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

Tuesday, April 4, 2017

SOIL CONTAMINATION-CLAIM IN WARRANTY DISMISSED AGAINST PRIOR OWNERS



In Sévigné et al. –vs- Prud’homme et al. 2016 QCCS 6529, soil contamination was discovered five years after the date of acquisition. The Buyer sued to cancel the sale or reduce the price in order to offset clean-up costs in the amount of $125,000. The Seller, in turn, sued his predecessor in title and so on up the chain of title. There were 4 levels of incidental warranty actions.

At least two legal arguments, based on the following provisions of the Quebec Civil Code, were raised by the buyers:

1725. The seller of an immovable warrants the buyer against any violation of public law restrictions affecting the property which are exceptions to the ordinary law of ownership.
The seller is not bound to that warranty where he has given notice of these restrictions to the buyer at the time of the sale, where a prudent and diligent buyer could have discovered them by reason of the nature, location and use of the premises or where such restrictions have been registered at the registry office.
1991, c. 64, a. 1725; I.N. 2014-05-01.

III.  —  Warranty of quality
1726. 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.
The seller is not bound, however, to warrant against any latent defect known to the buyer or any apparent defect; an apparent defect is a defect that can be perceived by a prudent and diligent buyer without the need to resort to an expert.
1991, c. 64, a. 1726; I.N. 2014-05-01.

The most recent sale took place in 2007. In 2012, there was serious flooding in the basement after which, the owner noticed the presence of noxious odours. Tests carried out in 2013 and 2014 confirmed the presence of hydrocarbons in the soil. In 2015, an underground heating oil tank was discovered which was believed to be the cause of the contamination.

Regarding Article 1725, the relevant “public law restrictions” are environmental protection statutes and regulations. To succeed, the buyer would have to establish that the contamination existed and the environmental protection law was in effect at the time of the sale. If the sale took place before the law came into effect, the buyer could not succeed on this ground.

Article 1726 requires the buyer to prove that the defect existed at the time of the sale; that the defect was not apparent; and that the defect either rendered the property unfit for its intended use or significantly diminished its usefulness to the extent that the buyer would not have bought it or paid so high a price if he would have been aware of it.

Regarding the most recent sale (i.e. Plaintiff’s claim), Article 1725 clearly applied. Article 1726 also applied since the presence of soil contamination made the property unfit for its intended use, which was to lease the property to earn rental income.

However, the outcome was different for the incidental actions in warranty that were brought against prior owners. For some of them, their purchases pre-dated the application of environmental statutes and regulations so they could not rely on Article 1725.


In addition, the fact that the soil contamination was not discovered until 2012 and had no palpable consequences before then was a bar to the application of Article 1726 since the prior owners could not establish that the latent defect (the soil contamination) diminished their use and enjoyment of the property.

Wednesday, February 8, 2017

PROBLEMS WITH THE DESCRIPTION OF LEASED PREMISES



Lack of care when describing the leased premises in a commercial lease exposes the parties to the risk of litigation.

In one case[1], the parties disputed the square footage of the leased premises, an office, upon which the rent was to be calculated. The landlord insisted that the rent be calculated on the gross leasable area, which means the actual measurement of the premises grossed up by 10-15%, depending upon the category of the building, in order to include a proportionate share of the common area. The tenant only wanted to pay for the usable space in the leased premises.

Around the beginning of 2010, tenant received a marketing flyer from landlord’s broker describing the leased premises having a leasable area/superficie locative of 2700 sq. ft. and a gross rental rate of $16 per sq. ft.

On or about June 3, 2010, tenant submitted a draft promise to lease a total gross area of 2600 sq. ft. (to be re-measured at landlord’s cost) at a gross annual rental of $12 per sq. ft.

On or about June 8, 2010, landlord submitted a counter-offer for a total gross area of 2775 sq. ft. at $13 per sq. ft.

Tenant rejected the counter-offer. After a meeting between the parties on July 16, the broker submitted a new draft promise to lease for a total gross area of 2775 sq. ft., subject to final re-measurement, at $13 per sq. ft.

On July 20, tenant submitted to the broker, a revised promise to lease containing some modifications for a total internal gross area of 2775 sq. ft. subject to final re-measurement, at $13 per sq. ft. Neither the broker nor the landlord’s representative noticed the insertion of the word “internal”, nor was it ever previously discussed by the parties or with the broker.

The tenant had to vacate its old premises by the end of August and needed to take possession of the leased premises without delay in order to carry out leasehold improvements.

Around the end of July, the broker sent tenant the landlord’s standard form lease agreement and followed up with the tenant on August 13 and again on August 30 by which time, the leasehold improvements were well under way and almost completed.

On September 3, tenant sent the broker a revised gross lease agreement for a gross rental area of approximately 2775 sq. ft. to be re-measured from the inside of the partition walls for exactness.
On September 14, tenant informed landlord, for the first time, that it had no obligation to pay any rent for the proportionate share of the common areas, which included the elevator, stairs, corridors and bathroom.

The building in question is a strip mall. The tenants at ground level are retail and each have a private entrance leading directly from the parking lot. They don’t use or benefit from the common areas.The second floor contains offices which use and benefit from the common areas. All other office tenants paid a proportionate share of the common area expenses by calculating the rent on the grossed-up area of their premises.

The previous owner had measured the building according to the BOMA (Building Owners and Managers Association) standard but the area summary was provided to the tenant only after the promise to lease was signed. Since the signed promise to lease did not refer to the BOMA standard, it could be argued that the rent should be calculated on the usable area without any gross up for common areas.

It would have been preferable for the landlord to be explicit in this regard. However, the landlord was saved by the particular facts of this case since the parties had agreed to lease a gross leasable area. It was held that the tenant acted in bad faith by adding the word internal to the description of the leased premises. In fact, neither of the two experts who were engaged by the parties had ever heard of the term, internal gross area, and could not interpret it with any degree of confidence. Considering that the tenant's representative was an experienced real estate lawyer, the court concluded that the insertion of the word internal was an attempt by tenant to avoid paying for common area expenses by causing confusion and dragging the landlord into further discussions.

There are different BOMA standards for retail, office and industrial buildings and the standards get revised from time to time. Ideally (but unfortunately not always), an extract of the specific BOMA standard should be annexed to the lease to avoid any misunderstanding. Moreover, Article 1435 of the Quebec Civil Code states that such an "external clause" is null unless it is incorporated in the contract, when the essential terms of the contract were imposed by one of the parties and are not negotiable.


[1] 9056-3818 Québec Inc.  vs- 110302 Canada Inc. 2013 QCCS 5543