Friday, February 15, 2013
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.
Thursday, October 4, 2012
CAN A LANDLORD CLAIM ARREARS OF RENT FROM A FORMER TENANT IF THE PREMISES ARE SUBSEQUENTLY LEASED TO A NEW TENANT FOR A HIGHER RENT?
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.
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.
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)
Friday, February 4, 2011
THE CASE OF THE STOLEN IDENTITY
CC and CD are French citizens. They reside at La Réunion, an island in the Indian Ocean administered byFrance.
The couple is familiar with Quebec, having spent several vacations here. In 2001, they purchased a condominium property consisting of two (2) units in Old Montreal. They mandated FB and a company entirely controlled by him (CGP) to manage the property for them.
In 2007, CC and CD received a prior notice of foreclosure from a mortgage creditor. It is only then that CC and CD discovered that their two (2) units had been successively mortgaged without their knowledge in order to guarantee various loans purportedly made to them in virtue of a power of attorney that bore their signatures and had been certified by a notary from La Réunion. However, the powers of attorney were
forgeries.
CC and CD applied to Court to have the mortgage loans that were contracted in their names in virtue of the fraudulent power of attorney declared null and void for all legal purposes and that the registration against the title to their units at the Land Register, cancelled. They also claimed damages from FB, CGP as well as the instrumenting notary who received the impeached mortgages.
CC met FB at La Réunion in 1993 or 1994 and knew that FB managed residential properties on behalf of various non‐resident owners. CC and CD purchased their units on May 29, 2001 and mandated FB to sign the notarial deeds of acquisition and a mortgage loan on their behalf in virtue of a special power ofattorney received by a notary on January 3, 2001. In virtue of the same power of attorney, CC and CD
entrusted FB with the management of all of their property, movable as well as immovable, situated in Montreal, with the power to borrow and mortgage the property.
Between 2001 and 2003, the management of the two units went smoothly although CC and CD had to inject an additional $10,000O to cover a rental revenue shortfall.
In order to facilitate the rental of the units, the owners decided to renovate them and combine them into one single unit. It was in this context that on July 1, 2003, CC and CD signed a property management agreement with CGP granting the latter extensive authority to manage the units, including authority to mortgage the units for up to 75% of their fair market value. The agreement was for a duration of eight (8) years with either party having the option to terminate it prematurely upon giving a one (1) year prior written notice at anytime after five (5) years.
For the purpose of the renovations, CC and CD contracted a new mortgage loan on August 11, 2003 in the amount of $210,000 and authorized FB to sign for them in virtue of a power of attorney dated August 4, 2003. The power of attorney is acknowledged as legitimate by all concerned.
Between 2003 and 2007, CC and CD did not receive any accounting updates from CGP. They received no proofs of payment of the mortgage, municipal and school taxes or condo fees. They received no information regarding the rental revenues of the units during this period, nor the vacancy rates. In the absence of any updates, they assumed that everything was in order.
Unknown to CC and CD, FB and CGP commenced to have serious liquidity problems in 2005and 2006 with respect to the management of their own condominium units, as well as those managed on behalf of non‐resident owners. The mortgage lender refused to renew any mortgages secured by units that were possessed or managed by CGP or FB. FB unsuccessfully sought refinancing from a new lender in order to avoid foreclosure.
On December 14, 2005, FB obtained a fraudulent power of attorney purportedly certified by a notary from La Réunion. On the basis of this fraudulent document, FB executed various mortgage deeds on behalf of CC and CD, namely, January 12, 2006 ‐ $120,000.00; January 13, 2006 ‐ $75,000.00; February 16, 2006‐ $50,000.00; March 30, 2006 ‐ $11,000.00; January 19, 2007 ‐ $75,000.00; February 1, 2007 ‐$220,000.0.
All of the foregoing mortgage loans, which were secured against the units belonging to CC and CD, were entered into on the basis of the fraudulent power of attorney purportedly given in favour of FB.
