The Court of Appeal addressed this and other interesting issues in Groupe Van Houtte Inc. vs. Les Développements Industriels et Commerciaux de Montréal Inc., 2010 QCCA 1970.
Van Houtte and the Landlord entered into a commercial lease for the period commencing March 15, 1988 and ending March 14, 1998. In December 1996, Van Houtte’s franchisee abandoned the leased premises and left them in an extremely poor condition, which Van Houtte exacerbated by removing equipment, furniture and signs.
Subsequently, Van Houtte and the Landlord negotiated and entered into a Lease Extension Agreement for an additional period of ten (10) years until March 14, 2007. However, Van Houtte stopped paying the rent on March 19, 1998. In November 1998, the Landlord entered into a lease for the premises with a new tenant with retroactive effect of one month. The new lease provided for a substantially higher rent which the new tenant paid for a period of ten years until October 31, 2008.
According to Van Houtte, the total revenue collected by the Landlord under the new lease was greater than what it would have collected under the Lease Extension Agreement, including all unpaid arrears of rent. Van Houtte argued that consequently, the Landlord in fact incurred no loss by Van Houtte’s default and therefore was not legally entitled to collect any unpaid rent that accrued before the new tenant moved in. Van Houtte asserted that the non-payment of rent was the result of its breach of contract which gave rise to a potential claim for damages. Since no damages could be proven by the Landlord, who was actually better off as a result of Van Houtte’s default, the latter argued that the Landlord’s claim was without legal merit.
Unfortunately for Van Houtte, both the Landlord and the Quebec Court of Appeal saw the situation differently.
The Court of Appeal decided that the claim of the Landlord for unpaid rent could not properly be qualified as “damages” i.e. the dollar value of what it would take to indemnify the Landlord for its loss resulting from Van Houtte’s breach of contract. Instead, the Court considered that the legal basis of the Landlord’s claim was the specific performance of the tenant’s obligation to pay rent under the Lease Extension Agreement. The previous tenant is responsible to pay the rent until the new tenant takes over. Although the Landlord made a profitable deal with the new tenant for a higher rent, the resulting financial benefit belongs to the Landlord alone and has no legal impact on the obligation to pay rent by Van Houtte for the period prior to the date when the new tenant moved in.
The Landlord also wanted Van Houtte to pay the rent for the first three months of the new lease which the new tenant was granted for free as a lease incentive. The Court of Appeal refused this claim, reasoning that since Van Houtte’s responsibility was limited to the rent payable under the former lease, the latter cannot be held responsible for rent payable subsequent to the end of the previous lease which coincided with the occupancy of the new tenant. Furthermore, the Court of Appeal considered that based upon the evidence, the three months of free rent that the Landlord granted to the new tenant was not proven to be damages incurred by the Landlord resulting from Van Houtte’s breach of contract but presumably, part of the ordinary cost of doing business. The Court appeared to have left the door open to the situation where it is proven that the free rent is the direct result of the lamentable condition of the premises left by the defaulting tenant.
The Landlord also claimed reimbursement of the legal fees and expenses that it incurred to enforce the terms of the lease. Based on previous case law, this clause would have been unenforceable as being too vague since arguably, the Landlord and his lawyer could unilaterally determine the amount payable by the defaulting tenant.
In the circumstances, Landlords were usually advised to draft the clause so that a percentage of the amount in default, usually between 15% and 25% would be recoverable from a tenant in default, which appeared to satisfy the Courts by removing the discretionary element from the calculation. The Court of Appeal, however, has modified the law on this subject by concluding that even without a specific percentage, such clauses may nevertheless be enforced. The burden is on the plaintiff, i.e. the landlord, to prove that the collection costs are just and reasonable, which in any event, is an ethical obligation imposed on all attorneys in Quebec with respect to the legal fees that they charge. In the circumstances, since the Courts are in a position to supervise and control such claims and intervene to revise exaggerated or abusive claims, such clauses are now considered to be legally valid and enforceable.
The impact of this evolution in the law is significant since it enhances the accessibility to justice of a claimant by improving the economics of the process. If a landlord could not add the collection costs to a claim, every exercise in debt recovery would automatically be an economically losing proposition.
Thursday, October 4, 2012
Friday, June 8, 2012
WHAT ARE THE TENANT’S OBLIGATIONS AT THE END OF A COMMERCIAL LEASE?
Two of the common issues that arise at the end of the lease are 1) the condition of the leased premises and 2) the disposition of leasehold improvements.
Condition of Leased Premises
At the termination of the lease, the tenant is bound to surrender the leased premises in the condition in which they were in at the commencement of the lease, save for ordinary wear and tear (Article 1890 Civil Code of Quebec).
The condition at the commencement of the lease may be established by the lease itself with a clause by which the tenant acknowledges that the premises are in good condition or with some objective evidence, such as photographs.
