Persons taking part in the construction or renovation of a building may be entitled to register a lien on the building called a legal hypothec to secure their claims to the extent of the increase in value added to the building as a result of the work, materials or services provided.
An essential condition for the right to register a legal hypothec is that there must be a contract between the owner and the builder. The subcontractors and suppliers of material who transact with the builder must also disclose their subcontracts to the owner to protect their rights. The rational for this system is that the owner, after being made aware of the existence of the subcontractors and suppliers of material, may choose to pay them directly or withhold payment from the builder until the latter provides releases from the subcontractors and suppliers.
Often, a commercial lease may provide that substantial renovations or leasehold
improvements be made to the leased premises. A recent case decided by the Superior
Court, District of Montreal, involved substantial ventilation and plumbing work that was carried out at the express request of the tenant in premises that were leased for the operation of a factory.1 The construction contract was concluded between the tenant and the builder. The subcontractor disclosed the existence of its subcontract to the tenant.
Although it was proven to the satisfaction of the Court that the owner was aware of the existence of the construction agreement as well as the nature of the work to be carried out by the tenant and it authorized the tenant to carry out the work to the leased premises, the owner did not legally bind itself to pay the sums due to the builder or the subcontractor upon the completion of the work in the event that the tenant failed to do so. Furthermore, the owner personally had direct contact and was consulted by the engineers who were responsible to design important parts of the work and the owner followed the progress of the work on a regular basis. The owner even participated, to a certain degree, in the development of the tenant’s project insofar as he made changes to the premises to facilitate the execution of the work. The Court concluded, however, that these elements were insufficient to establish that the work was carried out at the request of the owner.
Although it was clear that no contract had been entered into directly between the owner and the contractor, in certain circumstances, the terms of the lease could expressly or implicitly designate the tenant as the agent of the owner with respect to the construction of the leasehold improvements or renovations. In such a case, even if the contract is entered into directly between the tenant and the contractor, the owner would be considered to be a party to the construction contract and legally bound by the tenant, acting as his authorized agent. This would allow the builder and the subcontractors to register their construction liens against the owner’s property. Unfortunately for the builder and subcontractors, the evidence in this case did not support their argument.
Even if the construction agreement would have been binding on the owner of the building, the right to register a legal hypothec would still be limited to the increase in value added to the building by the work and materials. In the Calomat case, the builder and subcontractor built an entire factory in the leased premises for the tenant at a substantial cost. Although the material and equipment installed by the builder and subcontractor were certainly useful, if not indispensable, to the operation of the tenant’s business, the Court held that they did not add any significant value to the building nor were they physically incorporated into the building so as to form an integral part of it. They were only attached to the building in order to allow a part of the building to be used for the industrial production purpose envisioned by the tenant. They conserved their individuality and could be removed from the leased premises without seriously damaging the building or rendering releasing impossible. In the circumstances, even if the construction agreement would have been entered into directly with the owner, the builder and subcontractor would still not have had a right to register a construction lien because the work and materials did not significantly increase the value of the building.
The lesson for the builder and subcontractor from this case is that the construction contract should be entered into directly with the owner and that the identity of the latter should be verified by consulting the title to the property at the land registry office. Otherwise, the builder and subcontractor should take appropriate precautions to ensure that the tenant is financially able to meet its obligations pursuant to the construction agreement and the subcontracts.
1 Centre D’Isolants Calomat Inc. vs. La Plomberie Fury Inc. et al., 2010 QCCS 3425.
Monday, September 13, 2010
Tuesday, July 13, 2010
NOT ALL LEGAL HYPOTHECS ARE RENDERED UNENFORCABLE BY BANKRUPTCY
A judgment creditor for a sum of money has a right to seize and sell its debtor’s property to get paid, but it has no real right in the debtor’s property and no priority over other creditors.
It is possible to register a judgment against the debtor’s immovable property in order to create a legal hypothec, which is a real right in the property itself, and thereby obtain security and a preference over competing creditors. However, if the debtor becomes bankrupt, the legal hypothec becomes unenforceable as a result of Section 70 of the Bankruptcy and Insolvency Act.1
In a recent decision, the Quebec Court of Appeal was called upon to decide whether
Article 70 would apply to render a legal hypothec unenforceable when a mortgage
created after the legal hypothec resulted in the foreclosure of the debtor’s property prior to the date of bankruptcy.2
In November of 2003, Jacyno registered a legal hypothec on the debtor’s property for the sum of $200,000.00. In 2006, Québec Inc. made a loan to the debtor in the amount of $300,000.00 which was secured by a mortgage on the debtor’s property. When the debtor defaulted on the loan, Québec Inc. foreclosed on the mortgage and became the owner of the property retroactive to October 24, 2006. The property was still subject to the legal hypothec which had been registered in November 2003.
On March 23, 2007, the debtor made an assignment in bankruptcy. Québec Inc., now the
owner of the property, applied to the Court to have the legal hypothec cancelled and
removed from its property arguing that the effect of Section 70 of the Bankruptcy and
Insolvency Act was to render the legal hypothec unenforceable. Moreover, Quebec Inc.
argued that since the legal hypothec is an accessory to the monetary condemnation, which is cancelled by the bankruptcy, the legal hypothec, as an accessory to the debt, must also be cancelled.
In rebuttal, Jacyno argued that Section 67 (1) (c) of the Bankruptcy and Insolvency Act expressly limits the application of bankruptcy law to the property that was owned by the bankrupt at the date of the bankruptcy. Consequently, since Quebec Inc. foreclosed on the property and became the owner prior to the date of bankruptcy, the Bankruptcy and Insolvency Act would not apply. It was also argued that the Bankruptcy and Insolvency Act should be interpreted so as to achieve the objectives of the legislator namely, the administration of the assets of the bankrupt, the priority between creditors, the liquidation of their claims and the modalities of the discharge of the bankrupt.
