THE LEGAL OBLIGATION OF GOOD FAITH

In a recent judgment of the Quebec Superior Court, a tenant was authorized to annul a commercial lease with Développement Olymbec Inc. ("Olymbec") as a result of the latter's bad faith while negotiating the lease. (Canal Médical Inc. -vs- Développement Olymbec Inc., 2024 QCCS 2236). Canal Médical Inc. ("Canal") entered into a commercial lease with Olymbec to lease space to be used for the production of respiratory face masks. After signing the lease, Canal noticed the absence of mechanical ventilation in the premises. At the time of the intial visit to the premises, Olymbec confirmed that it would be feasible to install air conditioning in order to recycle warm air generated by Canal's production equipement at the latter's cost. Olymbec admits that it did not inform Canal that the premises had no ventilation system. Canal requested a second visit but Olymbec refused due to ongoing work being conducted there. After taking possession of the premises, Canal noticed that the ventilation grills were blocked. When Olymbec was asked whether it would be possible to unblock the grills in order to install air conditioning, Olymbec replied in the negative due to the structure of the building and that the blocked vents were not connected to the building's ventilation network. Thereafter, Canal was informed by CNESST that the absence of proper ventilation in the premises may contravene labour standards and it could be obliged to suspend its activities. Consent to a contract must be freely given. Article 1401 of the Quebec Civil Code provides that error provoked by deceit ("dol") vitiates consent if otherwise, the victim of deceit would not have agreed to the terms and conditions of the contract. Such deceit can result from the silence or reticence of the other party. Deceit consists of dishonest conduct resulting from false or misleading representations, silence, or reticence that leads or encourages the other contracting party to believe in the existence or inexistence of a fact that is a significant factor in the decision to agree to contractual terms or conditions. Furthermore, the law further provides that all rights must be exercised in good faith. No right may be exercised in a manner to hurt another or that is excessive or unreasonable. (Articles 6, 7 and 1375 Quebec Civil Code). In the course of negotiating a contract, the requirements of good faith include the obligation to provide the other party with information that he knows or is presumed to know is of a significant nature and that the other contracting party has no access to or is entitled to duly rely upon and trust the other party. The Court concluded that the omission by Olymbec to disclose the absence of ventilation in the premises was deceitful and provoked a material error on the part of Canal thereby justifying the annulment of the lease as well as a condemnation in damages. Olymbec argued that it had no legal obligation to inform Canal that the premises had no ventilation. The Court disagreed for the following reasons. Olymbec knew that the premises were deprived of proper ventilation and that the information was significant considering the intended use of the premises which was expressly confirmed in the lease. Olymbec argued further that the terms of the lease exculpated itself from the legal obligation to provide information. In particular, the lease included the usual clauses to the effect that the tenant accepts the premises in their current state and condition and that the tenant confirms that no representation was made that is not included in the lease. The Court found that Olymbec induced Canal to sign the lease in bad faith and could not rely on the terms of the lease to change the fact that Canal's consent was vitiated thereby giving rise to its annulment. The Court granted the annulment of the lease and damages including reimbursement of rent and certain compensatory damages. This case is an illustration of the crucial importance that good faith plays in contractual relations including the pre-contractual phase while the parties are negotiating terms and conditions as well as while performing their contractual obligations.