Even in the absence of a written acknowledgment by the tenant or other convincing evidence, the premises will be presumed by law to have been received in good condition at the commencement of the lease. This makes good sense since it is the landlord’s obligation to deliver the premises in a good state of repair in all respects (Article 1854 Civil Code of Quebec). If he does not, it is logical to presume that the tenant would complain.
If the premises are damaged at the end of the lease, the tenant would be liable to indemnify the landlord, unless he proves that the damages are due to normal aging or wear and tear, force majeure or the act of a third party not under his legal control, such as an employee.
It would be insufficient for the tenant to prove that he maintained the premises in a reasonable manner throughout the lease i.e. that he acted prudently and responsibly. To exonerate himself of liability, he must do more by proving beyond a balance of probability that the damages were caused by someone or something not within his control.
Leasehold Improvements
At the commencement of the lease, the tenant often wishes to adapt the premises to his particular needs. This may entail modifications of partitions, special lighting, plumbing, electricity, etc. Such changes may suit the particular tenant but at the end of the lease, the landlord should determine whether it would be necessary to restore the premises to its original design in order to attract a new tenant and if so, who will pay the cost?
It is recommended that the issue be specifically addressed by a clause in the lease. Moreover, although a landlord may authorize a tenant to make modifications to the premises at the commencement of the lease at the latter’s own cost and expense, the lease should provide that no change may be made that would lessen the market value of the leased premises. Furthermore, details of the modifications that are made should be documented in order to facilitate the responsibility for restoration at the end of the lease. Without sufficient evidence to identify the modifications that were carried out, the landlord will not succeed in requiring the tenant to undertake the restoration or to pay the cost thereof.
The tenant may invest in substantial leasehold improvements at the commencement of or during the lease, including built-in cabinets, furniture, equipment, lighting, flooring, etc. which are physically incorporated in and cannot be removed without damaging the premises. Often the cost may be subsidized by the landlord through an allocation of free rent.
Some leasehold improvements may have little residual value at the end of the lease as a result of depreciation and the cost of removal or restoration may be exorbitant.
The lease should provide that the landlord will have the option of retaining the leasehold improvements without indemnity or may require the tenant to remove them and restore the premises at the latter’s sole cost and expense.
(For an illustration, see Appartements Bonséjours –vs- Soulabaille 2010 QCCQ 4688)
Condition of Leased Premises
At the termination of the lease, the tenant is bound to surrender the leased premises in the condition in which they were in at the commencement of the lease, save for ordinary wear and tear (Article 1890 Civil Code of Quebec).
The condition at the commencement of the lease may be established by the lease itself with a clause by which the tenant acknowledges that the premises are in good condition or with some objective evidence, such as photographs.
Even in the absence of a written acknowledgment by the tenant or other convincing evidence, the premises will be presumed by law to have been received in good condition at the commencement of the lease. This makes good sense since it is the landlord’s obligation to deliver the premises in a good state of repair in all respects (Article 1854 Civil Code of Quebec). If he does not, it is logical to presume that the tenant would complain.
If the premises are damaged at the end of the lease, the tenant would be liable to indemnify the landlord, unless he proves that the damages are due to normal aging or wear and tear, force majeure or the act of a third party not under his legal control, such as an employee.
It would be insufficient for the tenant to prove that he maintained the premises in a reasonable manner throughout the lease i.e. that he acted prudently and responsibly. To exonerate himself of liability, he must do more by proving beyond a balance of probability that the damages were caused by someone or something not within his control.
Leasehold Improvements
At the commencement of the lease, the tenant often wishes to adapt the premises to his particular needs. This may entail modifications of partitions, special lighting, plumbing, electricity, etc. Such changes may suit the particular tenant but at the end of the lease, the landlord should determine whether it would be necessary to restore the premises to its original design in order to attract a new tenant and if so, who will pay the cost?
It is recommended that the issue be specifically addressed by a clause in the lease. Moreover, although a landlord may authorize a tenant to make modifications to the premises at the commencement of the lease at the latter’s own cost and expense, the lease should provide that no change may be made that would lessen the market value of the leased premises. Furthermore, details of the modifications that are made should be documented in order to facilitate the responsibility for restoration at the end of the lease. Without sufficient evidence to identify the modifications that were carried out, the landlord will not succeed in requiring the tenant to undertake the restoration or to pay the cost thereof.
The tenant may invest in substantial leasehold improvements at the commencement of or during the lease, including built-in cabinets, furniture, equipment, lighting, flooring, etc. which are physically incorporated in and cannot be removed without damaging the premises. Often the cost may be subsidized by the landlord through an allocation of free rent.
Some leasehold improvements may have little residual value at the end of the lease as a result of depreciation and the cost of removal or restoration may be exorbitant.