Although previous court decisions, even of the Quebec Court of Appeal, were divided on this issue, the Court of Appeal unanimously adopted the second argument namely, that when the debtor no longer owned the property at the date of bankruptcy, the legal hypothec would continue to be enforceable. In addition, the Court of Appeal noted that Québec Inc. foreclosed on the property with full knowledge of the existence of the legal hypothec, which had been duly published at the Land Registry office. In the circumstances, Quebec Inc. had various available legal options which it presumably rejected, such as having the property sold at justice and the proceeds of sale distributed according to law, instead of choosing to become the owner of the property or it could have waited for the debtor to become bankrupt in which event, the property would have been subject to the Bankruptcy and Insolvency Act and the legal hypothec would have become unenforceable and cancellable.
But what of the legal argument that once the claim is extinguished by the bankruptcy, the legal hypothec can no longer exist? The Court of Appeal answered that the effect of the bankruptcy is not to “extinguish” claims but to render them unenforceable. In civil law, an unenforceable claim may still constitute legal and valid consideration for the performance of an obligation. Such obligations fall into the category of moral or natural obligations which a debtor could validly decide to pay even after the statute of limitations period had expired or which were not enforceable as a result of bankruptcy.
In summary, although the extinction of an obligation that is guaranteed by a hypothec
results in the extinction of the hypothec itself, there is an exception in the circumstances of this case. Although the bankrupt debtor could not be sued for the debt that was subject to the bankruptcy, the debt continued to exist in law and the legal hypothec continued to subsist until payment or the expiry of the statute of limitations period. Therefore, the discharge of the bankrupt does not automatically signify that third parties who may also be held to pay the claim are also discharged.
1 R.S.C. 1985, C. B-3
2 3095-7252 Québec Inc. vs. Mickeck Jacyno, 2010 QCCA 940 (CanLII)
It is possible to register a judgment against the debtor’s immovable property in order to create a legal hypothec, which is a real right in the property itself, and thereby obtain security and a preference over competing creditors. However, if the debtor becomes bankrupt, the legal hypothec becomes unenforceable as a result of Section 70 of the Bankruptcy and Insolvency Act.1
In a recent decision, the Quebec Court of Appeal was called upon to decide whether
Article 70 would apply to render a legal hypothec unenforceable when a mortgage
created after the legal hypothec resulted in the foreclosure of the debtor’s property prior to the date of bankruptcy.2
In November of 2003, Jacyno registered a legal hypothec on the debtor’s property for the sum of $200,000.00. In 2006, Québec Inc. made a loan to the debtor in the amount of $300,000.00 which was secured by a mortgage on the debtor’s property. When the debtor defaulted on the loan, Québec Inc. foreclosed on the mortgage and became the owner of the property retroactive to October 24, 2006. The property was still subject to the legal hypothec which had been registered in November 2003.
On March 23, 2007, the debtor made an assignment in bankruptcy. Québec Inc., now the
owner of the property, applied to the Court to have the legal hypothec cancelled and
removed from its property arguing that the effect of Section 70 of the Bankruptcy and
Insolvency Act was to render the legal hypothec unenforceable. Moreover, Quebec Inc.
argued that since the legal hypothec is an accessory to the monetary condemnation, which is cancelled by the bankruptcy, the legal hypothec, as an accessory to the debt, must also be cancelled.
In rebuttal, Jacyno argued that Section 67 (1) (c) of the Bankruptcy and Insolvency Act expressly limits the application of bankruptcy law to the property that was owned by the bankrupt at the date of the bankruptcy. Consequently, since Quebec Inc. foreclosed on the property and became the owner prior to the date of bankruptcy, the Bankruptcy and Insolvency Act would not apply. It was also argued that the Bankruptcy and Insolvency Act should be interpreted so as to achieve the objectives of the legislator namely, the administration of the assets of the bankrupt, the priority between creditors, the liquidation of their claims and the modalities of the discharge of the bankrupt.
Although previous court decisions, even of the Quebec Court of Appeal, were divided on this issue, the Court of Appeal unanimously adopted the second argument namely, that when the debtor no longer owned the property at the date of bankruptcy, the legal hypothec would continue to be enforceable. In addition, the Court of Appeal noted that Québec Inc. foreclosed on the property with full knowledge of the existence of the legal hypothec, which had been duly published at the Land Registry office. In the circumstances, Quebec Inc. had various available legal options which it presumably rejected, such as having the property sold at justice and the proceeds of sale distributed according to law, instead of choosing to become the owner of the property or it could have waited for the debtor to become bankrupt in which event, the property would have been subject to the Bankruptcy and Insolvency Act and the legal hypothec would have become unenforceable and cancellable.
But what of the legal argument that once the claim is extinguished by the bankruptcy, the legal hypothec can no longer exist? The Court of Appeal answered that the effect of the bankruptcy is not to “extinguish” claims but to render them unenforceable. In civil law, an unenforceable claim may still constitute legal and valid consideration for the performance of an obligation. Such obligations fall into the category of moral or natural obligations which a debtor could validly decide to pay even after the statute of limitations period had expired or which were not enforceable as a result of bankruptcy.
In summary, although the extinction of an obligation that is guaranteed by a hypothec
results in the extinction of the hypothec itself, there is an exception in the circumstances of this case. Although the bankrupt debtor could not be sued for the debt that was subject to the bankruptcy, the debt continued to exist in law and the legal hypothec continued to subsist until payment or the expiry of the statute of limitations period. Therefore, the discharge of the bankrupt does not automatically signify that third parties who may also be held to pay the claim are also discharged.
1 R.S.C. 1985, C. B-3
2 3095-7252 Québec Inc. vs. Mickeck Jacyno, 2010 QCCA 940 (CanLII)
Friday, June 11, 2010
THE INEFFECTUAL SAFEGUARD ORDER
In commercial lease disputes, the Court is often called upon to issue safeguard orders to protect the rights of the parties in the interim period until the case can be heard and decided after a trial, which can often entail a delay of months if not years.
