Wednesday, June 12, 2013
LIABILITY OF THE PROPERTY MANAGER
What are the legal obligations of a property manager who is given sole discretion by the owner to carry out repairs as the latter deems necessary for the maintenance and preservation of the property?
In the Quebec Court of Appeal decision of Monit Management Limited v. Samen Investments Inc., 2012 QCCA 1821, the owner of a commercial building sued the property manager for gross negligence for omitting to perform regular maintenance and repairs to the concrete parking area.
The manager acknowledged that it kept the repairs and maintenance to a minimum in accordance with the owner’s directives to minimize expenses and maximize profits. The manager added that the owner benefited from the manager’s administration since had more been spent for maintenance and repairs, the owner would have received less profit.
The property management contract was in effect from 1976 to 2003, a period of 27 years. At the end of the contract, the owner decided to hire a different property manager who conducted an inspection of the property with a view to upgrading the building from a Class C to a Class B property. At that point, it was discovered that the concrete parking area had become structurally unsound. The evidence established that the concrete would have had to be replaced eventually, but the lack of timely maintenance on the part of the manager shortened the useful life of the structure.
Not only did the property management contract grant the manager sole discretion with respect to the necessity of maintenance and repairs but it also included an exoneration clause that shielded the manager from all liability other than for damages resulting from its willful misconduct or gross negligence.
Both the Superior Court and Court of Appeal sided with the owner. The argument of the manager that the owner could not question the manager’s discretion regarding the necessity of repairs and maintenance was rejected on the ground that the discretion of the manager was not absolute but was tempered by a fundamental obligation of the management contract to act as a prudent administrator and to perform its duties with due diligence. The Court reasoned that to allow the manager to exculpate itself on the ground that it enjoyed exclusive and absolute discretion would have rendered inoperative a fundamental contractual obligation of the manager. In a contract, the obligations are mutually dependent and it would do violence to the existence of the contract to interpret the obligations of one of the contracting parties as being merely voluntary and therefore legally unenforceable.
The Court also noted that it was the property manager who drafted the agreement and that any ambiguity regarding its interpretation should weigh in favour of the owner.
Another argument advanced by the manager was that since it was an experienced property manager who, at all relevant times, managed between 25 and 50 commercial properties, it could not possibly be guilty of gross negligence. This argument was obviously given little weight.
In order to succeed in the face of the exoneration clause, it was essential that the owner convince the Court that the manager was not merely negligent, but was guilty of willful misconduct or gross negligence.
Two factors contributed to the Court’s conclusion that the lack of maintenance of the underground parking area constituted gross negligence. The first factor was the long period of time during which the manager neglected to maintain and preserve the property. The second factor was that the manager knew or should have known the consequence that a lack of maintenance and repair would have on the concrete structure. More particularly, the evidence established that during the duration of the contract, the manager was aware that small pieces of concrete were detaching from the structure from time to time and causing minor damage to parked automobiles. The property manager even had a tarpaulin installed to protect parked cars from water infiltration and falling bits of concrete.
The manager also argued that even if the Court concluded that it was grossly negligent, since the underground parking area was old and would have had to have been redone anyway, and the owner’s revenues during the term of the contract were higher than they would otherwise have been due to low maintenance and repair costs, the owner incurred no prejudice.
Not surprisingly the owner saw things differently and argued that there was a cost involved in having to rebuild the underground garage earlier than necessary. Moreover, the owner argued that had the necessary maintenance and repairs been carried out during the term of the contract, such costs could have been passed on to and recovered from the tenants as part of their proportionate share of the operating expenses. The cost of rebuilding, as opposed to maintaining, is not an expense that can usually be passed on to tenants.
Once again, the Court sided with the owner despite the fact that the proof of quantum of damages was unclear. In the circumstances, the Court used its discretion to arbitrate an amount, $170,000.00, which was substantially less than the amount of $743,000.00 that the owner claimed.
An additional factor that may have influenced the outcome was that the property was owned by an absentee owner who resided in Italy. Moreover, the president of the owner, an accountant by profession, resided in Switzerland. Arguably, the Court may have held the manager to a slightly stricter standard than might have otherwise been the case since the evidence established that the owner and/or its president were only rarely physically present in Quebec, were primarily focused on the financial aspects of their investment and relied heavily upon the manager to take care of the property.
Again, reading between the lines, one might argue that in a contractual relationship, each party may have certain reasonable expectations which if not met, could result in the other party being considered in breach of contract and liable to indemnify the party whose expectations it failed to meet.
Thursday, May 2, 2013
OFFER TO PURCHASE CONDITIONAL UPON MORTGAGE FINANCING APPROVAL
If an offer to purchase is conditional upon the purchaser obtaining financing, which fails to materialize, can the purchaser cancel the deal?
The Quebec Court of Appeal decision in Hazan et al. v. Madeco Mascouche Inc., 2012 QCCA 2056, provides an informative illustration.
The facts of the case can be summarized as follows:
• The purchaser and seller signed an offer to purchase a building to be built by the seller.
• The offer to purchase was conditional upon the purchaser obtaining financing.
• The financing was approved subject to the condition that at the time of disbursement, leases shall have been concluded with an aggregate rent of at least $22,800.
• Seven weeks after the financing was conditionally approved, the lender unilaterally changed the condition to add a ten percent withholding requirement until the property is fully leased.
• The purchaser never objected to the change in condition nor did he inform the seller.
• The purchaser paid a deposit to the seller as well as progress payments according to the completion of various stages of construction as prescribed in the offer to purchase.
• The purchaser refused to sign the deed of sale within the stipulated delay due to the refusal of the lender to disburse the financing on the ground that the conditions for financing were not fully satisfied.
• Due to his inability to obtain financing, the purchaser claimed cancellation of the deal as well as reimbursement of his deposit and all progress payments that he had paid to the seller.
Based on the evidence, the Court found that the purchaser had not made any serious effort to lease the property, which was a condition precedent required by the lender. The purchaser’s attitude was described by the Court as tentative and passive, which it considered to amount to negligence and was in contrast to the proactive, diligent attitude that was recognized by the case law as being required in similar situations.
In effect, although the sale was conditional upon the purchaser obtaining financing, a contracting party is required by law to act diligently and in good faith with respect to the performance of his contractual obligations, including actively taking all reasonable means to perform his obligations and satisfy any conditions precedent upon which his obligations depend.
Furthermore, based on the evidence, the Court concluded that the purchaser never had the financial means to acquire the property and was at all relevant times, financially stretched to the limit. In the words of the Court, the purchaser entered into the contract to purchase in the same manner as houses were recently being built in Spain i.e. irresponsibly.
When a contract is cancelled, the law requires that the parties, to the extent reasonably possible, should be financially restored to the situation that they were in immediately prior to concluding the contract. The purchaser relied on this principle as the basis for his claim for reimbursement of the deposit and progress payments. However, as is often the case, the offer to purchase included a penal clause which allowed the seller to retain all amounts that it received up until the termination of the contract, in the event of the purchaser’s default. Moreover, purchaser made no effort to attack the validity of the penal clause on the ground that it was abusive.
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.)
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