LIABILITY OF THE PROPERTY MANAGER

What are the legal obligations of a property manager who is given sole discretion by the owner to carry out repairs as the latter deems necessary for the maintenance and preservation of the property?

In the Quebec Court of Appeal decision of Monit Management Limited v. Samen Investments Inc., 2012 QCCA 1821, the owner of a commercial building sued the property manager for gross negligence for omitting to perform regular maintenance and repairs to the concrete parking area.

The manager acknowledged that it kept the repairs and maintenance to a minimum in accordance with the owner’s directives to minimize expenses and maximize profits. The manager added that the owner benefited from the manager’s administration since had more been spent for maintenance and repairs, the owner would have received less profit.

The property management contract was in effect from 1976 to 2003, a period of 27 years. At the end of the contract, the owner decided to hire a different property manager who conducted an inspection of the property with a view to upgrading the building from a Class C to a Class B property. At that point, it was discovered that the concrete parking area had become structurally unsound. The evidence established that the concrete would have had to be replaced eventually, but the lack of timely maintenance on the part of the manager shortened the useful life of the structure.

Not only did the property management contract grant the manager sole discretion with respect to the necessity of maintenance and repairs but it also included an exoneration clause that shielded the manager from all liability other than for damages resulting from its willful misconduct or gross negligence.

Both the Superior Court and Court of Appeal sided with the owner. The argument of the manager that the owner could not question the manager’s discretion regarding the necessity of repairs and maintenance was rejected on the ground that the discretion of the manager was not absolute but was tempered by a fundamental obligation of the management contract to act as a prudent administrator and to perform its duties with due diligence. The Court reasoned that to allow the manager to exculpate itself on the ground that it enjoyed exclusive and absolute discretion would have rendered inoperative a fundamental contractual obligation of the manager. In a contract, the obligations are mutually dependent and it would do violence to the existence of the contract to interpret the obligations of one of the contracting parties as being merely voluntary and therefore legally unenforceable.

The Court also noted that it was the property manager who drafted the agreement and that any ambiguity regarding its interpretation should weigh in favour of the owner.

Another argument advanced by the manager was that since it was an experienced property manager who, at all relevant times, managed between 25 and 50 commercial properties, it could not possibly be guilty of gross negligence. This argument was obviously given little weight.

In order to succeed in the face of the exoneration clause, it was essential that the owner convince the Court that the manager was not merely negligent, but was guilty of willful misconduct or gross negligence.

Two factors contributed to the Court’s conclusion that the lack of maintenance of the underground parking area constituted gross negligence. The first factor was the long period of time during which the manager neglected to maintain and preserve the property. The second factor was that the manager knew or should have known the consequence that a lack of maintenance and repair would have on the concrete structure. More particularly, the evidence established that during the duration of the contract, the manager was aware that small pieces of concrete were detaching from the structure from time to time and causing minor damage to parked automobiles. The property manager even had a tarpaulin installed to protect parked cars from water infiltration and falling bits of concrete.

The manager also argued that even if the Court concluded that it was grossly negligent, since the underground parking area was old and would have had to have been redone anyway, and the owner’s revenues during the term of the contract were higher than they would otherwise have been due to low maintenance and repair costs, the owner incurred no prejudice.

Not surprisingly the owner saw things differently and argued that there was a cost involved in having to rebuild the underground garage earlier than necessary. Moreover, the owner argued that had the necessary maintenance and repairs been carried out during the term of the contract, such costs could have been passed on to and recovered from the tenants as part of their proportionate share of the operating expenses. The cost of rebuilding, as opposed to maintaining, is not an expense that can usually be passed on to tenants.

Once again, the Court sided with the owner despite the fact that the proof of quantum of damages was unclear. In the circumstances, the Court used its discretion to arbitrate an amount, $170,000.00, which was substantially less than the amount of $743,000.00 that the owner claimed.

An additional factor that may have influenced the outcome was that the property was owned by an absentee owner who resided in Italy. Moreover, the president of the owner, an accountant by profession, resided in Switzerland. Arguably, the Court may have held the manager to a slightly stricter standard than might have otherwise been the case since the evidence established that the owner and/or its president were only rarely physically present in Quebec, were primarily focused on the financial aspects of their investment and relied heavily upon the manager to take care of the property.

Again, reading between the lines, one might argue that in a contractual relationship, each party may have certain reasonable expectations which if not met, could result in the other party being considered in breach of contract and liable to indemnify the party whose expectations it failed to meet.

OFFER TO PURCHASE CONDITIONAL UPON MORTGAGE FINANCING APPROVAL

If an offer to purchase is conditional upon the purchaser obtaining financing, which fails to materialize, can the purchaser cancel the deal?