The safeguard order is similar to an interlocutory injunction. For example, the Court may order the tenant to continue to pay the rent to the landlord or deposit the rent at the office of the court until the case is decided. Without a safeguard order, a tenant in bad faith would be tempted to complain that the landlord is breach of its obligations pursuant to the lease and unilaterally withhold the rent. A landlord might not be able to survive the months or years it could take until the tenant’s complaints are decided by the Court. In the meantime, the landlord has to meet its expenses such as salaries, real estate taxes, insurance, maintenance, repairs, and mortgage payments.
In one recent case the landlord made an application for a safeguard order according to the following terms: (a) that the tenant be ordered to pay the rent monthly; (b) that in default to pay the rent, the tenant would be foreclosed from contesting the landlord’s claim, and the landlord would thereupon be authorized to obtain judgment by default. *
The Court granted the landlord’s application in part only and ordered the tenant to pay the rent for the current month and for subsequent months until a final judgment is rendered after trial. The tenant was ordered to pay one-half of the rent on the first and fifteenth of each month and the Court reserved all of the rights of the landlord for unpaid rent for the previous three months.
When the tenant failed to pay the rent, the landlord issued a Writ of Execution to forcibly execute the safeguard order by seizing the property of the tenant in order to sell it at a judicial sale.
The tenant contested the seizure and applied to the Court to have the seizure declared illegal. It argued that a safeguard order is not the equivalent of a monetary condemnation since it did not condemn the tenant to pay a specific sum of money and therefore, a Writ of Execution is not the appropriate remedy when a safeguard order is infringed.
The Court agreed with the tenant. The Court reasoned that the Judge who issued the safeguard order did not grant all of the conclusions that were asked for i.e. he did not consider it appropriate that the case proceed by default in the event that the tenant did not respect the safeguard order. By allowing the landlord to get a default judgment, the landlord would then have clearly been legally entitled to forcibly execute the judgment, which it could not do in the case of a safeguard order. The Court added that to allow forcible execution by seizure of property on the basis of the safeguard order as drafted, would be to confer on the safeguard order the character of a final judgment terminating the litigation.
The Court also reasoned that it is the essence of compulsory execution of movable property that it be sold at justice in order to pay the claim of the creditor, in principal, interest and costs. The Court reasoned that in the circumstances of the present case, since the arrears are accumulating and increasing from month to month, a safeguard order is not susceptible of execution by seizure and sale of movable property as it would be to collect a specific sum.
As a consequence of the Court’s decision, it appears that the safeguard order was illusory and ineffectual, notwithstanding the prima facie intention of the Court that issued the order and the landlord that applied for it. Although it seems quite clear that the Court that issued the order intended that the tenant pay the rent on a monthly basis during the interim period until trial, and that the monthly rent would no doubt be a liquidated amount, i.e. an amount that would be simple to calculate based on the express terms of the Lease, an order to pay such an amount is not significantly different from any other monetary condemnation. While one can understand the Court’s reasoning where the order to pay amounts that cannot be clearly calculated would not be executable since the calculation of the amount would be subject to interpretation or the discretion of the creditor, one cannot say the same about an order to pay the monthly rent.
As a result of the Court’s decision, the remedy of the safeguard order was completely ineffectual and the tenant was presumably able to remain in the leased premises while the landlord had to assume the ongoing expenses. Objectively, the result is extremely unjust.
In family cases, it is quite common for the Court to order interim or provisional spousal and/or child support on a periodic basis and such judgments are subject to compulsory execution by seizure and sale of property. It is submitted that to create an exception in the circumstances of this case where there is a safeguard order and the amount is objectively determinable, is to undermine the authority of the Court and the sound administration of justice. More particularly, as a result of the Court’s decision, a clear court order has been breached by the tenant and the innocent party, the landlord, finds itself the victim of the breach without any practical remedy. Moreover, the landlords prejudice increases each month that the rent is not paid.
Having said that, it is arguable that the landlord should apply for a new safeguard order to order the tenant to pay a specific amount, namely the amount of arrears of rent that are clearly due at the present time, either to the landlord directly or to Court failing which, the landlord should be entitled to seize and sell the property of the tenant and that the landlord would be authorized to apply for default judgment which, in light of the present decision, would appear to require that an express condition be included in the safeguard order.
* Les Tours 1200 Ouest Inc. vs. 9162-9600 Québec Inc., 2010 QCCS 1213
The safeguard order is similar to an interlocutory injunction. For example, the Court may order the tenant to continue to pay the rent to the landlord or deposit the rent at the office of the court until the case is decided. Without a safeguard order, a tenant in bad faith would be tempted to complain that the landlord is breach of its obligations pursuant to the lease and unilaterally withhold the rent. A landlord might not be able to survive the months or years it could take until the tenant’s complaints are decided by the Court. In the meantime, the landlord has to meet its expenses such as salaries, real estate taxes, insurance, maintenance, repairs, and mortgage payments.
In one recent case the landlord made an application for a safeguard order according to the following terms: (a) that the tenant be ordered to pay the rent monthly; (b) that in default to pay the rent, the tenant would be foreclosed from contesting the landlord’s claim, and the landlord would thereupon be authorized to obtain judgment by default. *
The Court granted the landlord’s application in part only and ordered the tenant to pay the rent for the current month and for subsequent months until a final judgment is rendered after trial. The tenant was ordered to pay one-half of the rent on the first and fifteenth of each month and the Court reserved all of the rights of the landlord for unpaid rent for the previous three months.
When the tenant failed to pay the rent, the landlord issued a Writ of Execution to forcibly execute the safeguard order by seizing the property of the tenant in order to sell it at a judicial sale.
The tenant contested the seizure and applied to the Court to have the seizure declared illegal. It argued that a safeguard order is not the equivalent of a monetary condemnation since it did not condemn the tenant to pay a specific sum of money and therefore, a Writ of Execution is not the appropriate remedy when a safeguard order is infringed.
