CAN THE BENEFICIARY OF A RIGHT OF FIRST REFUSAL TO PURCHASE REQUIRE THE SELLER TO SELL THE PROPERTY AS IT WAS DESCRIBED AT THE TIME OF THE AGREEMENT NOTWITHSTANDING THAT THE PROPERTY WAS THEREAFTER SUBSTANTIALLY MODIFIED AND ITS VALUE INCREASED?

(U. Cayouette Inc. vs. Georgette Rouleau-Beaudoin 2017 QCCS 3624)

Key Facts

1956 Robert acquires some vacant land (the "Property")

1958 Robert and brother Bruno operate a hardware store (the "HS) at a site adjacent to the Property

1958-1971 Robert allows HS to use the Property without charge to store material used in its business

1971 Robert sells the Property to HS for $15,000. The contract includes a right of first refusal ("ROFR") in favour of Robert to purchase the Property according to the same terms and conditions. There was no discussion between the parties regarding the transmission of the ROFR to Robert's heirs nor any restriction that would prevent its assignment or transfer to a third party.

1971-1977 HS continues to store its material on the Property. It builds hangars on the Property of which Robert was fully aware since he was still active in the HS business.

1977 Robert sells his entire interest in HS. None of the parties considers the impact of the sale on the ROFR.

1984 A major fire destroys the hangars on the Property. HS builds a warehouse to store its material at a cost of $250,000. Robert, who resides close by, is fully aware of the new construction. No one objects or raised the matter of the ROFR.

1991 Robert passes away and his wife, Georgette, ("G"), becomes his sole heir and legatee.

2013 HS is put up for sale and a third party expresses an interest to purchase all of its assets, including the Property. The municipal evaluation of the Property is $260,700 for the land and $151,100 for the building. 

Position of HS

The ROFR was entered into to assure that in the event that HS wished to sell the Property, Robert could purchase it according to the same terms and conditions as the third-party offer.

The ROFR was granted exclusively to Robert and could not be transferred to any third party, either by contract or to his heirs.

Robert implicitly renounced the ROFR by never objecting to the construction of hangars or the warehouse although he knew full well that such construction would substantially increase the value of the Property. Moreover, when Robert sold his interest in HS, the ROFR was never discussed. Finally, the ROFR could not remain in effect indefinitely.

By seeking to acquire title to the Property for $15,000, G is acting abusively since the land portion is worth $260,700 i.e. 25 times the offering price. Moreover, the land and the warehouse cannot be separated so G is seeking to acquire the whole, having a value of $400,000, for only $15,000.

Position of G

Considering that HS used Robert's land gratuitously for 20 years before acquiring it, it is only fair that G should benefit from any increase in value.

There is no legal basis to restrict the general rule of law that recognizes the transmission of property to one's heirs upon death.

Although Robert was fully aware of the construction of the hangar and warehouse, HS should have attempted to renegotiate the ROFR prior to building the warehouse and must alone assume the risks and consequences for not doing so.

The construction of the warehouse was not a sale and did not trigger the ROFR.

The ROFR could only be triggered by a sale, which only HS could decide to do, and the fact that it did not consider doing so until 2013 should have no bearing on the legal enforceability of the ROFR

Analysis and Decision of the Court

Since the general rule of law is that all rights are transmissible upon death, save and except those that are strictly personal and that the evidence on the whole did not support a finding that ROFR was strictly personal to Robert, G is legally entitled to benefit therefrom.

Although it is possible to waive and renounce the benefits of the ROFR, such waiver and renunciation must be clear, precise and unequivocal which the evidence did not support in this case. Conduct that was subject to different reasonable interpretations would not suffice to renounce a contractual right. 

The court identified 6 different hypotheses to resolve the dispute:

·      G purchases land only for $15,000 and HS retains ownership of the warehouse or sells it to someone else.

·      G purchases land for $15,000 and gets warehouse as a bonus.

·      G purchases land for $15,000 and pays fair market value for the warehouse.

·      G purchases all assets of HS for fair market value including the land and the warehouse.

·      G has no further rights in the Property because the object of ROFR no longer exists as it was. The Property became part of a different economic whole that HS cannot be forced to dismantle since to do so would harm its operations and interfere with its fundamental property rights.

·      HS pays G the fair market value of the land less $15,000.

The ROFR is a restriction on the right of property and therefore should be interpreted restrictively. ROFR is not a right in property but a personal right to become owner of property according to the terms and conditions of the contract. 