ESTOPPEL IN COMMERCIAL LEASES

Estoppel (fin de non-recevoir), is a legal principle that allows a court to declare a claim or defense that is otherwise legally well founded to be declared "not receivable" (irrecevable) due to the presence of reprehensible or non-cooperative conduct of a party including a failure to act in good faith. Such conduct need not amount to fault or negligence. The evaluation of the conduct is based on the principles of equity and good faith. The courts, which have substantial room to appreciate a party's conduct, are trending more frequently to invoke estoppel, which adds a further layer of uncertainty to predicting the probable outcome of litigation. While all persons including judges are created equal, their appreciation of a parties conduct, which is should be objectively considered, may nevertheless differ as a result of a judge's individual perspective. This is not a criticism but merely a practical observation since a party's reprehensible conduct or bad faith should never be allowed to be rewarded. An interesting illustration of estoppel in a commercial lease setting can be found in the Quebec Court of Appeal decision 9378-1417 Québec Inc. -vs- Groupe Ilqueay Inc., 2023 QCCA 351. The parties entered into a commercial lease for five years terminating on 2020-07-31. In mid-March 2019, the tenant verbally informed the landlord of its intention to vacate the premises prior to the end of the term namely in June 2019. The tenant reiterated its intention in mid-April by email to which the landlord replied that it expected the lease be respected although it was prepared to discuss terms and conditions for an early termination. In its reply, the landlord also undertook to communicate with the tenant to arrange a meeting. In May, the tenant, not having heard from the landlord, reached out to inquire regarding the landlord's intentions. The landlord did not reply. The tenant eventually vacated the premises in September 2019, ten months prior to the end of the term. Landlord filed suit claiming unpaid rent for ten months plus legal fees. The landlord's suit was dismissed by judgment in first instance which judgement was affirmed in appeal. The court concluded that the landlord's lack of cooperation since April 2019 amounted to bad faith on its part and its failure to minimize its damages (it made no effort to find a new tenant after retaking possession of the premises but instead, occupied the premises itself) justified the dismissal of landlord's claim on the grounds of estoppel.

REPOSSESSION OF A DWELLING BY A LANDLORD IN BAD FAITH

 

Quebec law gives tenants a right to remain in their leased dwelling and controls the amount of rent that a landlord can charge. There are some limited exceptions, including:

 

·      the right to retake possession to reside there himself or for an ascendent or descendent in the first degree or any other relative for whom he is the principal means of support;

 

·      for a spouse or ex-spouse for whom he is the principal means of support;

 

·      to subdivide the dwelling, enlarge it substantially or change its destination. (Article 1957 and ff. CCQ).

 

A landlord who exercises a right to retake possession in bad faith could be liable to pay both compensatory and punitive damages to the tenant, even if the tenant consented to leave. An interesting illustration can be found in the decision of the Tribunal Administratif du Logement at 2022 QCTAL 13865.

 

Context

 

The tenants took possession of a nine room cottage on 2015-07-15 in virtue of a two year lease at a monthly rent of $3000, which was tacitly renewed on 2017-07-01 for 12 months.

 

The lease ended on 2018-06-01 pursuant to an application by the landlords to retake possession for their daughter. The tenants received an indemnity in the amount of $6000.

 

The tenants moved to a different house in the same area at a monthly rent of $3500.

 

From 2018-10 to 2019-02, the landlords' daughter, who worked in the performing arts, used the house sporadically to practice but never resided there.

 

On 2019-03-15, the house was sold for the price of $905,000 with immediate possession. The promise to purchase was dated 2019-02-03 and accepted on 2019-02-21.

 

Convinced that their rights were breached, the tenants filed suit claiming the following:

 

·      $6000 pecuniary damages calculated as the rental difference of $500 per month during 12 months;

·      $4000 moral damages (aggravation and stress);

·      $45,250 punitive damages representing 5% of the proceeds of sale ($905,000).

 

A real estate agent gave expert testimony that it is easier to sell a vacant house rather than one that is occupied by a tenant, which generally results in a sale price that is 5% higher.

 

Some other evidence that the court retained included:

 

·      the landlords did not inform their daughter of their plans until after they already commenced the process of retaking possession;

·      the daughter was never interested in residing in the house;

·      the fact the house was put up for sale in September 2018, only a few months after repossession by the landlords, corroborates the position of the tenants that they were victims of the landlords' bad faith.

 

Decision

 

The Court maintained the tenants' application. It granted material damages in the amount of $3000, considering that although they paid a higher rent after moving, their new premises were superior.

 

The Court refused the claim for moral damages, considering the indemnity of $6000 that the tenants received from the landlords when they moved.

 

The Court granted punitive damages in the amount of $30,000, taking into account the landlords conduct, their net worth and their capacity to pay.