In June 2007, a notice of foreclosure was served upon CC and CD who learned for the first time of the fraud and the theft of their identities. According to the findings of the Court, the lenders were in good faith and had no knowledge that any
fraud was being committed or that the power of attorney was not valid.
The principal issue before the Court was whether the mortgage loans entered into by lenders in good faith were valid and could be set up against the innocent victims of the fraud who never authorized the loans.
The general rules of contract require that a valid consent be given in order to create a legally enforceable contract. However, in the circumstances of this case where the lenders provided the financing in good faith and relied upon a fraudulent power of attorney that appeared to be valid on its face, the law has to make the difficult choice as to which party, the lender or the owner, will suffer the consequences of the fraud. The Court decided that, notwithstanding the general rules of contract, when a lender is in good faith, it is the owner of the property that bears the brunt of the fraud, under reserve of all of his recourses to claim restitution from the perpetrators of the fraud.
The Court relied upon Article 1707 of the Civil Code of Quebec, which provides that in deeds of transfer of title for onerous title, which is defined as including mortgages, by a person that has an obligation to make restitution (the perpetrator of the fraud), the third party in good faith (the lender), is protected and the owner assumes the risk of obtaining restitution from the perpetrators of the fraud. If the perpetrators of the fraud are solvent, there should be no problem. Otherwise, the owner in good faith will bear a very heavy burden indeed.
In the present case, the owners not only sued the perpetrator of the fraud and obtained a judgment in their favour (although the eventual success of collecting the Judgment is unknown), they also sued the notary who received the tainted mortgage deeds claiming that he was negligent in not doing more to verify the authenticity of the fraudulent power of attorney. The owners argued that the notary, with very little effort, such as by contacting the owners directly themselves or the notary who purportedly certified the fraudulent power of attorney, could have easily determined that the power of attorney was a forgery and that by neglecting to do so, the notary incurred liability. The Court rejected this argument and exculpated the notary.
The standard to which a notary is held is that of diligence. One of the circumstances that exculpated the notary is the fact that the owners had previously given valid powers of attorney with extensive authority to the same property manager, including the capacity to mortgage the properties up to 75% of their fair
market value. The Court found that it was reasonable for the notary to rely on the past conduct of the parties in accepting the fraudulent power of attorney. Moreover, the owners were arguably imprudent in blindly relying upon the good faith of their property manager without making independent inquiries with the previous mortgage lenders, the syndicate of co‐owners, or being more forceful in requiring regular accounting updates from the property manager.
A lesson that we can retain from this case is how simple it is for someone to usurp another person's identity and how serious the consequences can be.
A property manager should be given the narrowest authority necessary for discharging his duties. It is certainly not necessary for a property manager to have authority at large to mortgage a property up to 75% of its market value. The owners would have been better served had they followed the adage, "trust but verify".
(Ouellette vs. Coppin et al., 2010 QCCS 6014, G. Mercure, J.S.C.)
The couple is familiar with Quebec, having spent several vacations here. In 2001, they purchased a condominium property consisting of two (2) units in Old Montreal. They mandated FB and a company entirely controlled by him (CGP) to manage the property for them.
In 2007, CC and CD received a prior notice of foreclosure from a mortgage creditor. It is only then that CC and CD discovered that their two (2) units had been successively mortgaged without their knowledge in order to guarantee various loans purportedly made to them in virtue of a power of attorney that bore their signatures and had been certified by a notary from La Réunion. However, the powers of attorney were
forgeries.
CC and CD applied to Court to have the mortgage loans that were contracted in their names in virtue of the fraudulent power of attorney declared null and void for all legal purposes and that the registration against the title to their units at the Land Register, cancelled. They also claimed damages from FB, CGP as well as the instrumenting notary who received the impeached mortgages.
CC met FB at La Réunion in 1993 or 1994 and knew that FB managed residential properties on behalf of various non‐resident owners. CC and CD purchased their units on May 29, 2001 and mandated FB to sign the notarial deeds of acquisition and a mortgage loan on their behalf in virtue of a special power ofattorney received by a notary on January 3, 2001. In virtue of the same power of attorney, CC and CD
entrusted FB with the management of all of their property, movable as well as immovable, situated in Montreal, with the power to borrow and mortgage the property.