Property rights are guaranteed and protected by the Quebec Charter of Rights and Freedoms

ROFR is a preliminary contract without any retroactive effect. It was only when HS decided to sell its assets, including the Property, 30 years after the ROFR was created, that it became exigible.

In order to interpret the ROFR and decide whether the warehouse should be included, the court tried to determine the probable common intention of the parties when the ROFR was created.

The fact that the parties described the object of the ROFR as "vacant" land is relevant as it points in the direction that any construction on the land should not be included.

For 13 years prior to the ROFR, HS used the land to store materials in tent like structures. The parties knew how the Property was being used when the ROFR was created and nevertheless described its object as "vacant" land.

After the sale to HS, the latter invested more heavily in sophisticated storage structures on the Property. The court concluded that HS's intention to do so may have been the reason that Robert agreed to sell to HS i.e. the Property was needed by HS for its economic viability.

Robert inherited the Property which had a sentimental value for him so if HS decided one day that it no longer needed it, Robert wanted it back hence the ROFR. The economics of the transaction were secondary to him.

Considering the restrictive interpretation to be given to ROFR the protection accorded by law to the protection of property rights together with the evidence as a whole, the court concluded that the ROFR should be interpreted to permit G to acquire the land for $15,000 and HS to keep the warehouse. Logistically, HS could pay G the fair market value of the land less $15,000 in full satisfaction of the ROFR.

One challenge of drafting good contracts is to attempt to peer into the future without a crystal ball. The parties together with their experienced legal advisor should make the effort to look ahead and try to anticipate issues that could arise going forward in order to deal with those that they are able to identify before the contract is concluded.

IS A PENAL CLAUSE IN A PRELIMINARY SALES CONTRACT FOR A NEW CONDOMINIUM ENFORCEABLE? IT DEPENDS…

The plaintiff sued the condo developer to recover the sum of $63,926.10 that he paid as a deposit pursuant to a preliminary sales contract for the purchase of a new condo to be built for a total sales price of $639,261. (Zerdazi -vs- Développement Roccabella Inc. 2017 QCCQ 3025).

The plaintiff alleged that due to the termination of his employment, he was unable to obtain approval for the financing that he expected and required so he could not complete the transaction.

The developer, relying on a clear and express clause of the preliminary sales contract that plaintiff was fully aware of and accepted, agreed to the cancellation of the contract but insisted on retaining the deposit. 

The developer claimed that as a result of plaintiff’s default, it had to invest time, energy and incurred costs to find a new buyer, which it succeeded in doing approximately 5 months after the property was ready for occupation. In fact, the developer sold the property for $715,000 i.e. $75,000 more than the price of the aborted sale.

The developer submitted evidence detailing the additional costs that it occurred to find a new buyer in the aggregate amount of $51,570 so that it made a profit on the re-sale in the amount of $9,304. The court had to decide whether the developer could keep the deposit in addition to the profit on the re-sale.

A penal clause, sometimes referred to as liquidated damages, allows the parties to a contract to determine in advance the quantum of damages that an aggrieved party would be entitled to receive in the event of a breach, without having to prove the quantum of damages. Such clauses are legally enforceable but not absolute. As with the law in general, there are rules, exceptions to rules, exceptions to the exceptions and so on. 

Certain clauses may be declared unenforceable or reduced if they meet two conditions. The first condition is that the contract must be an “adhesion contract”, which is a standard form contract the terms and conditions of which are imposed by one of the parties on the other without the possibility of negotiation.

The second condition is that the impeached clause must be considered to be abusive, which is defined as being “…excessively and unreasonably detrimental to the adhering party and is therefore contrary to the requirements of good faith;” (Article 1437 Civil Code of Quebec).

Here are some of the characteristics of abusive clauses that have been picked up by the doctrine and caselaw:

·      The creditor has suffered no loss whatsoever as a result of the breach of contract

·      There is a substantial disproportion between the loss incurred and the amount of the penalty

·      The breach of contract is associated with an element of bad faith or negligence on the part of the defaulting party

In the case at bar, the court concluded that the developer had incurred no loss and in fact, had incurred a profit on the re-sale. The default of the plaintiff could not be attributed to any fault, negligence or bad faith on his part but rather was solely due to the loss of his employment, which was not within his control. Finally, the court also considered the particular circumstances of the case namely, the harsh financial impact of the penalty upon the plaintiff, who had retired and was in his late sixties.