The Court agreed with the tenant. The Court reasoned that the Judge who issued the safeguard order did not grant all of the conclusions that were asked for i.e. he did not consider it appropriate that the case proceed by default in the event that the tenant did not respect the safeguard order. By allowing the landlord to get a default judgment, the landlord would then have clearly been legally entitled to forcibly execute the judgment, which it could not do in the case of a safeguard order. The Court added that to allow forcible execution by seizure of property on the basis of the safeguard order as drafted, would be to confer on the safeguard order the character of a final judgment terminating the litigation.
The Court also reasoned that it is the essence of compulsory execution of movable property that it be sold at justice in order to pay the claim of the creditor, in principal, interest and costs. The Court reasoned that in the circumstances of the present case, since the arrears are accumulating and increasing from month to month, a safeguard order is not susceptible of execution by seizure and sale of movable property as it would be to collect a specific sum.
As a consequence of the Court’s decision, it appears that the safeguard order was illusory and ineffectual, notwithstanding the prima facie intention of the Court that issued the order and the landlord that applied for it. Although it seems quite clear that the Court that issued the order intended that the tenant pay the rent on a monthly basis during the interim period until trial, and that the monthly rent would no doubt be a liquidated amount, i.e. an amount that would be simple to calculate based on the express terms of the Lease, an order to pay such an amount is not significantly different from any other monetary condemnation. While one can understand the Court’s reasoning where the order to pay amounts that cannot be clearly calculated would not be executable since the calculation of the amount would be subject to interpretation or the discretion of the creditor, one cannot say the same about an order to pay the monthly rent.
As a result of the Court’s decision, the remedy of the safeguard order was completely ineffectual and the tenant was presumably able to remain in the leased premises while the landlord had to assume the ongoing expenses. Objectively, the result is extremely unjust.
In family cases, it is quite common for the Court to order interim or provisional spousal and/or child support on a periodic basis and such judgments are subject to compulsory execution by seizure and sale of property. It is submitted that to create an exception in the circumstances of this case where there is a safeguard order and the amount is objectively determinable, is to undermine the authority of the Court and the sound administration of justice. More particularly, as a result of the Court’s decision, a clear court order has been breached by the tenant and the innocent party, the landlord, finds itself the victim of the breach without any practical remedy. Moreover, the landlords prejudice increases each month that the rent is not paid.
Having said that, it is arguable that the landlord should apply for a new safeguard order to order the tenant to pay a specific amount, namely the amount of arrears of rent that are clearly due at the present time, either to the landlord directly or to Court failing which, the landlord should be entitled to seize and sell the property of the tenant and that the landlord would be authorized to apply for default judgment which, in light of the present decision, would appear to require that an express condition be included in the safeguard order.
* Les Tours 1200 Ouest Inc. vs. 9162-9600 Québec Inc., 2010 QCCS 1213
Wednesday, May 12, 2010
RIGHT OF ACCESS TO THE LAKE
1 of 2
There was a time when people went to their cottage by the lake for peace and quiet and to cohabit with nature. More recently, with population growth and increases in the standard of living, cottage country is becoming more crowded and conflicts over property rights are becoming more frequent.
One such conflict that frequently arises is over the right of way to the lake. A right of way is usually a real servitude which is a charge imposed on one property (the servient land) in favor of another property (the dominant land). The rights and obligations are attached to the land and pass to future acquirers in perpetuity.
Often, the details of the servitude are not clearly set out in the constituting document. For example, the deed may state that there exists a right of access to the lake by foot over property no. 2 in favor of property no. 1, without stating on what part of the servient land the servitude is to be exercised or the precise dimensions of the right of way.
Problems often arise when the owner of the servient land tries to change or restrict the right of way. For example, the owner of the servient land may build a fence, plant trees or shrubs or enlarge his house in a way that may interfere with the exercise of the right of way.
In one such case, the servient land was a 25 ft. wide strip of vacant land that had previously been owned by a property developer who used the land to grant rights of way to purchasers of lots that he subdivided and sold. When he no longer needed the land, he sold it to the owner of the adjacent lot for whom it had some utility since it was too small to build on. The new owner unilaterally decided that those who were using the land for a right of way didn’t require 25 ft. to access the lake by foot, so he installed a fence to limit the users to a narrow 6 ft. strip. Furthermore, he moved the entrance to the right of way to the farthest extremity of the land as far away from his house as possible to a place where the path was more abrupt and dangerous. Also, the restricted path led right over a swampy patch that was muddy and slippery.
How do we balance the competing property rights of the parties in such circumstances?
Article 1186 of the Civil Code of Quebec states that the owner of the servient land cannot do anything that would tend to diminish the exercise of the servitude or render it less convenient. However he could, at his own expense, transfer the site of the servitude to another place if he has a legitimate interest to do so and if the exercise of the servitude in the new place would be no less convenient to the owner of the dominant land.
In order to define the emplacement of the servitude, the first step is to examine the title itself. If it is ambiguous, then try to determine the common intention of the parties at the time that the servitude was created instead of the literal sense of the terms used in the Act. The intention of the parties is determined by examining the essence of the Act that
2 of 2
created the servitude, the physical characteristics of the place at the time the servitude was created, the historical and social context of the servitude as well as the subsequent conduct of the parties. The subsequent conduct of the parties is usually a powerful indicator of what their common intention truly was.
If the owner of the dominant land were to establish that the servient land was used for no other purpose than the right of way; almost the entire property was used for the exercise of the right of way; and the changes unilaterally made by the new owner of the servient land resulted in the reduction of the exercise of the right of way from 25 ft. to 5 or 6 ft., the owner of the servient land would be acting illegally.
In another case, the servient owner wanted to transfer the servitude to the northern part of his property and reduce it from 20 ft. to 5 ft. The owner of the dominant land did not mind moving the servitude to a different place but would not agree to reduce it from 20ft. to 5 ft. in width. The owner of the servient land argued that the servitude was a right of access by foot to the lake and that it could be exercised just as easily within 5 ft. as 20 ft.
