Wednesday, October 22, 2014
A Quebec Court of Appeal decision, Europe Cosmétiques Inc. v. Locations Le Carrefour Laval Inc., 2013 QCCA 1633 (CanLII), discusses two interesting issues relating to commercial leases:
1. What is the distinction between a legally binding promise to lease and a draft lease intended to serve only as a basis for negotiations?
2. What is the scope of the creditors’ obligations to minimize damages?
In 2008, Carrefour embarked on an expansion of its shopping centre and Europe expressed an interest in the location to open a new medical spa.
On March 10, 2009, the parties finalized a Letter of Intent (LOI) providing that:
(a) Carrefour will prepare a lease.
(b) The lease, once signed, will constitute a binding agreement.
(c) Nothing other than the signature of the lease will be binding on the parties.
(d) The LOI (once the conditions expressly made for the exclusive benefit of Carrefour are satisfied) will be legally binding.
Without waiting for the lease to be signed, Carrefour commenced substantial work to accommodate Europe in order to satisfy the delays and other requirements of the LOI with the knowledge and participation of Europe.
On August 20, 2009, Europe informed Carrefour that it would not sign a lease until the financing for which it applied is approved.
On October 26, 2009, Carrefour sent Europe a notice of default requesting compensation for damages namely, the cost of the leasehold improvements and lost future rent.
Carrefour thereupon commenced a search for a new tenant and eventually succeeded in leasing part of the premises for a period of 10 years commencing on January 1, 2011, leaving 6,000 sq. ft. still vacant as a result of Europe’s refusal to sign a lease.
It was not clear from the drafting of the LOI whether it was meant by the parties to be legally binding. Europe naturally argued that it never intended to be legally bound to Carrefour prior to signing a lease and that the LOI was a non-binding letter, the purpose of which was to form the basis for negotiations, but nothing more.
The Court of Appeal confirmed the decision of the court of first instance that the LOI was a legally binding promise to lease which Europe contravened, thereby exposing itself to a claim in damages. The evidence established that the LOI required the parties to sign a lease. It contained all of the essential elements of a lease namely, the description of the property, its intended use, the rent and the term. Notwithstanding the literal wording of the LOI, it was the role of the court to determine the common intention of the parties which, as determined by the Trial Judge, was that the LOI would constitute a legally binding agreement.
Although Carrefour won the battle to determine whether or not there was a legally binding commitment between the parties, it still had to prove that it suffered damages arising from Europe’s breach.
Europe argued that Carrefour did not satisfy its legal obligation to minimize its damages. Although the Trial Judge granted Carrefour damages for the costs incurred to modify the premises in accordance with the requirements of the LOI, the Trial Judge only granted Carrefour $184,000 out of the sum of $607,000 that it claimed for lost future rent.
The Trial Judge excluded 6,000 sq. ft. from his calculation because he found that had it not been for Europe, Carrefour would not have attempted to lease the space but instead would have kept it as storage space for its tenants.
Regarding the obligation to minimize damages, the Court of Appeal, referring to Articles 1479 and 1375 of the Quebec Civil Code, confirmed that the obligation to minimize damages is not absolute but rather is a duty imposed by law on the aggrieved party to use reasonable best efforts. The victim must act reasonably and diligently in order to minimize its damages. Furthermore, the burden is on the party in default to prove that the creditor, i.e. the party that suffered the prejudice, neglected or omitted to do all that it reasonably could or should have done in the circumstances to avoid or minimize damages.
Regarding the damages for lost future rent, the Court of Appeal did not agree with the Trial Judge’s findings. It reiterated the principle that in the event of a breach, compensatory damages are granted with a view to putting the victim in the situation that it would have been in had there been no breach.
Since the commercial space was built at the request of Europe, the Trial Judge should have determined the amount of rent that Carrefour was deprived of as a result of the breach by taking into account the entire area of the premises and not only a part.
Arguably, the fact that Carrefour committed itself financially to create the commercial space for Europe prior to signing the lease and that Europe was fully aware and actively participated in the process was very strong corroboration that the LOI was intended to be legally binding. In different circumstances, the Court might have chosen to apply a different principle in face of an ambiguous agreement with contradictory terms, namely that in the case of ambiguity, a contract should be interpreted in favour of the debtor of the obligation namely, Europe.
