A Boost to Franchisor Entitlements under Alberta’s Expropriation Act

by Adrienne Boudreau and Lauren Huxtable

In its recent decision, Edmonton (City) v AW Holdings Corp, 2024 ABCA 92, Alberta’s top court has upheld a decision by the province’s Land and Property Rights Tribunal (LPRT), which dealt with the issue of whether a franchisor who neither owns title to, nor leases land, can be an owner through possession or occupation of that land, or have an interest in it, under provincial expropriation legislation.

The key point here was that the LPRT held, based on a very fact-specific analysis, that the franchisor’s interest in the business operated by its franchisee on land leased by the franchisor’s leasing corporation, pursuant to the franchise agreement was different and separate from an interest as a franchisee and as a sublessor. Based on its interest as a franchisor under its franchise agreement, the franchisor was entitled to control over the business activities of the franchisee and to income for the use of the franchise system, which was based on a right for compensation for expropriation of that land.

The case is novel, as it indirectly, and in the limited context of expropriation under the Expropriation Act, RSA 2000, c E-13 (“Act”), recognizes and affirms the party’s interests within a franchise relationship. The case recognizes that, for brick-and-mortar locations, where there is a sublease relationship, the franchisor (and not just the franchisor’s leasing company) may have an interest in the land. The overreaching implications of this case may be limited, as the court’s analysis is highly fact-dependent and dependent on the specifics of the Act. However, a takeaway for Canadian franchise counsel may be to balance the protective intent of having a separate leasing company with having some nexus between the franchisor and the premises. Counsel may find it a good idea to review their current forms of sublease to consider these issues.

Facts

As is common in franchise systems, the Booster Juice franchise system ( “System”) includes a franchisor corporation, AW Holding Corp (“Franchisor”), which owns the Booster Juice franchise and enters into franchise agreements with franchisees and includes a leasing corporation, Booster Juice Inc. (“LeasingCo”), which acquires, leases and sublets premises for the Booster Juice System.

Starting in 2001, LeasingCo entered into a lease agreement (the “Head Lease”) with Sun Life Assurance Company of Canada (“Landlord”) for Unit 11838-104 Avenue, Edmonton (the “Land”) and in turn sublet the Land (“Sublease”) to 1154264 Alberta Ltd ( “Franchisee”).

The Headlease contained a standard clause giving the Landlord control over the form of any sublease, however, this clause was crossed out.

This change in the lease enabled Franchisor to dictate the form of sublease Franchisee would have to execute with LeasingCo for the premises under its Unit Franchise Agreement (“Franchise Agreement”) between Franchisor and Franchisee. This section of the Franchise Agreement stated:

“4(a) If Franchisor or any corporation or Person linked with the Booster Juice System (including Booster Juice Inc.) enters into the lease for the Premises, Franchisee shall execute a sublease with Franchisor or such other corporation or person in Franchisor’s standard form attached hereto as “Schedule 3” concurrently with the execution of this Agreement.”

Clause 1.6 of the Franchise Agreement provided additional discretion to Franchisor, stating that the provisions of the Franchise Agreement must be read in priority to and must supersede the provisions of any sublease.

The Land subsequently became the subject of a proposed expropriation by the City of Edmonton (the “City”) to facilitate the construction of an LRT line and the City acquired LeasingCo’s sublease under an agreement with Franchisee in 2020 (the “Consent Agreement”), pursuant to section 30 of the Act which stipulates that, “the owner [of expropriated land] may consent to the acquisition of land by an expropriating authority subject to the condition that compensation for the land shall be determined by the [LPRT]”.

Franchisor, who was not a party to the Lease or Sublease, signed the Consent Agreement following the wording: “Booster Juice hereby consents to the conveyance of the Leasehold interest from [the Franchisor] to the City pursuant to the terms and conditions of this Agreement”.

The land was left vacant by the city from March 2020 until it was demolished in June 2022, resulting in Franchisor losing royalty income at that location.

The City acknowledged that Landlord, LeasingCo, and Franchisee were all “owners” and proper claimants under the Act, but disputed that Franchisor had the same status.

In August 2021, Franchisor, LeasingCo and the City submitted a joint written application to the LPRT for a determination regarding Franchisor’s status. The LPRT determined that Franchisor was a proper claimant for compensation by virtue of having both “possession” of, and an “interest” in, the Land.

Issue

The City appealed this decision submitting that the LPRT erred in its interpretation and application of the terms “possession […] of the land” under s. 1(k)(iii) of the Act, and “interest” or “interest in the land” under s. 1(k)(iv) of the Act.

Analysis

First Instance

The LPRT based its analysis on the wording of the Act and in particular on whether the Franchisor qualified as an “owner” such that they were entitled to compensation under the Act.