The Court held that a 75% reduction in the site of the servitude is substantial and diminishes its exercise. A 20 foot passage would allow the owner of the dominant land to partake in recreational activities relating to swimming and boating, by enabling him to transport a canoe or a small boat as long as it is done by foot. The reduction of the right of way to 5 ft. would unduly diminish such access. The Court also ordered the servient owner to pay nominal damages for unduly interfering with the rights of access of the owner of the dominant land.
While the principles of law that are to be applied in such circumstances are relatively clear, determining whether the owner of the servient land has an interest in transferring the servitude and whether the exercise of the servitude has been diminished or rendered less convenient for the dominant owner is more problematic.
There was a time when people went to their cottage by the lake for peace and quiet and to cohabit with nature. More recently, with population growth and increases in the standard of living, cottage country is becoming more crowded and conflicts over property rights are becoming more frequent.
One such conflict that frequently arises is over the right of way to the lake. A right of way is usually a real servitude which is a charge imposed on one property (the servient land) in favor of another property (the dominant land). The rights and obligations are attached to the land and pass to future acquirers in perpetuity.
Often, the details of the servitude are not clearly set out in the constituting document. For example, the deed may state that there exists a right of access to the lake by foot over property no. 2 in favor of property no. 1, without stating on what part of the servient land the servitude is to be exercised or the precise dimensions of the right of way.
Problems often arise when the owner of the servient land tries to change or restrict the right of way. For example, the owner of the servient land may build a fence, plant trees or shrubs or enlarge his house in a way that may interfere with the exercise of the right of way.
In one such case, the servient land was a 25 ft. wide strip of vacant land that had previously been owned by a property developer who used the land to grant rights of way to purchasers of lots that he subdivided and sold. When he no longer needed the land, he sold it to the owner of the adjacent lot for whom it had some utility since it was too small to build on. The new owner unilaterally decided that those who were using the land for a right of way didn’t require 25 ft. to access the lake by foot, so he installed a fence to limit the users to a narrow 6 ft. strip. Furthermore, he moved the entrance to the right of way to the farthest extremity of the land as far away from his house as possible to a place where the path was more abrupt and dangerous. Also, the restricted path led right over a swampy patch that was muddy and slippery.
How do we balance the competing property rights of the parties in such circumstances?
Article 1186 of the Civil Code of Quebec states that the owner of the servient land cannot do anything that would tend to diminish the exercise of the servitude or render it less convenient. However he could, at his own expense, transfer the site of the servitude to another place if he has a legitimate interest to do so and if the exercise of the servitude in the new place would be no less convenient to the owner of the dominant land.
In order to define the emplacement of the servitude, the first step is to examine the title itself. If it is ambiguous, then try to determine the common intention of the parties at the time that the servitude was created instead of the literal sense of the terms used in the Act. The intention of the parties is determined by examining the essence of the Act that
2 of 2
created the servitude, the physical characteristics of the place at the time the servitude was created, the historical and social context of the servitude as well as the subsequent conduct of the parties. The subsequent conduct of the parties is usually a powerful indicator of what their common intention truly was.
If the owner of the dominant land were to establish that the servient land was used for no other purpose than the right of way; almost the entire property was used for the exercise of the right of way; and the changes unilaterally made by the new owner of the servient land resulted in the reduction of the exercise of the right of way from 25 ft. to 5 or 6 ft., the owner of the servient land would be acting illegally.
In another case, the servient owner wanted to transfer the servitude to the northern part of his property and reduce it from 20 ft. to 5 ft. The owner of the dominant land did not mind moving the servitude to a different place but would not agree to reduce it from 20ft. to 5 ft. in width. The owner of the servient land argued that the servitude was a right of access by foot to the lake and that it could be exercised just as easily within 5 ft. as 20 ft.
The Court held that a 75% reduction in the site of the servitude is substantial and diminishes its exercise. A 20 foot passage would allow the owner of the dominant land to partake in recreational activities relating to swimming and boating, by enabling him to transport a canoe or a small boat as long as it is done by foot. The reduction of the right of way to 5 ft. would unduly diminish such access. The Court also ordered the servient owner to pay nominal damages for unduly interfering with the rights of access of the owner of the dominant land.
While the principles of law that are to be applied in such circumstances are relatively clear, determining whether the owner of the servient land has an interest in transferring the servitude and whether the exercise of the servitude has been diminished or rendered less convenient for the dominant owner is more problematic.
Wednesday, April 21, 2010
Is the presence of contaminated wooden beams used in the construction of a house a hidden defect that could entail the cancellation of a sale?
In a case decided by the Superior Court, district of Beauharnois, on February 17, 2009, the buyer purchased the house in May 2002 and noticed a strange odor upon taking possession. A doctor was consulted for his daughter’s health problems and measures were taken to improve the ventilation of the house.
The buyer consulted an expert who informed him that the structure of the house was made of wood that was contaminated with toxins and in order to remove it, it was necessary to completely demolish the house.
A lawsuit was filed against the Vendor in November 2004.
The vendor owned the house for approximately 1 year (2001 to 2002). The previous owner (vendor No. 2) owned the house for approximately 11 years (1990 to 2001). The previous owner (vendor No. 3) owned the house for 9 years (1981 to 1990) and the previous owner (vendor No. 4) built the house in 1967 and occupied it for 23 years until 1990. All of the previous vendors were sued in warranty by their respective buyers and testified at the trial.
Although at least two (2) of the sale transactions were preceded by professional inspections, none of the professionals noticed the presence of toxic contamination.
The Court noted that if the house were built today according to current standards, the contaminated beams would not be allowed to be used in the construction.
After hearing many ordinary and expert witnesses, the Court decided to dismiss the action but not on the ground that the contamination did not constitute a hidden defect. The Court concluded that the contamination was indeed a hidden defect. However, the evidence did not permit the Court to conclude that this defect was serious enough to justify the cancellation of the sale.
