Wednesday, October 22, 2014
BINDING PROMISE TO CONTRACT OR NON-BINDING BASIS FOR NEGOTIATIONS?
A Quebec Court of Appeal decision, Europe Cosmétiques Inc. v. Locations Le Carrefour Laval Inc., 2013 QCCA 1633 (CanLII), discusses two interesting issues relating to commercial leases:
1. What is the distinction between a legally binding promise to lease and a draft lease intended to serve only as a basis for negotiations?
2. What is the scope of the creditors’ obligations to minimize damages?
In 2008, Carrefour embarked on an expansion of its shopping centre and Europe expressed an interest in the location to open a new medical spa.
On March 10, 2009, the parties finalized a Letter of Intent (LOI) providing that:
(a) Carrefour will prepare a lease.
(b) The lease, once signed, will constitute a binding agreement.
(c) Nothing other than the signature of the lease will be binding on the parties.
(d) The LOI (once the conditions expressly made for the exclusive benefit of Carrefour are satisfied) will be legally binding.
Without waiting for the lease to be signed, Carrefour commenced substantial work to accommodate Europe in order to satisfy the delays and other requirements of the LOI with the knowledge and participation of Europe.
On August 20, 2009, Europe informed Carrefour that it would not sign a lease until the financing for which it applied is approved.
On October 26, 2009, Carrefour sent Europe a notice of default requesting compensation for damages namely, the cost of the leasehold improvements and lost future rent.
Carrefour thereupon commenced a search for a new tenant and eventually succeeded in leasing part of the premises for a period of 10 years commencing on January 1, 2011, leaving 6,000 sq. ft. still vacant as a result of Europe’s refusal to sign a lease.
It was not clear from the drafting of the LOI whether it was meant by the parties to be legally binding. Europe naturally argued that it never intended to be legally bound to Carrefour prior to signing a lease and that the LOI was a non-binding letter, the purpose of which was to form the basis for negotiations, but nothing more.
The Court of Appeal confirmed the decision of the court of first instance that the LOI was a legally binding promise to lease which Europe contravened, thereby exposing itself to a claim in damages. The evidence established that the LOI required the parties to sign a lease. It contained all of the essential elements of a lease namely, the description of the property, its intended use, the rent and the term. Notwithstanding the literal wording of the LOI, it was the role of the court to determine the common intention of the parties which, as determined by the Trial Judge, was that the LOI would constitute a legally binding agreement.
Although Carrefour won the battle to determine whether or not there was a legally binding commitment between the parties, it still had to prove that it suffered damages arising from Europe’s breach.
Europe argued that Carrefour did not satisfy its legal obligation to minimize its damages. Although the Trial Judge granted Carrefour damages for the costs incurred to modify the premises in accordance with the requirements of the LOI, the Trial Judge only granted Carrefour $184,000 out of the sum of $607,000 that it claimed for lost future rent.
The Trial Judge excluded 6,000 sq. ft. from his calculation because he found that had it not been for Europe, Carrefour would not have attempted to lease the space but instead would have kept it as storage space for its tenants.
Regarding the obligation to minimize damages, the Court of Appeal, referring to Articles 1479 and 1375 of the Quebec Civil Code, confirmed that the obligation to minimize damages is not absolute but rather is a duty imposed by law on the aggrieved party to use reasonable best efforts. The victim must act reasonably and diligently in order to minimize its damages. Furthermore, the burden is on the party in default to prove that the creditor, i.e. the party that suffered the prejudice, neglected or omitted to do all that it reasonably could or should have done in the circumstances to avoid or minimize damages.
Regarding the damages for lost future rent, the Court of Appeal did not agree with the Trial Judge’s findings. It reiterated the principle that in the event of a breach, compensatory damages are granted with a view to putting the victim in the situation that it would have been in had there been no breach.
Since the commercial space was built at the request of Europe, the Trial Judge should have determined the amount of rent that Carrefour was deprived of as a result of the breach by taking into account the entire area of the premises and not only a part.
Arguably, the fact that Carrefour committed itself financially to create the commercial space for Europe prior to signing the lease and that Europe was fully aware and actively participated in the process was very strong corroboration that the LOI was intended to be legally binding. In different circumstances, the Court might have chosen to apply a different principle in face of an ambiguous agreement with contradictory terms, namely that in the case of ambiguity, a contract should be interpreted in favour of the debtor of the obligation namely, Europe.