Between 2001 and 2003, the management of the two units went smoothly although CC and CD had to inject an additional $10,000O to cover a rental revenue shortfall.
In order to facilitate the rental of the units, the owners decided to renovate them and combine them into one single unit. It was in this context that on July 1, 2003, CC and CD signed a property management agreement with CGP granting the latter extensive authority to manage the units, including authority to mortgage the units for up to 75% of their fair market value. The agreement was for a duration of eight (8) years with either party having the option to terminate it prematurely upon giving a one (1) year prior written notice at anytime after five (5) years.
For the purpose of the renovations, CC and CD contracted a new mortgage loan on August 11, 2003 in the amount of $210,000 and authorized FB to sign for them in virtue of a power of attorney dated August 4, 2003. The power of attorney is acknowledged as legitimate by all concerned.
Between 2003 and 2007, CC and CD did not receive any accounting updates from CGP. They received no proofs of payment of the mortgage, municipal and school taxes or condo fees. They received no information regarding the rental revenues of the units during this period, nor the vacancy rates. In the absence of any updates, they assumed that everything was in order.
Unknown to CC and CD, FB and CGP commenced to have serious liquidity problems in 2005and 2006 with respect to the management of their own condominium units, as well as those managed on behalf of non‐resident owners. The mortgage lender refused to renew any mortgages secured by units that were possessed or managed by CGP or FB. FB unsuccessfully sought refinancing from a new lender in order to avoid foreclosure.
On December 14, 2005, FB obtained a fraudulent power of attorney purportedly certified by a notary from La Réunion. On the basis of this fraudulent document, FB executed various mortgage deeds on behalf of CC and CD, namely, January 12, 2006 ‐ $120,000.00; January 13, 2006 ‐ $75,000.00; February 16, 2006‐ $50,000.00; March 30, 2006 ‐ $11,000.00; January 19, 2007 ‐ $75,000.00; February 1, 2007 ‐$220,000.0.
All of the foregoing mortgage loans, which were secured against the units belonging to CC and CD, were entered into on the basis of the fraudulent power of attorney purportedly given in favour of FB.
In June 2007, a notice of foreclosure was served upon CC and CD who learned for the first time of the fraud and the theft of their identities. According to the findings of the Court, the lenders were in good faith and had no knowledge that any
fraud was being committed or that the power of attorney was not valid.
The principal issue before the Court was whether the mortgage loans entered into by lenders in good faith were valid and could be set up against the innocent victims of the fraud who never authorized the loans.
The general rules of contract require that a valid consent be given in order to create a legally enforceable contract. However, in the circumstances of this case where the lenders provided the financing in good faith and relied upon a fraudulent power of attorney that appeared to be valid on its face, the law has to make the difficult choice as to which party, the lender or the owner, will suffer the consequences of the fraud. The Court decided that, notwithstanding the general rules of contract, when a lender is in good faith, it is the owner of the property that bears the brunt of the fraud, under reserve of all of his recourses to claim restitution from the perpetrators of the fraud.
The Court relied upon Article 1707 of the Civil Code of Quebec, which provides that in deeds of transfer of title for onerous title, which is defined as including mortgages, by a person that has an obligation to make restitution (the perpetrator of the fraud), the third party in good faith (the lender), is protected and the owner assumes the risk of obtaining restitution from the perpetrators of the fraud. If the perpetrators of the fraud are solvent, there should be no problem. Otherwise, the owner in good faith will bear a very heavy burden indeed.
In the present case, the owners not only sued the perpetrator of the fraud and obtained a judgment in their favour (although the eventual success of collecting the Judgment is unknown), they also sued the notary who received the tainted mortgage deeds claiming that he was negligent in not doing more to verify the authenticity of the fraudulent power of attorney. The owners argued that the notary, with very little effort, such as by contacting the owners directly themselves or the notary who purportedly certified the fraudulent power of attorney, could have easily determined that the power of attorney was a forgery and that by neglecting to do so, the notary incurred liability. The Court rejected this argument and exculpated the notary.
