Commercial landlord on the hook for tenant shareholder’s loss in share value: Ontario Appellate Court clarifies limits on traditional rule that shareholders cannot sue for wrongs to the corporation

Shareholders of a corporation do not have a personal cause of action for wrongs committed against the corporation – such is the well-known rule in Foss v Harbottle. However, in Tran v. Bloorston Farms Ltd., the Court of Appeal recently clarified exceptions to that rule, one of which includes situations where a shareholder has her own personal cause of action and the corporation is not able to sue. In such circumstances the shareholder’s claim will not be barred by the rule.

Background

Sang Thi Tran (“Sang”) was a tenant under a lease assigned to her by her sister in 2010. Between December 2010 and April 2014 the leased premises were used by a restaurant called Gingers, operated by a corporation, 1835068 Ontario Ltd. (“183”) in which Sang was the only shareholder. In 2014 Bloorston Farms Ltd. (“Bloorston”) purchased the building where Gingers operated and became Sang’s landlord. Bloorston demanded increased Minimum Rent on the basis that the leased premises were larger than described in the 2010 lease Agreement. Bloorston also demanded increased Additional Rent based in part on Bloorston having increased the allocation of the building’s property taxes to the leased premises. Sang refused to pay such increases and Bloorston terminated Sang’s tenancy. As a result, Gingers restaurant could no longer operate.

The Action and Motion Judge’s Decision

Sang commenced an action against Bloorston seeking, among other things, damages for breach of the lease. Sang’s damages claim included the loss of value of her shares in 183. Bloorston counterclaimed for lost rent and other losses arising from Sang’s failure to pay increased rental amounts. Bloorston brought a summary judgment motion to dismiss Sang’s action and for judgment on its counterclaim.

Justice Chalmers dismissed Bloorston’s motion and refused judgment on the counterclaim and instead granted judgment in favour of Sang. Based on the terms of the 2010 lease Agreement Bloorston’s demand for increased Minimum Rent was not justified. The doctrine of estoppel by convention also applied in this case (i.e. the parties had a shared assumption of the square footage of the leased premises, the parties acted in reliance on that shared assumption, and it would be unfair to allow the landlord to depart from such shared understanding). The demand for increased Additional Rent was also not justified, given that Bloorston was not “acting reasonably” in its purported change to the method of allocation of property taxes – contrary to the requirements under the lease.

With respect to Sang’s claim for the loss of value of her shares, Justice Chalmers held that the termination of the lease caused Gingers restaurant to close and therefore Sang’s shares in 183 became worthless. Bloorston’s argument that the rule in Foss v Harbottle precluded Sang’s damages claim for diminution in share value was rejected by the Court given the exception that applies when a company suffers a loss but has no cause of action to recover the loss. In such case, the shareholder can sue for the loss of the value of the shares. In this case, the corporation 183 had no cause of action against Bloorston given it was not a party to the lease but Sang did have a cause of action for Bloorston’s breach.

Court of Appeal

Justice Chalmers’ decision was upheld on appeal. A central issue on appeal was whether Sang had a personal cause of action for loss of share value. Justice Zarnett for the Court of Appeal engaged in a thorough analysis of the rule in Foss v Harbottle and its rationale, noting the rule that a shareholder, even a controlling one, does not have a personal cause of action for a wrong done to the corporation is in place because a corporation is a separate legal entity and the rule avoids a multiplicity of proceedings.

By reason of the rule in Foss v Harbottle shareholders are precluded from personally suing for any damage, including diminished share value, because of a wrong done to the corporation. However, the rule does not prevent a shareholder from suing for wrongs done personally to her. The Court of Appeal outlined the limits to the rule and the importance of those limits in the following circumstances:

• When both the Corporation and Shareholder have separate and distinct causes of action. The same or overlapping facts could give rise to actionable wrongs against the Corporation and a shareholder. In such circumstances a shareholder’s claim for loss of share value may or may not be permissible and is dependent upon the nature of the wrongs to her and the corporation and their respective causes of action.
• When only the Shareholder has a cause of action and the corporation cannot sue. A shareholder may have a claim for loss of share value when she personally has a cause of action and the corporation has no cause of action – which were the circumstances in this case.

Justice Zarnett agreed with the motion’s Judge that only the tenant, Sang, had a cause of action and not the corporation, 183. Only Sang had a contractual relationship with the landlord Bloorston. Sang’s loss was consequently independent of any loss suffered by 183 as a result of a legal wrong done to 183. As such, Sang’s claim for loss of share value was not barred.

In this case the damages for loss in share value were reasonably foreseeable, the Court of Appeal held. The lease contemplated that the premises were for use of a restaurant and Bloorston was aware of and did not object to 183’s operations on the leased premises. Further, it was reasonably foreseeable that the wrongful termination of the lease would result in the restaurant ceasing its operations. Sang’s loss in share value was a type of damage to her property which could be expected to occur from the breach of the lease.

Takeaway

The Court of Appeal’s decision is a helpful clarification of the well-entrenched rule in Foss v Harbottle and its limits; the rule does not prevent a claim for loss of share value by a shareholder where the wrong committed is against the personal shareholder and the corporation has no right to sue the defendant.