Friday, October 3, 2014
I found the facts of the decision rendered in Rivard v. Re/Max Fortin Delage Inc., 2014 QCCS 2109, shocking and wake-up call to both sellers and agents.
On June 26, 2006, the Seller of a high-end residential property in Quebec City entered into an exclusive listing agreement with an agent for a list price of $3,995,000.00.
On August 9, 2008, the Seller accepted an Offer to Purchase from Mr. Grenier for the price of $3,300,000.00. No deposit accompanied the Offer. However, one of the terms of the Offer provided that the Purchaser would provide the Seller with proof of funds within 10 working days.
During the course of the next few months, the Seller and the Agent became exasperated at the prospective Purchaser’s repeated delays in obtaining the funding necessary to consummate the transaction and by December, the Seller cancelled the Offer.
As a result of this disappointing experience, the Seller and the Agent agreed that in the future, any buyer who wished to visit the property would be required to prove a capacity to pay, and the MLS listing of the property was amended accordingly.
At the beginning of December 2009, Mr. Morin contacted the Agent to express his interest in the property. On December 11, 2009, Groupe Financier Banque TD sent a letter signed by the director of the branch to the Agent confirming that their clients, Mr. and Mrs. Morin, had accounts at the bank which had operated satisfactorily for a number of years.
On December 15, the Agent, the Seller and Mr. Morin met to sign an Offer to Purchase. Mr. Morin signed the Offer on behalf of an unidentified trust for a price of $3,300,000.00. No deposit accompanied the Offer, which contained a clause requiring the Buyer to provide proof of funding within 10 days. Mr. Morin introduced himself as a former director of Provigo and current owner of the building supplies company, Groupe Patrick Morin Inc. In the verification of identify form that he remitted to the Agent, he also declared that he was a director of Bombardier. At the meeting, he exhibited a document stating his investments had an aggregate value of $28,000,000.00.
On December 23, a letter was received by fax by the Agent from Groupe Financier TD signed by Carl Simard, Portfolio Manager of TD Waterhouse, attesting to the solvency of Mr. and Mrs. Morin to consummate the transaction for the price of $3,300,000.00. Because the letter attested that Mr. and Mrs. Morin had together the necessary funds and not Mr. Morin alone, the Agent thereupon communicated with the director of the branch who had signed the first letter and was told that she would inform Mr. Morin accordingly.
Thereafter, the closing date was repeatedly postponed. The arrival of the funds at the notary was delayed. Mr. Morin explained to the Agent that the source of the funds was HSBC Securities and that Mr. Jean Tremblay was handling the matter for him. On January 19, the Agent decided to communicate with Jean Tremblay, Vice-President at HSBC Securities. Mr. Tremblay replied in writing to the Agent that considering the tax consequences of the transaction, the date of closing had to be delayed once again.
Upon being informed of the contents of Mr. Tremblay’s letter, the Seller decided to call Mr. Tremblay directly and was informed that Mr. Tremblay did not know Mr. Morin personally although he had been referred to him by a financial advisor and he advised Mr. Morin that it would be a good idea to undertake a global analysis of the situation before proceeding further. Mr. Morin was not a client of HSBC and had no funds on deposit with it.
The Seller thereupon reviewed the solvency letter of December 22 and called the person who signed it, Mr. Simard, at the TD Canada Trust branch. He then learned that there was no such person at that branch. The Seller then searched for Mr. Simard on the Web and concluded that there was no Carl Simard who had any connection with TD Canada Trust. The Seller then realized that he had been the victim of a scam.
The Seller informed the Agent and the notary about his discovery. The notary informed the Seller that he had received a cheque from Mr. Morin dated January 1, 2010 in the amount of $3,300,000.00 with instructions not to deposit it until further notice.
A criminal complaint for fraud and use of counterfeit documents were brought against Mr. Morin. However, he was found not guilty due to successfully raising an insanity defense.
The Seller then sued the Buyer and the Agent in damages.
The Court concluded that the Buyer did not have the mental capacity to enter into a binding legal agreement, i.e. the Offer to Purchase and consequently could not be held civilly liable for his actions. Consequently, the Seller’s claim for damages against the Buyer was unsuccessful.
The analysis by the Court of the obligations of the Agent is of much greater interest.
The grounds of the suit against the Agent included the following:
1) She omitted to verify the capacity of the Buyer who signed the Promise as a representative of an undeclared trust and did not sufficiently inform the Seller of this detail.
