Thursday, January 25, 2018

ILLEGAL ABANDONMENT OF LEASED PREMISES BY THE TENANT


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

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

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

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

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

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

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

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

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

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

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

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

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


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

Friday, December 1, 2017

WHEN IS SELLER NOT RESPONSIBLE FOR ENVIRONMENTAL CONTAMINATION?



Four years after the acquisition of a commercial property, the purchaser applied for a bank loan to pay the construction costs to increase the size of its building.[1] The financial institution required environmental testing for contamination as a condition for granting the loan. The results of the environmental testing revealed the presence of heating oil in the soil on part of the property and the application for the loan was refused pending decontamination.

The seller agreed to pay the costs of decontamination estimated at between $110,000 and $150,000. In the course of the decontamination work, the parties learned that oil had infiltrated beneath the building and the presence of rock prevented removal without its demolition. The revised cost of the clean up largely exceeded the $700,000 sale price of the property.

The seller offered to cancel the sale. The purchaser refused, restored the excavated parts and continued to use the property as it had for the previous four years without restriction, other than being unable to increase the leasable space due to its inability to obtain financing.

Purchaser argued that the oil contamination constituted a hidden defect that was known to the seller, who should be held responsible for all damages. In addition, purchaser relied on the seller’s declaration in the contract of sale that the property did not contravene any environmental protection laws. For the purchaser, this declaration constituted a contractual warranty that supplemented the statutory warranty of quality found in the Quebec Civil Code.

The seller invoked the lack of diligence on the part of the purchaser, who had substantial real estate experience. The purchaser was allegedly in a hurry to close a “deal” to purchase the property and did so without carrying out a pre-purchase inspection. Seller also argued that the purchaser did not incur any restriction in the intended use of the property and that the defect did not reach the level of seriousness that the purchaser alleged.

Regarding the declaration in the contract of sale, seller argued that the property did not infringe upon any environmental laws; the declaration was only a clause of style; and there was no evidence of any infraction. Finally, since the purchaser refused seller’s offer to cancel the sale, its recourse should be limited to a reduction in price, and not all damages.

Purchasers lack of diligence

Purchaser’s manager was highly experienced in residential real estate matters, but less so in the commercial sector. Seller was a non-profit organization that provided financial aid to charitable organizations. Its board of directors consisted of twelve volunteers who were mostly retired.

The property in question was situated adjacent to another property that was already owned by the purchaser and when the latter learned that the property was for sale, he saw an attractive opportunity. The purchaser visited the property for two hours and was given a document containing basic information about the property including the dates of construction and renovations; municipal evaluation; the lease of the sole tenant; and that the heating system was electric. The purchaser did not inquire further regarding the nature of the renovations or request additional details regarding previous heating systems. 

The day after the sole visit, purchaser submitted an offer. The sale transaction was completed within fifteen days for the agreed price of $700,000. The seller agreed to finance the sale so the purchaser did not have to obtain a bank loan. Purchaser testified that the application for a bank loan would have delayed the closing considerably since the bank would have required a Phase 1 environmental study, etc. For this reason, purchaser renounced the opportunity to conduct a Phase 1 prior to closing.

Did purchaser not foresee the day when a Phase 1 might be required, such as for a future bank loan or upon the re-sale of the property? In the opinion of the Court, the purchaser acted imprudently in that it benefited from a certain level of real estate experience; its haste to complete the sale and willingness to forego the opportunity to carry out an environmental assessment; foreseeability that an environmental assessment would eventually be required in the future and knowingly assumed the risks. 

Seriousness of the defect

The Court correctly noted that that the determination of whether a defect is covered by the legal warranty of quality is directly proportional to the impact on the intended use of the property by the purchaser. 

On the one hand, purchaser declared that the defect was so serious that it would not have bought the property had it known about the existence of environmental contamination. Once discovered, it refused to cancel the sale as proposed by the seller. The court concluded in the circumstances that either the defect was not as serious as the purchaser had alleged or that the value of the property was much greater than the price paid, despite the contamination.

The Court of Appeal has already recognized that the presence of environmental contamination will not be considered a defect unless is has a significant impact on the intended use of the property. [2]

The property was fully rented to a single tenant that intended to remain until the end of the lease. The purchaser was able to use the property for its intended use. Purchaser never received any notice from a public authority requiring that it cease exploiting the property as a result of the presence of environmental contamination. In short, the purchaser’s use of the property had not been adversely affected.

And what of the impact upon the resale value of the property? Purchaser offered no evidence on this point notwithstanding that it called a certified evaluator to testify.

For the foregoing reasons, the Court concluded that the purchaser could not rely on the statutory warranty of quality.

Sellers contractual declaration that the property does not contravene environmental protection laws

The purchaser submitted that the seller violated s. 20 of the Environmental Protection Act which makes it an infraction to contaminate the environment with any substance prescribed by regulation.

The Court noted that there was no evidence that the contamination was spreading and not limited to the area directly beneath the building. Consequently, there was no evidence of a violation of the law by the seller. Furthermore, the Minister of the Environment had not issued any notice of infraction in this regard.