 

The Court noted that the punitive damages are evaluated with the following purposes in mind: prevention, dissuasion and public condemnation of similar conduct. In other words, a wealthier perpetrator would be expected to face a higher punitive damage award in order for the award to achieve its purpose.

REAL AND PERSONAL SERVITUDES (EASEMENTS)

The legal consequences of real and personal servitudes differ significantly. Real servitudes are rights in property in favour of another property while personal servitudes are rights in a property in favour of a person, independent of any property that he may or may not possess. The distinction at the time of their creation is not always evident and sometimes leads to confusion, as was recently illustrated by the Court of Appeal decision of Belzil et al. -vs- Hôtel et Suites Le Lincoln Inc. et al., 2021 QCCA 626.

 

The definition of a real servitude is found at Article 1177 of the Quebec Civil Code:

 

1177. La servitude est une charge imposée sur un immeuble, le fonds servant, en faveur d’un autre immeuble, le fonds dominant, et qui appartient à un propriétaire différent.	1177. A servitude is a charge imposed on an immovable, the servient land, in favour of another immovable, the dominant land, belonging to a different owner.
Cette charge oblige le propriétaire du fonds servant à supporter, de la part du propriétaire du fonds dominant, certains actes d’usage ou à s’abstenir lui-même d’exercer certains droits inhérents à la propriété.	Under the charge the owner of the servient land is required to tolerate certain acts of use by the owner of the dominant land or himself abstain from exercising certain rights inherent in ownership.
La servitude s’étend à tout ce qui est nécessaire à son exercice.	A servitude extends to all that is necessary for its exercise.

To be valid, a real servitude must meet six conditions which are:

 

1.     There must be two separate properties

2.     Each property must have a different owner

3.     The two properties must be in proximity to each other

4.     The servitude must create a benefit for one of the properties

5.     The owner of the servient property must tolerate certain acts of use by the owner of the dominant property or abstain from exercising certain rights inherent in ownership

6.     The servitude is perpetual

 

To be valid, a personal servitude must satisfy three conditions:

 

1.     Creation of a real right in property

2.     In favour of a person independently of any property which he may or may not possess

3.     Established for a limited period of time

 

A third possibility is that a purely personal right is created i.e. a right in favour of a person (not a property) and a corresponding obligation on the part of another person (not a property) with no property right being affected.

 

The facts of the case can be summarized as follows:

 

1944-06-25	Manoir des Laurentides ("Manoir") opens (hotel, chalet, beach access, marina)
2000	Manoir decides to replace chalets with condos
2005-07-12	Deed of servitude between the promoter of the condos and municipality of St-Donat comprising a  renunciation by the promoter of all rights in the beach access and marina
2005-07-13	Declaration of co-ownership (legal creation of condos)
2007-06-07	Minister of Environment and Sustainable Development grants lease to Manoir for beach access and marina
	Appellants (condo owners) benefit from access to common pool, beach access and marina and pay share of related costs to Manoir
2012-12-	Manoir sold to 9265-9374 Quebec Inc.
2015-12-14	9265-9374 Quebec Inc. goes bankrupt
2016-10-21	Le Lincoln (Respondent) acquires Manoir and demolishes the hotel with intention to build a new hotel
Summer 2017	Appellants (condo owners) refuse to pay share of costs to use beach access and marina and Le Lincoln denies them access.

 

 

The trial judge decided that the deed of servitude created a real servitude that bound the property of which the Appellants subsequently became co-owners thereby depriving the Appellants of access to the beach and the marina. The Court of Appeal reversed the judgment for the reasons hereinafter described.

 

Although the intention of the parties can be considered in order to determine the nature of the servitude, they cannot decree a result that does not meet the conditions particular to each type of servitude. 

 

According to the Court of Appeal:

 

The Deed of Servitude did not create a real right in favour of the dominant (Le Lincoln) property as the trial judge concluded, but merely a personal obligation assumed by the promoter. It is impossible to conclude that the property of the Appellants is at the service of the property of Le Lincoln. The litigious clause of the Deed was designed to force the owner of Appellants' property to do or not to do certain acts in favour of the occupant of the Le Lincoln property but the Appellants' property itself is unaffected. In fact, the obligation was assumed personally by the owner of Appellants' property at the time namely, the promoter. When the promoter sold the condos to the Appellants, there was no provision in the sale agreements to require Appellants to assume the promoter's personal obligation not to use the beach or marina. Consequently, the renunciation of access by the promoter to the beach and marina had no legal consequence for the Appellants, who only became owners after. 

