Due diligence and commercial leases

December 1, 2012

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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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October 12, 2022

Sales without legal warranty at the buyers’ risk: Clarity is key

On July 15, 2022, Justice François Lebel of the Court of Québec rendered a decision1 confirming that, in the case of the sale of immovable property, a clear and unambiguous exclusion clause, whereby the warranty is waived at the buyer’s risk, results in a break in the chain of title preventing the buyer from taking any legal action under such warranty against the seller and previous sellers. Justice Lebel thus declared the originating application against the defendants Marshall and Bergeron inadmissible and dismissed the call in warranty. This decision is consistent with the recent decision of the Court of Appeal of Quebec in Blais,2 rendered in May 2022, which clarified the state of the law on the consequence of waiving a legal warranty where successive sales are involved. The facts In March 2009, the defendant Bergeron sold an income property (hereinafter the “Property”) to the defendants, the Marshalls, with a legal warranty of quality. In May 2012, the Marshalls in turn sold the Property to the defendants Hamel and Drouin, still with a legal warranty of quality. In December 2016, the defendants Hamel and Drouin resold the Property to the plaintiff, but this time [translation] “without legal warranty of quality, at the buyer’s risk, but with warranty of ownership”. In the fall of 2020, the plaintiff had work done to repair the drain tile system. It was at that point that it discovered the presence of petroleum hydrocarbons in the soil under the Property’s foundation, rendering the soil unsuitable for residential use. According to an expert report, the alleged contamination stemmed from a heating oil tank once located in a shed behind the Property. The tank was apparently removed before the sale in December 2016. The plaintiff was seeking a reduction in the sale price and to have the defendants Hamel and Drouin, as well as the two previous sellers, the defendants Marshall and Bergeron, held solidarily liable. The plaintiff referred to the warranty of quality provided for in articles 1726 and following of the Civil Code of Québec (C.C.Q.) and the warranty against public law restrictions provided for in article 1725 C.C.Q. The plaintiff also claimed to be the victim of fraud on the part of the defendants Hamel and Drouin. After being called in warranty by the defendants Hamel and Drouin, the Marshalls moved to dismiss the substantive claim and the action in warranty. They claimed that the sale of the Property between the defendants Drouin and Hamel and the plaintiff was made at the buyer’s risk and that such a clause in a subsequent deed of sale irrevocably breaks the chain of title, thereby preventing the plaintiff from taking any legal action against the seller and previous sellers. The law and the importance of a clear clause According to article 1442 C.C.Q., which codifies the principles arising from the decision in Kravitz,3 buyers may seek to have the sellers previous to their own seller held liable. However, for such an action to be deemed valid, it must be established that: The defect existed at the time that the previous sellers owned the immovable; and The right to the legal warranty was transferred to the plaintiff through subsequent sales. Indeed, the buyer of an immovable may take legal action directly against a previous seller in accordance with article 1442 C.C.Q. However, this article presupposes that the right to the legal warranty was passed on from one owner to the next, right down to the current buyer seeking to file a claim for latent defects. In other words, the legal warranty must have been transferred to each owner through the chain of title. In Blais, the Court of Appeal confirmed that an unambiguous warranty exclusion clause results in a break in the chain of title. Such a clause prevents the buyer of an immovable from taking legal action directly against the former owners who sold the immovable with a legal warranty. Given the decision in Blais, it is now clear that such a clause waiving the legal warranty closes the door to any direct recourse against a seller’s predecessors, even if such predecessors sold the immovable with a legal warranty.4 In these circumstances, a buyer who acquires an immovable at their own risk will be deprived of their right to take legal action directly against the previous sellers, insofar as the warranty exclusion clause in the deed of sale is clear and unambiguous. In this case, Justice Lebel considered that the wording of the warranty exclusion clause in the deed of sale, which was binding on the plaintiff, was clear and unambiguous, and that a sale at the buyer’s “risk” excludes both the warranty of quality and the warranty of ownership, which covers the public law restrictions of article 1725 C.C.Q. Justice Lebel indicated that there was a break in the chain of title resulting from the sale at the buyer’s risk and that the plaintiff could not claim that it was still entitled to take legal action directly against any sellers other than the defendants Hamel and Drouin. He therefore ruled in favour of the defendants Marshall and Bergeron and declared the originating application against them inadmissible. Key takeaways A warranty exclusion clause in a deed of sale will only be deemed valid if it is clear and unambiguous. The mention that a sale is made “at the buyer’s risk” completely eliminates the warranty of quality provided for in article 1726 C.C.Q. and the warranty of ownership provided for in article 1725 C.C.Q. A deed of sale containing a valid warranty exclusion clause AND a mention that the sale is made “at the buyer’s risk” precludes any recourse by the buyer against the seller, but also against previous sellers. With the current state of the Quebec real estate market, the decision in Hamel, which ties in with the Court of Appeal’s teachings in Blais, certainly clarifies how case law established in recent years should be applied, in particular as concerns the effect of a warranty exclusion clause on successive sales. The members of our Litigation and Dispute Resolution group are available to advise you and answer your questions. 9348-4376 Québec inc. c. Hamel, 2022 QCCQ 5217 Blais c. Laforce, 2022 QCCA 858. General Motors Products of Canada Ltd v. Kravitz, [1979] 1 S.C.R. 790 Supra note 1, paras. 6 and 8.

