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  • Quarterly legal newsletter intended for accounting, management, and finance professionals, Number 24

    CONTENTSNominees in the context of litigationUse of a nominee by limited partnerships and trusts for holding immovablesVoluntary registration for GST and QST purposes by a nomineeImmovables held by a nominee: Issues with respect to consumption taxesNOMINEES IN THE CONTEXT OF LITIGATIONLéa Maalouf In commercial matters, it frequently happens that two persons agree to hide their true intent from third parties and express such intent in a secret contract (or counter letter), while publicizing another contract, known as a fictional or apparent contract. This process is called simulation. This practice is entirely legal unless it is used to break the law or allow a party to avoid liability, for instance, by removing an item of property from his patrimony in order to avoid the execution of a judgment. Simulation is governed by articles 1451 and 1452 of the Civil Code of Québec. A counter letter is subject to no condition as to form: it is valid whether it is in the verbal or written form. A nominee agreement is one of the forms under which simulation may be carried out: when a person uses a third party to enter into a contract with another person, the third party is called a nominee. With as many players at the table, it is interesting to review the issues related to the liability of the parties and the precedence of the contracts in the event a dispute occurs. If a dispute occurs between the parties to the nominee agreement, the law is clear: the counter letter, whether verbal or written, prevails over the apparent contract. Either party cannot refuse to give effect to the nominee agreement. It is interesting to note that proof of the existence of a counter letter may be made by any mean, including testimony. This is rather exceptional, considering that the rules of evidence do not allow the parties to a written contract to use testimony to contradict or vary its terms. The reasoning of the courts is that the nominee agreement constitutes a contract by itself, which is separate from the apparent contract. This being so, testimony is not used to contradict the apparent contract but rather to establish the existence of a new contract. However, if a third party institutes proceedings while being in good faith – meaning that the third party is unaware of the existence of the secret instrument, the Civil Code of Québec provides that the third party may, according to his interest, avail himself of the apparent contract or the counter letter. In principle, third parties do not need to prove fraudulent intent of the parties to the counter letter to rely on the secret instrument. However, according to some judgments, third parties should at least prove that they suffered some kind of harm as a result of the simulation. Once again, proof of the simulation may be made by any mean. Conversely, parties to a counter letter may decide to publish it to end the simulation: in that case, it will be more difficult for third parties to rely on the apparent contract. However, in a recent case1, the Superior Court found liable both the nominees and true owners of an immovable, concluding that the parties had deliberately created confusion tantamount to abuse of right and that the theory of alter ego had also to be applied. In closing, although it may look surprising at the outset, a fictive instrument, such as a nominee agreement, is entirely legal unless it is used for improper purposes. However, parties to that fictive instrument must remember that a third party in good faith may set such instrument aside and rely on the apparent contract as being the true agreement between the parties, even if this does not constitute the initial intent of the contracting parties. _________________________________________1 9087-7135 Québec inc. c. Centre de santé et de services sociaux Lucille-Teasdale, 2013 QCCS 3856. USE OF A NOMINEE BY LIMITED PARTNERSHIPS AND TRUSTS FOR HOLDING IMMOVABLESDominique Bélisle Several legal arguments justify the practice that has developed in Quebec and in the common law provinces of registering the ownership title to immovables or real estate, acquired by a limited partnership or a real estate investment trust (“REIT”), in the name of a nominee. One of these arguments is based on the fact that partnerships and trusts created under the Civil Code of Québec (“Civil Code”) do not benefit from legal personality and therefore are not separate «persons» distinct from their members, partners or beneficiaries. Indeed, historically, under the civil law, the patrimony was always considered to be attached to a natural or legal person. Over time, the concept developed which attributed a distinct patrimony to the partnership from the patrimonies of the partners, and which attributed a patrimony by appropriation to the trust, autonomous and distinct from the patrimonies of the settlor, trustee or beneficiary thereof. In the case of trusts constituted under the Civil Code, including REITs, nominees have not been consistently used in practice and are less common. Indeed, article 1278 of the Civil Code states that the titles relating to the property of the trust are drawn up in the trustees’ names. On this basis, it is common to see the title to property held by a REIT registered in the land registry under the names of all the trustees acting in their capacity as trustees of the trust. Other legal advisers still register the title to the property directly in the name of the REIT, despite article 1278. For the time being, nothing indicates that this practice affects the validity of the property title. In the above cases, however, a nominee is not used on the basis of the lack of legal personality of the trust because the Civil Code expressly recognizes that the parties involved have no real rights in the distinct patrimony. This recognition helps resolve the ambiguity caused by this lack of personality. The advantage of a nominee for a REIT therefore lies elsewhere, such as, for example, in the flexibility offered for transfers of title between parties related to the trust, and in relation to the transfer duties that are triggered when these transfers are registered in the land register. Indeed, the exemptions provided for in section 19 of the Act respecting duties on transfers of immovables (Quebec) with respect to a corporate restructuring do not apply in the cases of a trust or partnership. Some exemptions contained in section 20 of that statute do apply to trusts, but in very specific cases. In the case of a partnership, however, the use of a nominee is more common and warranted not only in connection with the Act respecting duties on transfers of immovables, but also due to the uncertainty caused in relation to the holding of title to property because of the partnership’s lack of legal personality. Indeed, in contrast to the situation pertaining to trusts, the Civil Code does not directly provide for the autonomous nature of the patrimony for partnerships, or that the partners hold no real right in the partnership’s property. Furthermore, in the case of Ville de Québec c. Compagnie d’immeubles Allard ltée 1, the Court of Appeal stated that since the limited partnership did not have a distinct legal personality from its members, it did not hold the partnership’s assets, and therefore found that the partners held an undivided real right in the property. In that case, the Court determined that the transfer by a partner of his interest in the partnership constituted a transfer of his undivided share, thereby triggering transfer duties (the parties having had the bad idea of registering the transfer…). This decision has created some uncertainty surrounding the identity of the property owner. Is the property title really held in undivided co-ownership by each of the partners? And what about limited partnerships? The argument relied on by the Court of Appeal to justify its conclusions applies equally to limited partnerships. In practice, however, the partners in a limited partnership would certainly not intend to trigger a transfer in undivided co-ownership of the property each time a unit is transferred. This uncertainty has led to the commercial practice of registering the property title in the land register in the name of the general partner, or a nominee corporation. _________________________________________1 [1996] RJQ 1566 (C.A.).  VOLUNTARY REGISTRATION FOR GST AND QST PURPOSES BY A NOMINEEDiana Darilus In an immovable property context, a person can act as a nominee for another person for the purpose of holding title to the property and handling the property management. This type of structure implies the existence of a mandatary-mandator relationship that is not disclosed to third parties. In the context of this type of relationship, the mandator is the person considered to be carrying on commercial activities involving the property, and is therefore generally required to register for GST and QST purposes. However, a nominee corporation holding title to immovable property on behalf of the true owner may wish to register voluntarily for several reasons, such as the following: use of the nominee’s GST and QST registration numbers in the legal and administrative documentation, such as invoices or commercial leases, in order to preserve the confidentiality of the true owner of the property; joint election by the mandator and mandatary provided for in subsection 177(1.1) of the Excise Tax Act (“ETA”) and section 41.0.1 of An Act respecting the Québec sales tax (“AQST”), which allows the mandatary to remit the GST and QST collected to the tax authorities on the mandator’s behalf; and joint venture election provided for in sections 273 ETA and 346 AQST, which enables the co-venturers to designate an “operator” responsible for remitting the GST and QST collected to the tax authorities and claiming the input tax credits and input tax refunds (ITCs/ITRs) on behalf of the co-venturers. A nominee corporation can only register voluntarily for GST and QST purposes if it carries on a commercial activity in Quebec. The definition of “commercial activity” is very broad and includes the carrying on of a business by a corporation without a reasonable expectation of profit, except to the extent to which the business involves the making of exempt supplies. As for the definition of the term “business”, this includes any undertaking of any kind whatever, whether or not engaged in for profit. In light of these definitions, it seems that a nominee corporation whose activities are limited to holding title to property on behalf of the true owner without receiving compensation for doing so, could be considered to be carrying on a commercial activity. However, Revenu Québec has raised doubts in the past few years about the voluntary registration of certain nominee corporations in the form of “shell corporations” on the basis that they did not carry on any commercial activities, and retroactively canceled their registration numbers. To avoid such a dispute with the tax authorities, one should in our view be cautious when setting up a nominee corporation as part of a structure for holding immovable property in Quebec. We recommend that the following minimum measures be taken to reduce the risk of contestation by Revenu Québec: monthly fees (plus applicable taxes) should be paid to the nominee corporation pursuant to terms of a written nominee agreement; and the nominee corporation should open a bank account to receive its compensation. We believe that if such measures are taken, it is more reasonable to consider that the nominee corporation is in fact carrying on a commercial activity, i.e., the taxable supply of services as a mandatary on behalf of a mandator or participants in a joint venture. IMMOVABLES HELD BY A NOMINEE: ISSUES WITH RESPECT TO CONSUMPTION TAXESJean-Philippe Latreille In the last few years, tax authorities have intensified their auditing efforts aimed at corporations holding immovables as nominees. In this context, the validity of some elections pertaining to joint ventures in respect of GST and QST has been questioned. These elections allow the participants in a joint venture to designate one of them as “operator”, whose role is to remit taxes and claim input tax credits and input tax refunds in the name of the other participants. Now, in some circumstances, tax authorities adopt a position whereby a corporation which is solely used as a nominee is not a participant in the joint venture and thus, cannot validly be appointed as “operator”. However, tax authorities recently announced that they gave instruction to their auditors not to assess when such a situation occurs. This administrative tolerance is conditional to all returns having been filed and all amounts due having been paid. This measure is temporary since it only applies to reporting periods ending prior to January 1, 2015. Furthermore, tax authorities expect all participants in a joint venture relying on the tolerance to make valid elections in the future. Owners of immovables relying on a nominee should therefore now review their holding structure in the light of the positions published by tax authorities.