RIGHT OF PROPERTY OWNER TO PRESERVE PANORAMIC VIEW

 

It happens that an important consideration for purchasing a property is the exceptional view that it has of a lake, river, seashore, valley or downtown. Does an owner have a recourse if a neighbour or future acquirer of the neighbour's property decides to build a new construction or increase the height of an existing one that substantially blocks a panoramic view? This issue was litigated in Raymond v. Goldberg et al. 2008 QCCS 5925.

 

Raymond acquired her property in 1999 and had extraordinary views of downtown Montreal and the St. Lawrence river as well as unobstructed natural light. Goldberg's property was situated in front of but at a lower elevation that that of Raymond.

 

The problem occurred when Goldberg decided to add a third story to his house which would partially, but not completely, obstruct Raymond's views. Goldberg applied to the City of Westmount for a building permit which was granted by city council after a thorough review by the Planning Advisory Committee and the Inspections department determined that the proposed renovations were in conformity with the City's by-laws.

 

Raymond applied for an injunction to prevent Goldberg from carrying out the renovations, alleging that she would incur a substantial loss of value to her property; loss of privacy; reduced lighting; and loss of the panoramic view.

 

Goldberg replied that his project was submitted to and approved by the City of Westmount after a rigorous process that confirmed that it was in conformity with municipal regulations. Consequently, he was within his rights to carry out the construction and that even if Raymond's view would as a result be adversely affected, her view was not protected by law. The City of Westmount was also a party to the case and supported Goldberg's position.

 

What are the legal principles that should apply and resolve the issue?

 

·      Goldberg has the right to use and enjoy his property to the fullest extent subject to the limits of the law. His title to property was not limited by any servitude of non-construction in favour of Raymond or her property.

·      The construction must respect the applicable laws and regulations, including zoning rules.

·      Goldberg must respect the limits of Article 976 of the Quebec Civil Code which requires neighbours to accept normal inconveniences (and the corollary, not to impose unusual or exceptional inconveniences or nuisances).

·      Goldberg must at all times, act in good faith.

 

The Court noted that Goldberg did not contravene any law, regulation or contractual obligation and acted in good faith. 

Goldberg took necessary precautions to limit inconvenience and his project was "blessed" by the City after a rigorous and legitimate review process. He acted as a responsible owner, did not pollute, did not significantly deprive Raymond of her privacy and only partially limited her panoramic view.

 

The Court noted that there was no objective test to determine when inconveniences are excessive. Each case must be decided on its particular set of facts. Raymond and Goldberg were both entitled to use and enjoy their properties. Based on the facts of the case, the Court was not convinced that Goldberg's construction project would have resulted in an excessive inconvenience for Raymond. An inconvenience yes, but one that she was required to put up with.

 

 

CONTESTING MORTGAGE FORECLOSURE PROCEEDINGS (TAKING IN PAYMENT)

In a recent case, the Court had to decide whether a borrower raised valid grounds to contest the foreclosure proceedings brought by a private lender (Prêts Relais Capital Inc. v. Pierre Bonneau et al., 2020 QCCS 4055).

 

The borrower's grounds of contestation consisted essentially that the interest charged and the fees for opening and analysing the loan application were exaggerated and illegally claimed. The lender claimed the aggregate amount of $360,563.12 including principal, interest, penalties and costs. The borrower acknowledged owing $236,961.

 

In addition to the principal amount of the loan, the lender claimed the following:

·      interest at 12% per annum, plus Interest on any unpaid interest at the annual rate of 32%.

·      collection costs including the lender's legal fees.

·      liquidated damages in the event of default in the amount of 10% of the amount in default.

