Commercial Lease Basics -- Lawyer Tips for Small and Medium Sized Businesses

Commercial Lease Basics

By Courtney Aarbo, Barristers & Solicitors

Providing Information to Assist Small Businesses

One of the most important, and costly agreements entered into by virtually all businesses new and old, is a commercial lease for their premises.

The standard lease agreement for commercial space will almost always be the longest and most difficult to understand “standard form” agreement one will have to deal with. The lease agreement of the 50 page variety will almost without exception be extremely one sided providing the Landlord with everything conceivable, and the Tenant with the minimum possible protection.

Despite what the leasing agent of the landlord lets on, the Tenant has a lot of bargaining power. Many of the one sided terms in the standard form lease blank can be eliminated or amended, resulting in large savings to the Tenant.

Given all these factors it is a very wise investment to retain professional help such as a lease broker and / or lawyer to help.

What follows are general recommendations when dealing with lease negotiations and the lease itself:

1. The commercial leasing agent, while useful to advise you efficiently as to the rental space on the market, is not the best person to provide you with advice on whether you are getting a “good deal”. Remember, the leasing agent is paid usually a percentage commission by the Landlord, only if he rents the space.

2. It is critical that you have an idea as to the market rate for space before you start bargaining on a specific location. Look around. Make inquiries. You should  approach your search in a fashion similar to how you would look for a house.

3. Everything is negotiable (within reason).

4. Gross rent usually means the total amount the tenant will pay to the Landlord- it is a fixed sum. Net rent plus operating costs is not a fixed sum. The net rent to the Landlord (his “profit”) is fixed, but the operating costs will fluctuate (usually going up) through the lease term. Often the operating costs are more than the net rent. With Gross rent you should have a known fixed sum per month for you to pay during the entire term.

5. Most commercial leases involve net rent plus operating costs. It is crucial that you obtain a history of the operating costs for the space and that you have a good assurance as to what to expect during the lease term. For example, if a property tax reassessment is in the works- it has been known for operating costs to double in one year due to property tax increases. It is critical that you obtain a detailed definition of what is included in operating costs. Sometimes Landlords try to charge inappropriate items as operating costs. It is critical that the lease stipulates that the tenant get a proper account of the operating cost charges each year.

6. If you operate through a corporation, personal guarantees of the rent payment by your corporation are almost always requested, but can frequently be eliminated or reduced in negotiations. Remember that you set up a corporation to avoid personal liability, so it is obviously unwise to lose the protection through a huge personal guarantee.

7. Tenant inducements like several “free” months rent, or money towards tenant improvements are regularly given by Landlords (and appreciated by tenants starting out in business). Nothing comes “free” however, as most Landlords will have calculated the payback for the tenant inducements by requiring higher rent during the balance of the term. If you don’t require tenant inducements, then require lower rent.

8. Most commercial leases involve a 5 or 6 page “Offer to Lease” and a 50 page lease (to be signed later) The Offer to Lease is a binding legal document that may in fact constitute a binding lease. Most major terms are set out in the offer. Going to your lawyer for advice on matters covered in the Offer to Lease, after it is signed is too late. At a minimum make sure the offer contains a term that it is subject to approval by your lawyer, and that your lawyer can propose reasonable amendments to the lease itself. Better yet, call the lawyer in during negotiations, where he or she can do the most good.

9. Get any “verbal” assurance put into the offer and lease. Virtually all offers and leases have a clause that says there have been no representations except what is in the document in writing. If it is not written in, you may not get the concession.

10. That 50 page document which the leasing agent says is “standard” contains 50 pages of detailed legal clauses, many of which you will have difficulty understanding and many of which should be eliminated or amended. These clauses are important. The fact that it is the “Landlord’s Standard Lease” should tell you that it is written for the Landlord’s benefit, not yours. Have your lawyer review it before you sign it.

For more information contact Courtney Aarbo Barristers & Solicitors at 3^rd Floor 1131 Kensington Road N.W., Calgary Alberta T2N 3P4 or info@courtneyaarbo,ca or phone 403-571-5120.

