WHEN IS POSSESSION NINE-TENTHS OF THE LAW?

The Quebec Court of Appeal rendered an interesting decision in 2015 confirming the possessor of property to be the owner notwithstanding that title was registered in the name of another. (Ostiguy et al. –vs- Allie et al. 2015 QCCA 1368)

Appellants and Respondent were respective owners of two chalets that were built as part of a development near the Bromont ski resort.

Except for these two chalets, all of the others in the development had parking spaces situated in front of each lot that could accommodate two vehicles. Because of the unique configuration of the two chalets belonging to the Parties, parking for four vehicles was arranged adjacent to Appellants’ chalet. Ever since the chalets were built, the parking spaces were used by the respective owners of the two chalets or their predecessors in title.

A real and perpetual servitude of passage by foot was created on Appellants’ lot for the benefit of Respondent’s property, thereby permitting Respondent to access a parking space on Appellants’ lot. Some years later, Respondent’s predecessor in title added a parking space on his lot that was used principally for his visitors.

Appellants acquired their lot on July 26, 2011. The real estate listing referred to an existing parking space for two vehicles and the real servitude in favour of Respondent’s lot. However, the cadastral description at the land registry office clearly indicated that four parking spaces adjacent to Appellants’ chalet (not merely two) were part of Appellants’ lot.

Respondent’s spouse acquired her chalet in 1993 and inherited it when her spouse passed in 2001. Respondent had been using the parking space on Appellant’s property since 1993. Unlike all other owners in the development, the cadastral description of her property did not include any parking space.

Some months after acquiring their property in 2012, Appellants filed suit against Respondent to obtain a restraining order to prevent Respondent from trespassing on their property. In response, Respondent sought a declaratory judgment to recognize her title to part of Appellants’ property containing the parking space for two vehicles, which she alleged to have possessed as owner for more than ten years.

The Trial Judge rejected Appellants’ suit and their argument that Respondent’s access to the parking space on Appellants’ land was a result of simple tolerance on their part, and the Court also granted Respondent’s application. The Court of Appeal agreed with the Trial Judge.

The relevant legal principle that the Court of Appeal applied is that title to property can be acquired by possession that is peaceful, continuous, public and unequivocal during a period of ten years (Articles 922 and 2918 Civil Code of Quebec).

There didn’t seem to be any question that Respondent’s possession was peaceful, continuous and public. However, what is meant by unequivocal?

The legal authorities interpret this to mean that the pretended owner’s possession cannot be subject to different interpretations, but rather must necessarily imply the exercise of an exclusive right of ownership. This is a question of fact to be determined by the Trial Judge based on the evidence.

But what of the fact that Appellants’ title was registered at the land registry office and therefore was of public notoriety, at least in the legal sense?

After reviewing the case law, the Court recognized that the good faith of the possessor is not a relevant factor to consider when determining whether ownership has been acquired by possession. Otherwise, if registered title would be presumed to be public and everyone is presumed to know the law, then it would be impossible for anyone to acquire title to property that is registered in someone else’s name by possessing it over ten years. This would render Article 2918 of the Civil Code of Quebec superfluous. Consequently, the Court concluded that registration of title at the land registry office cannot protect an owner against the effects of useful possession by a third party.

The Court also commented on the legal consequences of registration of title to property. The purpose of registration of title is not to prove the existence of a right of property but rather to sort out the various claims that third parties could have against the same author and to establish the rank of security claims. It does not offer any guarantee concerning the quality of the title to the property. It only creates a rebuttable presumption of ownership.

Mr. Justice Denis Jacques, in his dissenting opinion, commented that the rules of acquisition of property by possession could occasionally give rise to surprising results when set up against a purported owner with a duly registered title. However, even though the majority of the Court agreed with Justice Jacques’ comment, they stated that it was not up to the courts to modify the choice of the legislature in this regard, who intentionally did not adopt proposed modifications to the law that would have made a registered title uncontestable.