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  • Fungal Contamination and Commercial Leases

    Fungal contamination: a complex problem The detection of a fungal contamination problem in a building can be a complex operation. For example, recurring water infiltration due to leaks in a building’s outer envelope can create an environment that is conducive to the growth of mould in spaces not visible to the occupant, such as behind walls, in ventilation conduits, and in the plenums of the ventilation system.Many companies offer a wide array of services for detecting fungal contamination, ranging from ambient air quality tests to sniffer dogs. Nevertheless, if the source of the fungal contamination is not adequately identified and all the necessary corrections are not made, the problem can recur. In such cases, the multiplication of decontamination operations can become very costly and result in a significant reduction in the peaceful enjoyment of the leased premises.In some cases, the health of employees can be affected, which can lead to significant operational difficulties for the occupying lessee.In November 2002, the Institut national de santé publique du Québec (the “Institute”) published a scientific report1 on health risks associated with the presence of interior moulds. The purpose of this report, which is still current, was to provide support for public health responses to mould problems occurring in both residential settings and in public buildings. The fungal contamination considered in this report “(…) refers to the uncontrolled growth of moulds on structures, furniture or other materials usually free of humidity, and in ventilation systems,”2 in non-industrial and non-agricultural indoor environments.3With respect to the origin of fungal contamination in indoor environments, the Institute indicates that: “The main factor contributing to fungal growth therefore remains the presence of available water, which can be due to problems of chronic infiltration, excessive humidity, surface condensation or a broken pipe or a flood.”4 The Institute further notes that, at present, no reliable data exists to establish a threshold below which there is no effect on health, and there is no reference list to evaluate the health risk for a given mould species.5The Institute concludes as follows:6“The reviewed studies complement each other, confirm the scientific consensus described in the preceding paragraph and make it possible to state that indoor mould exposure is a health risk varying according to the species encountered, the exposure dose and the subjects’ individual susceptibility, and that the symptoms encountered affect several systems, especially the respiratory system. The main problems recognized as being associated with moulds are irritation, asthma exacerbation, and allergic and hypersensitivity reactions. Toxic reactions following a strong or repeated exposure as well as infections in severely immunodepressed subjects are also documented.”Deficient air quality in a building can result in the intervention of an inspector from the Commission de la santé et sécurité au travail (“CSST”) and the issuance of a remedial order to the employer.7 The employer must then ensure that the corrective measures identified in the remedial order are carried out.Finally, when a physician suspects that there is a threat to the health of the population, as fungal contamination in a building can be, he must notify the public health director (“directeur de santé publique”) in his territory8. The public health director may then conduct an epidemiological investigation where he believes on reasonable grounds that the health of the occupants is or could be threatened9.Peaceful enjoyment and abandonment of the premisesUnless the lease provides otherwise, the lessor has various obligations, including the obligation to provide peaceful enjoyment of the leased premises to the lessee during the term of the lease.10The lessor’s failure to fulfill its obligation to provide peaceful enjoyment can, in some cases, provide justification for the lessee to abandon the leased premises and treat the lease as terminated as of right.11 The lessee’s right to abandon the leased premises is based, in particular, on articles 1590, 1591, 1605 and 1863 C.C.Q., which enshrine the right to termination as of right, without judicial intervention, when a party to a contract of successive performance repeatedly neglects or refuses to perform its obligation. While termination as of right in commercial leases is not a possible remedy in all cases,12 the courts have recognized it when there is a substantial reduction in the enjoyment, causing the lessee serious prejudice.13 Two conditions must be met to justify the lessee’s abandonment of the leased premises and termination of the lease as of right:1. the substantial non-performance of the lessor’s obligations; and2. notification by the lessee of the disturbance to the lessor.14  The courts have previously held that a danger to the health or safety of the occupants could be considered as causing serious prejudice and constitute a substantial reduction in the enjoyment of the leased premises.15 As for whether the lessor is liable, this depends on the source or sources of the fungal contamination and the commercial lease that was entered into. It may be difficult to prove the sources of the contamination and identify the necessary corrective measures that have to be made. The assistance of experts will often be useful and necessary. Once the sources of contamination have been identified, the relevant clauses of the commercial lease, including those dealing with the parties’ respective obligations relating to repair work and maintenance, will contribute to determining whether the lessor is truly the debtor of the unfulfilled obligation to provide this peaceful enjoyment.The lessee must notify the lessor of the disturbance before abandoning the leased premises. The purpose of notifying the lessor of the disturbance is to give it the opportunity to remedy the problem, and the notice must give it a reasonable time period for doing so. Where the occupants’ health is at risk, the lessor is well-advised to act swiftly to identify the source or sources of contamination and take the necessary corrective measures. The obligation to provide peaceful enjoyment is an obligation to achieve a result, and the lessor cannot relieve itself of this obligation by showing that it took reasonable measures to correct the disturbance.When the health of the occupants and the operations in the leased premises are compromised due to a fungal contamination, the lessee may be justified in abandoning the leased premises on an urgent basis and claiming damages from the lessor equal to the costs incurred for the relocation of its operations.16In conclusion, the termination of the lease as of right is a remedy that can be considered when the lessor’s failure to perform its obligations is substantial and causes serious prejudice. The fact that the occupants’ health and the operation of their business in the leased premises are compromised is an example of a prejudice that is sufficiently serious to warrant such termination._________________________________________ 1. Rapport scientifique - Les risques à la santé associés à la présence de moisissures en milieu intérieur (available in French only), Direction des risques biologiques, environnementaux et occupationnels et Laboratoire de santé publique – November 2002, http: www.Insqp.qc.ca. See also “Health risks associated with the indoor presence of moulds: summary document”. 2. See note 1, summary document, page 2. 3. See note 1, summary document, page 2. 4. See note 1, summary document, page 2. 5. See note 1, summary document, page 5. 6. See note 1, summary document, page 8. 7. Christian BEAUDRY, “Qualité de l’air intérieur et enjeux pour le droit de la santé et de la sécurité au travail” in Santé et sécurité au travail, vol. 2, Montréal, LexisNexis, updated July 4, 2012, p. 28/6. Denis JOBIN, “Qualité de l’air intérieur - Responsabilités du propriétaire et de l’employeur à l’égard de la L.S.S.T. et de la L.A.T.M.P.”, in Développements récents en droit de la santé et sécurité au travail, Cowansville, Éditions Yvon Blais, 1997, pages 14 and 15. An Act respecting occupational health and safety, R.S.Q. c. S-2.1, see, in particular, sections 2, 4, 51, 56 and 182. 8. Public Health Act, R.S.Q. c. S-2.2, Sections 2 and 93. 9. Public Health Act, cited note 8, Section 96.10. See the text published by Nicole Messier entitled “The Landlord’s Obligation to Provide Peaceful Enjoyment,” in Lavery Real Estate, July 2013, Bulletin Number 7. See also Société de gestion Complan (1980) inc. v. Bell Distribution inc., 2011 QCCA 320 (CanLII). 11. While the present article deals with the abandonment of the leased premises, the lessee also has other rights, such as the right to apply for a reduction in rent (article 1863 C.C.Q.). 12. See, in particular, the article by Marie-Josée HOGUE, Recours en cas d’inexécution des obligations prévues à un bail commercial, in Louage commercial : un monde en évolution, Carswell, 2000. 13. See, in particular, Bernard LAROCHELLE, Le louage immobilier non résidentiel, in Répertoire de droit, nouvelle série : doctrine, 2006, Chambre des notaires du Québec, pages 44 and 45. 14. See, in particular, Pierre-Gabriel JOBIN, Le louage, 2nd edition, Éditions Yvon Blais, Cowansville, 1996, pages 470 to 476. 15. See, in particular, Société de gestion Complan (1980) inc. v. Bell Distribution inc., cited note 10; 9087-7135 Québec inc. et al. v. Centre de santé et de services sociaux Lucille-Teasdale, 2013 QCCS 3856 (CanLII) (under appeal). 16. See, in particular, 9087-7135 Québec inc. et al. v. Centre de santé et de services sociaux Lucille-Teasdale, cited note 15 (under appeal).

