Article by James Papadimitriou, ©2005 Blake, Cassels & Graydon LLP
This article was originally published in Blakes Bulletin on Real Estate & Mortgage Financing - March 2005
Issues surrounding the registration of offers to lease and leases of real property have been the subject of a number of recent cases of interest to mortgage lenders in Québec.
Offers to Lease. The first set of cases address the issue of whether offers to lease constitute leases susceptible of registration and thus protected in the event of a sale or foreclosure of the property. In a 2004 decision, Guzzo v. Fiducie Immobilière M.C.M., the Québec superior court rejected the claim of a tenant that the purchaser of a power centre was bound by an offer to lease signed by the previous landlord, which offer had been registered against title without the landlord’s consent prior to the sale. Two recent Québec Court of Appeal decisions, Industries Ultratainer Inc. v. Rosenberg and Sobeys Québec Inc. v. 3764681 Canada Inc., have also resolved the underlying issue of whether an offer to lease constitutes a binding agreement of lease (coupled with an obligation to enter into a further formal lease agreement) or whether it is simply a promise to lease giving rise to a lease by tolerance pending the execution of a formal lease agreement. In both cases, the Court held that an offer does not constitute a lease. An offer to lease is therefore not susceptible of registration and cannot bind a subsequent purchaser of the property. By way of analogy, an offer to lease would similarly not bind a mortgage or hypothecary lender.
Priority of Registered Leases. The priority of registered leases vis à vis mortgage lenders is governed by Article 1887 of the Civil Code of Québec. The Civil Code provides that the acquirer or the person who benefits from the "extinction" of a landlord’s title may terminate a commercial lease registered after the registration of the acquisition or extinction of the landlord’s title. It is obviously of critical importance to ascertain the time at which the landlord’s title is "extinguished" for the purposes of this provision.
Private Sale. In a 2004 decision, Compagnie Trust Royal v. Pinkerton Flowers Limited, the Québec Court of Appeal had occasion to consider when the landlord’s title is "extinguished" in the context of private sale proceedings by the secured creditor of the landlord. In that case, the tenant’s lease was registered after the creditor’s security, but before the creditor had given notice of the exercise of its hypothecary rights and before the private sale proceedings were completed pursuant to the exercise of the secured creditor’s rights. The trial judge concluded that a private sale, whether by a hypothecary (mortgage) creditor or otherwise, constitutes an "alienation" and it is the execution of the sale agreement that extinguishes the landlord’s title, not the original registration of the deed of hypothec (mortgage). As the lease was registered before the execution of the sale agreement, the trial judge found that the purchaser (in this case, the secured creditor itself) could not terminate the lease.
Taking in Payment (Foreclosure). On appeal, the Québec Court of Appeal concurred with the trial court decision in Pinkerton Flowers and also went on to consider when the landlord’s title is "extinguished" in the case of "taking in payment" of the property by the secured creditor (which is similar to foreclosure in common law jurisdictions). Prior to the reform of the Civil Code, a taking in payment had retroactive effect to the date of registration of the deed of hypothec. However, the Court in Pinkerton Flowers reviewed and confirmed the effect of the provisions of the new Civil Code, which provide that the retroactive effect of a taking in payment reverts back only to the registration of the notice of exercise of the remedy, not to the registration of the deed of hypothec, and that to give effect to a taking in payment a creditor must obtain a judgment or a voluntary deed of surrender. Pinkerton Flowers reversed a line of cases under the new Civil Code which had maintained the old Civil Code jurisprudence that a taking in payment had retroactive effect to the deed of hypothec. According to the Court, none of the hypothecary remedies available in Québec will allow a hypothecary creditor to terminate a commercial lease that is registered after the deed of hypothec, but before a sale or voluntary surrender by sale or judgment.
Consequences. As a consequence of the Pinkerton Flowers decision, tenants in Québec are now afforded much greater protection and can seek to rely on this decision to prevent eviction by prior registered secured creditors which have not yet filed notice of the exercise of their hypothecary remedies. Conversely, hypothecary or mortgage lenders in Québec must be aware that they may be unable to evict subsequently registered tenants which have nevertheless registered their leases prior to the filing of notice of exercise of the hypothecary lenders’ hypothecary remedies. The onus is now on mortgage lenders to enforce more strictly their covenants from borrowers not to enter into new lease agreements without the lender’s consent.
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.