There were two (2) very important elements that weighed against canceling the sale. First, prior to the acquisition of the property by the current owner, the property had been occupied by previous owners for over 40 years without adverse issues arising. All of the previous owners testified and confirmed that they had no significant problems with the odor or air quality of the house. Second, air quality tests that were conducted on the part of experts named by both sides in the case came to similar conclusions namely, that the levels of contaminants found in the treated wood were not present in any significant quantities in the air. Consequently, the air quality was not adversely affected by the contaminated wooden beams.
The Court noted that the mere presence of a hidden defect does not by itself render the vendor in breach of the statutory warranty of quality (Article 1726 of Civil Code of Quebec). For there to be liability, the hidden defect must be sufficiently serious to render the property unfit for the use for which it was intended or which so diminishes its usefulness that the buyer would not have bought it all or paid so high a price if he had been aware of it.
For example, the presence of urea formaldehyde insulation (UFI) does not automatically give rise to the cancelation of the sale at the request of the buyer. The insulating characteristics of UFI are recognized and seven years after its application, UFI no longer emits any noxious gas and, consequently, would have no adverse impact on the usefulness of the property.
Although in the circumstances, the sale could not be cancelled, the Court did not rule out the possibility that a reduction in price could have been granted, had the buyer requested it and proven
that had he known of the existence of the hidden defect at the time of the sale, he would not have agreed to pay so high a price.
In a case decided by the Superior Court, district of Beauharnois, on February 17, 2009, the buyer purchased the house in May 2002 and noticed a strange odor upon taking possession. A doctor was consulted for his daughter’s health problems and measures were taken to improve the ventilation of the house.
The buyer consulted an expert who informed him that the structure of the house was made of wood that was contaminated with toxins and in order to remove it, it was necessary to completely demolish the house.
A lawsuit was filed against the Vendor in November 2004.
The vendor owned the house for approximately 1 year (2001 to 2002). The previous owner (vendor No. 2) owned the house for approximately 11 years (1990 to 2001). The previous owner (vendor No. 3) owned the house for 9 years (1981 to 1990) and the previous owner (vendor No. 4) built the house in 1967 and occupied it for 23 years until 1990. All of the previous vendors were sued in warranty by their respective buyers and testified at the trial.
Although at least two (2) of the sale transactions were preceded by professional inspections, none of the professionals noticed the presence of toxic contamination.
The Court noted that if the house were built today according to current standards, the contaminated beams would not be allowed to be used in the construction.
After hearing many ordinary and expert witnesses, the Court decided to dismiss the action but not on the ground that the contamination did not constitute a hidden defect. The Court concluded that the contamination was indeed a hidden defect. However, the evidence did not permit the Court to conclude that this defect was serious enough to justify the cancellation of the sale.
There were two (2) very important elements that weighed against canceling the sale. First, prior to the acquisition of the property by the current owner, the property had been occupied by previous owners for over 40 years without adverse issues arising. All of the previous owners testified and confirmed that they had no significant problems with the odor or air quality of the house. Second, air quality tests that were conducted on the part of experts named by both sides in the case came to similar conclusions namely, that the levels of contaminants found in the treated wood were not present in any significant quantities in the air. Consequently, the air quality was not adversely affected by the contaminated wooden beams.
The Court noted that the mere presence of a hidden defect does not by itself render the vendor in breach of the statutory warranty of quality (Article 1726 of Civil Code of Quebec). For there to be liability, the hidden defect must be sufficiently serious to render the property unfit for the use for which it was intended or which so diminishes its usefulness that the buyer would not have bought it all or paid so high a price if he had been aware of it.
For example, the presence of urea formaldehyde insulation (UFI) does not automatically give rise to the cancelation of the sale at the request of the buyer. The insulating characteristics of UFI are recognized and seven years after its application, UFI no longer emits any noxious gas and, consequently, would have no adverse impact on the usefulness of the property.
Although in the circumstances, the sale could not be cancelled, the Court did not rule out the possibility that a reduction in price could have been granted, had the buyer requested it and proven
that had he known of the existence of the hidden defect at the time of the sale, he would not have agreed to pay so high a price.
Thursday, February 11, 2010
Can a purchaser force the vendor to respect an accepted offer to purchase and proceed with the sale of the property?
The Quebec Court of Appeal recently confirmed a judgment of the Quebec Superior Court ordering that title to a property be conveyed to the purchaser despite the fact that the latter was one (1) year late in obtaining financing and did not tender the purchase price together with the lawsuit.
On or about August 29, 2002, the vendor agreed to sell a parking lot for $1.2M conditional upon the purchaser obtaining financing in the amount of $500,000 within thirty (30) days and completing the sale by January 2003.
According to the facts that were determined by the court, the parties did not intend for the delays to be mandatory and they implicitly consented from time to time to various extensions.
Finally, on November 18, 2003, the purchaser received a commitment from a financial institution for financing and informed the vendor. However, a few days prior, the vendor had already agreed to sell the same property to a different purchaser for $150,000 more, but did not inform the first purchaser until December 9.
On December 12, the vendor notified the purchaser that the default to obtain financing within the stipulated 30-day period rendered the offer to purchase null and void.
On December 23, the purchaser filed a lawsuit seeking a judgment to be considered as title to the parking lot because of the vendor’s refusal to voluntarily sign the deed of sale.
In order to succeed with such a claim, the courts have identified four (4) conditions that the purchaser must satisfy: (1) the existence of a legally binding offer to purchase; (2) a notice of default; (3) a draft deed of sale consistent with the terms and conditions of the offer to purchase, and (4) a legal tender and deposit of the entire purchase price. Historically, the failure to satisfy all four conditions risked the summary dismissal of the lawsuit.
The first condition regarding a legally binding offer to purchase was satisfied, taking into account the trial judge’s conclusion that the parties implicitly agreed to extend the delay for financing.
The second condition regarding the notice of default was deemed to be non essential because of the vendor’s manifest refusal to sign the draft deed of sale and because the service of the lawsuit itself was considered to be equivalent to a formal notice of default.
