| ICSC Legal Database - Articles | Monday, February 22, 1999 04:59 PM |
| Title: |
| Guarantee Agreements in the Province of Quebec |
| Body: |
| Landlords devote considerable time and resources t
o forming lease agreements with tenants, including the |
| cost of leasehold improvements to premises, free rental periods, financial inducements to tenants and the |
| payment of commissions to real estate brokers. It is important, therefore, that they obtain appropriate |
| security in order to ensure that leases will be honoured and that the expected return on their investments will |
| be received. Examples of security that may be obtained in the Province of Quebec include cash deposits, |
| hypothecs (mortgage) on movables in the premises and letters of credit. |
| Apart from a cash deposit, the easiest security that landlords can obtain is an undertaking by a third party to |
| "guarantee" the obligations of the tenant. In the civil law of the Province of Quebec, this is known as a |
| contract of suretyship (for ease of reference called a "guarantee" agreement in this article). Such a |
| guarantee is necessary when the landlord is uneasy about the financial means of the tenant or when the |
| tenant is a subsidiary, with no real assets, of a company with substantial worth. |
| The contract of guarantee is fairly simple and straightforward. It is also the most dangerous and foolhardy for |
| a guarantor to give. There is an old but true adage that states, "He who guarantees pays." It is, however, an |
| area of the law that is evolving and has been changing since the adoption of the new Civil Code in 1994. The |
| purpose of this article is to examine guarantee agreements as a form of security in a commercial lease and |
| to see how they should be drafted to ensure that they will be enforceable in the Province of Quebec. |
| A guarantee in a commercial lease is a contract by which a third party (either a person or a company) binds |
| itself toward the landlord to perform the obligations of the tenant if the tenant fails to fulfill them. |
| A guarantee can be contracted either for all of the obligations of the tenant (i.e., rent, obligation to insure, |
| obligation to remove leasehold improvements at the end of the term, etc.), and the accessories of the |
| principal obligation such as interest thereon and the cost of action, or for only a part of the principal |
| obligation. In fact, it is not uncommon in commercial leases for guarantors to request that their guarantees |
| be limited either in time or in the amount [i.e., for the first twelve (12) months of the term or to a specific |
| dollar amount or number of months of rental] in the event of the tenant's default. |
| Guarantors, including those who guarantee leases, benefit from certain legal rights stipulated in the Civil |
| Code of Quebec, including the benefit of "discussion" (which is the right to ask the landlord to take an action |
| against the tenant first) and the benefit of "division" (which is the right of a guarantor to ask a landlord to |
| divide its action and to reduce it to the amount of the proportionate share of each guarantor, if there is more |
| than one guarantor). These legal rights are not of public order, and it is possible for a guarantor to renounce |
| these benefits by agreeing to be "solidarily" bound with the debtor or the other guarantors. |
| Landlords usually wish to avoid the inconvenience and uncertainty created by these benefits. Thus, properly |
| drafted guarantees in commercial leases usually provide as follows: |
| "The Guarantor agrees to be solidarily bound with the Tenant for the fulfillment of all of the obligations of the |
| Tenant under this Lease and hereby renounces to and waives the benefit of discussion and division." |
| A guarantor also benefits from the right of "subrogation," which is the right, if the guarantor fulfills the |
| obligation of the tenant, to take an action against the latter for what he has paid in capital, interest and |
| costs, or against the other guarantors, each for its proportionate share of same. The Civil Code provides that |
| where, as a result of the act of the creditor, the guarantor can no longer be usefully subrogated in the |
| creditor's rights, the guarantor is discharged to the extent of the prejudice it has suffered. This provision is of |
| public order; the Civil Code specifically providing that a guarantor may not renounce in advance to the benefit |
| When negotiating and drafting guarantee agreements in a commercial lease, parties should be aware that |
| they are not always easy to enforce in the event of a lease default. The law permits a guarantor to raise |
| several defences, and permits a guarantor to terminate the guarantee in a variety of specific circumstances |