The Court also noted that the law generally doesn’t require a property owner or occupant to clean up and remove contaminants except for businesses with industrial operations specifically prescribed by regulation or in some specific cases where the Minister is given the authority to order a clean-up, neither of which scenarios would apply to the case at bar. 

Consequently, the purchaser’s claim was dismissed.

Quantum of damages claimed by the purchaser

Purchaser claimed $3,580,287 including various expenses incurred, the value of the building prior to demolition; demolition costs; decontamination costs; and compensation for lost revenue resulting from the cancellation of the lease. 

Did the purchaser reasonably believe that it could keep the property and that seller would pay it $3.5 million dollars? 

The Court concluded that even if the purchaser could avail itself of the warranty of quality or the seller’s contractual declaration, (which it unsuccessfully argued), the amount of the monetary relief to which it would be entitled would be limited. More particularly, when a purchaser becomes aware that the cost of repairs is disproportionate to the purchase price, the appropriate legal remedy is the cancellation of the sale together with a claim for damages that it actually incurred, but not the cost of repairs. Otherwise, the purchaser could effectively end up paying little or nothing for a property, which could lead to an unreasonable and unfair result.



[1] Société en Commandite de l’Avenir c. Familia Saint-Jérôme inc., 2017 QCCS 4246
[2] 125385 Canada inc. c. Groupe Collège LaSalle inc., 2006 QCCA 522

Wednesday, May 17, 2017

DISCREPANCY IN THE SIZE OF A CONDO



What are the rights of a buyer of a new condo when the actual square footage is less that what is shown in the plans?

In a recent decision of the Quebec Superior Court,[1] a lawyer promised to purchase a condo on January 14, 2010 to be delivered in September 2011 for the price of $1,350,000. According to the plans provided by the promoter, the condo was to comprise an area of 2904 square feet. When delivered, the purchaser hired a surveyor to measure it and found that it was only 2558 square feet, a shortfall of 346 square feet or 12 %. Put another way, the shortfall was equivalent to a good size room (20 x 17).

The purchaser proceeded with the sale and took possession of the condo under reserve of
his rights.

The purchaser claimed a reduction of the purchase price in the amount of $113,000 to compensate him for the shortfall. He argued that the size of the condo was an essential condition for him and the shortfall was substantial.

The promoter argued that he never promised to deliver a condo with 2904 square feet of living space and that he had explained to the purchaser the difference between gross measurements (including the thickness of walls and windows) and net, which is measured from interior surfaces. In addition, the promoter invoked the following exculpatory provision of the Promise to Purchase:

Dans l’éventualité de toute divergence entre les Plans et les Spécifications incluses aux Annexes jointes à la Promesse, le plan de l’arpenteur prévaudra et l’Acheteur accepte que le Prix d’Achat demeurera le même nonobstant toute divergence de superficie par rapport à la superficie mentionnée dans les plans préliminaires.

The key legislative provisions are the following articles of the Quebec Civil Code:

1720. The seller is bound to deliver the area, volume or quantity specified in the contract, whether the sale was made for a price based on measurements or for a flat price, unless it is obvious that the certain and determinate property was sold without regard to such area, volume or quantity.
1991, c. 64, a. 1720; I.N. 2014-05-01.

1737. Where the seller is bound to deliver the area, volume or quantity specified in the contract and is unable to do so, the buyer may obtain a reduction of the price or, if the difference causes him serious injury, resolution of the sale.
However, where the area, volume or quantity exceeds that specified in the contract, the buyer is bound to pay for the excess or to restore it to the seller.
1991, c. 64, a. 1737; I.N. 2014-05-01.

The Court accepted the purchaser’s testimony that at no time did the promoter ever discuss with him the distinction between gross and net measurements.

Article 1720 stipulates that the seller must warrant that the size of the area stipulated in the Promise to Purchase is accurate. The Court found that the promoter could not exculpate himself from the warranty with a clause that states that the size of the area stipulated in the Promise to Purchase is only approximate. Moreover, the legal warranty is independent of the good or bad faith of the promoter.

The exception to the warranty included in Article 1720 has generally been interpreted restrictively, and the burden of proof is on the seller to establish that it applies to a given set of facts. In the present case, the promoter was unable to do so, particularly given the size of the shortfall.

Having determined that the promoter breached the legal warranty, what then is the compensation that is appropriate in the circumstances?

The jurisprudence does not support a rule of thumb approach i.e. a reduction in price proportionate to the size of the shortfall. Trial judges are accorded significant discretion to quantify damages and price reductions, but must not do so arbitrarily or enrich the purchaser.

In the present case, the purchaser hired an expert evaluator to undertake a comparative review of similar properties, and arrived at a value of $500 per square foot. From this he subtracted the cost of two garage spaces and a storage locker that were included in the price, leaving the amount of $327 per square foot. The expert concluded that if 2904 square feet at $327 gives $949,608, then 2558 square feet would give $836,466, a difference of $113,142 (tax included) which rounded off to $113,000, is the amount that the Court granted.



[1] Gagné et al. –vs- 6983499 Canada Inc. et al., 2017 QCCS 1721