An additional argument raised by Appellants’ was that to interpret the law as Respondent proposed would risk leaving registered owners of property in good faith at the risk and peril of unknown third parties who appear out of the blue. However, the majority in the Court of Appeal recognized that the facts in the present case could not fit such a description. More particularly, the real estate broker’s listing agreement, which was provided to Appellants at the time of their acquisition, clearly stated that they were acquiring parking for two and not four vehicles. Furthermore, the same listing agreement as well as the title search clearly indicated the existence of the real servitude of passage on Appellants’ lot to the parking spaces for the benefit of Respondent. If Respondent would not have the right to use the parking spaces on Appellants’ land, what then would the purpose be of the servitude of passage by foot?

In conclusion, property owners need to be vigilant regarding anyone in possession of even a part of their property. Any accommodation or tolerance of a possessor should be confirmed in writing to ensure that the possession does not become “unequivocal”.

DISGUISED EXPROPRIATION

In 2008, Québec City adopted a by-law requiring owners of waterfront properties to protect a strip of land adjacent to the shore measuring between 10 – 15 meters, depending on the configuration of the land, in order to protect the drinkable water supply and the lakeshore.

Some property owners applied to court to ask for the nullity of the by-law on the ground that it deprived them of the full use and enjoyment of a significant part of their property and was the equivalent of confiscation or a disguised expropriation without compensation. The trial judge dismissed the suit which ended up before the Quebec Court of Appeal, whose decision can be found at 2011 QCCA 1165 (Wallot v. Ville de Québec).

The stated objective of the by-law was to protect the shores of Lac Saint-Charles and to maintain the quality of its water. According to the Appellants, the primary effect of the by-law was to interfere with the enjoyment of their property without otherwise lessening their obligations relating to the exercise thereof i.e. their property taxes remained the same. The Appellants argued that the by-law amounted to a de facto expropriation of a substantial part of their property thereby depriving them of its reasonable use.

According to the Court of Appeal, the solution to the dispute required a determination as to whether there had in fact, been a suppression of all reasonable use of Appellants’ property. The Court of Appeal commenced its analysis by recalling that the right of ownership in Quebec is not absolute.

The principles established by jurisprudence that the Court of Appeal reviewed in its analysis included the following:

• Disguised expropriation requires the absolute negation of the owner’s right to access his property.

• Disguised expropriation requires interference with the exercise of the right of ownership to such extent that it renders the use of the property impossible.

• It is not because a law or zoning by-law tends to sterilize the right of ownership in whole or in part, or interferes with its exercise, even in a draconian fashion, for it to be considered to be abusive or unenforceable.

• Unless the by-law amounts to a veritable confiscation of private property, economic prejudice resulting from the imposition of restrictions on use and enjoyment cannot affect the validity of the by-law.

The Court of Appeal concluded that for such a by-law to be considered illegal, the restriction must be equivalent to an absolute negation of the right to exercise ownership of the property or a de facto confiscation of the property. Limitations on the right of ownership or its exercise that tend to only partially sterilize a right without depriving the owner of the reasonable use of his property will not be considered to be abusive.
Although the trial judge recognized that the by-law caused the Appellants certain inconvenience, he nevertheless considered that their property had not lost all of its value and that the by-law still allowed the reasonable use of and exercise of their right of ownership. Moreover, the trial judge concluded that the Appellants still retained a degree of use of the protected strip. He concluded that the effects of the by-law could not be interpreted as being a confiscation of the strip of the property adjacent to the lakeshore.

The Court of Appeal accepted the reasoning of the trial judge and added that it had not been demonstrated to the satisfaction of the Court that the by-law diminished the right of ownership and its fundamental attributes, including the exclusive use of the property. The Court could not conclude that the benefits that the Appellants derive from their ownership would, as a result of the by-law, transfer to Quebec City. Moreover, the consequence of the by-law was not to convert the Appellants’ ownership into public property. The by-law, despite certain restrictions, still allowed for the reasonable use of the part of the property adjacent to the lake, a view of the lake and even the possibility of using, in a restricted manner, the protected strip.