·      late payment and file closing fees

 

The borrower did not dispute that he was in default, only the total amount of the claim. Although the law provides that the default may be cured at any time before judgment is rendered, the borrower did not attempt to do so, nor did he deposit any amount with the Court, even the amount that he acknowledged owing.

 

Article 2332 of the Quebec Civil Code grants authority to the Court to reduce the obligations of the borrower in a contract of loan taking into account the circumstances, when there is a significant difference in the bargaining power of the parties which leads to exploitation. The Court may also reduce a penalty clause which it considers to be abusive.

 

In the present case, the Court considered the claim for legal fees to be contrary to Article 2762 CCQ and therefore illegal. It considered that there was insufficient evidence that the interest rate and costs to open the file and review the loan application were usurious.  To succeed, the borrower would have had to produce an analysis by an actuary or accountant to establish the real underlying interest rate, which he did not do.

 

The Court did consider the 10% penalty, 32% interest rate on unpaid interest and the fees for reimbursement after default and for closing the file to be exaggerated and would have reduced them. However, no useful purpose would have been served by reducing the amount of the lender's claim since, by choosing the "taking in payment" recourse instead of proceeding by judicial sale, the lender took title to the mortgaged property in complete payment of the debt, whatever the correct amount, without further recourse against the borrower.

SHORTFALL OF LIVING SPACE IN NEW CONDO

What are the rights of a purchaser when the living area of the condo delivered by a promoter is considerably smaller than advertised? This issue was discussed in Duval v. Habitats District Griffin Îlot 10 Inc., 2018 QCCS 4703 (confirmed by the Court of Appeal 2020 QCCA 1614).

 

Jean was living in the suburbs in the family home encompassing  2000 sq. ft. of habitable space, excluding the basement. He wanted to move closer to downtown and estimated that he would require  a condo with @ 1400-1500 sq. ft. He signed a preliminary contract with Habitats to purchase a new condo advertised as comprising 1321 sq. ft. plus a loggia for a total of 1408 sq. ft.

 

The preliminary contract included a note that the dimensions were approximate and subject to modification without prior notice. The note also stated that the gross square footage was calculated by including 1/2 of the interior walls as well as the exterior and corridor walls.

 

Shortly before the closing, the certificate of location was delivered to Jean showing a living area of only 1174 sq. ft. namely, 12% less than what he expected. According to Jean, his options are very limited since the preliminary contract did not allow him to withhold any amount from the purchase price. Moreover, he had already advanced between $50,000 to $60,000 for high end materials so that the interior finishing of the new condo would meet his expectations of superior quality. In the circumstances, he proceeded with the closing and took possession of his condo.

 

Jean claimed a reduction in the purchase price to reflect the reduction in the living space of the condo compared to what he expected and declared that he was promised. Habitats argued that by closing without reserving his rights, Jean implicitly renounced any claim that he may have had. Subsidiarily, Habitats states that the dimensions of the condo were gross and only approximate and that it never made any representations or promises regarding the dimension of the livable area.

 

The Court found that according to the evidence, Habitats led Jean to believe that the livable area of the condo would be 1318 sq. ft. and that it was an important consideration for Jean when he agreed to purchase the condo. This constituted a false representation which was actionable both pursuant to Articles 1401 and ff. of the Quebec Civil Code as well as Articles 216 and ff. of the Consumer Protection Act.

 

The Court also found that Jean never renounced his rights by closing without reserve since the cancellation of the contract was not a viable option for the reasons hereinabove mentioned. In the circumstances, the Court granted Jean a reduction of the purchase price in the amount of $73,000.

 

Article 1720 of the Quebec Civil Code requires the seller to deliver the area or quantity specified in the contract unless it is obvious that the property was sold without regard to such factors. In this case, the Court concluded that the size of the habitable space was an important consideration for Jean. 

 

The restriction in the contract regarding the dimensions of the property did not prevail based upon the specific facts of this case namely, that according to the Court, Habitats provoked Jean into error by confusing gross area with net living space. Habitats would have been better served to consider the adage: the primary objective of good communication is not to be understood, but rather to avoid being misunderstood.