The standard to which a notary is held is that of diligence. One of the circumstances that exculpated the notary is the fact that the owners had previously given valid powers of attorney with extensive authority to the same property manager, including the capacity to mortgage the properties up to 75% of their fair
market value. The Court found that it was reasonable for the notary to rely on the past conduct of the parties in accepting the fraudulent power of attorney. Moreover, the owners were arguably imprudent in blindly relying upon the good faith of their property manager without making independent inquiries with the previous mortgage lenders, the syndicate of co‐owners, or being more forceful in requiring regular accounting updates from the property manager.
A lesson that we can retain from this case is how simple it is for someone to usurp another person's identity and how serious the consequences can be.
A property manager should be given the narrowest authority necessary for discharging his duties. It is certainly not necessary for a property manager to have authority at large to mortgage a property up to 75% of its market value. The owners would have been better served had they followed the adage, "trust but verify".
(Ouellette vs. Coppin et al., 2010 QCCS 6014, G. Mercure, J.S.C.)
Monday, September 13, 2010
CONSTRUCTION LIENS WHEN WORK ORDERED BY TENANT
Persons taking part in the construction or renovation of a building may be entitled to register a lien on the building called a legal hypothec to secure their claims to the extent of the increase in value added to the building as a result of the work, materials or services provided.
An essential condition for the right to register a legal hypothec is that there must be a contract between the owner and the builder. The subcontractors and suppliers of material who transact with the builder must also disclose their subcontracts to the owner to protect their rights. The rational for this system is that the owner, after being made aware of the existence of the subcontractors and suppliers of material, may choose to pay them directly or withhold payment from the builder until the latter provides releases from the subcontractors and suppliers.
Often, a commercial lease may provide that substantial renovations or leasehold
improvements be made to the leased premises. A recent case decided by the Superior
Court, District of Montreal, involved substantial ventilation and plumbing work that was carried out at the express request of the tenant in premises that were leased for the operation of a factory.1 The construction contract was concluded between the tenant and the builder. The subcontractor disclosed the existence of its subcontract to the tenant.
Although it was proven to the satisfaction of the Court that the owner was aware of the existence of the construction agreement as well as the nature of the work to be carried out by the tenant and it authorized the tenant to carry out the work to the leased premises, the owner did not legally bind itself to pay the sums due to the builder or the subcontractor upon the completion of the work in the event that the tenant failed to do so. Furthermore, the owner personally had direct contact and was consulted by the engineers who were responsible to design important parts of the work and the owner followed the progress of the work on a regular basis. The owner even participated, to a certain degree, in the development of the tenant’s project insofar as he made changes to the premises to facilitate the execution of the work. The Court concluded, however, that these elements were insufficient to establish that the work was carried out at the request of the owner.
Although it was clear that no contract had been entered into directly between the owner and the contractor, in certain circumstances, the terms of the lease could expressly or implicitly designate the tenant as the agent of the owner with respect to the construction of the leasehold improvements or renovations. In such a case, even if the contract is entered into directly between the tenant and the contractor, the owner would be considered to be a party to the construction contract and legally bound by the tenant, acting as his authorized agent. This would allow the builder and the subcontractors to register their construction liens against the owner’s property. Unfortunately for the builder and subcontractors, the evidence in this case did not support their argument.
Even if the construction agreement would have been binding on the owner of the building, the right to register a legal hypothec would still be limited to the increase in value added to the building by the work and materials. In the Calomat case, the builder and subcontractor built an entire factory in the leased premises for the tenant at a substantial cost. Although the material and equipment installed by the builder and subcontractor were certainly useful, if not indispensable, to the operation of the tenant’s business, the Court held that they did not add any significant value to the building nor were they physically incorporated into the building so as to form an integral part of it. They were only attached to the building in order to allow a part of the building to be used for the industrial production purpose envisioned by the tenant. They conserved their individuality and could be removed from the leased premises without seriously damaging the building or rendering releasing impossible. In the circumstances, even if the construction agreement would have been entered into directly with the owner, the builder and subcontractor would still not have had a right to register a construction lien because the work and materials did not significantly increase the value of the building.