Gary C. Courtney

Courtney Aarbo Barristers & Solicitors
www.courtneyaarbo.ca  

Selling Residential Rental Properties in Alberta- How to Terminate a Tenancy

By Courtney Aarbo Barristers & Solicitors

Providing Information to Assist Small Businesses

It has been our experience at Courtney Aarbo that in sales of rental property there is some confusion about what is required to be done by seller’s to comply with the “Residential Tenancies Act of Alberta”. Failing to comply with this legislation can result in great complications or even not being able to close the real estate deal.

As a first point one should note clause 2 (1) of the Act, which exempts certain types of rental properties from its provisions. These include rentals of mobile homes and rooms rental within the landlord’s home (boarders).

Assuming the Act applies, and the Seller is attempting to sell a home or condo that is rented with either a yearly or monthly lease, and the Buyer is planning to move in as apposed to continuing to rent, then the Seller is going to need to properly terminate the lease as of the sale closing date, or earlier. Failure to do so will breach the Seller’s obligation to provide the Buyer vacant possession under the contract.

If the Lease is a ‘month to month’ lease then section 8 (1) (b) of the Act requires the landlord (the Seller) to give the tenant notice on or before “the first day of the notice period.” The notice period is defined as being 3 consecutive ‘Tenancy months’. By way of example, if the sale is to close on July 1^st, then the month to month tenant must be given proper notice to vacate by no later than April 1^st.

If the Lease is a yearly tenancy then section 9 of the Act requires that a landlord give notice to the tenant “on or before the 90^th day before the last day of the tenancy year”, to be effective at the end of the lease year. Section 10 (c) does allow a notice to terminate a yearly tenancy that is late to be effective 90 days later so long as it is served before the end of the tenancy year. By way of example, if the lease year ends June 30, a notice would need to be served on the Tenant on or before April 2^nd to be effective June 30^th. If however it was served on June 1^st, it would be effective 90 days later. If the landlord (the Seller) did not serve the tenant until July 1^st, into a new tenancy year, the notice would not terminate the tenancy until June 30^th the following year- obviously a problem if the real estate deal close date is only one month later.

Please note that by section 10 of the Act the notice to terminate must

a)      be in writing;

b)      be signed by the person giving the notice (landlord) or the landlord’s agent;

c)      set out the reason for terminating the tenancy example: a sale of the property;          

d)      identify the premises for which the notice is being served; and

e)      state the date on which the tenancy is to terminate.

Service of the notice can be effected under Section 57 of the Act by personal service, registered mail, or certified mail. If the landlord cannot serve because the tenant is absent from the premises, it can be left with an adult or posted to the premises door.

Of course if the Buyer is purchasing the property with the idea of not continuing to rent it, then provided the Buyer wants the existing tenant, no notice to terminate needs to be given. The Seller will however have to assigned the tenancy agreement to the Buyer, notify the Tenant of his or her new landlord, and properly adjust on closing for rent paid and damage deposits. These adjustments are usually calculated by the Seller and Buyer’s respective lawyers.

For more information contact Courtney Aarbo Barristers & Solicitors at 3^rd Floor 1131 Kensington Road N.W., Calgary Alberta T2N 3P4 or info@courtneyaarbo.ca or phone 403-571-5120.

Gary C. Courtney

Courtney Aarbo Barristers & Solicitors
www.courtneyaarbo.ca

Selling and Purchasing a Business -- Legal Considerations

SELLING AND PURCHASING A BUSINESS

At Courtney Aarbo (www.courtneyaarbo.ca) we attempt to be proactive in providing some general information that may assist businesses now or at some point in the future. We hope you find the information helpful.

Obviously at some point in the life of a business, an owner may be contemplating selling the business or buying another business.

No matter whether one is selling or buying a business, it is wise to consider the following:

1. Early Planning- particularly when one is selling a business, it is important to get one’s accountant and lawyer involved as soon as possible.

A very important consideration in a sale is for the “Seller” to be able to utilize the $750,000.00 “Small Business Capital Gains Exemption”. At least 2 years before a sale, an owner should consult his or her accountant to determine if the business would qualify. If not, there is a likelihood that steps can be taken to bring the business into line with CRA requirements before the sale. If you don’t qualify this very large tax deduction could be lost.