The third condition regarding the existence of a draft deed of sale consistent with the terms and conditions of the offer to purchase was initially found to be wanting by the trial judge but the latter agreed to allow the purchaser additional time in order to amend it. Consequently, it is no longer a fatal defect if the draft deed of sale is not filed at the
commencement of the lawsuit. This requirement will be satisfied if at the moment the judgment is rendered, the court is in possession of a draft deed of sale signed by the purchaser which is in conformity in substance with the accepted offer.
Often the most troublesome condition for the purchaser to satisfy is tendering and depositing the purchase price since the purchase of real estate is usually subject to mortgage financing. Purchasers usually need to borrow most of the purchase price and such financing generally requires security in the form of a hypothec which can only be obtained once judgment has been rendered in their favor. Consequently, the right to the judgment may become illusory if the purchaser must tender the full amount of the purchase price at the moment that the lawsuit is filed.
Historically, the courts have been very formalistic, if not impractical, and many purchasers have been deprived of their rights and many vendors have benefited from their abusive failure to respect a legally binding offer to purchase. It was only fairly recently that the Quebec Court of Appeal reversed this trend to alleviate this injustice.
As a result, the court now looks for a commitment and a capacity on the part of a purchaser to discharge its obligation to pay the purchase price. The court has recognized that this condition may be met without the necessity of depositing the entire amount of the purchase price at the commencement of the suit. The court recognized that as a matter of justice, purchasers in good faith should not be prevented by formalistic rules from exercising their valid legal recourses against vendors in bad faith that refuse, without valid grounds, to proceed with the sale. On the other hand, vendors in good faith should not have their property tied up by purchasers in bad faith that file frivolous claims and are in fact unwilling or unable to pay the purchase price.
In such circumstances, the court can draft the conclusions of the judgment to ensure that title to the property does not pass from vendor to purchaser as a result of the judgment until the purchaser has fully paid for it.
One option is for the court to suspend the judgment for a certain period of time, say thirty (30) days, in order to allow the purchaser a reasonable delay to obtain a mortgage loan and tender and deposit the purchase price. Another alternative is for the court to render an interlocutory judgment recognizing the rights of the purchaser and ordering the purchaser to deposit the purchase price at court within a fixed delay and that upon proof of the required deposit, final judgment would convey title to the property to purchaser.
The Quebec Court of Appeal recently confirmed a judgment of the Quebec Superior Court ordering that title to a property be conveyed to the purchaser despite the fact that the latter was one (1) year late in obtaining financing and did not tender the purchase price together with the lawsuit.
On or about August 29, 2002, the vendor agreed to sell a parking lot for $1.2M conditional upon the purchaser obtaining financing in the amount of $500,000 within thirty (30) days and completing the sale by January 2003.
According to the facts that were determined by the court, the parties did not intend for the delays to be mandatory and they implicitly consented from time to time to various extensions.
Finally, on November 18, 2003, the purchaser received a commitment from a financial institution for financing and informed the vendor. However, a few days prior, the vendor had already agreed to sell the same property to a different purchaser for $150,000 more, but did not inform the first purchaser until December 9.
On December 12, the vendor notified the purchaser that the default to obtain financing within the stipulated 30-day period rendered the offer to purchase null and void.
On December 23, the purchaser filed a lawsuit seeking a judgment to be considered as title to the parking lot because of the vendor’s refusal to voluntarily sign the deed of sale.
In order to succeed with such a claim, the courts have identified four (4) conditions that the purchaser must satisfy: (1) the existence of a legally binding offer to purchase; (2) a notice of default; (3) a draft deed of sale consistent with the terms and conditions of the offer to purchase, and (4) a legal tender and deposit of the entire purchase price. Historically, the failure to satisfy all four conditions risked the summary dismissal of the lawsuit.
The first condition regarding a legally binding offer to purchase was satisfied, taking into account the trial judge’s conclusion that the parties implicitly agreed to extend the delay for financing.
The second condition regarding the notice of default was deemed to be non essential because of the vendor’s manifest refusal to sign the draft deed of sale and because the service of the lawsuit itself was considered to be equivalent to a formal notice of default.
The third condition regarding the existence of a draft deed of sale consistent with the terms and conditions of the offer to purchase was initially found to be wanting by the trial judge but the latter agreed to allow the purchaser additional time in order to amend it. Consequently, it is no longer a fatal defect if the draft deed of sale is not filed at the
commencement of the lawsuit. This requirement will be satisfied if at the moment the judgment is rendered, the court is in possession of a draft deed of sale signed by the purchaser which is in conformity in substance with the accepted offer.
Often the most troublesome condition for the purchaser to satisfy is tendering and depositing the purchase price since the purchase of real estate is usually subject to mortgage financing. Purchasers usually need to borrow most of the purchase price and such financing generally requires security in the form of a hypothec which can only be obtained once judgment has been rendered in their favor. Consequently, the right to the judgment may become illusory if the purchaser must tender the full amount of the purchase price at the moment that the lawsuit is filed.
Historically, the courts have been very formalistic, if not impractical, and many purchasers have been deprived of their rights and many vendors have benefited from their abusive failure to respect a legally binding offer to purchase. It was only fairly recently that the Quebec Court of Appeal reversed this trend to alleviate this injustice.
As a result, the court now looks for a commitment and a capacity on the part of a purchaser to discharge its obligation to pay the purchase price. The court has recognized that this condition may be met without the necessity of depositing the entire amount of the purchase price at the commencement of the suit. The court recognized that as a matter of justice, purchasers in good faith should not be prevented by formalistic rules from exercising their valid legal recourses against vendors in bad faith that refuse, without valid grounds, to proceed with the sale. On the other hand, vendors in good faith should not have their property tied up by purchasers in bad faith that file frivolous claims and are in fact unwilling or unable to pay the purchase price.
In such circumstances, the court can draft the conclusions of the judgment to ensure that title to the property does not pass from vendor to purchaser as a result of the judgment until the purchaser has fully paid for it.