• Possession

Section 1(k)(iii) of the Act defines “owner” as: any other person who is in possession or occupation of the land. If a person can show possession or occupation of the land, they are an owner. In this case, the LPRT found the powers Franchisor reserved to itself under the Franchise Agreement gave it (i) control over the Land, because it could and did, dictate the terms of the sublease on the Land, and (ii) the right to possession of the Land if certain circumstances under the Franchise Agreement arose.

This finding is novel in that it confirms the context of expropriation contemplates relationships that could give rise to possession or occupation other than those through the chain of legal ownership of property. The LPRT found possession in the broadest sense is sufficient. The Franchise Agreement gives the Franchisor a degree of control over the Land, distinct from the legal ownership of freehold owner or the legal interests of the lessee or sublessee.

• Interest

Section 1(k)(iv) defines “owner” as: any other person who is known by the expropriating authority [here the City] to have an interest in the Land. It is clear. Under this section, if a person, who is known to the expropriating authority, has an interest in the Land that is different from the interests of freehold or lease hold, they are an owner for the purposes of the Act.

The Franchisor argued that the powers it reserved to itself under the Franchise Agreement gives it control over the business operations of Franchisee, and through control of the System, control over the use of the Land by Franchisee under the terms of the Franchise Agreement. In effect, Franchisor’s interest under the Franchise Agreement gives it participation in the business of the Franchisee located on the Land.

The LPRT agreed the Franchisor had a business interest in the franchised business and had significant control of the operation of the franchised business located on the Land.

Appeal

The LPRT’s decision was reviewed on a reasonableness standard in light of its underlying rationale and as a whole to determine whether it exhibited (i) justification, (ii) transparency, and (iii) intelligibility. The Court of Appeal of Alberta (“Court”) reviewed the LPRT’s analysis of the Franchise Agreement grounding “possession” of the Land for the Franchisor under section 1(k)(iii) of the Act, and upheld their decision. Having upheld the decision on the first analysis, the court did not consider whether the Franchisor had an “interest” under Section 1(k)(iv) of the Act.

The Court held that Sections 1(k)(iii) and (iv) must be interpreted broadly and strictly construed in favour of claimants. It reasoned that the terms “possession” and “interest” in those provisions have broader meanings in the expropriation context than the same terms used in the context of property law, citing Edmonton (City) v Business Care Corp, 2019 ABQB 724.

The Court affirmed the LPRT determination that the Franchisor was a party “in possession or occupation of the land”, pursuant to section1(k)(iii) based on a number of factors.

• Control Over the Sublease – Franchisor maintained control over the land by dictating the terms of the sublease in the Franchise Agreement. Part of the bundle of rights initially held by Landlord was the ability to dictate the terms of any sublease by LeasingCo. By deleting Landlord’s standard clause from the Headlease, Landlord had expressly given up its right to control the sublease terms on which the Franchisee would use the subject premises. Franchisor exercised that control through its Franchise Agreement with the Franchisee which dictated with whom the Franchisee could enter into a sublease and the use of Franchisor’s mandatory form of sublease for the subject premises.
• Control over the operation of the business on the Land – Franchisor had possession of the land by virtue of the non-exclusive rights of the Franchisee to use Franchisor’s day-to-day business operations system in the operation of the franchise outlet and the control exercised by Franchisor over that system.
• Signing the Consent Agreement – Franchisor signed the Section 30 Agreement pursuant to the Franchise Agreement with the Franchisee, thereby consenting to the City’s acquisition of the Franchisee’s sublease interest. Both parties acknowledged that there was sparse information as to how and why Franchisor came to sign the Section 30 Agreement, however the Court concluded that it was not unreasonable for the LPRT to infer from it that the Franchisee deemed it was at least prudent if not necessary, and sufficient, to obtain Franchisor’s consent to the Section 30 Agreement. It was not unreasonable for the LPRT to conclude that Franchisor’s signature was therefore another indicia of control.

Obiter Dicta

The City raised the concern with the Court that the LPRT decision creates a dangerous precedent by allowing the Franchisor, which was not on the Headlease or Sublease, to claim possession of the Land. The court commented that the LPRT did not espouse any novel principles of general application relating to the law of “possession” in the expropriation context, but rather clearly decided the matter based on the very particular facts before it.

Adrienne Boudreau, Sotos LLP

Adrienne is a partner at Sotos LLP, Canada’s leading franchise law firm. She has earned recognition as a leading Canadian franchise law practitioner from numerous prestigious publications, including Chambers Canada, Best Lawyers in Canada, and the Best Lawyers Global Business Edition. Adrienne is consistently recommended in the Canadian Legal LEXPERT Directory and has been acknowledged by Who’s Who Legal Canada and the Who’s Who Legal Global Guide. Additionally, she is listed as a Leading Litigation Lawyer in the LEXPERT Special Edition – Canada’s Leading Litigation Lawyers. Adrienne can be reached directly at 416.572.7321 or aboudreau@sotos.ca.

Lauren Huxtable, Sotos LLP

Lauren is an associate at Sotos LLP. She can be reached directly at 416.572.7318 or lhuxtable@sotos.ca.