Canada: Estoppel Certificates: To Sign Or Not To Sign, That Is The Question

As part of the due diligence process involved in a real estate transaction, the potential buyer or creditor will typically review the leases affecting the property and ask the current landlord to have its tenants sign an "estoppel certificate" in which the tenants will describe the status of the lease and claims, if any, that they may have against the landlord 1.

On August 10, 2017, the Ontario Superior Court issued a decision that deals with the importance and enforceability of an estoppel certificate 2.



1960529 Ontario Inc. v. 2077570 Ontario Inc.

In this case, a company was running a business as a bar and game arcade (the Tenant), and was leasing premises in a property in Toronto (the Property) belonging to the landlord (the Landlord). The Tenant's lease contained a right of first refusal provision, under which, in the event the Property was to be sold, the Landlord would need to provide the Tenant with a copy of the offer to purchase prior to accepting the offer, in which case the Tenant would have 24 hours to submit to the Landlord an equivalent offer. On October 17, 2016, the Landlord entered into an agreement with a buyer (the Buyer) for the purchase of the Property. On February 14, 2017, the Landlord notified the Tenant of the sale of the Property and made it sign an estoppel certificate in which the Tenant admitted, among other things, that the Landlord was not in default under the terms of the lease and the Tenant had no claim against the Landlord based on the terms of the lease. On February 17, 2017, the Landlord sold the Property to the Buyer. On February 21, 2017, the Buyer gave the Tenant a notice of termination of the lease, requiring it to leave the leased premises no later than February 28, 2018, the whole in accordance with a demolition provision included in the lease. On March 23, 2017, the Tenant brought a motion for declaratory judgment and injunctive relief, in support of its claim for enforcement of its right of first refusal.

In its analysis regarding the decision of whether or not to grant the Tenant a provisional interlocutory injunction, the court stated that parties to a commercial real estate transaction are entitled to rely upon an estoppel certificate to prevent the party signing the certificate from taking a position that is contrary to the statements therein 3. The court continued by explaining that when the Tenant's representative signed the estoppel certificate and gave it to the Landlord, it should have known that the parties affected by the sale of the Property would rely on the contents thereof 4.

Furthermore, the court stated that it would be unfair to accept the Tenant's claim that the Landlord was in breach of its obligations relating to the right of first refusal provision, after the Tenant had signed the estoppel certificate, in which the Tenant stated the Landlord was not in default under the lease and that it had no claim against said Landlord 5. The court therefore confirmed that by signing the estoppel certificate, the Tenant was waiving the rights granted to it by the right of first refusal provision.

Finally, the court concluded that because of the legal effect of the estoppel certificate, it would not grant the injunction requested by the Tenant 6.

Even if this is an Ontario judgment, Quebec jurisprudence shows that the same principle applies in Quebec.

Enforceability of an estoppel certificate in Quebec

In certain decisions, when the court is asked to interpret the terms of a lease, it relies, among other things, upon an estoppel certificate as additional evidence 7.

However, in a Superior Court of Quebec decision dated 2015, the court addressed the applicability of an estoppel certificate in connection with a breach of the terms of a lease 8. In this case, the owner, through its property manager, sought damages against the Tenant who operated a restaurant in the owner's building. The owner alleged that the Tenant made false representations regarding the term of its lease, which false representations were found in an estoppel certificate signed by the Tenant. It is important to note that there were two leases in force between the Tenant and the owner, namely, a French lease with an end date of March 30, 2014, and an English lease with an end date of November 30, 2014. Prior to purchasing the building, the owner  relied upon an estoppel certificate signed by the Tenant in which it admitted that its lease had a termination date of November  30, 2014, namely, the end date of the English lease. It was when the Tenant terminated its lease on March 30, 2014, in accordance with the term of the French lease, that the owner sought damages against it.

After having assessed the evidence, the court determined that the lease in force between the Tenant and the owner was in fact the French lease 9. Concerning the issue of the estoppel certificate, the court mentioned that the fault was with the Tenant who knew or should have known that potential hypothecary creditors or purchasers of the building would rely on the statements made in said certificate, even if the lease in force actually had a termination date of March 30, 2014 10. Consequently, the damages suffered by the owner were equivalent to eight months of rent, being, the difference between the term of the French lease, and that of the English lease. More importantly, the court stated that the amount to be awarded as damages must reflect the amount of rent indicated in the estoppel certificate, despite the fact this amount differed from that specified in the lease in force 11.

It is therefore apparent from this case that, under the circumstances and notwithstanding the explicit wording of the lease in force, the terms of the estoppel certificate may prevail, given the fact that it is a legal document on which the parties to a transaction are reasonably entitled to rely upon.

It is relevant to mention that in a Quebec Court of Appeal 12 judgment, the court stated that an estoppel certificate constitutes an extra-judicial admission, that can be revoked only through evidence of an error of fact by its author. With the weight of the extra-judicial admission being left to the court's discretion, the court must choose the most plausible version between the evidence on file and the estoppel certificate. In this case, despite the Tenant's claims to the effect that the Landlord had not performed work properly, the Tenant had signed an estoppel certificate that recognized the contrary, that is, the owner's work had been carried out properly and all the obligations under the lease had been fulfilled. The trial court had concluded, following the analysis of the lease terms, that the work in question had been carried out properly and added the Tenant had confirmed it by signing the estoppel certificate. The court stated that it shared the trial judge's opinion and confirmed that said judge had not committed an error by concluding that the Tenant had signed the estoppel certificate with full knowledge of the evidence, in which it expressly recognized that the owner had complied with all of its obligations and that it couldn't then deny what it had explicitly acknowledged 13.

In light of the foregoing, it is important for tenants to ensure the certificates they sign are consistent with the lease, failing which, they could find themselves in a position in which they have to waive their rights set forth in their lease or even be required to compensate parties who would be relying upon said certificate. Furthermore, the estoppel certificate represents a valid legal document or even an extra-judicial admission by the party signing the estoppel certificate, and this evidence could work against Tenants in the event of a dispute.  

Footnotes

1 René Gauthier, "Les règles générales applicables à tous les baux," in Jocelyne Temblay, coord., Obligations et contracts, Collection de droit 2017-2018, Vol. 6, Cowansville (Quebec), Éditions Yvon Blais/École du Barreau du Québec, 2017, p. 267.

2 1960529 Ontario Inc. v. 2077570 Ontario Inc., 2017 ONSC 5254.

3 Ibid., at para 44.

4 Ibid.

5 Ibid., at para 45.

6 Ibid., at para 73.

7 IMS Health Canada Inc./IMS Santé Canada Inc., v Trans-Edmond Development Inc./Développement Trans-Edmond Inc., 2013 QCCS 5357 and The Forum Entertainment Centre Company v Cinegrand Montreal Inc., 2004 QCCS 1347.

8 Gestion Elm Bishop Inc., v Farias, 2015 QCCS 6545.

9 Ibid., at para 34.

10 Ibid., at para 40.

11 Ibid., at para 73-75.

12 Cinegrand Montreal inc. v Forum Entertainment Centre Company, 2006 QCCA 1579.

13 Ibid., at para 63-65.


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