2. Structuring a Deal- all too often clients will present an agreement that has not been structured properly from their point of view or in their best interests.

One example is how the sale/purchase price is to be paid. There should be a deposit posted. In an asset sale the purchase price should be properly allocated to assets and goodwill from a tax stand point. If the Seller is going to carry some of the purchase price it is crucial that the loan to the Buyer has been properly set up, been properly secured, and things such as personal guarantees for the loan considered.

3. Share vs Asset Sales- there is a major difference from both Sellers and Buyers viewpoint between a transaction where the Seller signs over his or her shares in the corporation, verses selling assets and goodwill. It is extremely important for both sides to consult their accountants and legal advisers on the point, before they commit to a deal. Some of the considerations are; 

•     Business liabilities- in a properly documented purchase of assets, generally speaking the Buyer takes them free and clear of the Seller’s secured or unsecured or unknown creditors. With a share purchase, the Buyer takes over the corporate Seller by becoming the shareholder, but also will inherit any of that corporations problems- known and unknown. Generally it is a bit of a risk for Buyers.

•     Tax issues- if a Seller can take advantage of the $750,000.00 Small Business Capital Gains Exemption by a share sale, that is a clear benefit. A Buyer may rather wish to buy assets so that the Buyer gains ability to depreciate the assets on a yearly tax filing basis.

•     Existing contracts- generally it is easier to assume the business contracts of an existing corporation by buying its shares, as that corporation legally continues to run its business, with the existing contracts. When buying assets this is not the case and there will be a greater need to deal with any existing contracts by having to contact and possibly negotiate new agreements or assignments of old agreements to the new owner.

•     Employees- in a share sale, the corporate employer continues as the employer. Employees continue in their jobs. If the Buyer doesn’t want an employee, special terms may need to be agreed to where the Seller terminates the employee and pays severance, otherwise the Buyer will be responsible to pay full severance sometime in the future. In an asset sale, the Seller no longer runs the business, and generally terminates all employees, paying them severance. It is usually agreed that the Buyer will hire back the employees it wants to keep- but severance will still have to be paid by the Seller. Obviously the issue of employees needs to be carefully addressed in the deal’s negotiation stage, not as an after thought.

4. Conditions of the Deal- often there will be several conditions put in the agreement, which if not fulfilled, will allow the Buyer to not close. It is very important that these conditions be kept to a minimum, and are reasonable from the Seller’s perspective. If not, the Buyer is given an ability to walk away from the deal without the Seller having any recourse. It is very important to the Buyer that critical matters are made conditions.

5. Reviewing the Lease- the premises lease almost always needs to be taken over or negotiated by the Buyer. The lease terms need to be reviewed early in the process. Usually, being satisfied about the lease is a condition of the sale.

6. Non- competition/ Non-solicitation Clauses- these can be critical to both sides. Obviously the Buyer does not wish to buy a business, and find its value diminished by the Seller competing. The Seller does not want to be prevented from making a living in the future. A reasonable compromise of the 2 competing interests needs to be incorporated.

Obviously, the above points only scratch the service of these issues and can only be properly dealt with by a full consultation. We hope you agree however, that it is important to be aware of all of them in any sale/purchase process. The critical piece of advice that we do urge you to take is the need to consult accountants and lawyers early in the process, before mistakes that cannot be corrected are made.

If we can be of further assistance we would be pleased to speak with you.

Gary C. Courtney

Courtney Aarbo Barristers & Solicitors

www.courtneyaarbo.ca

Business Account Collection -- Tips from a Lawyer

BUSINESS ACCOUNT COLLECTION

In small businesses, being paid for ones work, being only partially paid, or having to expand energy and money to collect an account is a huge detriment to ones bottom line. In an effort to minimize your difficulties Courtney Aarbo Barristers and Solicitors (www.courtneyaarbo.ca) is pleased to provide you with;

10 Tips for account Collection

1. If your business is not being ‘paid up front’, then you are in the business of extending credit and you should try to think a bit like your bank.