The Court noted that the municipality had not attempted to acquire waterfront property indirectly but rather through its zoning regulation, sought to control the use of such property in the collective interest of its residents.

In summary, the Court of Appeal concluded that the Appellants’ claim must fail and that any analysis of the evidence clearly demonstrated that the Appellants retained the substantial use of their entire property, including the strip adjacent to the lakeshore.

CAN AN ELDERLY PERSON CANCEL AN OFFER TO SELL A PROPERTY ON THE GROUND OF EXPLOITATION?

This issue was discussed in Désormeaux v. R.D., 2015 QCCS 4719 (CanLII).

R.D. was an 87 year-old owner of a semi-detached duplex in the Cartierville neighbourhood of Montreal where she resided since it was built in 1966.

In the summer of 2010, Massé, a real estate broker himself 82 years old, advertised his services in a senior’s magazine. In mid-July 2010, R.D. hired Massé to sell her property at a list price of $495,000.

After having visited the property during the Christmas holidays, the Plaintiff expressed an interest to buy it.

On August 21, 2011, Plaintiff, R.D. and Massé met at R.D.’s residence and agreed on a selling price of $310,000. Massé prepared on Offer to Purchase that the parties signed and accepted shortly thereafter. The sale was to be made without legal warranty and at the sole risk and peril of the Purchaser.

On or about September 2, 2011, a lawyer claiming to represent the interests of R.D. informed the instrumenting notary that R.D. had a signed a Power of Attorney of Sale in favour of her niece, who herself was a real estate broker, and that the niece had exclusive authority to negotiate and conclude a sale of the property; that Massé knew of the situation and nevertheless, encouraged R.D. to sign the Offer to Purchase; R.D. was mentally incompetent; and the Offer to Purchase was null and void for all legal purposes.

A lawsuit followed which raised the following issues:

i. Was R.D. mentally competent to enter into a contract?

ii. Was R.D. the victim of fraudulent manoeuvers or abuse on the part of the Purchaser or the broker which would have undermined her free and unfettered consent to agree to the Offer to Purchase?

iii. Was R.D. the victim of exploitation?

I. Was R.D. mentally competent to enter into a contract?

At the date of the trial, R.D. had not been declared legally incompetent by the court. Furthermore, there was insufficient proof that R.D. was mentally incompetent at the time that she signed the Offer to Purchase. There was no evidence that R.D. was mentally incompetent at any time since the filing of the legal proceedings until the date of the trial.

According to law, the capacity to contract is appreciated at the time that the consent to the contract is given. Every person is presumed mentally capable of entering into a contract unless a court judgment exists declaring otherwise.

The party alleging an interlude of mental incapacity, i.e. at the time of the signature of the contract, has the burden of proof, which must be preponderant and not consist merely of suspicions and doubts.

In this case, the Court concluded that the proof of mental incapacity was not conclusive.

II. Was R.D. the victim of fraudulent manoeuvers or abuse on the part of the Purchaser or the broker which would have undermined her free and unfettered consent to agree to the Offer to Purchase?

Fraudulent manoeuvers usually take the form of false or misleading representations with respect to a material element of a contract.

In this case, R.D. alleged that the Purchaser exaggerated the cost of repairs and renovations that would be required for the property as a means of reducing the selling price.

The Court found that there was insufficient evidence to support this claim. The Court noted that the law makes allowance for a degree of exaggeration which is generally acceptable in the course of negotiations and each situation must be appreciated according to its own particular facts.

Moreover, the Court concluded that there was no evidence that R.D. did not or was not able to appreciate the physical condition of her property, or the necessity or need for renovations and the cost thereof. If she was willing to sell the property without legal warranty at the Purchaser’s sole risk and peril, it is likely that R.D. suspected that there could be substantial costs to be incurred by the Purchaser.