For all of these reasons, the court assessed the penalty in the amount of only $2000 and ordered the developer to reimburse the plaintiff the amount of $61,926.10, with interest.

CAN A NON-ANCHOR TENANT BE FORCED TO CONTINUE TO OPERATE IN COMMERCIAL LEASED PREMISES?

In Michael Rossy Ltd. vs. 9190-9309 Quebec Inc.  2017 QCCA 937, the tenant sought leave to appeal from a judgment granting an interlocutory injunction enjoining it to continue to occupy the leased premises and operate its retail business therein.

The appeal judge decided to grant leave to appeal but then had to decide whether the interlocutory injunction should remain in effect pending the final judgment of the Court of Appeal.

The relevant facts can be summarized as follows: 

 
The leased premises are located in a shopping center;

The tenant operated its business at a substantial loss namely, $233,241 for the fiscal year ending January 2017;

The leased premises consist of approximately 25,000ft²representing about 7% of the total leasable area of the shopping center;

There are two (2) anchor tenants who occupy respectively 96,694 ft²and 44,266ft²in the center;

There is one (1) vacant store in the center representing approximately 5% of the total square 
footage;

The tenant undertakes to continue to pay the rent notwithstanding its intention to close its store;

The lease contains no express obligation on the part of the tenant to occupy and continuously use the premises during the lease term.

When granting the interlocutory injunction, the trial judge relied upon article 1856 of the Quebec Civil Code which states as follows:

“Neither the lessor nor the lessee may change the form or destination of the leased property during the term of the lease.”

The appeal judge found, however, that the case law did not support the trial judge’s conclusion that the abandonment of leased premises would constitute a change in destination when the tenant is not a major or anchor tenant.

At the hearing before the appeal judge, a new argument not presented in first instance was submitted:  given the existence of an obligation on the part of the tenant to pay a percentage of gross sales as additional rent, the landlord argued that there was an implicit obligation on the tenant to continue to operate its store in the shopping center during the entire lease term. 

On the basis of the foregoing, the appeal judge concluded that although the right asserted by the landlord was not inexistent, it was, at best, weak. Consequently, the appeal judge proceeded to analyze the balance of inconvenience to determine whether or not the interlocutory injunction should be stayed pending the outcome of the appeal. He found in favor of the tenant and suspended the interlocutory injunction pending the appeal.

Article 1863 of the Quebec Civil Code provides that in the event of a breach of a lease, specific performance can be obtained “…in cases which admit of it”.  The case law generally interprets the quoted words as limiting the availability of the specific performance remedy. 

When a tenant vacates the leased premises prematurely but continues to pay the rent, the landlord arguably would incur no loss or prejudice. Therefore, specific performance might not be the appropriate remedy in the circumstances.

When the tenant is a major or anchor tenant in a retail center for example, a substantial amount of vacant space could adversely affect other tenants by reducing traffic in the center; reducing their revenues and making it more difficult for them to pay their rent. Indeed, some leases have “co-tenancy” clauses providing that in the event of the vacancy by an anchor tenant, other tenants would have the right to substantially reduce their rent or stop operating their businesses prior to the end of the lease term. 

Also, there are often covenants in mortgage deeds that trigger a default in the event that a prescribed percentage of space in the building becomes vacant. The mortgage lender could call the loan or require that the borrower put up additional security.

The vacancy of substantial space in the building could also cause insurance premiums to rise.

One could see why the specific performance remedy would be of extreme importance in such scenarios.

Consequently, it would be prudent for landlords in all cases to include in the lease, an express contractual obligation on the part of the tenant to remain in occupation of the leased premises and continue to operate its business therein during the entire lease term. Furthermore, considering the reluctance of courts to order specific performance in the event of a breach of such an obligation, consideration should be given to requiring the tenant to pay liquidated damages in the event of a breach, equivalent to 200% of the aggregate amount of rent and other amounts payable until the end of the lease term and any renewals thereof.

ILLEGAL ABANDONMENT OF LEASED PREMISES BY THE TENANT

It happens more frequently than we would like for a tenant to abandon leased premises before the end of the lease without just cause.  A recent illustration of the problem is depicted in Investissements Eres Ltée -vs- Louha et al., 2014 QCCS 5820; 2016 QCCA 5820.