2. If your business is extending significant credit, have the customer fill out a credit application, which will hopefully contain information about the customer’s address, place of employment, and bank. All this information way be invaluable in later trying to chase the customer for payment.

3. If possible obtain a credit card number with an authorization to use it to pay for the services once completed.

4. If worried about a customer’s credit worthiness do some basic checks on him or her. For example our office or a registry shop can order a ‘Personal Property Registry Search’ at a cost of only a few dollars. This search will show what creditors are registered against the customer and against his or her assets. It will also show registered writs of enforcement by other creditors who have obtained Court Judgments. Obviously doing business with a poor credit risk is to be avoided.

5. If possible prepare a contract with the customer and make sure it is properly signed. The contract should specify the ‘terms of payment’ and what interest is to be paid on overdue accounts. Note: Simply putting an interest rate on the bottom of an invoice (for example 2% per month) is not legally enforceable. An interest rate must be agreed to in writing in a contract in advance of the contract’s performance.

6. Make sure any contract contains a term that the customer will repay to the business any and all costs of collecting an account, including lawyer’s fees and disbursements on a solicitor/ client basis. Hopefully if you need to hire a lawyer to collect an account, the cost can be added to the claim.

7. Be sure to clearly and carefully document on invoices the services which have been done or provided and the charges and credits on the account. Too often unclear accounting results in a customer not paying on a timely basis, or at all.

8. Be sure that any changes to the work being done or product provided is carefully documented, preferably with the customer acknowledging the change in writing. Surprise changes in a final accounting often result in payment problems. If an account has to be sued on to collect an improperly documented change, a judgment may not be awarded by a judge.

9. Keep a complete file reflecting what has been done for the customer. For example memos of important conversations or copies of emails confirming important events provide a good record. This documentation will be very useful in settlement discussions or court proceedings.

10. Sit down with a customer to discuss in a calm straightforward manner any difficulties he or she has with the services or the accounting. Often misunderstandings can be worked through before positions harden on payment. Often a small compromise on an account is much better than a dragged out fight with a customer, sapping your time and energy, and possibly incurring legal bills.

The above points deal largely with account collection before the need to come into a lawyers office. Frankly the most positive outcome for a business is not to have to hire a lawyer for account collection. While we are happy to provide legal services for this purpose, we would prefer to see accounts all paid on time leaving business to retain our services for more positive purposes.

We hope you find the above to be helpful.

Gary C. Courtney

Courtney Aarbo Barristers & Solicitors

www.courtneyaarbo.ca  

Common Contract Format -- Tips from Lawyer for Small and Medium Sized Businesses

Common Contract Format

By: Gary Courtney, Barrister and Solicitor, 

Providing Information to Assist in Business

Most commercial agreements prepared by lawyers, or prepared from a lawyer’s precedent, have six parts, each with their own purpose:

a)         Date

Generally the date of the agreement will be the first thing found in any agreement.  It should be the date the agreement is signed.  It is usually the date the agreement is effective.

From time to time one may find the following term:

“This Agreement dated the 5^th day of May, 2012 to be effective from the 1^st day of January, 2012.”

In other words the term is backdating the agreement.  The above term is much preferred to simply dating the Agreement for January 1^st, 2012, when in fact it is not signed until May 5^th.

There is nothing wrong with the above wording having the effect of backdating an agreement, as long as the agreement was in fact in place on January 1, 2012, but simply took about four months to properly document.

 A problem arises if there was no agreement on January 1, 2012, as in reality the agreement was not struck until May.  In other words we do not have a proper effective date of an agreement that took a few months to document, but we have a fictitious backdating of an agreement reached in May.  In this case the contracting parties may be committing a fraud if for example the reason for backdating is to obtain some tax advantage.

 b)         Parties

The second part of the contract should accurately set out the parties to the agreement. Make sure the name of a corporate party is accurately set out.

c)         Preamble

Most contracts, especially if the document is a lengthy one, will set out a preamble.

The preamble is meant to set out the background for the parties entering into an agreement.  Its purpose is to assist in explaining what will be coming next, i.e., what has been agreed.  It also often contains a standard clause acknowledging the flow of consideration necessary to form a binding agreement.