| before an event of default occurs. |
| A Guarantee May Be Terminated After Three Years |
| A new provision of the Civil Code adopted in 1994 provides that, with regard to a guarantee which has been |
| contracted with a view to cover future or indeterminate debts (which is the case in a commercial lease, given |
| that the rent is paid over time), the guarantor may terminate the guarantee after three years, as long as the |
| debt has not become exigible by giving a prior notice to the creditor. Upon termination of the guarantee, the |
| guarantor does, however, remain liable for debts existing at that time, even if those debts are subject to a |
| Those who have guaranteed the obligations of a lease that is not in default should be aware of this provision, |
| and should consider notifying the landlord and the other guarantors in writing that they no longer wish to be a |
| guarantor if they wish to be liberated from their obligation once three years have elapsed since the beginning |
| of the term of the lease. |
| Nothing in the Civil Code indicates that this provision is of public order. From a landlord's point of view, a |
| short and limited guarantee for the long-term obligation of a lease is not satisfactory. It is important, |
| therefore, that a clause be inserted in the lease to ensure that the guarantor waives the benefit of this |
| provision. Some may also want to provide that it will be an event of default of the lease if a guarantor gives |
| notice of termination of the guarantee to the landlord. |
| A Guarantee May Be Terminated upon End of Duties |
| Another new provision of the Civil Code adopted in 1994 provides that a guarantee attached to the |
| performance of special duties is terminated upon cessation of the duties. It is not yet clear what the words |
| "special duties" mean, but we can imagine that if a shareholder, an officer or a director of a company |
| guarantees the obligations of the company or if a spouse guarantees the obligations of the other spouse, |
| they will claim the right to put an end to the guarantee once they cease to occupy those functions. Some |
| have argued that the words "special duties" should be interpreted restrictively and should be limited to the |
| application of guarantees given in the exercise of certain specific legal functions such as those that are |
| required by law to obtain a permit or to be a travel agent, a door-to-door salesman, a tutor or a curator. |
| It is too early since the adoption of the new Civil Code to tell exactly how courts will finally interpret those |
| words. In the meantime, early court decisions appear to be interpreting this provision rather restrictively. |
| Thus, in order to avoid any possible defence or uncertainty, and to be sure that the guarantee will be |
| enforceable against a guarantor throughout the term of the lease, it is important, from a landlord's point of |
| view, to ensure that a clause be inserted in the guarantee agreement which stipulates specifically that the |
| guarantee will not terminate if the guarantor ceases to perform "special duties" or which provides that the |
| guarantor waives the benefit of this provision of the Civil Code. |
| A Guarantee Does Not Extend to the Renewal of a Lease |
| The Civil Code provides that security given by a third person to secure the performance of the obligations of a |
| lease does not extend to a renewed lease. |
| When examining whether or not a guarantee will terminate upon the renewal of the lease, the case law |
| sometimes makes a distinction between a lease that has been renewed in virtue of an option to renew and a |
| lease that has expired and that has been renewed by agreement between the parties. |
| In the 1986 Provincial Court decision of Elysian Inc. v. Société de Gestion S.G.L. Inc., the |
| Court held that two guarantors of a lease were not liberated upon the renewal of a lease, given that they had |
| guaranteed all of the obligations stipulated in the lease, including the obligations of the renewal period set |
| More recent decisions have not made the same distinction. See, e.g., the 1995 Superior Court decision of |
| Jean-Guy Ferland v. Les Cuirs Pako Inc., where the court held that the landlord had been given sufficient |
| verbal notice that there would be no renewal of the lease in the circumstances. It also held that it did not |
| agree with the Elysian decision, stating that the words used in the Civil Code do not make a distinction |
| between tacit or agreed-upon renewal. In addition, the court found that one cannot presume that a guarantor |
| has agreed to be bound by a guarantee with respect to an option to renew period, given that the Civil Code |
| provides that guarantee agreements are to be restrictively interpreted since they are "not presumed" without |