One option is for the court to suspend the judgment for a certain period of time, say thirty (30) days, in order to allow the purchaser a reasonable delay to obtain a mortgage loan and tender and deposit the purchase price. Another alternative is for the court to render an interlocutory judgment recognizing the rights of the purchaser and ordering the purchaser to deposit the purchase price at court within a fixed delay and that upon proof of the required deposit, final judgment would convey title to the property to purchaser.
Thursday, January 14, 2010
CLAIM AGAINST LANDLORD FOR ALLOWING A SHOPPING CENTER TO DETERIORATE
The Landlord claims from the Tenant, the sum of $142,635 for arrears of rent. The Tenant in turn, counter sues in the amount of $4,000,000.00 claiming damages as a result of the alleged default of the Landlord to deploy reasonable efforts and resources to ensure the lease of contiguous commercial space in the shopping center, thereby allowing the center to deteriorate and reduce the volume of pedestrian traffic.
The Tenant also alleged that the Landlord purposely neglected to adequately maintain the shopping center so as to drive existing tenants out of the food court in order to lease the premises to a large surface tenant.
The evidence established that the Tenant’s revenues declined by 50% during the eight (8) year period between the signing of the lease and the filing of the legal suit. However, the evidence also established that, in addition to being adversely affected by the deterioration of the shopping center, the Tenant also litigated with its franchisor, who had allegedly adopted a strategic plan to terminate all franchises in order to operate all stores at the corporate level. So what was the direct cause of the Tenant’s damages?
The evidence established that the shopping center was in a lamentable state which surely had an adverse impact on the Tenant’s goodwill and on its right to peaceable enjoyment of the leased premises. The absence of substantial renovations over a number of years and the absence of adequate maintenance in the common areas together with the dilapidated appearance of vacant premises and the failure to respect the established business hours caused the Tenant to suffer a loss of enjoyment in the premises which justified a reduction in the rent. In the circumstances, the Court rejected the claim of the Landlord for recovery of the arrears of rent.
The Court concluded however that the reduction in the Tenant’s revenues was not the direct and sole result of the Landlord’s neglect of the shopping center since other factors, such as litigation with the franchisor and substantial competition in the area, all contributed to adversely affect the Tenant’s goodwill.
The Court noted that the Tenant never attempted to mitigate its damages by negotiating changes to the terms and conditions of the lease as did other commercial tenants. Moreover, the Tenant did not request a reduction in rent or other court order of a nature to lessen the negative impact upon its goodwill or request the cancellation of the lease at an opportune time. Instead, it chose to remain in possession of leased premises which were adversely impacted by the Landlord’s neglect. Consequently, the Court rejected the counter claim of the Tenant for damages, while ratifying the agreement between the parties to cancel the lease.
The party making the claim has the legal burden to prove its damages. When a multitude of factors are present, it may be rather difficult to prove the case to the satisfaction of the court and next to impossible to attribute the direct cause of the damages.
The principle of “mitigation of damages” requires a victim to take reasonable steps to minimize its damages. Based on this legal principle, the Court held that the Tenant should have requested a reduction in rent or cancellation of the lease earlier than it did. Had it done so, the amount of its loss may have been less. On the other hand, the Tenant had a right to remain in possession of and enjoy the premises until the end of the lease and the Landlord had a corresponding obligation to provide peaceable enjoyment. When the Landlord does not do so, is it reasonable to exculpate the Landlord for breaching its obligations and shift the onus to the Tenant, who was not in breach?
The Tenant also alleged that the Landlord purposely neglected to adequately maintain the shopping center so as to drive existing tenants out of the food court in order to lease the premises to a large surface tenant.
The evidence established that the Tenant’s revenues declined by 50% during the eight (8) year period between the signing of the lease and the filing of the legal suit. However, the evidence also established that, in addition to being adversely affected by the deterioration of the shopping center, the Tenant also litigated with its franchisor, who had allegedly adopted a strategic plan to terminate all franchises in order to operate all stores at the corporate level. So what was the direct cause of the Tenant’s damages?
The evidence established that the shopping center was in a lamentable state which surely had an adverse impact on the Tenant’s goodwill and on its right to peaceable enjoyment of the leased premises. The absence of substantial renovations over a number of years and the absence of adequate maintenance in the common areas together with the dilapidated appearance of vacant premises and the failure to respect the established business hours caused the Tenant to suffer a loss of enjoyment in the premises which justified a reduction in the rent. In the circumstances, the Court rejected the claim of the Landlord for recovery of the arrears of rent.
The Court concluded however that the reduction in the Tenant’s revenues was not the direct and sole result of the Landlord’s neglect of the shopping center since other factors, such as litigation with the franchisor and substantial competition in the area, all contributed to adversely affect the Tenant’s goodwill.
The Court noted that the Tenant never attempted to mitigate its damages by negotiating changes to the terms and conditions of the lease as did other commercial tenants. Moreover, the Tenant did not request a reduction in rent or other court order of a nature to lessen the negative impact upon its goodwill or request the cancellation of the lease at an opportune time. Instead, it chose to remain in possession of leased premises which were adversely impacted by the Landlord’s neglect. Consequently, the Court rejected the counter claim of the Tenant for damages, while ratifying the agreement between the parties to cancel the lease.
The party making the claim has the legal burden to prove its damages. When a multitude of factors are present, it may be rather difficult to prove the case to the satisfaction of the court and next to impossible to attribute the direct cause of the damages.
The principle of “mitigation of damages” requires a victim to take reasonable steps to minimize its damages. Based on this legal principle, the Court held that the Tenant should have requested a reduction in rent or cancellation of the lease earlier than it did. Had it done so, the amount of its loss may have been less. On the other hand, the Tenant had a right to remain in possession of and enjoy the premises until the end of the lease and the Landlord had a corresponding obligation to provide peaceable enjoyment. When the Landlord does not do so, is it reasonable to exculpate the Landlord for breaching its obligations and shift the onus to the Tenant, who was not in breach?
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