In addition to the Preamble’s position in the contract document, following the listing of the “Parties”, one can often recognize the preamble by the use of the word “Whereas”.

A typical example is as follows:

“Whereas:

1.         Sally Smith is the owner of 50 shares of A.B.C. Investments Ltd. which she wishes to sell;

2.         John Jones wishes to purchase 50 shares of A.B.C. Investments Ltd.

Now Therefore in return for the sum of $1.00 paid by John Jones to Sally Smith and other good and valuable consideration contained herein the payment and receipt of which is acknowledged:

IT IS AGREED”

d)         What is Agreed

The next part of the typical agreement will generally be the setting out of the main points of the agreement.  If the contracting parties were asked what has been agreed, most or all would be incorporated into this part of the agreement.

Usually this part of the contract will state what is to be done, when it is to be done, and how it is to be done.

This part might state the following:

1.         Sally Smith agrees to sell and transfer to John Jones all her interest and title to 50 shares of A.B.C. Investments Ltd. for a price of $1,000.00, or $20.00 per share.

2.         John Jones will pay to Sally Smith the sum of $1,000.00 or $20.00 per share for the 50 shares of A.B.C. Investments Ltd., which sum will be paid on or before May 31, 2000, by certified cheque payable in trust for Sally Smith to Courtney Aarbo, Barristers and Solicitors, 1131 Kensington Road N.W. (3^rd Floor), Calgary, Alberta, T2P 3P4.

3.         On receipt of payment for the shares Sally Smith will forthwith effect the share     transfer by causing a transfer of the share certificate to John Jones to be effected  and registered on the share register of A.B.C. Investments Ltd.

e)         Standard Clauses

The next parts of a standard agreement are the standard clauses, sometimes referred to as “the fine print”.  The section is typically thought of as the part of the agreement that the parties’ lawyers would likely put into an agreement.  It may be much longer than the rest of the agreement.  The terms are difficult to understand.  Unfortunately the parties often do not read these sections of the agreement prior to signing it.

In the share transfer agreement that we have been using as an example this area of the agreement would likely contain terms covering the following areas:

·         Extensive provisions regarding representations  and warranties that Sally Smith would give to John Jones concerning her having good and clear title to the shares, her having the right to transfer the shares, and even the financial position of the company itself.

·         Detailed particulars of further acts which must be done to effect the share transfer.

·         Conditions precedent to the share transfer.

·         Termination of the agreement.

·         Amendment of the agreement.

·         Interest for late payment.

·         Where notices can be sent.

·         Arbitration of dispute clause.

·         “Standard” closing clauses such as the clause that the written agreement contains the whole agreement.

A further example that most persons can relate to is a mortgage.  Most individuals will review their mortgage, to the extent of the first few clauses setting out the amount borrowed, the interest rate, and the payment terms.  A particularly studious person may review their early payment provision.  With respect to the other 80% of the mortgage, few take the time to review it.

If people did review their whole mortgage, they would find shocking terms, such as that they were supposed to get permission of the mortgage company for renovations, and provide copies of their insurance policies.

Persons in business should be aware that the “Fine Print” generally contains crucial terms which should be reviewed and understood before signing.  In the event the agreement is signed, and one of the “Fine Print” terms comes back to haunt the signatory, there is no defense to a claim based on not having read the contract.

In the real world of business it is difficult to find the time, or have the patience to review all the “Fine Print”.  If the contract is of great importance then likely it will be reviewed by the business’ lawyer, in which case one can often rely on the lawyer to bring any problem to your attention.  Due to cost concerns, it is not always possible to hire a lawyer, but if that decision is made, it will be even more critical for the business person to take the time to review the agreement thoroughly.

f)         Execution

The last part of any agreement is the portion where the parties sign.

For more information contact Courtney Aarbo Barristers and Solicitors at www.courtneyaarbo.ca or info@courtneyaarbo.ca  or phone 403 571-5120.

Proper Signing of Contracts -- Tips from a Lawyer

Proper Signing of Agreements

By: Courtney Aarbo, Barristers and Solicitors

Providing Information to Assist in Business

a)         Sole Proprietor, Partnership, or Corporation

There are basically three types of business entity:

·        a sole proprietorship;

·        a partnership;

·        a corporation.

