Canada: Property Management: When Does A Breach Of Contract Become Gross Negligence?

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.

Footnotes

1 Monit Management Ltd. v. Samen Investments Inc., 2012 QCCA 1821.

2 Samen Investments Inc. v. Monit Management Ltd., 2010 QCCS 2618.

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