Wednesday, June 12, 2013
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.