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  • Legal newsletter for real estate professionals, Number 7

    CONTENT  What Happens when an Option to Terminate is not Exercised in Accordance with its Terms? The Landlord's Obligation to Provide Peaceful Enjoyment WHAT HAPPENS WHEN AN OPTION TO TERMINATE IS NOT EXERCISED IN ACCORDANCE WITH ITS TERMS?Chantal JoubertAn option for the renewal or termination of a lease generally provides for the mechanism that is necessary to exercise the option. Is the failure to comply with this mechanism fatal to the exercise of the right? If the clause does not state that the fulfillment of the conditions is necessary to validly exercise the option, the clause will be construed in favour of the party exercising the option, even where it has not scrupulously complied with those conditions.In the case of World Color Press Inc. v. Édifice 800 Industriel Inc. 2012 QCCS 1774, the court had to determine whether the lessee had validly exercised an option to terminate the lease which provided that the lessee’s right had to be exercised by no later than March 31, 2011, for purposes of terminating the lease on March 31, 2012, together with the payment of a penalty of $1 million by no later than March 31, 2011 in “full and final payment of all the lessee’s obligations under the Lease”. The lessee sent the notice on March 30, 2011 indicating that a cheque in the amount of $1 million was attached to the notice; however, no cheque was attached. On discovering the omission, the lessee sent the cheque on April 8, 2011, but the lessor returned it, claiming that the option had not been validly exercised and that the lease would continue until March 31, 2017, the expiry date of the initial term.In fact, the termination clause was reproduced upon each renewal. Only the dates and amount of the penalty were changed. However, according to the lessor, at the time of the last renewal, the parties had wanted to make the payment of the penalty concomitant with the notice of exercise of the option. On the other hand, the lessee pleaded the whole agreement clause in order to exclude the discussions surrounding the changes made to the last version of the option to terminate.Two issues were raised in court: was the non-payment of the penalty by the specified date fatal to the exercise of the option to terminate and, if the answer was no, did the penalty serve as the payment of the rent until the end of the term in 2012, since this penalty represented a “full and final payment of all the lessee’s obligations under the Lease”.The court held that the lessee had validly exercised the option to terminate but that it still had to pay the rent until the end of the term in 2012.The court found that the entire agreement clause was inoperative in the circumstances and that it did not prevent the court from endeavouring to determine the parties’ true intention since, on the one hand, the option to terminate clause was incomplete and, on the other hand, the literal application of the clause would have had an absurd result from a commercial point of view.The option to terminate clause was incomplete because it did not specify the nature of the time limits, i.e. whether or not they were mandatory. The court found that the parties never discussed this point and, therefore, that the time limits were not mandatory and that the lessee had validly exercised the option to terminate. As for the penalty, the court held that it should not be considered as rent paid in advance, otherwise, the concept of penalty would lose all its meaning. Consequently, the lessee had to pay the rent until the end of the term in 2012 despite the words “in full and final payment of all the lessee’s obligations under the Lease,” which could be given their full meaning under the previous versions of the option to terminate when the penalty was payable at the end of the term, but which would have yielded an absurd result where the penalty was payable one year prior to the end of the term, as in the present case.  NEW RULES RESPECTING SAFETY, HEALTH AND THE PROTECTION OF BUILDINGS In the December 2012 edition of this bulletin, we discussed the draft Regulation to improve building safety (the “Regulation”) which will amend the Quebec Safety Code, adopted under the Building Act. In general, the Regulation specifies, for the territory of Quebec, the standards to be complied with by owners to improve building safety. It contains standards applicable at the time of construction and imposes maintenance requirements for building façades and parking lots. The Regulation has been adopted by the government and the first provisions of the Regulation, i.e. those relating to the maintenance of building façades and parking lots, came into force on March 18, 2013. We will discuss the new obligations imposed on owners under the Regulation in a special bulletin to be published shortly. THE LANDLORD’S OBLIGATION TO PROVIDE PEACEFUL ENJOYMENTNicole MessierAlthough non-residential real estate leases provide for a variety of obligations, which are often more onerous for the tenant than the landlord, it is the very essence of the lease that the landlord must provide the tenant with the peaceful enjoyment of the leased premises. This means unimpeded possession that enables the tenant to fully use the premises for the purposes for which they were rented. The tenant is entitled to conduct its activities in the premises with peace of mind and without fear of the risk of accidents.The obligation to provide peaceful enjoyment extends both to the leased space, to the areas used jointly by the tenants of the property, and to the appurtenances necessary for its use. It is a continuous obligation that is binding on the landlord until the end of the lease.Peaceful enjoyment is a concept which is assessed, firstly, according to the authorized use of the leased space, but also in light of all the circumstances surrounding the lease and the property. The nature of the tenant’s activities, the main reasons for the tenant’s lease of this space in the building, the location of the property in the city or chosen sector of the city, the type of construction of the building and neighbouring area, are some of the factors to be considered in assessing the peacefulness of the occupancy and the use of the leased premises by the tenant. This is because, for some tenants, the same event may prevent or interfere with the normal exercise of their activities, while it would have little impact on others. For example, one can imagine the consequences of opening a bar in a building housing a law firm as compared to opening a bar in proximity to a billiard hall.The criterion used for assessing the peaceful enjoyment afforded to the tenant is the average person. Moreover, the landlord’s duty to provide peaceful enjoyment does not require it to provide exceptional services in order to take a specific situation into account.Interference with peaceful enjoyment may be due either to the conduct or omissions of the landlord and its employees, or to disturbances from circumstances under the total or partial control of the landlord, such as those caused by other tenants in the building. Thus, the landlord may not transform the physical space of the building with the effect of restricting access to the leased space or preventing the free use of the amenities and services available to the tenant without the risk of infringing on peaceful enjoyment. It cannot turn a blind eye to a water leak, an invasion of cockroaches, constant loud noise or a persistent toxic odour without incurring its liability. Nor may it make excessive use of its right to visit the premises for an inspection or to re-lease or sell them without exposing itself to damages, an abatement of rent, or even termination of the lease.As important as it may be, the landlord’s obligation to provide peaceful enjoyment is sometimes limited by the consent of the parties through the insertion of a clause in the lease exonerating the landlord of any liability in this regard. The effect of such a clause has been reviewed on several occasions and recognized as valid by the courts, although they found it to be inoperative in cases where the tenant was totally deprived of the enjoyment of its space, or where the peaceful enjoyment was disturbed by the deliberate acts of the landlord. And justifiably so, since the peaceful enjoyment of the premises chosen by a tenant to carry on its activities is the primary benefit sought by it and for which it pays a price. It is a benefit which should not be nullified. The use of such a clause requires both care and advice.