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November 28, 2018

Cannabis legalization | Lessors : what steps should you take?

Subject to many restrictions, the possession and production of cannabis were legalized in Canada following the coming into force of the Cannabis Act1 (the “Cannabis Act”) on October 17, 2018. In this context, a guide for employers was previously published by our team in Employment and Labour. To consult it, click here. Beyond the area of employment, the entire legislation concerning cannabis legalization in Canada affects the business community, including cannabis producers, lessors of residential or commercial buildings, associations of co-owners, financial institutions and others. The cultivation, production and use of cannabis raise a number of serious questions arising from real estate law and public law. Residential Leasing For lessors, certain legal considerations regarding the use of cannabis in residential rental properties require specific actions in the short term. What are they? On June 12, 2018, the Quebec government adopted the Cannabis Regulation Act2 (hereinafter referred to as the “Act”) to complement the Cannabis Act. Section 107 of the Act states the following: 107. A lessor may, until 15 January 2019, modify the conditions of the lease of a dwelling by adding a prohibition against smoking cannabis. [Our emphasis] To that end, the lessor must give the tenant a notice of modification describing the prohibition against smoking cannabis applicable to the use of the leased premises. The tenant may refuse the modification for medical reasons. The tenant must do so by informing the lessor of the refusal within 30 days after receiving the notice of modification. In such a case, the lessor may apply to the Régie du logement, within 30 days after receiving the notice of refusal, for a ruling on the modification of the lease. In the absence of a refusal, the prohibition is deemed entered in the lease 30 days after the tenant received the notice of modification. In light of this provision, any lessor may take the necessary measures to prohibit the use of cannabis on the leased premises of residential rental properties before January 15, 2019. More specifically, what steps must lessors, who wish to assert their right to modify a lease unilaterally, take before January 15, 2019, under section 107 of the Act? 1. Draft a clause amending the lease. Lessors must first draft an amendment clause for the leases that they wish to amend to include the prohibition against smoking cannabis on leased premises, including, without limitation, balconies. The amendment clause need not extend the prohibition against smoking cannabis to common areas such as halls and lobbies, given that such a prohibition is already provided for under section 12, paragraph 8 of the Act. 2. Send a notice of modification to the tenants. Once this amendment clause is drafted, lessor must send a written notice of modification to all tenants, to the address indicated in the lease, before January 15, 2019. The notice of modification should include the following: Name and surname of the tenant or tenants concerned; Section 107 of the Act (full text); The exact text of the modification to the lease; and The lessor’s signature and the date on which they have signed the notice of modification. Although no specific requirement in this regard is provided for in either the Act or the Civil Code of Québec, it is recommended that lessors indicate the consequences that tenants face if they fail to comply with the prohibition against smoking cannabis in the notice of modification. These consequences may include the resiliation of the lease in a case where the other tenants’ right to the peaceable enjoyment of the premises has been violated3. 3. Use an appropriate delivery method The lessor will have to choose a means of transmission that will ensure that the notice of change is transmitted AND received before January 15, 2019, and that physical and enforceable proof of receipt by the tenant is kept. The most appropriate means of transmitting the notice of change may vary depending on the circumstances and the means of communication agreed upon between the lessor and their tenant and/or used by them in the past. The methods of transmission provided for in the Code of Civil Procedure include, among other things, delivery by the bailiff, sending by registered mail, personal delivery and sending by technological means. In any event, the lessor must ensure that they choose the method of transmission that provides the most convincing evidence that the tenant has received the notice. When will the amendment clause come into effect? In the absence of a refusal by the tenant (the tenant may, for medical reasons, refuse the modification proposed by the lessor under section 107 of the Act), and following a 30-day period from the receipt of said notice, the prohibition against smoking on leased premises will be deemed to have been entered in the lease. What happens if a lessor fails to assert their right to unilaterally modify a lease under section 107 of the Act before January 15, 2019? Any lessor who does not send the notice of amendment before January 15, 2019 will have to wait until the expiry of the current lease and will be subject to the general provisions of the Civil Code of Québec for the amendment of a residential lease, unless an agreement is reached with the tenant. Commercial Leasing Are lessors of commercial rental properties, like lessors of residential rental properties, required to take a particular action before a given date? Lessors of commercial rental properties cannot benefit from the right to modify leases unilaterally set out in section 107 of the Act. However, paragraph 17 of section 12 of the Act provides that smoking is prohibited in enclosed spaces that are open to the public, such as office buildings and shopping centres. Moreover, it is possible for the owners of commercial buildings to consider an amendment to the rules and regulations of the buildings in order to prohibit the use of cannabis on leased premises as well as in common areas. In this regard, lessors of commercial buildings would be well advised to immediately adopt a policy in line with the policy adopted regarding the use of tobacco on leased premises and in common areas, if appropriate. Cannabis Act, S.C. 2018, c. 16 Cannabis Regulation Act, CQLR, c. C-5.3 Chartier v. Chassé, 2018 QCCQ 2823