The sole proprietor is a business entity owned by a person who as the owner has personal liability for all that that business does.  The sole proprietorship may be operating under a registered business name, for “Quick and Cheap Computing”, but the owner “Phil Jones” is the business.  If you had to sue on an agreement, you would sue “Phil Jones” personally.

A partnership is a business entity owned by two or more separate legal entities who generally have joint liability for all that the business does.  The business may operate under a registered business name for example “Quick and Cheap Computing”, but be owned by the two partners “Phil Jones” and “John Cheap”, who each have personal liability for the business debt.  Usually the partners will have a written (or verbal) agreement relating to the establishment of the partnership.

A Corporation is a separate legal entity from its owners, who are the stockholders.  Debt of the corporation is not normally a personal liability of the individual stockholders.  If “Quick and Cheap Computing Inc.” runs up $100,000.00 of debts, the stockholders are not personally liable.  The Corporation should be looked upon as if it is a separate legal person, which needs the help of other persons to enter legal relations, which other persons have the corporate signing authority.

It is essential that you know, and properly describe the parties to a contract.  Always make sure that the other side to a contract knows you act on behalf of a corporation if that is the case.  Always find out who or what you are contracting with.  If you don’t know, or wish to check, any registry shop will be able to search a business name to determine if it is a corporation, or simply a registered name, or neither.  Failure to properly indicate one is acting on behalf of a corporation will likely result in personal liability under the contract for the person signing it.

b)         Signing of Contract

In order for contracts to be binding upon all parties, it is in their best interest that they be signed properly.  As most documents are not prepared by lawyers, it is necessary for people in business to make sure proper signing occurs.

If you are dealing with a corporate entity, it will always end its name with one of the words or suffixes Company, Co., Limited, Ltd., Corporation, Corp., or Incorporated, Inc.

What follows is a reference table for proper description and execution of documents:

Type of Business	Name Description	Execution
Sole Proprietor	Phil Jones carrying on business under the name “Quick and Cheap Computing”	_______     ________________ Witness      Phil Jones
Partnership	Phil Jones and John Cheap carrying on business in Partnership under the name “Quick and Cheap Computing”	_______     ________________ Witness      Phil Jones _______     ________________ Witness      John Cheap
Corporation	“Quick and Cheap Computing Inc.”	“Quick and Cheap Computing” Inc. Per: ___________________         Phil Jones (President) Per:  __________________         John Cheap (Treasurer)

It is always good practice to check identification of the person signing an agreement especially if one is witnessing his or her signature.  Corporate seals are not essential when a corporation is signing, but if a seal is not being used one should make sure the persons signing for the corporation has proper signing authority.  One is usually safe if the signing person is an officer or director of the corporation (although not always).  A registry shop corporate search should indicate directors and officers.  If in doubt verify corporate signing authority.

It is also a good practice for the parties to initial each page of the contract.

c)         Alteration of Contracts

It is essential that any alterations to contracts be done in writing.  All too often the parties agree to an amendment of their agreement, but fail to properly document it.

Properly documenting an alteration may involve making a simple change to the original agreement by crossing a few words out and then having the signing parties initial the change and date it.  In a more complex alteration, a separate written document or an “Addendum” will need to be prepared.  An addendum is attached to the original agreement and initialed by all parties.

A verbal agreement may cause great difficulty.  Similarly a verbal alteration or amendment to a written agreement may be unenforceable.  Remember that the written agreement likely contains the term that it contains the whole agreement.  Under the Parol Evidence Rule, verbal contract terms should not be allowed to contradict written terms.

A review of the original agreement may reveal a term that states how amendments or alterations are made.  If there is such a term make sure it is followed precisely.

For more information contact Courtney Aarbo Barristers and Solicitors at www.courtneyaarbo.ca or info@courtneyaarbo.ca  or phone 403 571-5120.