2) She omitted to verify the information that she obtained relating to the solvency and financial resources of the Buyer and in particular, the contents of the solvency letters dated December 11 and 22, 2009.
3) She omitted to recommend to the Seller that he require a deposit on account.
4) The Agent installed a "sold" sign at the property before all of the conditions of the offer to purchase were satisfied.
5) She omitted to obtain Seller’s consent prior to publishing the news of the sale in the newspapers.
In its analysis of the Agent’s obligations to the Seller, the Court considered the following:
• Article 2100 of the Civil Code of Quebec provides that whoever contracts to provide services must act in the best interests of the client and with prudence and diligence;
• Sections 1 and 22 of the Real Estate Agents and Brokers Code of Ethics provides that agents and brokers shall practice their profession with prudence, diligence and competence.
To successfully defend herself against the claim, the Agent had to prove that she provided her services with prudence and skill. Diligence is determined on the basis of what a reasonable professional would do in similar circumstances.
The Agent had twenty years of experience selling high-end residences and promoted herself as such. Although she had undertaken to ensure that she would obtain a solvency letter prior to allowing a Buyer to visit the property, she failed to do so. Moreover, the first solvency letter was insubstantial and far short of confirming that Mr. Morin had sufficient financial resources to complete the sale.
When the parties met to sign the Offer to Purchase, the Seller knew that no solvency letter existed although one of the conditions in the Offer required the Buyer to provide such a letter within ten days.
The Court noted that the Seller was a sophisticated person who had been involved over a number of years as a shareholder investor and in the governance of an important information technology consulting business. He had been president of the business for a period of twelve years. His duties included prospecting new acquisitions for the business and business development. He was a sophisticated businessman who accepted the Offer to Purchase without requiring a solvency letter and should be presumed to know what he was doing.
An element that the Court found particularly striking was the failure of the Agent to verify the unidentified trust that Mr. Morin was representing. By accepting to sell to an unidentified trust, the Seller exposed himself to the risk that Mr. Morin would not have the authorization to legally bind the trust.
Regarding the solvency letter of December 22 purportedly signed by Mr. Simard, instead of contacting Mr. Simard, the Agent contacted Mme Dalaire, the director of the Branch. The Court concluded that this was difficult to understand and contrary to good sense, which would have required the Agent to use her best efforts to communicate with the author of the letter, who would be the best source of information and knowledge regarding the financial accounts of the prospective Buyer and his wife that the letter referred to.
The Court stated that the obligations of prudence and diligence to which brokers and agents are held, require that they take cognizance of such solvency letters and they verify that they are valid and binding. If the Agent would have done a proper verification in a timely fashion, she would have immediately discovered that it was counterfeit. The Court was also surprised that although the Buyer had significant mental problems, the Agent made no effort to verify his representations that he was a former officer of Provigo, owner of Groupe Patrick Morin and a director of Bombardier with investments of $28M. Basic curiosity if not prudence would have required some follow-up verification with respect to such representations in the context of such an important transaction.
In fact, the Agent relied exclusively on information provided to her verbally by the Buyer and the two solvency letters from TD Canada Trust, which were all false.
The Court also referred to Article 2102 of the Civil Code of Quebec which requires a supplier of services to provide the client with all useful information relating to the services to be provided.
The supplier of services could be held responsible for providing the client with false information if he did not sufficiently verify the information that he provided, such as the solvency of the prospective buyer.
Although not a guarantor of the solvency of the buyer, the Court was of the opinion that a real estate agent has the obligation to present a buyer who is honest and solvent, and to verify the seriousness, honesty and solvency of the buyer.
When the Seller was provided with the solvency letter and informed by the Agent that the condition had been accomplished and the Offer to Purchase became irrevocable, he had every reason to feel secure in the transaction.
The sham was discovered within a few minutes by the Seller because the Agent didn’t do her job properly. The Court concluded that the Agent committed many faults with respect to her obligations pursuant to the listing agreement and was liable for the damages that the Seller was able to prove.
The facts of this case remind stakeholders in business transactions not to presume or take important matters for granted. The letter of the law says that all persons are presumed to act in good faith. However, the parties as well as their legal advisors must balance trust with a certain degree of skepticism. As the saying goes, trust but verify.