The lesson for the builder and subcontractor from this case is that the construction contract should be entered into directly with the owner and that the identity of the latter should be verified by consulting the title to the property at the land registry office. Otherwise, the builder and subcontractor should take appropriate precautions to ensure that the tenant is financially able to meet its obligations pursuant to the construction agreement and the subcontracts.
1 Centre D’Isolants Calomat Inc. vs. La Plomberie Fury Inc. et al., 2010 QCCS 3425.
An essential condition for the right to register a legal hypothec is that there must be a contract between the owner and the builder. The subcontractors and suppliers of material who transact with the builder must also disclose their subcontracts to the owner to protect their rights. The rational for this system is that the owner, after being made aware of the existence of the subcontractors and suppliers of material, may choose to pay them directly or withhold payment from the builder until the latter provides releases from the subcontractors and suppliers.
Often, a commercial lease may provide that substantial renovations or leasehold
improvements be made to the leased premises. A recent case decided by the Superior
Court, District of Montreal, involved substantial ventilation and plumbing work that was carried out at the express request of the tenant in premises that were leased for the operation of a factory.1 The construction contract was concluded between the tenant and the builder. The subcontractor disclosed the existence of its subcontract to the tenant.
Although it was proven to the satisfaction of the Court that the owner was aware of the existence of the construction agreement as well as the nature of the work to be carried out by the tenant and it authorized the tenant to carry out the work to the leased premises, the owner did not legally bind itself to pay the sums due to the builder or the subcontractor upon the completion of the work in the event that the tenant failed to do so. Furthermore, the owner personally had direct contact and was consulted by the engineers who were responsible to design important parts of the work and the owner followed the progress of the work on a regular basis. The owner even participated, to a certain degree, in the development of the tenant’s project insofar as he made changes to the premises to facilitate the execution of the work. The Court concluded, however, that these elements were insufficient to establish that the work was carried out at the request of the owner.
Although it was clear that no contract had been entered into directly between the owner and the contractor, in certain circumstances, the terms of the lease could expressly or implicitly designate the tenant as the agent of the owner with respect to the construction of the leasehold improvements or renovations. In such a case, even if the contract is entered into directly between the tenant and the contractor, the owner would be considered to be a party to the construction contract and legally bound by the tenant, acting as his authorized agent. This would allow the builder and the subcontractors to register their construction liens against the owner’s property. Unfortunately for the builder and subcontractors, the evidence in this case did not support their argument.
Even if the construction agreement would have been binding on the owner of the building, the right to register a legal hypothec would still be limited to the increase in value added to the building by the work and materials. In the Calomat case, the builder and subcontractor built an entire factory in the leased premises for the tenant at a substantial cost. Although the material and equipment installed by the builder and subcontractor were certainly useful, if not indispensable, to the operation of the tenant’s business, the Court held that they did not add any significant value to the building nor were they physically incorporated into the building so as to form an integral part of it. They were only attached to the building in order to allow a part of the building to be used for the industrial production purpose envisioned by the tenant. They conserved their individuality and could be removed from the leased premises without seriously damaging the building or rendering releasing impossible. In the circumstances, even if the construction agreement would have been entered into directly with the owner, the builder and subcontractor would still not have had a right to register a construction lien because the work and materials did not significantly increase the value of the building.
The lesson for the builder and subcontractor from this case is that the construction contract should be entered into directly with the owner and that the identity of the latter should be verified by consulting the title to the property at the land registry office. Otherwise, the builder and subcontractor should take appropriate precautions to ensure that the tenant is financially able to meet its obligations pursuant to the construction agreement and the subcontracts.
1 Centre D’Isolants Calomat Inc. vs. La Plomberie Fury Inc. et al., 2010 QCCS 3425.
Tuesday, July 13, 2010
NOT ALL LEGAL HYPOTHECS ARE RENDERED UNENFORCABLE BY BANKRUPTCY
A judgment creditor for a sum of money has a right to seize and sell its debtor’s property to get paid, but it has no real right in the debtor’s property and no priority over other creditors.
