Copyright 2011, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Real Estate - Commercial Leasing, October 2011
Although there are similarities between Quebec's civil law system and Canada's common law system, it is important to highlight some significant differences as they relate to commercial real estate leases. Even if the wording in leases may sometimes appear to be similar, there are underlying differences that a landlord or a tenant should be aware of when negotiating and carrying out their obligations under commercial leases in Quebec.
Nature of the Lease
One fundamental difference between the two legal systems as they relate to commercial leasing is the nature of the rights granted to the tenant under a lease. At common law, although the rules of contract law apply, the relationship between the tenant and the landlord is heavily based on the rules of property law, whereby the lease creates an interest in the land in favour of the tenant, i.e., it grants the tenant a real right on the property. In Quebec, the relationship between the tenant and the landlord is contractual in nature and governed by the rules of contract law. A lease in Quebec is a personal right.
It is generally accepted in both Quebec and in common law provinces that a tenant can register its rights granted pursuant to a commercial lease at the applicable land registry office.
Failure to register a commercial lease can have severe consequences for a tenant in Quebec. A tenant may risk having its lease terminated prior to the end of its term in the event that a new purchaser acquires the building or a hypothecary creditor exercises its rights on the building. However, prior to the termination, such person must provide the tenant with a notice, which length may vary, depending on the term of the lease. A tenant in Quebec can avoid the risk of having its lease terminated by registering its lease. The tenant's right to register its lease has been deemed of public order – in other words, it is a right that landlords cannot force a tenant to contract out of. Although a commercial lease in Quebec can be registered by four different means, most parties agree to register a notice of lease which excludes all financial information pertaining to the transaction. If the tenant registers a notice of lease in the land registry office prior to the registration of a deed of alienation or another act which extinguishes the landlord's title, the subsequent owner of the building or the hypothecary creditor, as the case may be, will not be able to terminate the lease.
Prior to 2004, the Quebec courts gave priority to hypothecary creditors who wanted to prematurely terminate commercial leases over tenants who registered their leases after the registration of the deed of hypothec. In Pinkerton Flowers, the Québec Court of Appeal concluded that the registration of a prior notice of the exercise of a hypothecary right determines the moment in which the forced alienation of the property occurs. Therefore, if a tenant registers a notice of lease prior to a notice of exercise of a creditor's hypothecary right, the hypothecary creditor cannot terminate the tenant's lease. Consequently, so long as they register their lease, commercial tenants in Quebec no longer need to include non-disturbance provisions in their leases or to negotiate non-disturbance agreements with the landlord's hypothecary creditor. Of course, in the common law provinces, whether or not the tenant registers its lease or a notice thereof on title, a non-disturbance agreement is required in order to protect a tenant against any mortgage which ranks in priority to the lease.
It is also important to note that although a tenant may register an offer to lease in common law provinces, such registration is not permitted in Quebec. Only a commercial lease is subject to registration in Quebec, hence it is in the best interest of the tenant to ensure its lease is promptly executed and registered in order to protect its rights.
Right to Distraint
The landlord's right to distraint in common law provinces is a well-known recourse despite being seldom used due to its technical nature. The right grants the landlord the authority to seize and dispose of the tenant's goods found in the leased premises if the tenant is in default of paying rent.
In Quebec, the landlord does not have an equivalent right to distraint. Instead, the provincial legislators created what is known as the movable hypothec without delivery. A movable hypothec is essentially security granted over a tenant's personal property. A movable hypothec must be granted in writing, provide a description of the hypothecated property and should specify the amount of the hypothec. It is usually included as a provision in the lease so that the landlord can effectively seize a tenant's property for unpaid rent. In order for it to be opposable (perfected) to third parties, it must be registered in the Québec Register of Personal and Movable Real Rights. As a result, if a purchaser is acquiring a building in Quebec and the vendor is assigning leases with movable hypothecs, the movable hypothecs must be assigned to the purchaser following the closing of the sale.
A clause requiring that the tenant continuously operates in the leased premises is common in commercial leases. Such clauses are often considered essential in shopping centre leases, where the combination of tenants usually creates a synergy that attracts a greater number of people to the centre. If one tenant goes dark, especially an anchor tenant such as a grocer or a pharmacy, the repercussions can have a domino effect and may exponentially reduce the number of customers entering the shopping centre. In Quebec, if a tenant does not respect the continuous operation provision, the landlord can either seek damages or request specific performance of the obligation (an injunction, if necessary) or termination of the lease, subject to the landlord proving serious injury was suffered. In common law provinces, the courts have favoured damages as recourse and, as such, it is almost impossible to obtain an order of specific performance or an injunction for a tenant's breach of a continuously operating covenant.
Landlord's right to terminate lease
Normally, if a tenant is in default under the terms of a lease and a provision in the lease grants the landlord the right to terminate in cases of breach, the landlord will exercise its right to terminate and maintain any recourse it may have related to rental arrears. Although the foregoing right to terminate has existed for some time in common law provinces, it is still relatively new in Quebec. Until recently, a landlord in Quebec had to request the court's permission prior to terminating a commercial lease. Such is no longer the case, provided that the right to terminate in the lease is clearly detailed and that the non-performance of the tenant causes "serious injury" to the landlord or the other occupants of the property.
These are only some of the differences that exist between Canada's two legal systems. It is therefore important to be cognisant of the differences and the resulting consequences when negotiating commercial leases and carrying out lease obligations in Quebec.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.