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March 23, 2017

Artificial Intelligence and the 2017 Canadian Budget: is your business ready?

The March 22, 2017 Budget of the Government of Canada, through its “Innovation and Skills Plan” (http://www.budget.gc.ca/2017/docs/plan/budget-2017-en.pdf) mentions that Canadian academic and research leadership in artificial intelligence will be translated into a more innovative economy and increased economic growth. The 2017 Budget proposes to provide renewed and enhanced funding of $35 million over five years, beginning in 2017–2018 to the Canadian Institute for Advanced Research (CIFAR) which connects Canadian researchers with collaborative research networks led by eminent Canadian and international researchers on topics including artificial intelligence and deep learning. These measures are in addition to a number of interesting tax measures that support the artificial intelligence sector at both the federal and provincial levels. In Canada and in Québec, the Scientific Research and Experimental Development (SR&ED) Program provides a twofold benefit: SR&ED expenses are deductible from income for tax purposes and a SR&ED investment tax credit (ITC) for SR&ED is available to reduce income tax. In some cases, the remaining ITC can be refunded. In Québec, a refundable tax credit is also available for the development of e-business, where a corporation mainly operates in the field of computer system design or that of software edition and its activities are carried out in an establishment located in Québec. This 2017 Budget aims to improve the competitive and strategic advantage of Canada in the field of artificial intelligence, and, therefore, that of Montréal, a city already enjoying an international reputation in this field. It recognises that artificial intelligence, despite the debates over ethical issues that currently stir up passions within the international community, could help generate strong economic growth, by improving the way in which we produce goods, deliver services and tackle all kinds of social challenges. The Budget also adds that artificial intelligence “opens up possibilities across many sectors, from agriculture to financial services, creating opportunities for companies of all sizes, whether technology start-ups or Canada’s largest financial institutions”. This influence of Canada on the international scene cannot be achieved without government supporting research programs and our universities contributing their expertise. This Budget is therefore a step in the right direction to ensure that all the activities related to artificial intelligence, from R&D to marketing, as well as design and distributions, remain here in Canada. The 2017 budget provides $125 million to launch a Pan-Canadian Artificial Intelligence Strategy for research and talent to promote collaboration between Canada’s main centres of expertise and reinforce Canada’s position as a leading destination for companies seeking to invest in artificial intelligence and innovation. Lavery Legal Lab on Artificial Intelligence (L3AI) We anticipate that within a few years, all companies, businesses and organizations, in every sector and industry, will use some form of artificial intelligence in their day-to-day operations to improve productivity or efficiency, ensure better quality control, conquer new markets and customers, implement new marketing strategies, as well as improve processes, automation and marketing or the profitability of operations. For this reason, Lavery created the Lavery Legal Lab on Artificial Intelligence (L3AI) to analyze and monitor recent and anticipated developments in artificial intelligence from a legal perspective. Our Lab is interested in all projects pertaining to artificial intelligence (AI) and their legal peculiarities, particularly the various branches and applications of artificial intelligence which will rapidly appear in companies and industries. The development of artificial intelligence, through a broad spectrum of branches and applications, will also have an impact on many legal sectors and practices, from intellectual property to protection of personal information, including corporate and business integrity and all fields of business law. In our following publications, the members of our Lavery Legal Lab on Artificial Intelligence (L3AI) will more specifically analyze certain applications of artificial intelligence in various sectors and industries.