The Quebec Court of Appeal decision in Hazan et al. v. Madeco Mascouche Inc., 2012 QCCA 2056, provides an informative illustration.

The facts of the case can be summarized as follows:

• The purchaser and seller signed an offer to purchase a building to be built by the seller.

• The offer to purchase was conditional upon the purchaser obtaining financing.

• The financing was approved subject to the condition that at the time of disbursement, leases shall have been concluded with an aggregate rent of at least $22,800.

• Seven weeks after the financing was conditionally approved, the lender unilaterally changed the condition to add a ten percent withholding requirement until the property is fully leased.

• The purchaser never objected to the change in condition nor did he inform the seller.

• The purchaser paid a deposit to the seller as well as progress payments according to the completion of various stages of construction as prescribed in the offer to purchase.

• The purchaser refused to sign the deed of sale within the stipulated delay due to the refusal of the lender to disburse the financing on the ground that the conditions for financing were not fully satisfied.

• Due to his inability to obtain financing, the purchaser claimed cancellation of the deal as well as reimbursement of his deposit and all progress payments that he had paid to the seller.

Based on the evidence, the Court found that the purchaser had not made any serious effort to lease the property, which was a condition precedent required by the lender. The purchaser’s attitude was described by the Court as tentative and passive, which it considered to amount to negligence and was in contrast to the proactive, diligent attitude that was recognized by the case law as being required in similar situations.

In effect, although the sale was conditional upon the purchaser obtaining financing, a contracting party is required by law to act diligently and in good faith with respect to the performance of his contractual obligations, including actively taking all reasonable means to perform his obligations and satisfy any conditions precedent upon which his obligations depend.

Furthermore, based on the evidence, the Court concluded that the purchaser never had the financial means to acquire the property and was at all relevant times, financially stretched to the limit. In the words of the Court, the purchaser entered into the contract to purchase in the same manner as houses were recently being built in Spain i.e. irresponsibly.

When a contract is cancelled, the law requires that the parties, to the extent reasonably possible, should be financially restored to the situation that they were in immediately prior to concluding the contract. The purchaser relied on this principle as the basis for his claim for reimbursement of the deposit and progress payments. However, as is often the case, the offer to purchase included a penal clause which allowed the seller to retain all amounts that it received up until the termination of the contract, in the event of the purchaser’s default. Moreover, purchaser made no effort to attack the validity of the penal clause on the ground that it was abusive.

Who Is Responsible for Latent Defects in a Property?

Article 1726 Civil Code of Quebec states that "The seller is bound to warrant the buyer that the property and its accessories are, at the time of the sale, free of latent defects which render it unfit for the use for which it was intended or which so diminish its usefulness that the buyer would not have bought it or paid so high a price if he had been aware of them."

In order for the buyer to succeed, his claim must satisfy the following conditions:

1. The defects must be hidden;
2. They must have existed at the time of the sale, and
3. Notice of the latent defects must be given to the seller within a reasonable delay.

Occasionally, some defects may take years or even decades to manifest themselves. Hypothetically, a building may be constructed with materials or techniques that are recognized as acceptable at the time of construction but years later may subsequently be determined to be toxic, hazardous or unsound. What are the recourses of a buyer in such circumstances?

The legal warranty of quality applies to every sale by default, whether or not it is written into the contract, unless it is expressly excluded by the parties. It is an accessory to the sale contract and by virtue of Article 1442 of the Civil Code, the warranty automatically follows the property and transfers to successive buyers. The practical implication of this is that a buyer may not only sue his immediate seller, but may also sue anterior sellers as far back as the latent defect existed. Moreover, each seller can sue his anterior seller(s) to claim indemnification for any condemnation that may be rendered in favour of the ultimate buyer.

Of course, the recourses are predicated upon notice being given to the anterior seller(s) within a reasonable delay of the discovery of the defect.

The right to pursue previous sellers may have practical advantages for a buyer when the immediate seller has disappeared or is insolvent. Moreover, even if the buyer waived and renounced the legal warranty of quality vis-à-vis his immediate seller, he could still pursue one or more anterior sellers.

Assuming that the buyer will not agree to waive the benefit of the warranty, the seller should insist that the warranty will be limited to the immediate buyer and not transferrable to successors in title. Alternatively, the parties could stipulate in the sale contract that the warranty shall lapse and be null and void after a certain period of time e.g. 3 years.

For an illustration, see Riendeau v. Guy Brière Courtier d’assurances Inc., 2012 QCCS 6071.