Restrictive Covenants and Fiduciary Duites -- Employment Law Update

EMPLOYMANT LAW UPDATE

RESTRICTIVE CONVENANTS AND FIDUCIARY DUTIES

by DARRYL AARBO, BARRISTER AND SOLICITOR

In the recent Alberta Court of Appeal decision of Evans v The Sports Corporation, 2013 ABCA 14 (CanLII) the Court clarified and revisited restrictive covenants and fiduciary duties.  There is nothing new in this decision, but it is always extremely helpful to revisit these areas in a specific fact scenario to better understand these concepts.

No surprises on the restrictive covenant issue.  The Court confirms that the enforceability of these agreements are tough, to say the least.  In this case the Court of Appeal overturned the trail decision that was going to enforce it.  The Court of Appeal went back to its decision in Globex Foreign Exchange Corp. v. Kelcher, 2011 ABCA 240 to support its position.  When considering whether the agreement is reasonable and enforceable the clause, among many other things, must be unambiguous.  Again, being unambiguous is really one of many harsh tests that these clauses must pass.

The agreement in this case failed on this basis.  It found its plain meaning to be “ambiguous and reach undeterminable.”  It could not determine with certainty which clients were covered by the clause.

This ruling is consistent with a long line of cases that make the enforcement of restrictive covenants unenforceable.  Makes one wonder why employers even bother anymore, except in the rarest of cases.

The next issue was fiduciary duties.  This case is again consistent with former rulings out of this Court, but again it is always good to revisit the concepts in particular instances.  The key principle in play here is that one does not need to be an executive or high ranking officer of a company, or a director or a shareholder.  It found that: “…the status of a fiduciary does not emanate from holding corporate office. Rather, it relates to the responsibilities entrusted to an employee, including any attendant power to affect the economic interests of the company.” 

A final issue the Court deals with is whether the employee was relieved of his fiduciary duties when he was “wrongfully dismissed”.  The Court, without much discussion at all, distinguished the Alberta trial decision of ADM Measurements Ltd v Bullet Electric Ltd, by simply stating that this situation “is much different”.  It then goes on to state: “…we (do not) subscribe to the view that a termination of employment will automatically relieve a former employee of ongoing fiduciary obligations.”

The above quotes are given in more details below.  All citations form Canlii.

Background

[7] In 1999, Evans approached TSC about the possibility of becoming a sports agent. Trained as a lawyer, Evans had been working for six years as the director of legal and business affairs for the Professional Hockey Players’ Association. At a meeting during the NHL All-Star game in 2000, Evans was invited to join TSC. He was seen as someone who could take over the recruitment and management of the Czech and Slovak hockey players from Kotlowitz.

[8] Evans moved from Toronto to Edmonton and took over the Czech-Slovak Pipeline. The parties then, with the help of lawyers, negotiated an employment agreement with a three-year term. The contract contained the following restrictive covenant:

7.Non-Disclosure, Developments, and Unfair Competition

Evans acknowledges that he is a key employee of the Company and that in the course of his employment with the Company, he has been and will be entrusted with, has developed and will develop, and has obtained and will obtain confidential information and trade secrets concerning the business of the Company, the disclosure of any of which to the Company’s competitors or the general public would be highly detrimental to the best interests of the Company. Evans further acknowledges and agrees that the right to maintain confidential all of such confidential information and trade secrets constitutes a proprietary right which the Company is entitled to protect. Accordingly, Evans covenants and agrees with the Company that:

(b) he will not, either during the continuance of his employment under this agreement or for a period of 24 months thereafter, obtain or attempt to obtain the withdrawal from the Company of any employees of the Company.

(c) he will not, either during the continuance of his employment or for a period of 24 months thereafter, directly or indirectly through others, call on, solicit, divert or take away or attempts to call on, solicit, divert or take away any client of the Company which has been a client of the Company or any other company to whom Evans provided any services related to the Company’s business. This provision shall not apply to those clients of the Company from whom Evans has received or is owed payments under section 4 of this agreement.

(j) Evans acknowledges and agrees that any revenue generated by Evans’ activities which contravene paragraphs 7(a), (b), (c) (d) and (e) of this agreement will unjustly enrich Evans or another third party and will thereby create a trust in favour of the Company in relation to the revenue referenced in this paragraph.