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  • Building Safety – New Onerous Obligations for Owners

    On March 18, 2013, the Règlement visant à améliorer la sécurité dans le bâtiment, adopted pursuant to the Building Act, came into force. The new Regulation, which became chapter VIII of the Safety Code entitled “Building”, contains rules on fire safety and on maintenance of building facades and multi-level concrete parking structures. The fire safety rules will come into force progressively between now and 2018, most likely to allow owners to plan any code compliance work and associated costs.On May 12, 2013, the Regulation to amend the Safety Code will come into force and will add provisions to Chapter VIII - Building - that will impose upon owners new obligations pertaining to the maintenance of water cooling towers.This bulletin provides a summary of the new provisions of the Safety Code pertaining to building facades, parking structures and water cooling towers.THE NEW REGIME FOR INSPECTION AND MAINTENANCE OF FACADESThe new safety norms apply to all facades of five stories or more above ground. The facades of a building must be maintained so as to ensure safety and avoid the development of dangerous conditions. A dangerous condition exists when the component of one of the facades of a building can, imminently, detach itself from the building or collapse and cause bodily injuries.Every five years, the owner of a public building of five stories or more must obtain an assessment report from an engineer or an architect indicating that the facades of the building do not present any dangerous conditions and, if applicable, that recommendations intended to correct defects that may contribute to the creation of dangerous conditions have been made.When a dangerous condition is detected, whether it be during an inspection or otherwise, the owner must respect certain obligations. He must, without delay, put in place emergency measures to ensure the safety of the occupants and of the public and he must advise the Régie du bâtiment; he must also provide to the Régie, within thirty days, a description prepared by an engineer or an architect, of the corrective measures that must be implemented and a work schedule that must be approved by the Régie; afterwards, he must ensure that the work is performed in accordance with the documents provided to the Régie and he must obtain, when the work is completed, an assessment report confirming that the facades of the building are safe. At the end of this process, the owner must provide to the Régie a letter signed by the engineer or the architect confirming that all of the corrective measures were completed to his/her satisfaction and that there no longer exists a dangerous condition.The government has in a way delegated to the professionals, engineers and architects, a supervisory role with respect to the application of some of the measures provided for in the Regulation. For example, the Regulation specifies that the choice of inspection methods for the report that must be provided every five years belongs to the professional who must recommend any tests, examinations or trials he deems necessary. The engineer or the architect must, in his report, identify the defects and their causes that may contribute to the development of dangerous conditions including, for example, infiltrations, rust stains, signs of efflorescence, scaling, etc. He must also describe the corrective measures to be undertaken and the work schedule, and confirm that the facades are exempt from any dangerous condition. If applicable, he must also confirm that recommendations were addressed to the owner in order to correct the defects observed that may contribute to the development of dangerous conditions.This report must be produced every five years and the necessary inspections to issue such a report must be performed within six months preceding the production of the report. The first inspection report of the facades must be produced by the owner no later than on the day of the tenth anniversary of the construction of the building. However, if on March 18, 2013, the building is more than ten years old, the first report must be produced on the date determined by the Regulation on the basis of the age of the building. In such a case, the timetable is as follows: if the building is more than 45 years old, before March 18, 2015; between 25 and 45 years old, before March 18, 2016; between 15 and 25 years old, before March 18, 2017; and between 10 and 15 years old, before March 18, 2018.THE NEW REGIME FOR THE INSPECTION OF PARKING STRUCTURESThe Regulation also provides for new obligations for owners of underground or aboveground parking structures with a cement slab having a rolling surface that does not rest on the ground. In the case of parking structures, the five-year report may only be prepared by an engineer and the first report must be produced between 12 and 18 months following the end of the construction of the building. However, if the parking structure is between 1 and 5 years old, the report must be produced before March 18, 2014, and if it is more than 5 years old, before March 18, 2016.If an incident occurs that may have an impact on the soundness of the parking structure, the owner must have an engineer conduct and in-depth inspection. An owner will want to establish a protocol identifying the types of incidents that require such an in-depth assessment. A structural engineer should be able to assist the owner in establishing such a protocol.A parking structure must also be inspected annually and the first annual inspection must take place before March 18, 2014 for all parking structures subject to the Regulation. The Regulation provides a detailed inspection checklist that must be completed by the owner during the annual inspection. The contents of the checklist suggest that the owner may rely on a visual inspection.MAINTAINING A REGISTRYAll the reports that we have referred to, both for facades and parking structures, must be kept by the owner on site in a registry with other information required by the Regulation, including copies of plans, photographs, a description of the repair, modification and maintenance work, and a description of repeated repairs pertaining to a recurring problem.THE MAINTENANCE OF WATER COOLING TOWERSThe provisions of the Regulation to amend the Safety Code that come into force on May 12, 2013, enact the obligation of the owner to maintain the facilities and equipment of water cooling towers in accordance with a maintenance program. They also provide for the obligation to keep a register on the premises for consultation by the Régie, which must contain, among other things, the maintenance program(s) of the towers.The maintenance program must be drawn up and signed by one or more members of a professional order whose activities are related to the field of water cooling towers. The Regulation does not specify in any greater detail the qualifications of these professionals. Section 402 provides a list of eight elements which must form part of the maintenance program. These include the procedures for winterizing, re-starting, decontaminating and maintaining the quality of the water in order to minimize the growth of bacteria, including bacteria of the Legionella species. The program must also contain measures for reducing corrosion, scaling and the accumulation of organic matter, as well as measures for verifying the mechanical components of the facility and equipment of water cooling towers. Finally, the program must take into account certain documents, including the manufacturers operation and maintenance manual and certain guides published by specialized organizations such as the Cooling Technology Institute (CTI), the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) and the Association of Water Technologies (AWT).Within thirty days following the initial start-up of a water cooling tower, the owner must send to the Régie the address of the facility, the name and contact information of the owner, the names of the professionals that have prepared the maintenance program and a brief description of the type of facility. The owner must advise the Régie without delay of any change to the foregoing information. For water cooling towers already in operation when the Regulation comes into force, such information must be sent to the Régie by May 12, 2013.The register that must be maintained by the owner must contain the name and contact information of the latter, the plans for the design and installation of the water cooling towers, if they are available, the manufacturer’s operation and maintenance manual, the results of the water analysis for the past two years, the history and description of the maintenance, repairs, replacements and alterations made, and the names of the person responsible for and the personnel assigned to the maintenance and their telephone numbers.SEVERE PENALTIESThe Regulation provides that a violation of any of its provisions constitutes an offence. The Building Act provides the penalties for such offences. The fines imposed for violations of provisions intended to promote public safety are severe.For example, fines vary from $5,241 to $26,204 for individuals and from $15,723 to $78,612 for corporations. It is important to mention that in case of repeated offences, fines can double and even triple in certain cases.The Building Act also provides that when a violation of a provision intended to protect the public lasts more than one day, each day constitutes a separate offence. For example, this means that if a notice must be provided to the Régie within thirty days following the finding of a dangerous condition and if said notice is transmitted 45 days after such finding, the fine could be multiplied by 15.The importance of public safety is such that not only the offender may be fined, but also any person who by act or omission helps another person to commit an offence.IMPORTANT CONSEQUENCESThe new provisions of the Safety Code will have important consequences in many respects.First of all, in terms of the civil liability of the owner, they create new safety norms which, if not respected, may facilitate certain civil liability recourses if an accident where to occur. These provisions will also have an impact on professional liability since they contain new obligations for the professionals while giving them considerable latitude in terms of the measures that need to be taken to discharge their obligations. Hopefully, jurisprudence will, in the future, clarify the conduct to be followed by the professionals in the performance of their obligations.The new safety norms will also have consequences on the relationship between landlords and tenants. Since an owner will have to perform more regular and in-depth inspections to comply with the new safety norms, and since the owner will have to perform certain maintenance and repairs recommended by the engineer or the architect, will he be able to add his expenses to the operating costs that are payable by the tenants as additional rent? Since expenses related to structural repairs are often excluded from operating costs that may be charged to the tenants of a building, the drafting of the lease will determine how this question may be answered and each case will have to be reviewed on its merits.The buyer of a building subject to the provisions of the Safety Code pertaining to facades, parking structures and water cooling towers will want to have access to the registry maintained by the owner, including any inspection report prepared by an engineer, an architect or another professional. The buyer will also want a confirmation that all recommendations made by the professional have been followed and that there are no dangerous conditions. An informed buyer will most likely want to obtain from the vendor appropriate representations and warranties. It remains to be seen whether the vendor will agree to provide such representations and warranties. The outcome may vary from one case to another depending on the circumstances.A lender financing a property will also want to ensure that the property is in compliance with the provisions of the Safety Code and that the borrower has not committed an offence. If a professional has recommended that certain repairs be carried out, the lender may be reticent to advance funds if there are serious defects or, if the defects are not so serious, the lender may wish to obtain a holdback designed to ensure that the recommended work is performed.In residential buildings subject to the new provisions, we can expect that there will be debates between owners and tenants pertaining to rent increases that the owner may want to justify on the basis of increased costs for inspections and maintenance required by the coming into force of the new provisions. In condominium projects, syndicates of co-owners will want to add to their budgets the costs for inspections, maintenance and repairs required by the new norms and they will want to determine if the contributions to the contingency fund must be revised accordingly.