III. Was R.D. the victim of exploitation?

Article 48 of the Quebec Charter of Rights and Freedoms protects elderly persons (and persons with a handicap) from any form of exploitation. They have the right to be protected and to the security that is owed to them by their family or others in their stead.

The right not to be exploited is something more than the usual civil rights enjoyed by the general population. An elderly person who is vulnerable nevertheless retains control over his property and has the capacity to dispose of it at will and even at his own risk and peril. However, when an elderly person is the victim of exploitation, he has a right to be protected, even when he is not mentally incompetent. This legal remedy requires a preponderance of evidence of exploitation, which has been defined by case law as the result of being taken advantage of by a person of influence to the detriment of the elderly person’s personal interests. One must weigh the vulnerability of the elderly person against the degree of influence of the alleged exploiter, together with the adverse consequences to the interests of the vulnerable person.

Consequently, the actual or potential vulnerability of an elderly person is insufficient to succeed without additional evidence that he was taken advantage of by a person in a position of influence.

In this case, the Court rejected the claim of exploitation taking into account, in particular, the following evidence:

• The Purchaser did not initiate the Offer to Purchase or the selection of Massé as the listing broker.

• Apart from the fact that R.D. was an elderly person, there was no evidence that the Purchaser suspected that R.D. was of limited intellectual capacity, nor was this ever proven to be true.

• There was no evidence that R.D. was a vulnerable person, naïve, easily influenced, incapable to discern or subject to poor judgment.

• It is the essence of a contract that each party acts in his own best interests and seeks his own greatest advantage.

• The agreed sale price, taking into account the renovations and repairs envisaged, was not proven to be unreasonably low.

• The Purchaser met with R.D. on only a few occasions without seeking or receiving any gifts, or seeking to influence R.D. by any artifice, scheme or expression of false kindness or otherwise with a view to obtaining special favours.

• The Purchaser was not a “real estate shark” but rather an ordinary purchaser.

• The evidence did not reveal that the Purchaser was in a position of influence vis-à-vis R.D.

• The evidence did not reveal any collusion between the Purchaser and Massé. Although R.D. reproached Massé for not having advised her properly or acting in her best interests, that was not the responsibility of the Purchaser and therefore, not an issue properly raised in this suit. If the broker committed a fault by not properly advising R.D., the latter theoretically could file a separate lawsuit against him, which has no bearing on the outcome of the present suit.

CONCLUSION

When transacting with an elderly person, we should be aware of his right against exploitation, which supplements the usual civil rights that are enjoyed by the population at large. In such situations, it would be advisable to take additional measures to inoculate ourselves against potential claims by ensuring that the elderly person obtains or at least has a reasonable opportunity to obtain independent legal advice which is confirmed by the contract. Alternatively, it would be advisable for another family member or friend with no conflict of interest, who is a person of trust, be involved in the negotiations and also sign the contract or a letter affirming that the elderly person was treated fairly and equitably and was not the victim of any exploitation with respect to the transaction.

LOVE THY NEIGHBOUR

The introduction to a recent Superior Court judgment begins as follows:

9209-1537 Québec Inc. (Habitations du Sud-Ouest) v. Lombardo, 2015 QCCS 4266

“An American journalist of the late 19th century mischievously defined a neighbour as: “One whom we are commanded to love as ourselves, and who does all he knows how to make us disobedient.”

This is another case of a property dispute arising between neighbours, which are becoming more and more frequent. The decision provides an interesting case study of encroachment i.e. how does the law resolve the problem of a construction that encroaches on a neighbouring property?

Rocco owned a house as well as two adjacent vacant lots, one of which he sold to Habitations upon which it intended to build a six-unit condominium.

During the construction of the foundation, an error occurred that resulted in encroachment on Rocco’s property. The footing of the foundation was poured in a T shape configuration instead of an L, thereby encroaching on Rocco’s property by about 5”.

