THE LEGAL OBLIGATION OF GOOD FAITH

In a recent judgment of the Quebec Superior Court, a tenant was authorized to annul a commercial lease with Développement Olymbec Inc. ("Olymbec") as a result of the latter's bad faith while negotiating the lease. (Canal Médical Inc. -vs- Développement Olymbec Inc., 2024 QCCS 2236). Canal Médical Inc. ("Canal") entered into a commercial lease with Olymbec to lease space to be used for the production of respiratory face masks. After signing the lease, Canal noticed the absence of mechanical ventilation in the premises. At the time of the intial visit to the premises, Olymbec confirmed that it would be feasible to install air conditioning in order to recycle warm air generated by Canal's production equipement at the latter's cost. Olymbec admits that it did not inform Canal that the premises had no ventilation system. Canal requested a second visit but Olymbec refused due to ongoing work being conducted there. After taking possession of the premises, Canal noticed that the ventilation grills were blocked. When Olymbec was asked whether it would be possible to unblock the grills in order to install air conditioning, Olymbec replied in the negative due to the structure of the building and that the blocked vents were not connected to the building's ventilation network. Thereafter, Canal was informed by CNESST that the absence of proper ventilation in the premises may contravene labour standards and it could be obliged to suspend its activities. Consent to a contract must be freely given. Article 1401 of the Quebec Civil Code provides that error provoked by deceit ("dol") vitiates consent if otherwise, the victim of deceit would not have agreed to the terms and conditions of the contract. Such deceit can result from the silence or reticence of the other party. Deceit consists of dishonest conduct resulting from false or misleading representations, silence, or reticence that leads or encourages the other contracting party to believe in the existence or inexistence of a fact that is a significant factor in the decision to agree to contractual terms or conditions. Furthermore, the law further provides that all rights must be exercised in good faith. No right may be exercised in a manner to hurt another or that is excessive or unreasonable. (Articles 6, 7 and 1375 Quebec Civil Code). In the course of negotiating a contract, the requirements of good faith include the obligation to provide the other party with information that he knows or is presumed to know is of a significant nature and that the other contracting party has no access to or is entitled to duly rely upon and trust the other party. The Court concluded that the omission by Olymbec to disclose the absence of ventilation in the premises was deceitful and provoked a material error on the part of Canal thereby justifying the annulment of the lease as well as a condemnation in damages. Olymbec argued that it had no legal obligation to inform Canal that the premises had no ventilation. The Court disagreed for the following reasons. Olymbec knew that the premises were deprived of proper ventilation and that the information was significant considering the intended use of the premises which was expressly confirmed in the lease. Olymbec argued further that the terms of the lease exculpated itself from the legal obligation to provide information. In particular, the lease included the usual clauses to the effect that the tenant accepts the premises in their current state and condition and that the tenant confirms that no representation was made that is not included in the lease. The Court found that Olymbec induced Canal to sign the lease in bad faith and could not rely on the terms of the lease to change the fact that Canal's consent was vitiated thereby giving rise to its annulment. The Court granted the annulment of the lease and damages including reimbursement of rent and certain compensatory damages. This case is an illustration of the crucial importance that good faith plays in contractual relations including the pre-contractual phase while the parties are negotiating terms and conditions as well as while performing their contractual obligations.

ESTOPPEL IN COMMERCIAL LEASES

Estoppel (fin de non-recevoir), is a legal principle that allows a court to declare a claim or defense that is otherwise legally well founded to be declared "not receivable" (irrecevable) due to the presence of reprehensible or non-cooperative conduct of a party including a failure to act in good faith. Such conduct need not amount to fault or negligence. The evaluation of the conduct is based on the principles of equity and good faith. The courts, which have substantial room to appreciate a party's conduct, are trending more frequently to invoke estoppel, which adds a further layer of uncertainty to predicting the probable outcome of litigation. While all persons including judges are created equal, their appreciation of a parties conduct, which is should be objectively considered, may nevertheless differ as a result of a judge's individual perspective. This is not a criticism but merely a practical observation since a party's reprehensible conduct or bad faith should never be allowed to be rewarded. An interesting illustration of estoppel in a commercial lease setting can be found in the Quebec Court of Appeal decision 9378-1417 Québec Inc. -vs- Groupe Ilqueay Inc., 2023 QCCA 351. The parties entered into a commercial lease for five years terminating on 2020-07-31. In mid-March 2019, the tenant verbally informed the landlord of its intention to vacate the premises prior to the end of the term namely in June 2019. The tenant reiterated its intention in mid-April by email to which the landlord replied that it expected the lease be respected although it was prepared to discuss terms and conditions for an early termination. In its reply, the landlord also undertook to communicate with the tenant to arrange a meeting. In May, the tenant, not having heard from the landlord, reached out to inquire regarding the landlord's intentions. The landlord did not reply. The tenant eventually vacated the premises in September 2019, ten months prior to the end of the term. Landlord filed suit claiming unpaid rent for ten months plus legal fees. The landlord's suit was dismissed by judgment in first instance which judgement was affirmed in appeal. The court concluded that the landlord's lack of cooperation since April 2019 amounted to bad faith on its part and its failure to minimize its damages (it made no effort to find a new tenant after retaking possession of the premises but instead, occupied the premises itself) justified the dismissal of landlord's claim on the grounds of estoppel.