It is possible to register a judgment against the debtor’s immovable property in order to create a legal hypothec, which is a real right in the property itself, and thereby obtain security and a preference over competing creditors. However, if the debtor becomes bankrupt, the legal hypothec becomes unenforceable as a result of Section 70 of the Bankruptcy and Insolvency Act.1
In a recent decision, the Quebec Court of Appeal was called upon to decide whether
Article 70 would apply to render a legal hypothec unenforceable when a mortgage
created after the legal hypothec resulted in the foreclosure of the debtor’s property prior to the date of bankruptcy.2
In November of 2003, Jacyno registered a legal hypothec on the debtor’s property for the sum of $200,000.00. In 2006, Québec Inc. made a loan to the debtor in the amount of $300,000.00 which was secured by a mortgage on the debtor’s property. When the debtor defaulted on the loan, Québec Inc. foreclosed on the mortgage and became the owner of the property retroactive to October 24, 2006. The property was still subject to the legal hypothec which had been registered in November 2003.
On March 23, 2007, the debtor made an assignment in bankruptcy. Québec Inc., now the
owner of the property, applied to the Court to have the legal hypothec cancelled and
removed from its property arguing that the effect of Section 70 of the Bankruptcy and
Insolvency Act was to render the legal hypothec unenforceable. Moreover, Quebec Inc.
argued that since the legal hypothec is an accessory to the monetary condemnation, which is cancelled by the bankruptcy, the legal hypothec, as an accessory to the debt, must also be cancelled.
In rebuttal, Jacyno argued that Section 67 (1) (c) of the Bankruptcy and Insolvency Act expressly limits the application of bankruptcy law to the property that was owned by the bankrupt at the date of the bankruptcy. Consequently, since Quebec Inc. foreclosed on the property and became the owner prior to the date of bankruptcy, the Bankruptcy and Insolvency Act would not apply. It was also argued that the Bankruptcy and Insolvency Act should be interpreted so as to achieve the objectives of the legislator namely, the administration of the assets of the bankrupt, the priority between creditors, the liquidation of their claims and the modalities of the discharge of the bankrupt.
Although previous court decisions, even of the Quebec Court of Appeal, were divided on this issue, the Court of Appeal unanimously adopted the second argument namely, that when the debtor no longer owned the property at the date of bankruptcy, the legal hypothec would continue to be enforceable. In addition, the Court of Appeal noted that Québec Inc. foreclosed on the property with full knowledge of the existence of the legal hypothec, which had been duly published at the Land Registry office. In the circumstances, Quebec Inc. had various available legal options which it presumably rejected, such as having the property sold at justice and the proceeds of sale distributed according to law, instead of choosing to become the owner of the property or it could have waited for the debtor to become bankrupt in which event, the property would have been subject to the Bankruptcy and Insolvency Act and the legal hypothec would have become unenforceable and cancellable.
But what of the legal argument that once the claim is extinguished by the bankruptcy, the legal hypothec can no longer exist? The Court of Appeal answered that the effect of the bankruptcy is not to “extinguish” claims but to render them unenforceable. In civil law, an unenforceable claim may still constitute legal and valid consideration for the performance of an obligation. Such obligations fall into the category of moral or natural obligations which a debtor could validly decide to pay even after the statute of limitations period had expired or which were not enforceable as a result of bankruptcy.
In summary, although the extinction of an obligation that is guaranteed by a hypothec
results in the extinction of the hypothec itself, there is an exception in the circumstances of this case. Although the bankrupt debtor could not be sued for the debt that was subject to the bankruptcy, the debt continued to exist in law and the legal hypothec continued to subsist until payment or the expiry of the statute of limitations period. Therefore, the discharge of the bankrupt does not automatically signify that third parties who may also be held to pay the claim are also discharged.