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  • Legal hypothecs for construction and the enforcement of contractual rights: The Superior Court condemns the use of the land registry as a means for intimidation

    On September 21, 2012, Justice Babin of the Superior Court of Québec rendered a decision which denotes the effect of bad faith of the registrant on damages awards in the context of the unjustified publication of a legal hypothec for construction.1While the decision serves as a useful reminder that a legal hypothec for construction may only secure the surplus value added to the immovable from the work undertaken, it also makes very clear that the holder of a hypothec may not use the land registry as a tool to intimidate, harm or prevent a party from enforcing its contractual rights. Moreover, the case provides further evidence that Quebec courts are very hesitant in awarding sizeable compensation to plaintiffs for their troubles and inconveniences relating to their creditor’s oppressive acts.THE FACTSIn November 2009, Carol Bergeron and his spouse Sophie Gagné (the “plaintiffs”), were looking to purchase a vacant lot of land in order to build their family residence. After several discussions with a representative of Gestion L.M.S. (“Gestion” or alternatively, the “defendant”), the plaintiffs decided to purchase land from the defendant for $75,000. However, given that the land was located on mountainous and rocky terrain of approximately 40 feet in height, it was also agreed that Gestion would dynamite and excavate specific areas so as to allow for the construction of a home. With these elements in place, Gestion and the plain­ tiffs entered into a contract of sale on February 22, 2010 (the “Agreement”).Over the Spring of 2010, the plaintiffs decided to construct a larger home than was originally planned. As such, the parties modified the Agreement – Gestion was to dynamite and excavate an additional parcel of land on the plaintiffs’ property, and the plaintiffs were to provide an additional consideration of $20,000. As the plaintiffs had sold their previous home and agreed to vacate the premises by July 1, 2010, a provision that all work was to be completed by June 1, 2010 was added to the Agreement so that construction of the new home could commence as quickly as possible.Gestion only delivered the land in a suitable condition for construction on October 12, 2010, over four months later than the deadline stipulated in the Agreement.On October 29, 2010, after having put Gestion in default on two separate occasions with no results, the plaintiffs initiated an action before the Superior Court for damages in the amount of just over $48,000. A few days later, Gestion published a legal hypothec for construction on the plaintiffs’ land in the amount of $217,417.The plaintiffs petitioned the Superior Court for an order striking the hypothec from the land registry, as well as for damages flowing from the troubles, inconveniences and expenses incurred from Gestion’s failure to deliver the land in a suitable condition.THE DECISIONJustice Babin declared Gestion’s legal hypothec to be illegal, abusive and contrary to good faith on several grounds.First, the Court held that the monetary amount of the purported legal hypothec was unreasonable given that the excavation work under the parties’ contract was evaluated at $20,000. Indeed, art. 2728 of the Civil Code of Québec stipulates that a construction hypothec may only validly secure the increase in value added to the immovable by the work carried out. An expert’s evaluation es­ tablished that the land in question was worth $71,000 in May 2011, $4,000 less than what the plaintiffs’ paid for it in February 2010. As such, the excavation work most certainly did not increase the land’s value by the $217,417 indicated by the defendant.Second, the Court held that the hypothec was published with the specific intention to intimidate and embarrass the plaintiffs, as well as to negatively impact their ability to obtain credit. Indeed, the published hypothec had considerable financial ramifications on the plaintiffs, as the financial institution which had agreed to provide their initial mortgage refused to advance the $217,417 as a result of the significant charge on the property. As such, one of the plaintiff’s fathers had to finance the construction work being carried out so that the general contractor would allow work to go forward. This situation persisted for nearly two years, as the plaintiffs were unable to convince a financial institution to lend them the funds necessary to complete construction under such conditions.Third, certain facts led Justice Babin to determine that Gestion was in bad faith. Gestion curiously published its legal hypothec for construction only a few days after the plaintiffs had put it in default and claimed over $48,000 in damages. Moreover, one of Gestion’s representatives approached the plaintiffs and asked them to sign a document prepared by Gestion’s notary stipulat­ ing a mutual release under the Agreement. The document also included a mention that the plaintiffs agreed to forfeit any right to judicial recourse stemming from Gestion’s failure to deliver the land in a condition suitable for construction by the deadline established.For these reasons, the Court ordered the cancellation of the defendant’s legal hypothec from the land registry and awarded damages in the amount of $24,594.94 to the plaintiffs. Of this amount, $3,000 was awarded to compensate the plaintiffs for the troubles and inconveniences experienced on account of the defendant’s actions.COMMENTARYWhile the Superior Court’s holding makes clear that the land registry is not to be used as a tool for intimidation or coercion, it nevertheless failed to seize the opportunity to award significant damages which would serve as a suffi­ cient deterrent against such aggressive and hostile acts.In the present case, the plaintiffs requested $50,000 under this head of damage but were only awarded $3,000. This number seems quite low when one considers that the defendant’s charge on the property caused the plaintiffs to be denied access to financing to complete their project for over two years. Although the Court made repeated ref­ erence to the defendant’s bad faith and abusive behaviour, such acts still did not justify significant damages, and this, despite the very real harm inflicted upon the plaintiffs.It is interesting to note that the holding is in line with Quebec jurisprudence, as courts have typically awarded between $1,500 and $7,500 for troubles and inconveniences endured in similar circumstances._________________________________________  1 Bergeron v. 9099-5374 Québec inc. (Gestion LMS), 2012 QCCS 4739.