Thereafter, the parties negotiated for almost one year but were unable to come to an agreement. Although Habitations was prepared to grant a limited right of way to Rocco, the latter insisted on terms that were much too rich for Habitations’ liking. Arguably, Rocco was attempting to exploit Habitations’ good faith error to gain a disproportionate advantage. The lack of resolution of the dispute caused Habitations serious difficulty because it could not sell its condo units with clear title. Finally, Habitations filed suit in which it asked the court to order Rocco to sign a deed of servitude to regularize the encroachment and to pay damages for his delay in doing so.

Rocco contested the suit and made a counterclaim in the amount of $70,000.00 representing the cost to restore his garden, and $25,000.00 for stress and inconvenience.

Article 992 of the Quebec Civil Code provides legal recourses when a neighbour builds beyond the limit of his property. It provides different remedies depending upon the particular facts.

1) If the encroachment is minor, was built in good faith and does not cause serious prejudice, the victim of the encroachment may elect to sell his parcel of land or to be compensated for the temporary loss of use of this parcel of land. The loss is “temporary” in the sense that a construction may have a limited useful life although with proper maintenance, any construction can last a very long time.

2) If the encroachment is considerable, built in bad faith or causes a serious prejudice, the victim can force the demolition of the construction or require the encroacher to purchase the victim’s entire property. It is generally recognized by case law that an encroachment of less than 10% of the victim’s land is considered minor.

The foregoing recourses would not however apply when the victim has consented, expressly or implicitly, to the encroachment. In such a case, the consent of the victim creates in favour of the owner of the construction what is called a right of superficies. In this situation, the owner of the construction coexists with the victim of the encroachment who owns the subsoil and their respective rights are governed by the Quebec Civil Code (Articles 1110 and following).

The right of superficies creates a servitude on the victim’s land to regularize the encroachment so that they both may exercise their respective rights of property with clarity of legal title.

In the case at bar, the evidence established that the victim implicitly by his conduct acquiesced in Habitations’ right of superficies.

1) When Rocco first learned of the encroachment, he told Habitation that it would not be a problem;

2) Later on during negotiations under the auspices of a notary, Rocco agreed to the right of superficies in consideration for a limited right of passage through Habitations’ property to his back yard;

The Court also found that the encroachment amounted to 5.5” at the base of the foundation, i.e. 7 to 10 feet below ground and consequently was determined to be relatively insignificant and would not cause Rocco or his successor in title any prejudice;

This was a dispute that began in 2010 but was not resolved until judgment was rendered in September 2015.

Had Rocco been more reasonable (i.e. treated his neighbour as he would have his neighbour treat him), the dispute could have been settled much earlier and at a minimal cost to both parties.

Legal Duty of a Real Estate Listing Agent to the Buyer

This issue was recently discussed in the Superior Court decision of Ratté v. Lévesque, 2015 QCCS 2769.

The buyer purchased a duplex in 2008 that was listed at $249,000 for only $210,000 but without legal warranty. Subsequent to the sale, the buyer discovered water infiltration and mold in the basement which cost in excess of $64,000 to repair.

When a property is sold in Quebec, the seller is bound by law to warrant that the property is at the time of sale, free of hidden 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 it. (Article 1726, Civil Code of Quebec). This implied warranty applies whether or not it is written in the sales contract although the parties may exclude it by express mutual consent.

In the present case, the owner of the property authorized his mortgage creditor to sell the property in order to minimize the cost of foreclosure proceedings. The mortgage creditor was not personally familiar with the physical condition of the property so insisted that it be sold without legal warranty.

The agent recommended that the buyer make an offer because in his opinion, it was an excellent property for a first-time buyer with limited financial means.

To decide the case, the Court proceeded to examine the extent of the duty of the agent in the context of a sale without legal warranty, taking into account the availability and importance of a pre-purchase inspection.

