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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lenders – Duty to notify the insurer of a material change in risk Undivided co-ownership and the right of redemption Unpublished servitudes  Mortgage lenders – Duty to notify the insurer of a material change in risk Louis-Martin Dubé and Ariana Lisio All fire insurance policies which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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  • Legal newsletter for real estate professionals, Number 1

    CONTENT  The Breach of a Promise to Purchase - Liability of the Third Party Purchaser Entire Agreement Clauses Closed Hypothecary Loans With a Term Exceeding Five (5) Years: Legislative Change  The Breach of a Promise to Purchase - Liability of the Third Party Purchaser Louis-Martin Dubé The sale of real estate assets usually starts with a preliminary contract, more specifically, a promise to purchase signed by the seller and the purchaser, which sets out most of the terms and conditions of the deed of sale to be entered into. However, it may happen that an owner will go back on his word and choose to sell to a third party whose offer for the assets is more favourable. If the owner sells his property to the third party purchaser, what are the remedies of the original purchaser? Can he or she seek to have the sale to the third party voided? Can he or she claim damages from the third party? In a judgment issued on September 8, 2011, the Quebec Superior Court considered the case of a company (GLS) that had signed a promise to sell assets to a purchaser (Midbec) and, a few days later, sold them to a third party purchaser (Reliable) under more favourable terms. Midbec instituted an action for damages against GLS and Reliable solidarily. As GLS had gone bankrupt, only a judgment ordering Reliable to pay damages could compensate Midbec for the harm it suffered. Reliable invoked the absence of a legal relationship between itself and Midbec since Reliable was not a party to the first promise to purchase, which, moreover, its representatives had not read. In addition, Reliable considered that there had been no complicity or collusion between itself and GLS and that, accordingly, it was not in bad faith within the meaning of section 1397 of the Civil Code of Québec, which reads as follows: “A contract (the sale to Reliable) made in violation of a promise to contract (the GLS/Midbec promise to purchase) may be set up against the beneficiary of the promise (Midbec), but without affecting his remedy for damages against the promisor (GLS) and the person (Reliable) having contracted in bad faith with the promisor. ” (The text in italics has been added and is not part of the quotation) The evidence showed that in fact, although Reliable’s representatives had not seen the promise to purchase entered into between GLS and Midbec, Reliable knew of its existence and was even aware of some issues of concern for GLS. It also made sure to remedy such issues in its own promise to purchase and, at the request of GLS, agreed not to sue GLS in the event that Midbec instituted proceedings. The parties closed the transaction quickly to avoid being prevented from doing so by proceedings instituted by Midbec. The Court came to the conclusion that Reliable had acted with full knowledge of the situation and that the facts were sufficient to demonstrate its bad faith. Reliable was ordered to pay Midbec, for loss of profit, an amount of $784,703 in damages with interest at the legal rate plus the additional indemnity. DUTIES ON TRANSFERS OF IMMOVABLESREMINDER - In 2010, the City of Montreal adopted a by-law setting a rate higher than other municipalities in the calculation of the duties for the transfer of an immovable. The rate is 2% on the basis of imposition that exceeds $500,000. This rate applies only to immovables located in the City of Montreal and therefore excludes those in demerged municipalities.   Entire Agreement Clauses Chantal Joubert “This contract shall constitute the entire agreement between the parties with respect to the subject matter hereof and shall not include any representation, promise or warranty other than those set out herein.” The purpose of these clauses, known as “entire agreement” clauses, which are often found in commercial contracts, is to prevent the parties who entered into a final contract from invoking prior discussions or understandings to give a different meaning to its provisions. The reasoning underlying such a clause is simple: because the contract is supposed to reflect the final agreement between the parties as to their rights and obligations and, accordingly, their true intent, it would be dangerous to allow them to go back to discussions or understandings that preceded the contract. Such clauses basically aim to preserve the stability of contracts. The courts have generally upheld such clauses and excluded evidence relating to verbal or written understandings that preceded the signature of the final contract. However, the Superior Court, in the case of IHAG-Holding AG v. Intrawest Corporation, put aside the “entire agreement” clause included in the final agreement to consider a prior letter of intent in order to determine the method to be used to calculate the purchase price. The facts of the case may be summarized as follows: a letter of intent, which did not bind the parties, stipulated an elaborate formula for the calculation of the purchase price of a sports complex located in the Gatineau region. The final agreement signed by the parties reproduced this same formula but with a drafting mistake that had the effect of increasing the purchase price by $6.2 million relative to the amount that would have been obtained if the formula set out in the letter of intent had been correctly reproduced. The Superior Court decided to set aside the formula for calculating the purchase price in the final contract signed by the parties and instead applied the formula set out in the letter of intent, which did not bind the parties. The Court concluded that it was justifiable to set aside the “entire agreement” clause and return to a prior understanding when it was obvious that one party was trying to rely on that clause in order to take advantage of a mistake. In fact, the drafting error, which both parties were unaware of until then, was only discovered at the time of paying the “earnout payment” element of the price. The seller had then tried to apply the “entire agreement” clause that allowed it to set aside the less favourable formula contained in the letter of intent. However, the application of an “entire agreement” clause cannot have the effect of setting aside each party’s obligation to act in good faith. As for the letter of intent, although it did not bind the parties, the Court concluded that it could be applied since it truly represented their real agreement respecting the formula for determining the purchase price.   Closed Hypothecary Loans With a Term Exceeding Five (5) Years: Legislative Change François Martel To the contentment of lenders and owners of commercial properties, a long-awaited amendment involving section 10 of the Interest Act (Canada) (the “Act”) has just been made. Indeed, on October 20, 2011, the Canadian government adopted the Prescribed Entities and Classes of Mortgages and Hypothecs Regulations. These regulations define the entities that will be eligible for the purposes of applying paragraph 10(2)(b) of the Act. A brief historical reminder is called for Paragraph 10(1) of the Act, passed in 1890, provided that borrowers could repay their loans secured by hypothecs on immovables after five (5) years, even if the hypothec was a closed hypothec for a longer term, subject to paying a penalty equal to three (3) months’ interest. At that time, Parliament wished to protect individuals by means of this provision, in particular farmers. Later, to encourage commerce, particularly the railway companies attempting to structure their long-term debts, Parliament amended the Act by adding a second paragraph to section 10 that provided that the above-mentioned general rule did not apply to joint stock companies or other corporations. From then on, the companies had access to loans for more than five (5) years secured by hypothecs on immovables. Commercial real estate practice having greatly evolved since then, owners of commercial immovables increasingly structure themselves as limited partnerships or commercial trusts, for tax purposes. Unfortunately, not being governed by the exception in the second paragraph of section 10 of the Act but rather by the more generous general rule of paragraph 10(1), it is difficult for these owners to access loans for more than five (5) years because lenders do not want to allow their borrowers to repay their loans in advance after the fifth year by paying a modest penalty (the general rule of paragraph 10(1) of the Act being of public order). Therefore, structures such as holding an immovable through a nominee corporation have been conceived and implemented by these property owners in order to benefit from long-term loans. However, numerous lenders remain hesitant, with good reason, to take on this kind of loan, fearing that these structures will not be recognized by the courts. In the explanation of its new regulation, the government clearly states the reasons for the change: “Some business and commercial entities, not structured as corporations… have had difficulties in accessing long-term mortgage financing because the prepayment terms for their mortgages are prescribed by the Act.” Under this new regulation, partnerships (notably limited partnerships) and trusts established for business or commercial purposes will benefit from the exception in the second paragraph of section 10 of the Act, in the same way as joint stock companies and other corporations, with respect to hypothecs on immovables entered into after January 1, 2012. That will be the long-awaited end of convoluted property structures aimed at obtaining loans for more than five (5) years secured by hypothecs on immovables. Lenders will, from then on, be able to grant such loans to limited partnerships and trusts established for business or commercial purposes and to freely negotiate the repayment terms of their loans.