The lease should provide that the landlord will have the option of retaining the leasehold improvements without indemnity or may require the tenant to remove them and restore the premises at the latter’s sole cost and expense.
(For an illustration, see Appartements Bonséjours –vs- Soulabaille 2010 QCCQ 4688)
Thursday, February 2, 2012
LIABILITY OF PROPERTY OWNER FOR CAUSING DAMAGE TO NEIGHBOR
The owner of an immovable property in Quebec may be the king of his castle but what he does to or with his property is limited, not only by zoning regulations, but also by the adverse consequences that legitimate activity may have on a neighbor. Neighbors are also the kings of their castles and competing rights may often conflict.
What are the legal principles that determine when a property owner may be liable for damages that he has caused to a neighbor? The leading court decision on this subject was rendered by the Supreme Court of Canada in St. Lawrence Cement Inc. v. Barrette.(1)
This decision clarified what was until then, a conflicting and controversial area of the law. The Supreme Court decided that there are actually two (2) complementary regimes of legal liability that are applicable.
The first requires a degree of fault or negligence on the part of the offending property owner, which is consistent with the general theory of liability applicable to most civil claims. Under this regime, the victim must prove the existence of a fault, i.e. the breach of an objective standard of conduct, damages and a direct causal link between the two.
In the St. Lawrence Cement case, the evidence established that the cement plant operated by St. Lawrence Cement ("SLC") caused substantial dust, odor and noise that disturbed the owners of other properties located in the vicinity of the SLC plant. The evidence also established that SLC had implemented reasonable measures to minimize the disturbance and consequently, was not negligent or at fault and was merely exercising its right of ownership in a reasonable manner by operating its business on the property that it owned.
The second regime of liability which is specifically applicable to property owners, does not rely on impeachable conduct as a basis for a successful claim. It is a no fault liability regime based upon Article 976, Civil Code of Quebec, which reads as follows:
Neighbors shall suffer the normal neighborhood annoyances that are not beyond the limit of tolerance they owe each other, according to the nature or location of their land or local custom.
This regime ignores the conduct of the property owner and instead, focuses on the annoyance suffered by the victim that, when deemed to be excessive, triggers the legal liability of the offending property owner.
In the SLC case, the Court concluded that SLC had not committed any civil fault; had fulfilled its obligation to implement the best available means to eliminate dust and smoke; and had taken reasonable precautions to ensure that its equipment was in good working order.
The Court, however, concluded that neighbors of the plant suffered excessive annoyance that was beyond the limit of tolerance that neighbors generally owe to each other, and SLC was condemned to compensate them accordingly.
(1) St. Lawrence Cement Inc. v. Barrette, [2008] 3 S.C.R. 392, 2008 SCC 64 (CanLII)
What are the legal principles that determine when a property owner may be liable for damages that he has caused to a neighbor? The leading court decision on this subject was rendered by the Supreme Court of Canada in St. Lawrence Cement Inc. v. Barrette.(1)
This decision clarified what was until then, a conflicting and controversial area of the law. The Supreme Court decided that there are actually two (2) complementary regimes of legal liability that are applicable.
The first requires a degree of fault or negligence on the part of the offending property owner, which is consistent with the general theory of liability applicable to most civil claims. Under this regime, the victim must prove the existence of a fault, i.e. the breach of an objective standard of conduct, damages and a direct causal link between the two.
In the St. Lawrence Cement case, the evidence established that the cement plant operated by St. Lawrence Cement ("SLC") caused substantial dust, odor and noise that disturbed the owners of other properties located in the vicinity of the SLC plant. The evidence also established that SLC had implemented reasonable measures to minimize the disturbance and consequently, was not negligent or at fault and was merely exercising its right of ownership in a reasonable manner by operating its business on the property that it owned.
The second regime of liability which is specifically applicable to property owners, does not rely on impeachable conduct as a basis for a successful claim. It is a no fault liability regime based upon Article 976, Civil Code of Quebec, which reads as follows:
Neighbors shall suffer the normal neighborhood annoyances that are not beyond the limit of tolerance they owe each other, according to the nature or location of their land or local custom.
This regime ignores the conduct of the property owner and instead, focuses on the annoyance suffered by the victim that, when deemed to be excessive, triggers the legal liability of the offending property owner.
In the SLC case, the Court concluded that SLC had not committed any civil fault; had fulfilled its obligation to implement the best available means to eliminate dust and smoke; and had taken reasonable precautions to ensure that its equipment was in good working order.
The Court, however, concluded that neighbors of the plant suffered excessive annoyance that was beyond the limit of tolerance that neighbors generally owe to each other, and SLC was condemned to compensate them accordingly.
(1) St. Lawrence Cement Inc. v. Barrette, [2008] 3 S.C.R. 392, 2008 SCC 64 (CanLII)
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