The Court commenced its analysis by reviewing the basic legal obligations of a real estate agent. A listing agent is contractually bound only to the seller. In addition, when consulted by a buyer, the agent assumes a legal obligation to provide advice with skill and diligence and in conformity with the real estate agent code of ethics.

The agent must avoid conflicts of interest, such as concluding a sale at all costs in order to earn a commission. With respect to inspections and the discovery of hidden defects, the agent is required to identify apparent defects and ensure that the description of the property in the listing is accurate. The agent must advise all parties to a transaction objectively. When it is in the best interests of any party to a transaction, the agent should recommend the hiring of an expert.

The Court found that the standard of the duty of the agent to advise is higher when the legal warranty is excluded.

Although the Offer to Purchase included the standard inspection clause, the Court found that when the agent was questioned by the buyer regarding the necessity of a pre-inspection, the agent was non-committal. The Court found that the agent should have explained the usefulness, if not the necessity, of a pre-inspection to the buyer when the legal warranty is excluded and the seller is the mortgage creditor who has no personal knowledge of the physical condition of the property.

The Court concluded that the agent was in breach of his duty to advise and was liable to indemnify the buyer for the cost to repair the hidden defect.

It is interesting to contrast the legal philosophies underpinning such contracts in Quebec as compared to, for example, the State of Florida, where the legal warranty of quality does not exist and where the principle caveat emptor (buyer beware) prevails.

In Quebec, the legal burden to disclose defects is on the seller, the rationale being that he is the one who is most familiar with the property. However, there are many situations where hidden defects exist without the knowledge of the seller. In buyer beware jurisdictions, the philosophical assumption is that every individual is responsible for his or her own transactions and risks and therefore, the reliance upon due diligence investigations by the buyer assumes a greater importance in order to minimize such risks.

The legal warranty in Quebec has, on occasion, produced surprising circumstances. Where it was proven that a hidden defect had existed for a very long period of time, the most recent buyer who first discovered it could sue his seller who in turn could sue his seller and so on until the date that it is determined when the hidden defect first arose. For example, a building may have been constructed in 1960 and sold four (4) times since with a hidden defect in the building or the land. Each of the sellers of the four transactions could be liable to indemnify his particular buyer. Someone who sold a property 25 years ago or his heirs could suddenly find themselves facing such a lawsuit. The statute of limitations would only begin to run when the hidden defect is discovered which, in theory, could be decades later.

The law often casts a wide net in order to attempt to prevent perceived potential abuses but by doing so, it can often lead to unforeseen circumstances that are themselves, unjust.

CURRENT OVERVIEW OF ACQUIRED RIGHTS IN REAL ESTATE MATTERS

The Court of Appeal decision in Les Immeubles Desaubec (2002) s.e.n.c. v. Ville de Granby, 2014 QCCA 1768, provides an interesting and instructive overview and update of acquired rights law in real estate matters.

Originally, the notion of acquired rights was created by the Courts and based on the principle of the non-retroactivity of municipal by-laws. In particular, it was considered to be unjust to require a property owner to modify his building or change its use as a result of a modification to municipal by-laws. However, it is generally considered beneficial that such derogatory use cease with the passage of time since municipal regulation is presumed to be made to serve the public interest.

The Courts established a compromise between the objectives of new or modified by-laws and the protection of property owners who find themselves in non-compliance with the law as a result of the implementation of new standards.

Once acquired rights are lost, they cannot be resuscitated and there has been and continues to be much litigation on the subject. In some cases, the acquired rights represent significant value to the property owner the loss of which can be very onerous. It is generally recognized that there are three (3) ways to lose the benefit of acquired rights: destruction of the property; cessation of use; or change of use.

Voluntary demolition of a building (as opposed to destruction by fire for example) and the erection of a new construction entirely different from the original would entail a loss of acquired rights even if the material emanating from the old construction is recycled in the new one. The test consists of determining whether the new construction is a “new entity.”