| a clear ("express") stipulation. In another 1995 Superior Court decision of 93877 Canada Inc. v. Peter |
| Drescher, the court found that the option to extend stipulated in the lease had expired, and that the |
| guarantee had, therefore, terminated and, accordingly, the guarantor was not liable for the amount claimed. |
| Finally, in the 1997 Superior Court decision of Le Groupe Jean Coutu (PJC) Inc. v. Dr. Marc Tremblay (on |
| appeal), it was found that the renewal of a lease had not caused a guarantor's obligations to terminate, given |
| that the lease in question specifically provided an option to renew which the guarantor had himself |
| As the case law is not always consistent on this point, it will be interesting to see how the Court of Appeal |
| will finally decide this issue. Given the uncertainty in the case law, it is essential from a landlord's point of |
| view that a guarantee agreement in a commercial lease provide specifically that the guarantee shall extend |
| to any renewal or extension of the lease. |
| Right to Obtain Information |
| Another new provision of the Civil Code adopted in 1994 stipulates that, at the request of a guarantor, a |
| creditor is bound to provide him with any useful information respecting the terms and conditions of the |
| principal obligation and the progress made in its performance. This obligation to provide information upon |
| request is of public order and the parties may not opt out of it in their contract. Parties to a lease should be |
| aware of this provision, and landlords should promptly and accurately reply to any request from a guarantor |
| for information to ensure that it will not be accused of failing to respect this obligation. |
| This provision does not create an obligation for a landlord to inform the guarantor, without a request to do so. |
| The doctrine and case law have found this provision to mean that a guarantor is entitled to receive answers |
| to his questions, but he does not have the right to obtain unsolicited information. However, one should note |
| that if the landlord does take the initiative to inform the guarantor of the status of the tenant's obligations |
| without being asked, he must do so in a complete manner. |
| The case law has developed an obligation on the part of creditors to provide information to guarantors, even |
| when it is not solicited in certain cases. This obligation is based on the principle that if a creditor fails to |
| inform a guarantor of certain facts concerning the principal obligation, this may prejudice the guarantor and |
| cause him to lose the benefit of subrogation, namely, the ability to take an action against the debtor or other |
| guarantors when the guarantor has to fulfil the principal obligation. In such an event, as previously |
| result of an act of the creditor, the guarantor is discharged to the extent of the prejudice that has been |
| caused to the guarantor by the creditor. |
| The case law has found on a number of occasions that the failure to notify a guarantor that a loan is being |
| renewed or that it is in default has caused a prejudice to the guarantor and caused the loss of the benefit of |
| For example, in the 1997 Superior Court decision of Banque Nationale v. Paulette Portelance, the court held |
| that the failure of the mortgagee to inform the mortgagor of the renewals of the loan and of the default of the |
| purchaser to make his mortgage payments and to properly insure was prejudicial to the mortgagor and |
| liberated her from her personal guarantee. |
| Thus, if a landlord wants to ensure that the guarantor of a commercial lease will not raise a defence of not |
| having been sufficiently informed or of having its subrogation rights prejudiced, a policy should be in place to |
| inform guarantors if there are any difficulties with the tenant or if the terms and conditions of the lease are |
| modified, given difficulties with the tenant. It would also be a wise practice to send notices to the guarantors |
| whenever a tenant is in default. From the guarantor's point of view, it is necessary to remain informed of the |
| status of the lease and to seek and obtain all necessary information on a regular basis in order to ensure |
| that one's rights are safeguarded should the tenant default. |
| From a landlord's point of view, a guarantee should be properly drafted to ensure that it will survive the default |
| of the tenant and that a guarantor does not end up liberated from his guarantee as he laughs all the way to |
| the bank. If a guarantee is obtained, time and effort should be spent to ensure that it is properly drafted in |
| order to minimize the risk of its enforceability. |
| Author Company: |
| Martineau Walker |
|