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  • Due diligence and commercial leases

    Generally speaking, the acquisition of rental property requires a due diligence process that is usually focused on building and property conditions, property titles and lease analysis. During this phase, the purchaser will primarily be concerned about a possible right of first refusal to acquire property that could have been granted to a lessee or about a right of rescission that could enable a lessee to cancel a lease in particular circumstances or the lessee’s and lessor’s obligation to repair. What are the lessee’s obligations and what can a lessor include in his operating expenses? The answer to this question will depend on building conditions and the purchaser’s real estate projects. (Available in French only.)

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  • Legal newsletter for real estate professionals, Number 5

    CONTENT  Property Management : When does a breach of contract become gross negligence? Ensuring the safety of citizens is a primary obligation of the state  Property Management : When does a breach of contract become gross negligence? Louis-Martin Dubé On October 10, 2012, the Québec Court of Appeal rendered a most interesting judgment for owners and managers of commercial real estate.1 In May 1976, Samen Investments Inc. acquires the Gordon Brown Building on De Maisonneuve Boulevard West, near Bleury Street. Samen immediately entrusts its management to Monit Management Limited pursuant to a contract that will remain in force for some 28 years. In September 2003, Samen advises Monit that the management contract will end on December 31 of that same year. An inspection of the Gordon Brown Building by Gestion Sidev Inc., the property management firm hired by Samen to replace Monit, reveals that parts of the structure of the underground parking garage are deteriorated to the point of having to be demolished and rebuilt. In a letter sent to Monit by Samen’s lawyers, the owner claims that Monit is responsible for the poor state of repair of the concrete slab, having neglected to perform appropriate maintenance and repairs during its tenure as property manager between 1977 and 2004. Accordingly, Samen requires that Monit carry out the necessary repairs at its cost. Monit denies any wrongdoing and claims that Samen never complained about anything having to do with the level of Monit’s maintenance and repairs and that the owner is known for neglecting to invest in the maintenance of its real estate properties in Montreal. Samen decides to go ahead with the extensive repair work recommended by its structural engineer and institutes proceedings against Monit before the Québec Superior Court claiming contractual damages in the amount of $743,229.77. Monit responds with a counter-claim for $135,000 in damages alleging that Samen’s action is illegal and abusive. On June 17, 2010, Mr. Justice Louis Crête, J.S.C.2, rules that Monit failed to properly execute its obligations under the contract and that its conduct constituted gross negligence and rules in favor of Samen at least for part of the damages claimed. Monit appeals the judgment to the Québec Court of Appeal. Justice Jacques A. Léger, J.C.A., writing for a unanimous bench of three judges, first examines Monit’s obligations under the property management agreement with Samen and rules that pursuant to Section 2 of the agreement, Monit must “operate and manage the Property as a prudent administrator” and must, among other obligations, “cause to be made all Landlord’s repairs which the Manager in its sole discretion shall deem necessary for the maintenance and preservation of the Property.” The agreement also contains a provision exonerating Monit from liability towards Samen, except for instances where the manager is guilty of willful misconduct or gross negligence. Monit argues that its management strategy consisted in maximizing revenue and limiting expenses and that this was done in accordance with the owner’s instructions. It contends further that it had the responsibility to act in the best interest of the owner. It therefore made a business decision to minimize the maintenance of the property in order to maximize profit. Rather than disregarding the interests of the owner, Monit claims that it acted in its best interest and, therefore, its conduct should not be considered gross negligence. While it cannot be denied that the management company was hired to maximize the profits of the Gordon Brown Building, can this obligation completely negate Monit’s other obligations that are clearly set forth in the agreement, in particular the obligation to maintain and preserve the property as required by Section 2? The Court does not think so. In the end, the considerable length of time during which Monit neglected the maintenance and repair of the concrete slab of the parking garage and the knowledge that the structure was deteriorating significantly were, according to the Court, tantamount to gross negligence. And, while it is true that Section 2 of the agreement gave the management company discretion as to the determination of the maintenance and repair work that the property may require from time to time, it did not give it the right to neglect the performance of an obligation very clearly expressed in the property management agreement - the obligation to maintain and preserve the property - on the basis that it was preferable to let the concrete slab of the parking garage deteriorate until it needed a complete replacement, to avoid the cost of maintenance. WHAT CAN WE LEARN FROM THE CASE OF MONIT V. SAMEN? First, that a property manager should be vigilant with an owner that does not wish to over spend on maintenance and repairs, in particular if certain components of the property are aging and in need of more than regular maintenance. In such circumstances, there is an inherent difficulty for the property manager who has undertaken to maintain and preserve the property, but ultimately does not hold the purse strings. A property manager should always make regular written recommendations to the owner for appropriate maintenance programs, major repairs and capital expenditures with the corresponding budgets, leaving it up to the owner to make the final decision as to how much it is willing to spend on the property. Second, a contract provision exonerating the property manager from liability, although valid, has its limits. Not only will the property manager be responsible in clear cases of intentional or gross fault (whether or not the contract speaks of intentional or gross fault) but also, in the face of a clear and serious breach of contract by the manager, a court may be tempted to grant relief to the owner that has suffered damages notwithstanding the presence of an exoneration clause in the contract.   Ensuring the safety of citizens is a primary obligation of the state Ariana Lisio Ex-Premier Jean Charest and his cabinet probably had the safety of citizens in mind when, on June 20, 2012, they introduced the draft regulation entitled “Regulation to improve building safety”3 (the “Regulation”), which would amend the Safety Code of Québec (the “Code”) adopted under the Building Act4. This Regulation, if enacted by the new government, would amend the Code by adding a new chapter entitled “Buildings”. The Regulation sets out the standards applicable for the territory of Quebec that owners, occupiers and users must comply with to improve building safety. It contains applicable construction standards that would ensure the safety, soundness and protection of buildings from fire and structural damage. It would also introduce provisions, which would be more restrictive than the initial construction requirements, for sleeping accommodations and care occupancies, including special requirements for private seniors’ residences subject to the certification mechanism of the ministère de la Santé et des Services sociaux. The Regulation also contains provisions concerning the inspection and maintenance of building façades and multistorey garages. As of the date of this bulletin, the Regulation has not been enacted by the government. If it were enacted in its entirety, what would be the immediate consequences for the owners? In practical terms, owners would have to comply with new standards for fire alarm and detection systems. These standards will simply implement the fire protection provisions contained in the National Fire Code of Canada.5 Also, more rigourous and periodical maintenance will be necessary for building façades and underground and aboveground multistorey garages. The maintenance of building façades will be required for any building having five or more storeys above ground. A register must be kept on the premises during the lifetime of the building to record certain basic information. Among other things, a description of the repair work, maintenance work and modifications made to the façade, as well as verification reports, must be included in or appended to this register. In addition, every 5 years, the building owner must obtain a verification report from an engineer or architect stating that the building’s façades are not in a dangerous condition, and that recommendations have been made for the correction of deficiencies, if any are found. Also, special conditions apply concerning the frequency for obtaining verification reports when buildings are more than 10 years old. The same reasoning applies to the verification of multistorey garages. A register must be kept on the premises of the garage for recording basic information, including the owner’s name, description of work done, etc. In addition, the Regulation also requires the owner to conduct an annual verification of the multistorey garage. This verification must take the form of an information sheet (contained in the Regulation), describing the specific conditions observed and supported by dated photographs. Furthermore, every 5 years, the owner must obtain an in-depth verification report from an engineer. Finally, an additional verification of the multistorey garage will be required if any event should occur that could affect its structural behaviour. This bulletin provides a summary of the responsibilities and additional costs that will apply to the owners of buildings covered by the Regulation. If the draft regulation is ultimately enacted, it is hoped that the rationale of safety underlying the regulation will serve as a guide for the owners who are subject to it. ________________________________ 1 Monit Management Ltd. v. Samen Investments Inc., 2012 QCCA 1821. 2 Samen Investments Inc. v. Monit Management Ltd., 2010 QCCS 2618. 3 Gazette officielle du Québec, June 20, 2012, Part 2, Vol. 144, no. 25, page 1997. 4 R.S.Q. c. B-1.1. 5 Standards established by the National Fire Code of Canada 2010 (NRCC 53303) published by the Canadian Commission on Building and Fire Codes of the National Research Council of Canada.