Acquired rights in relation to a derogatory use can be lost by the abandonment or interruption of such use. They can also be lost by the change in use from one that is derogatory to one that is not. Quebec jurisprudence has been relatively severe with respect to the preservation of acquired rights since they derogate from standards that are generally considered to be in the public interest.

In the present case, Desaubec was the owner of a property in the City of Granby where it operated an alcoholic beverage business. It was a use that the zoning by-laws no longer permitted but was acknowledged to be protected by acquired rights.

In 2007, Desaubec leased the commercial establishment to a third party tenant who was required by the lease to continue to operate an alcoholic beverage business on the premises. In 2009, the tenant modified the use of the premises by transforming the business from an alcoholic beverage bar to a juice bar after applying for and obtaining from the City of Granby the appropriate permit to proceed with the leasehold modifications. This was presumably done without the owner’s knowledge or consent. After the work was completed, the juice bar operated for only a few weeks before it closed and the tenant abandoned the premises.

Desaubec retook possession of the premises with a view to once again, operate an alcoholic beverage business. It applied to the regulatory authority for such a permit which the City of Granby contested on the ground that the acquired rights to operate a bar with alcohol service had been lost due to the change of use, the whole in conformity with the by-laws then in effect and the terms of the permit issued for the operation of the juice bar. Desaubec applied to the Court for a declaratory judgment asking for judicial recognition of its acquired rights.

Desaubec argued that the passage of time was an essential condition for the extinction of acquired rights because Article 113 (2), paragraph 18A of the Land Use Planning Act required a minimum period of six (6) months for the extinction of acquired rights. The City of Granby argued that the time delay was not a relevant factor when the derogatory use was intentionally replaced and subsequently, there was no possibility of resuscitating the acquired right that had been voluntarily given up. The relevance of the six-month minimum delay in the Act applies to the abandonment, cessation or interruption of a derogatory use, in which event, the lapse of time would give rise to a legal presumption that the derogatory use had permanently ceased.

In the case of abandonment, cessation or interruption, the owner’s intention to abdicate acquired rights is not always evident hence, the utility of such a legal presumption. In contrast, where a derogatory use is intentionally replaced by a use that is in conformity with the new standards then in force, it is objectively clear that the owner intended to put an end to the derogatory use that was protected by acquired rights.

A person has an acquired right to a derogatory use when three (3) conditions are met: (1) the derogatory use commenced or the permit or the certificate required to commence was obtained before the modification of the by-law; (2) the derogatory use was legal immediately before the modification of the by-law; (3) the derogatory use continued thereafter. In the present case, the third condition has not been met. When the alcoholic beverage bar was intentionally replaced by a juice bar, there was an automatic loss of the acquired right.

To summarize, the derogatory use that was protected by acquired rights was replaced by a different use that was in conformity with the by-laws then in effect. The new use resulted from specific steps undertaken by the tenant with the City of Granby, which resulted in the issuance of a permit so that work could be undertaken to transform the premises to be used in conformity with the by-laws. The permit that was issued was accompanied with a letter that included a notice to the tenant that the issuance of the permit would entail the extinction of the acquired rights.

The work to transform the leased premises was carried out with full knowledge of the consequences by the tenant although it appears, not by the owner. The juice bar did in fact operate. The dispute arose a few months later as a result of the opposition by the City of Granby to the application for a liquor license by Desaubec. Granby never required Desaubec to cease the derogatory use that had been protected by acquired rights. The acquired rights were not lost as a result of any act on the part of Granby, but rather as a direct result of the voluntary change in the use of the property by the tenant against whom, Desaubec presumably had an illusory recourse in damages for breach of the lease.

TENANT RESTAURANT SUES SPORTS CLUB LANDLORD FOR CLOSING SHOP

Is a sports club (the "Landlord") who leased space to a restaurant (the "Tenant") liable in damages for closing its business and depriving the Tenant of clientele? This was the issue before the Superior Court in 9202-9131 Quebec Inc et al. –vs- 6943870 Canada Inc, 2015 QCCS 1209.