On June 1, 2011 the parties leased two premises comprising respectively 900 and 2200 square feet at 5180 and 5186 Queen Mary Road, Montreal for a period of 15 years.

On September 18, 2012, the tenants notified the landlord that they intended to vacate the premises on or before December 31. As it turned out, business was not very good and the tenants were struggling to pay the rent.

The landlord replied on September 24, 2012 offering to assist the tenant to sub-let the premises but insisted that the tenants were responsible for their lease obligations and could not legally cancel the lease unilaterally. The tenants did not reply.

On August 29, 2012 the tenants signed a lease with a different landlord for premises in a nearby building. The tenants moved to the new premises on October 23, 2012.

On October 23, 2012 the landlord’s attorneys notified the tenants that the landlord refused to cancel the lease; the tenants would be held responsible for all rent that remained unpaid; the landlord would search for a new tenant to occupy the premises; and unless the rent for October was paid and the obligations under the lease respected, legal proceedings would be instituted against the tenants who, once again, did not rely.

The landlord filed suit claiming, inter alia, unpaid rent and additional rent from December 2012 until September 2014. The landlord declared that since September 2012, it had acted in good faith tried to try minimise its loss but was not able to find a new tenant until October 2014.

The principal question that the Court had to decide was whether the landlord acted in good faith by making a reasonable effort to minimise its loss. Even though the tenant was in flagrant violation of the lease by abandoning the premises prior to the expiry of the term, the law requires the landlord in such circumstances to act in good faith by making reasonable efforts to mitigate the lost rent and/or damages resulting from the tenant’s contractual breach (Articles 6, 7, 1375 and 1479 Civil Code of Quebec).

The landlord was able to prove that it posted a For Rent sign in the window of the premises, by the elevator and on the façade of the building for 2000 to 5000 square feet in January or February 2013. Various inquiries were received but the dates when they were received were not clear, although the Court retained the month of July 2013 as most likely. The landlord also testified that it placed ads on the classified internet site, Kijiji, in the Fall of 2013 without any positive results although it did so believing that it was a useless exercise. The Court also retained from the evidence that the landlord had been aware of the tenants’ financial difficulties and struggle to pay the rent prior to their leaving.

The Court concluded that the landlord did not do enough to promote the success of the tenants’ business and minimise its loss, and that it instead, chose to adopt a hard line with respect to pursuing a positive relationship with the tenants. The Court found the landlord’s efforts to find a new tenant to be too little. In the circumstances, the Court concluded that the tenants should not have to indemnify the landlord for 22 months of rent and reduced their liability to the equivalent of only 14 months of rent.

The Court of Appeal maintained the trial judge’s conclusions. More particularly, while the trial judge did not explicitly declare the landlord to have been in bad faith, the conclusion can be inferred from her finding that the landlord’s attitude was closed and non-receptive to the tenants’ attempts to reduce the rent and the landlord’s attempt to find a new tenant was minimal at best. It appears that according to the Courts, at least in the circumstances of this case, the landlord should have been receptive to a reduction of rent until a new tenant could be found to minimise its loss.

I would respectively differ and argue that a contract is the law between the parties and the result of their free and unbridled consent. To require a landlord to reduce the rent in the context of a tenant’s financial difficulty flies in the face of the foregoing. Furthermore, once the landlord agrees to reduce the rent until a new tenant can be found or the lease ends, whichever comes first, the landlord will presumably incur an irreparable loss equivalent to the aggregate amount of reduced rent. This is not an acceptable outcome in the context of the abandonment of premises without just cause by a tenant in bad faith. By treating the landlord so severely, the Courts are creating an unreasonable imbalance between the rights and obligations of the landlord and tenant and letting off the latter too lightly by reducing the consequence of a flagrant breach of contract and bad faith.

Furthermore, the Courts were critical of the landlord because the For Rent sign that it posted was not tailored specifically to the abandoned premises, but also referred to other vacant space that the landlord was trying to rent. Again, I find the reasoning unconvincing. The landlord posts a generic sign for space to rent which includes, but is not limited to, the abandoned space. This is reasonable and would attract prospective tenants seeking space in the size range of the abandoned space, as well as others, and would cause no prejudice whatsoever to the tenant.

Although the Courts concluded that the landlord did not do enough, it would have been useful had they stated what else they expected the landlord to do in order to be considered to have acted in good faith. Had the landlord retained a real estate broker to market the space, it would arguably have crossed the good faith threshold.