annette LaGrange—fell behind with the rent. One morning, she abruptly left, handing the restaurant keys to a Spirit Ridge representative while stating “The restaurant is now yours” or words to that effect.

    She left behind forty-eight employees who were owed almost three weeks’ worth of wages. Spirit Ridge felt compelled to accept this questionable gift immediately because the restaurant was to provide food for a wedding event which the Osoyoos resort was hosting that evening. But, like the Greeks’ wooden horse, the gift had a hidden surprise—a staggering bill of over $51,000 consisting in large part of the outstanding wages.

    With its reputation at stake, Spirit Ridge took over Passa Tempo’s assets and inventory and continued the operation of the restaurant two hours after Ms. LaGrange departed. It produced employment agreements offering Passa Tempo’s staff continued employment with no loss of seniority although at the same time it informed the employees that Passa Tempo continued to be liable for their unpaid wages. Notably, however, Passa Tempo had never formally terminated its employees’ service.

    For its part, Spirit Ridge thought it was simply exercising its rights under the lease when it took over the restaurant and assets of its defaulting tenant. It believed that in doing so it assumed no risk or liability for the unpaid wages which Passa Tempo owed to its employees.
    However, a delegate of the Director of Employment Standards—with whom the employees filed an employment standards complaint—issued a Determination finding that Spirit Ridge had taken over operation of the restaurant without Passa Tempo’s employees having been dismissed, thereby becoming the “successor employer” of the employees.

    Spirit Ridge appealed this Determination to the Employment Standards Tribunal, which upheld the Delegate’s Determination, and then to the British Columbia Supreme Court—in Spirit Ridge Holdings Ltd. v. British Columbia (Employment Standards Tribunal. The Supreme Court did not find the Tribunal’s decision to be patently unreasonable, the test for overturning the Tribunal’s decision.

    The key legislation relating to this issue is Section 97 of the Employment Standards Act (ESA), which reads:

    If all or part of a business or a substantial part of the entire assets of a business is disposed of, the employment of an employee of the business is deemed, for the purposes of this Act, to be continuous and uninterrupted by the disposition. (Author’s italics.)

    According to B.C.’s Interpretation Act, “disposed”, broadly interpreted, means “to transfer by any method and includes assign, give, sell, grant, charge, convey, bequeath, devise, lease, divest, release and agree to do any of those things.” (Author’s italics within quotation.)

    When Spirit Ridge accepted the surrender of the restaurant from Ms. LaGrange and continued its operations, a “transfer” or “disposition” under ESA’s Section 97 occurred. Further, the two-hour gap between Ms. LaGrange’s departure and Spirit Ridge’s delivery of the offers of employment did not affect the employees’ continuous and uninterrupted employment because Passa Tempo did not terminate their employment before Spirit Ridge took over the restaurant.

    Accordingly, Spirit Ridge was ordered to pay the employees the wages that Passa Tempo had not paid them plus interest and a $1,000 administrative fine. The wages determination included termination pay of a restaurant employee that Spirit Ridge had dismissed without cause calculated from the date of the employee’s original hiring by Passa Tempo. Given other circumstances, Spirit Ridge might have been additionally liable to pay the employees for statutory holidays and vacation pay.

    Good intentions, as we all know, can have unforeseen consequences. In this case, Spirit Ridge acted quickly to fulfill its obligations to its guests. Unfortunately, given the urgency of the situation, it had no choice but to use Passa Tempo’s assets, inventory and employees. What it failed to do before taking over the restaurant operations was to take the necessary steps to avoid, or at the very least minimize, the risk of assuming Passa Tempo’s unpaid wage liabilities to its employees.

    As the Tribunal itself recognized in its decision, given a different factual scenario, it is possible the outcome would have been different. Although the Tribunal refused to speculate on what those different factual scenarios might be, a commercial landlord finding itself in a situation similar to Spirit Ridge’s should at the very minimum ensure that its tenant has formally terminated its employees’ services before taking over the tenant’s operations. Even when time is of the essence, as in this case, the landlord should consult a lawyer to understand the consequences of its decision, what steps can be taken to avoid or minimize those consequences, and the nature of the financial obligations it might be assuming.

    Whether, under any given circumstances, a commercial landlord taking over its tenant’s business operations will trigger the operation of the ESA’s Section 97 to make it a “successor employer” is always an important question that needs careful analysis. At the very least, the uppermost thought for commercial landlords facing similar situations should be, to reverse another saying, “always look a gift horse in the mouth.”