1 R.S.C. 1985, C. B-3
2 3095-7252 Québec Inc. vs. Mickeck Jacyno, 2010 QCCA 940 (CanLII)
It is possible to register a judgment against the debtor’s immovable property in order to create a legal hypothec, which is a real right in the property itself, and thereby obtain security and a preference over competing creditors. However, if the debtor becomes bankrupt, the legal hypothec becomes unenforceable as a result of Section 70 of the Bankruptcy and Insolvency Act.1
In a recent decision, the Quebec Court of Appeal was called upon to decide whether
Article 70 would apply to render a legal hypothec unenforceable when a mortgage
created after the legal hypothec resulted in the foreclosure of the debtor’s property prior to the date of bankruptcy.2
In November of 2003, Jacyno registered a legal hypothec on the debtor’s property for the sum of $200,000.00. In 2006, Québec Inc. made a loan to the debtor in the amount of $300,000.00 which was secured by a mortgage on the debtor’s property. When the debtor defaulted on the loan, Québec Inc. foreclosed on the mortgage and became the owner of the property retroactive to October 24, 2006. The property was still subject to the legal hypothec which had been registered in November 2003.
On March 23, 2007, the debtor made an assignment in bankruptcy. Québec Inc., now the
owner of the property, applied to the Court to have the legal hypothec cancelled and
removed from its property arguing that the effect of Section 70 of the Bankruptcy and
Insolvency Act was to render the legal hypothec unenforceable. Moreover, Quebec Inc.
argued that since the legal hypothec is an accessory to the monetary condemnation, which is cancelled by the bankruptcy, the legal hypothec, as an accessory to the debt, must also be cancelled.
In rebuttal, Jacyno argued that Section 67 (1) (c) of the Bankruptcy and Insolvency Act expressly limits the application of bankruptcy law to the property that was owned by the bankrupt at the date of the bankruptcy. Consequently, since Quebec Inc. foreclosed on the property and became the owner prior to the date of bankruptcy, the Bankruptcy and Insolvency Act would not apply. It was also argued that the Bankruptcy and Insolvency Act should be interpreted so as to achieve the objectives of the legislator namely, the administration of the assets of the bankrupt, the priority between creditors, the liquidation of their claims and the modalities of the discharge of the bankrupt.
Although previous court decisions, even of the Quebec Court of Appeal, were divided on this issue, the Court of Appeal unanimously adopted the second argument namely, that when the debtor no longer owned the property at the date of bankruptcy, the legal hypothec would continue to be enforceable. In addition, the Court of Appeal noted that Québec Inc. foreclosed on the property with full knowledge of the existence of the legal hypothec, which had been duly published at the Land Registry office. In the circumstances, Quebec Inc. had various available legal options which it presumably rejected, such as having the property sold at justice and the proceeds of sale distributed according to law, instead of choosing to become the owner of the property or it could have waited for the debtor to become bankrupt in which event, the property would have been subject to the Bankruptcy and Insolvency Act and the legal hypothec would have become unenforceable and cancellable.
But what of the legal argument that once the claim is extinguished by the bankruptcy, the legal hypothec can no longer exist? The Court of Appeal answered that the effect of the bankruptcy is not to “extinguish” claims but to render them unenforceable. In civil law, an unenforceable claim may still constitute legal and valid consideration for the performance of an obligation. Such obligations fall into the category of moral or natural obligations which a debtor could validly decide to pay even after the statute of limitations period had expired or which were not enforceable as a result of bankruptcy.
In summary, although the extinction of an obligation that is guaranteed by a hypothec
results in the extinction of the hypothec itself, there is an exception in the circumstances of this case. Although the bankrupt debtor could not be sued for the debt that was subject to the bankruptcy, the debt continued to exist in law and the legal hypothec continued to subsist until payment or the expiry of the statute of limitations period. Therefore, the discharge of the bankrupt does not automatically signify that third parties who may also be held to pay the claim are also discharged.
1 R.S.C. 1985, C. B-3
2 3095-7252 Québec Inc. vs. Mickeck Jacyno, 2010 QCCA 940 (CanLII)
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