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  • Francization – Bill No 14 amending the Charter of the French language

    This publication was authored by Luc Thibaudeau, former partner of Lavery and now judge in the Civil Division of the Court of Québec, District of Longueuil. The title of this newsletter gives a good summary of the explanatory notes that serve as an introduction to Bill 14, entitled An Act to amend the Charter of the French language, the Charter of human rights and freedoms and other legislative provisions (the “Bill”). The legislator is concerned that English is being used systematically in certain workplaces. The Bill was tabled on December 5, 2012 and the proposed amendments are designed to reaffirm the primacy of French as the official and common language of Quebec.

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  • Due diligence in leasing

    It is fairly common and in fact recommended, to proceed with a due diligence review of a property before its acquisition. At a minimum, title to the property is confirmed through a title search review. Often times, a much more thorough review is completed. Matters such as zoning and other legal compliance are reviewed together with the status of realty taxes owing as well as a physical and environmental inspection. All of these elements should be reviewed by a purchaser, even where the sale is made with legal warranty, that is where the vendor sells on the basis of its warranty that it owns the property and that the property is in good condition. In commercial transactions, a property is often sold without warranty or with limited warranties, such that the onus is on the purchaser to ensure itself of the quality and condition of the property it intends to acquire. What is less common, but is also as important, is to complete a due diligence review of a property when a party is considering simply leasing a property. The level of due diligence required will vary greatly depending on the nature of the lease. For example a review required when a party leases a small area in an office tower will be different from the case of a single tenant lease of an industrial facility. That being said in both scenarios, and those in between, some due diligence review will be required. The extent of the review required will depend on the obligations that the tenant will assume under the terms of the lease. The following are certain items that a tenant should confirm or review in the context of a lease. TITLE This review will confirm the ownership of the property. In many cases, the party signing the lease is not necessarily the owner of the property, either by error or where the owner prefers to act by another party, a property manager for example. In any event it is preferable for a tenant to have the lease signed by the owner or at a minimum, establish the consent of the owner and its authorization to have a party represent it for the purposes of the lease. A review of title will also show signs as to the landlord’s financial situation, in that, it will indicate if it is default as to realty taxes, its lenders, and if there are any construction liens. This would be an indication of an owner’s financial situation and its ability to respect its obligations under a lease. CONDITIONS OF PREMISES This review is of particular concern where under the terms of the lease, notably in a single tenant industrial or retail setting, the tenant will accept the leased premises as is, and agree to assume either through the payment of operating expenses or otherwise, the costs of repairs and maintenance. For example the roof may cost a significant amount of money to repair. Upon contemplating a lease of a single tenant facility, some inspection (which report can be requested from the landlord) on the condition of the roof should be conducted. This will allow the parties to clearly understand the possible liabilities and set out who will have the responsibility for any repairs either minor or major. Another example may be the existence of any environmental issues together with the existence of asbestos, PCBs and lead (again it would be common to require reports from the landlord). Typically any repair issues related to these are to the account of the landlord, but it remains preferable to have complete knowledge of the situation to clearly state each parties’ responsibility in relation thereto. ZONING AND LEGAL COMPLIANCE In most leases, the landlord will not warrant or certify that the intended use therein will comply with applicable zoning rules. Even where a landlord has confirmed the use, the cost, inconvenience and damages incurred by a tenant will be difficult to recuperate in any related litigation, if in fact the use is not permitted. In an industrial or manufacturing situation, zoning by-laws may have restrictions as to access, noise and emissions. Retail situations will have limitations as to the nature of operations. A tenant therefore would typically need to confirm these elements. GENERAL Finally, a more general review of the transaction is also required. A lease can be viewed as a long term business relationship, where both landlord and tenant will be called upon to work together on a regular basis over a five (5) or ten (10) year term, if not more. Therefore it is important for a tenant to consider the record of the landlord in dealing with its tenants, the maintenance of the property and the landlord’s overall financial situation. Where there is a record of poor management or where the landlord may have limited financial means otherwise required to conserve and maintain the value of the property, it is likely that there will be issues when problems need to be corrected even where the landlord has clear obligations under the lease. SUMMARY As with any commercial transaction a level of due diligence is required. What that level is will be subject to any number of factors, which can be determined with legal counsel. Not to forget, tenant beware applies to leases.

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  • The limits of additional mortgage

    An overview of the restrictive interpretation given to additional mortgage in both the doctrine and case law. An additional mortgage is often added to the primary mortgage to better protect the creditor (available in French only). 

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  • What to do when your lessee declares bankruptcy?

    A commercial lease does not end on the sole basis that the lessee declares bankruptcy; to the contrary, the Bankruptcy and Insolvency Act (“BIA”) provides that the property of the bankrupt, including the lease, is vested in the trustee. In fact, the terms of the lease are what make it possible for the lessor to terminate the lease should the lessee declare bankruptcy. Once the lease is terminated, the lessor has priority to recover three months of rent due as at the date of bankruptcy; however, if the lessor is entitled to advance rent under the lease, he will also be able to recover three months of upcoming rent. The priority granted to the lessor applies only to rent and does not include any amount related to damage caused by the lessee, for which the lessor can make an ordinary claim. Although granting the lessor priority may seem an efficient way to recover rent in a bankruptcy, the relative import of this must be kept in mind, since the preferential debt payable to the lessor can only be paid from the net equity value of the movable property, or goods, located on the leased premises, i.e., the value after the secured creditors who had rights on the goods have been paid. If the value of the goods is low, the priority granted to the lessor can be altogether worthless. Faced with this reality, can the lessor improve his position by means of collateral securities? There are other means by which lessors can ensure the payment of rent, such as movable hypothec, security deposits, letters of credit, surety bonds, etc. Without elaborating on the debates in this regard, the movable hypothec the lessor has over the lessee’s goods is useless in a bankruptcy, because the federal law (BIA) takes precedence over the provincial law. The same situation exists with regard to a security deposit since, as a security, the deposit is still considered the property of the lessee and therefore is vested in the trustee at the time of bankruptcy; however, this does not apply to rent paid in advance, since it would be considered the property of the lessor and therefore cannot be claimed by the trustee. Third-party endorsements of rent payment, such as a surety bond or bank letter of credit, are by far the most efficient means to adequately compensate the lessor in the event that the lessee declares bankruptcy, since the bankruptcy is immaterial to the third-party agreements. In conclusion, make sure that the lease binding you to your lessee expressly provides for (i) termination of the lease should the lessee declare bankruptcy; (ii) the possibility of recovering three months of advance rent and not only the three months of rent due as prescribed in the BIA; and (iii) if a deposit is paid, that it is rent paid in advance and not just a security. DID YOU KNOW ? “Entering into a contract with the limited partner of a limited partnership cannot be equated with entering into a contract with the limited partnership; only the general partner can bind a limited partnership.”