The Lease was signed on December 1, 2008 for a term of 10 years and the Tenant opened its restaurant for business the following month. The Landlord however was losing money and began exploring other business options such as the installation of two (2) ice surfaces to replace the tennis courts.

At the beginning of 2010, the Landlord decided to pursue the development of a residential condo project on its property. This would necessarily result in the closing of the sports club, the demolition of the building and the termination of Tenant’s lease. Tenant was not informed of this decision.

Landlord filed a rezoning application and informed members of the sports club that it would most probably close. In the meantime, turmoil over the future of the sports club was having a negative impact on the Tenant’s sales. As a result, the parties agreed to a reduction of rent and of the restaurant’s opening hours. The rezoning application was eventually rejected by the municipal authority.

In September 2010, the Tenant sent a demand letter to the Landlord asking for compensation and announcing that the restaurant would close the following month. No compensation was paid.

The Court had to decide whether the Landlord was in breach of the lease and if so, what were the damages?

The lease did not impose any express obligation on the Landlord regarding the operation of the sports club or the retention of any minimum number of members. However, the Court pointed out that contracts in general, and leases in particular, have implied obligations. For example, Article 1434 of the Quebec Civil Code stipulates that the parties to a contract are bound by not only what is specifically expressed in it, but also what is implied by the nature of the contract, in conformity with usage, equity or law.

Article 1856 of the Quebec Civil Code stipulates that neither landlord nor tenant may change the form or destination of the leased premises during the term of the lease. The Court considered whether closing down a substantial part of the building would amount to changing the destination of the leased premises.

The Court noted that the courts have historically limited the scope of such implied obligations, particularly when in the presence of a clause similar to the one found in the lease between the parties stipulating that the lease and its schedules contain all of the undertakings and obligations of the parties. The Courts are reluctant to give a tenant the benefit of an obligation that it did not negotiate for itself.

For example, the courts have dismissed claims by tenants complaining that the vacancy rate is too high; that the landlord has undertaken disruptive renovations; or that the construction of a shopping centre is not proceeding as the tenant understood it would. In the absence of a specific clause in the lease to deal with such issues, the courts have often sided with the landlord.

The Court noted the series of cases relating to the decision to transfer passenger traffic from Mirabel to Dorval Airport which were on the whole, more favourable to the tenant. In those cases, the courts held that the reduction in the services offered at Mirabel Airport constituted a breach of an implied obligation to maintain sufficient traffic there.

In other cases, the courts have found that the transformation of a portion of a shopping centre into office premises or ceasing to lease space and encouraging the vacating of premises with the intention of changing the vocation of a shopping centre constituted a change in the destination of the leased premises and a breach of the landlord’s legal obligation.

The Court noted the specific context of the case at bar that the restaurant was located within a sports club which in turn, is located in a residential area and not on a commercial artery. It was reasonably expected that most of the customers of the restaurant would be the members of the Landlord’s sports club. The Court concluded that the Landlord had breached its obligations to the Tenant by announcing that it would shut down the sports club, thereby driving away a substantial number of members without having any plan to replace them.

The Court concluded that the Tenant was entitled to expected lost profits for the duration of the lease plus interest, notwithstanding that the Tenant never made a profit during its short lifespan. The Tenant was able to prove with the help of a business evaluator that had the Landlord decided not to close the sports club, in all probability, the Tenant would have become profitable after a few years and for most of the duration of the lease.

The key event was arguably the Landlord’s decision to enter into a 10-year lease at a time when its sports club was in financial difficulty. The financial statements of the Landlord showed a loss of $397,362 for the year ended August 31, 2009 and a similar loss for the 2010 fiscal year. It is understandable that the Landlord preferred to close the sports club rather than continue to lose money, but it could not legally do so without breaching its lease with the Tenant and incurring liability for the latter’s consequential damages.