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December 7, 2016

Overview of the Canadian Public-Private Partnerships market

The Public-Private Partnership delivery model (“PPP” or “P3”) is now well established in Canada, where more than 177 of such projects were closed between 1993 and 2015 (source: InfraAmericas). The great majority thereof (166) have been closed since 2004, and the current trend indicates the number of projects is on the rise. Thus, considering the projects already completed in 2016 as well as projects currently engaged in the tendering process, according to the Canadian Council for Public- Private Partnerships “CCPPP”, the total number of completed and pending PPP projects in Canada currently stands at 247. Canada is often described as the most active PPP market in the world, and is certainly one of the most mature. The life cycle of infrastructures, the Canadian geography and the current economic context are all convergent factors that favour this market. Also, the improvement of public infrastructures through the use of private capital is a concept which has always benefited from the support of the federal government. The Liberal government elected in October 2015 made infrastructure a major pillar of its economic platform with the campaign promise to double the country’s infrastructure investments. On November 1, 2016, Finance Minister Bill Morneau announced the creation of the Canada Infrastructure Bank (“CIB”) in 2017, whose mandate will be to invest in large infrastructure projects by attracting capital from institutional investors. Taking into account existing infrastructure programs ($91 billion), the investments announced last March in the government’s first budget ($14 billion), and additional investments included in the economic and financial update last November 1 ($81 billion), the federal government estimates that the country’s total infrastructure investments will reach $180 billion between 2016 and 2028. According to the CCPPP’s data, the Canadian P3 industry is still dominated by social infrastructure (58%) and civil infrastructure projects (24%). The health sector remains the largest subsector within social infrastructure, with 37% of the completed transactions. However, we note an increase in transportation-related projects, particularly suburban highways and light-rail transit projects. Other types of projects are also being developed, such as wastewater treatment and waste management plants and power transmission lines, all of which are new asset classes offering alternative investment opportunities for investors. Provincial bodies such as Infrastructure Ontario, Partnerships BC, SaskBuilds, Alberta Infrastructure, Partnerships New Brunswick and the Société québécoise des infrastructures are at the heart of the Canadian PPP programs and are directly responsible for the majority of infrastructure projects. Infrastructure Ontario remains the largest agency in terms of size and the number of completed transactions. It also serves as a reference for documentation and processes. At the municipal level, about 15 municipalities have also undertaken to develop their own projects, although they are often implemented in partnership with the provincial agencies. Federally, seven projects have been launched to date in PPP mode, notably the Confederation Bridge and the new Champlain Bridge. Another recent example is the Gordie Howe International Bridge connecting Windsor, Ontario to Detroit, Michigan, which is currently engaged in a call for tenders process. The 177 PPP projects completed since 1993, as reported by InfraAmericas, represent an aggregate value of $79 billion, or an average project value of $482 million. If we consider the aggregate of projects identified by the CCPPP as completed and currently underway (247), this represents a total value of $118 billion. It is generally acknowledged in the industry that a project must have a minimum value of $50 to $75 million to be viable for the PPP delivery model. To date, Ontario and British Columbia have been the most active Canadian provinces in terms of PPP, together contributing 121 out of a total of 177 projects (68%) by the end of 2015. Ontario has completed 90 projects to date, or 51% of the Canadian market. This is followed by Quebec with 10%, New Brunswick with 6%, Alberta with 6% and Saskatchewan with 5%. Canada remains a market open to international competition and foreign capital, and continues to attract numerous players from Europe and the United States. In terms of risk, this is a relatively conservative market that is not so open to projects exposed to volume (or traffic) risk. However, this has the advantage of attracting the interest of institutional investors for Canadian infrastructure debt, which actually benefits from high-quality risk ratings. In terms of financing, the Canadian pension funds and life insurance companies are the main actors involved in investments in the form of private placements. Their interest in this class of assets has made private placements the primary financing solution for the Canadian P3 market. Most of the projects resort to bank credit during the construction phase, which is then refinanced on the bond market once the project has been completed. However, some projects have been financed solely through bond issues. Thus, according to InfraAmericas, of the 177 projects that were financed by the end of 2015, 125 (71%) were financed solely with bank debt, 37 (21%) were financed solely in the capital markets, and 15 (8%) were financed with hybrid forms, i.e., through a combination of bank debt and long-term bond financing. More recently, a secondary market for PPP projects has developed which has some potential throughout Canada. While most institutional investors such as pension funds and insurance companies view PPPs as long-term investments, there are also some promoters who potentially wish to assign their interests in certain projects after a relatively short time, in order to redeploy their capital in other projects or sectors.

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