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  • Can a creditor who institutes a hypothecary recourse recover "Extra-judicial professional fees...for services"? A Quebec Court rules

    Since the amendments made to the Civil Code of Québec (“C.C.Q.”) in 2002, article 2762 provides that:2762. A creditor having given prior notice of the exercise of a hypothecary right is not entitled to demand any indemnity from the debtor except interest owing and costs.Notwithstanding any stipulation to the contrary, costs exclude extra-judicial professional fees payable by the creditor for services required by the creditor in order to recover the capital and interest secured by the hypothec or to conserve the charged property.

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  • Legal newsletter for business entrepreneurs and executives, Number 6

    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. Disclosure Rules Applicable Prior to the Sale of Additionnal Warranties Attornment of Jurisdiction Clause set Aside in Bankruptcy Proceedings What to do When Your Lessee Declares Bankruptcy

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  • Your Contracts: a Systematic and Disciplined Approach is Called for

    Every day, and several times a day, we enter into contracts without knowing it or without considering and controlling their effects. This bulletin provides a brief and non-exhaustive summary to help you better understand, prepare for and monitor your contractual environment.Do you know that a contract is a meeting of minds that may be expressed and entered into in different ways (written, verbal, e-mail, filling of orders, etc.). Do you know that a contract may be amended or rights abandoned by actions, words or subsequent writings, or by failing to take action in a timely manner.This bulletin provides practical advices before you drafting, negotiating, also advices regarding the performance and monitoring of contracts.In summary, clarity, transparency, a mutual understanding of the goals and expectations of each party, good faith and the use of a systematic and disciplined approach will smooth the way for your contracts. Have good contracts!

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