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  • Legal newsletter for real estate professionals, Number 2

    CONTENT  Mortgage lenders – Duty to notify the insurer of a material change in risk Undivided co-ownership and the right of redemption Unpublished servitudes  Mortgage lenders – Duty to notify the insurer of a material change in risk Louis-Martin Dubé and Ariana Lisio All fire insurance policies which cover a mortgaged immovable contain a clause dealing with the mortgage security (the “mortgage clause”). Financial institutions are familiar with this clause, which is considered as a separate contract from the insurance policy between the insurer and the mortgage creditor (the “creditor”) of the insured immovable.1 Under this separate contract, the actions, negligence or statements of the insured—for example, misrepresentations by the insured when the policy is first taken out—cannot be invoked against the mortgage creditor. Moreover, this characteristic of the mortgage clause is also its cornerstone. However, the protection afforded to the creditor by the mortgage clause does suffer from imperfections, which are underlined in the judgment rendered on January 25, 2011 by the Quebec Court of Appeal in the matter of Xceed Mortgage Corporation v. Wawanesa2. In the aforementioned case, the creditor exercised his hypothecary rights against its debtor, who was insured by Wawanesa. Unfortunately, a fire substantially damaged the mortgaged building (the “building”) before the creditor completed its recourse. The creditor therefore filed a claim with Wawanesa who refused to indemnify it, arguing that the creditor failed to inform the insurer that the insured no longer lived in the building and had rented it to a third party. Indeed, in the certificate of service of the motion to institute proceedings for forced surrender which was served by the creditor, the bailiff mentioned that a third party, and not the insured, occupied the insured building. The mortgage clause attached to the policy issued by Wawanesa contained the following provision: [Translation] The mortgage creditors must promptly disclose to the insurer (if the insurer is known to them) any circumstances that increase the risks set out in the policy and that are a result of their actions if the said circumstances would materially affect the insurer in setting the rate of the premium, assessing the risk, or deciding to maintain the insurance [...] Wawanesa’s refusal to pay was based on the fact that since this was a homeowners’ policy, Wawanesa would not have agreed to insure the building knowing that it was rented to a third party. According to the insurer, this fact would have had a material impact on its decision to maintain the insurance and ought to have been disclosed to it by the lender. In its judgment, the Court concluded that the insurer never intended to insure for the risk of fire where the insured did not live in the building as a homeowner and that, if it had been informed of this on a timely basis, it would have terminated the policy before the loss occurred. The lender’s action for payment of the insurance indemnity was therefore dismissed. This Court decision without a doubt brings to light the significant impact that a material change in risk may have on a mortgage creditor. ________________________________ 1 National Bank of Greece (Canada) v. Katsikonouris, [1990] 2 SCR 1029. 2 Xceed Mortgage Corporation et Xceed Funding Corp. v. Wawanesa compagnie mutuelle d’assurance, 2011 QCCA 197.   Undivided co-ownership and the right of redemption Chantal Joubert Immovables are frequently owned by several co-owners, residential condominiums being one example that naturally comes to mind. However, while commercial immovables are not exceptions to co-ownership, they do, on the other hand, more frequently take the form of undivided co-ownership, where each co-owner has an undivided right of ownership to the whole property. This type of ownership, and especially the associated rights, are frequently misunderstood. The judgment in 2159-4395 Québec Inc. v. Gérard Lamarche et Richard Cousineau is a good example. FACTS – Lamarche and Charbonneau were co-owners of an immovable property. Charbonneau sold his 50% share in the immovable to 2159-4395 Quebec Inc. (“Quebec Inc.”) for a price of $570,000, including $50,000 in cash, with the balance payable in six (6) interest-free instalments. There was also a hypothec on the immovable maturing in 2007. Article 1022 of the Civil Code provides that an undivided co-owner may, within sixty days of learning that a third party has acquired the share of the other co-owner, purchase the said share himself by paying the third party the sale price and associated costs. This is known as the right of redemption. However, the right of redemption may not be exercised if the undivided co-ownership agreement contains a right of preference in favour of the co-owners, provided the agreement was registered against the immovable. In this case, Lamarche exercised his right of redemption within the requisite time and offered to reimburse Quebec Inc. for the first payment of $50,000, and to take over Quebec Inc.’s hypothec with the hypothecary creditor. He also filed a letter of credit for the balance of the sale price. Quebec Inc. objected to the exercise of the right of redemption, claiming that it had not been validly exercised because Lamarche’s offer was insufficient: it should have included the full payment of the sale price, since Lamarche did not benefit from the terms of payment offered to Quebec Inc. JUDGMENT – The trial judge and the Court of Appeal ruled in favour of Lamarche, holding that his offer to pay the $50,000, plus the letter of credit for the balance, were sufficient, and that he benefited from the terms of payment given to Quebec Inc. It should be added that the deed of sale to Quebec Inc. included a provision that was designed to counteract Lamarche’s right of redemption by stipulating that if Lamarche exercised his right of redemption, the full payment of the balance of the sale price would become due—causing Lamarche to lose the benefit of the terms of payment if he exercised the right of redemption. Without much discussion on this point, the Court of Appeal refused to give effect to a scheme aimed at discouraging Lamarche from exercising his right of redemption. CONCLUSION – The existence of a right of redemption has the effect of making the purchaser’s title to an undivided share quite precarious. The right of redemption must be exercised within one year of the sale. This means that, on the sale of an undivided share to a third-party purchaser, the purchaser’s acquisition can be challenged for a year following the sale. Mechanisms should therefore be set up to stabilize the transaction, i.e. to prevent the right of redemption from coming into existence. To do so, the undivided co-ownership agreement should either provide for a pre-emptive right—which closely resembles the right of redemption, except that it is exercised prior to the sale and does not therefore give rise to the same uncertainty—or simply a waiver by the co-owners of the right of redemption. DID YOU KNOW THAT... ... failure to pay when due one instalment of municipal or school taxes can cause the unpaid balance of the taxes billed, to become immediately payable, thus causing the taxpayer to lose the benefit afforded by instalment payments.   Unpublished servitudes Nicole Messier Like all other immovable real rights which must, by law, be published (registered) to be enforceable against third parties, servitudes must be registered in the land register. Once a servitude is registered in the land register against the immovables that it affects, all persons dealing with the immovables are deemed to have knowledge of it. What then is the fate of an unpublished servitude? When a servitude is not published, it is effective between the parties who created it, but is not binding on the purchasers of the immovables it affects or that benefit from it, even if the deed of sale provides that the immovable is sold “with all the active and passive, apparent or unapparent servitudes” charged against it. Also, based on the well-established principle in article 2963 of the Civil Code of Québec, which states that “[n]otice given or knowledge acquired of a right that has not been published never compensates for absence of publication,” even where the purchaser has knowledge of an unpublished servitude, this does not cure the failure to register it in the land register. However, a line of cases has considered whether knowledge of an unpublished servitude could affect its unenforceability. Quite recently, the Quebec Court of Appeal1 was asked to rule on the enforceability of a servitude for the drawing of water that was not registered in time. The owners of the property benefiting from the servitude alleged that the owner of the servient land was aware of the existence, or tolerated the exercise, of the servitude even before it was registered in the land register. Relying, among other things, on the principle in article 2963 of the Civil Code of Québec, the Court of Appeal held that this servitude for the drawing of water was unenforceable against the owner of the servient land. However, in its reasoning, the Court of Appeal confirmed that, nonetheless, it is still possible to present evidence that the owner of the servient land had knowledge of an unpublished servitude, but stressed that this evidence must be very strong: [Translation] If one wishes to prove that he verbally or implicitly acknowledged the servitude, which is a priori unenforceable against him, one cannot be content to adduce evidence of the tolerance, even over a long time, or of the exercise, albeit lengthy, of the servitude in question. The burden of proof to be met by the owner of the allegedly dominant land is therefore a heavy one.2 In addition, the Court of Appeal added that this evidence must attain a “necessary threshold” (without otherwise defining it) to reach the conclusion that a servitude has been implicitly created or recognized. Ultimately, the Court of Appeal’s judgment reminds us that, to avoid any conflict over the existence of a servitude, the first thing you should do is register it. ________________________________ 1 Beaulieu v. Sinotte, 2011 QCCA 1743. 2 Op. cit. no. 1, p. 12.

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