In May 2022, the Superior Court ruled in Troll Immobilier Inc. v. Landry ¹ case that illustrates the crucial importance of being aware of clauses in deeds of sale relating to commercial leases, especially when lease terminations are contemplated post-closing. The legal consequences can be significant.

In this case, the plaintiff, Mr. Gagnon, president and sole shareholder of Troll Gestionnaire Inc. is a pharmacist by profession. ² Having long dreamed of opening his own pharmacy, he decided to embark on this project by acquiring two contiguous buildings for this purpose. ³ From the outset of discussions concerning the purchase, Mr. Gagnon expressed his wish to terminate all unpublished leases on the buildings concerned, in order to be able to commence his project. ⁴ However, following the sale transaction, one of the tenants refused to vacate the premises, leading to legal proceedings. The tenant’s defense is founded on a subrogation clause inserted in the deed of sale, worded as follows:

The seller declares that, concurrently with the signing of the offer to purchase, it has provided the buyer with a complete copy of all leases and related documents. The Vendor hereby subrogates to the Purchaser all its rights under the said leases from the date hereof. ⁵

Although article 1887 of the Civil Code of Québec ⁶ (hereinafter the “Code”) grants the purchaser of an immovable a right to terminate unpublished leases after a period of 12 months following the date of acquisition, subject to six (6) months’ written notice, the Court deemed that the subrogation clause contained in the deed of sale superseded this right of the purchaser under the Code. This conclusion is based on the fact that, without express stipulation, article 1887 of the Code allows the purchaser to terminate unpublished leases by simple notice. It goes without saying that the rights under article 1887 of the Code apply to the extent that the leases in question are not published by the lessees. Any lease published by notice of lease must be respected by a purchaser for its term. Consequently, the Court decides that the insertion of a subrogation clause demonstrates an intention to maintain all leases in force between the tenants and the buyer. ⁷ Similarly, the Court ruled that when a subrogation clause is included in the deed of sale, the contract transfers the rights as well as the obligations relating to the leases in force. This decision reflects the principle established by the Court of Appeal, which states that “subrogation involves not only rights, but also the obligations to which those same rights are subject”. ⁸ The Court’s interpretation resulted in Mr. Gagnon being unable to terminate the lease, thereby delaying the project for which he had acquired the buildings ⁹ ; the subrogation clause being the only obstacle to opening the pharmacy within the planned timeframe. ¹⁰

This case highlights the importance for buyers to pay particular attention to general clauses in deeds of sale in the context of commercial leases. In particular, where there is an intention to terminate leases, it is essential to rigorously examine the implications of subrogation clauses. Failure to do so could result in significant delays to the project, or even its total failure.

Similarly, the presence of subrogation clauses also implies that the buyer will have conducted a thorough due diligence review of the landlord’s obligations under the leases before making an express assumption, without any conditions or limitations.

In any case, it remains preferable to proceed with the assumption of specific leases rather than using broad terms.

¹ Troll Immobilier inc. v. Landry, 2022 QCCS 1920 (CanLII); this case was appealed, but the appeal was focused on the quantum rather than the interpretation of the subrogation clause, which was confirmed. The details regarding this appeal are therefore omitted from the present article.
² Ibid, par. 5.
³ Ibid, par. 12.
⁴ Ibid, par. 12.
⁵ Ibid, par. 26.
⁶ Code civil du Québec, RLRQ, c. CCQ-1991, art.1887.
⁷ Idem, note 1, par. 31.
⁸ Morris c. Matus Trading Co., AZ-75011114, [1975] C.A. 429, page 430.
⁹ Idem, note 1, par. 34.
¹⁰ Idem, note 1, par. 194.

By Me Audrey Robitaille and student Louisa Kouretas