Evans left his employer and continued to work with his clients and in particular, client sourced before his emplyment.

Restrictive Covenant

[27] … The majority judgment in Globex emphasized the requirement that a restrictive covenant be unambiguous when considering its reasonableness. The majority stated, at paras 19-20:

If it is impossible to predict when you are breaching a restrictive covenant, it is in essence unreasonable.

Second, the clause is ambiguous in another way. Read literally, all it prohibited was soliciting customers “for” any client of the appellant. There is no suggestion that the respondents’ new employer was a client of the appellant. It seems unlikely this is what the clause was meant to prohibit. But the example demonstrates the difficulty in ascertaining the reach of the clause.

[28] In this case, the non-solicitation clause in 7(c) is directed at “any client of the Company which has been a client of the Company or any other company to whom Evans provided any services related to the Company’s business”. It seems likely that this provision is aimed at prohibiting solicitation of other people previously given services by Evans while they were clients of this or a related company. However, the clause can also be read as prohibiting solicitation of past clients of TSC. It is difficult to understand why it would be reasonable to restrain Evans from soliciting past clients which have already left the company.

[29] In short, we are not satisfied that the restrictive covenant in clause 7(c) is plain or readily interpretable. Rather, its meaning is ambiguous and its reach undeterminable. As observed by the Supreme Court in Shafron v KRG Insurance Brokers (Western) Inc, 2009 SCC 6 (CanLII), 2009 SCC 6, [2009] 1 SCR 157, “a restrictive covenant is prima facie unenforceable unless it is shown to be reasonable. However, if the covenant is ambiguous, in the sense that what is prohibited is not clear as to activity, time, or geography, it is not possible to demonstrate that it is reasonable” (para 43).

 Fiduciary Duties

[34] Evans correctly points out that he was neither a director nor shareholder of TSC, and that he could not hire or promote any employee. As this court pointed out, however, in Anderson, Smyth & Kelly Custom Brokers Ltd v World Wide custom Brokers Ltd, 1996 ABCA 169 (CanLII), 1996 ABCA 169 at para 15, 39 Alta LR (3d) 411, the status of a fiduciary does not emanate from holding corporate office. Rather, it relates to the responsibilities entrusted to an employee, including any attendant power to affect the economic interests of the company. In this case, while the Eastern European market was merely a segment of the overall business operations of TSC, Evans was entrusted with primary responsibility for its successful operation. TSC paid Henys and Kadlecek to find and recruit players who were then turned over to Evans. Evans could then use the power and influence arising from the personal relationship developed with these players, either for the benefit of TSC, or for himself. The great majority of the revenues flowing to Evans and his company, after he left TSC, were from the players originally entrusted to his care by TSC.

[35] While the trial judge did not frame it this way, the situation is akin to the appropriation of a corporate opportunity; namely, players entrusted to Evans to develop on behalf of TSC were diverted to his own benefit. We are satisfied, therefore, that the trial judge did not err in finding Evans a fiduciary in the circumstances of this case.

[36] Evans submits that even if he had fiduciary obligations, they were relieved when he was “wrongfully dismissed” on April 12, 2006. He cites ADM Measurements Ltd v Bullet Electric Ltd, 2012 ABQB 150 (CanLII), 2012 ABQB 150, 9 Alta LR (5th) 278, wherein the court concluded that, even if an employee is a fiduciary, any fiduciary obligation would end when the employee “was constructively dismissed without cause”(para 117).

 [37] In our view, Evans’situation is much different than that of the employee in ADM, nor do we subscribe to the view that a termination of employment will automatically relieve a former employee of ongoing fiduciary obligations. here, it was only after Evans gave notice that he would be departing on April 17 that TSC required that he immediately leave his office and asserted that it had no further need for his services. While we do not condone the failure of TSC to make payment for the five-day balance of the term, it is doubtful that the breach to make payment constituted a “wrongful dismissal” and, in any event, involved no repudiation of the employment contract. In these circumstances, TSC’s relatively minor breach of contract is irrelevant to Evans’ongoing fiduciary obligations, and does not serve to relieve him of them.