While exclusive use clauses remain common in leases, they can no
longer be drafted in the form of servitude agreements in
transactions.
In April 2020, in the case of Société
immobilière Duguay Inc. v. 547264 Ontario
Limited1, the Court of Appeal of Quebec
ruled in favour of dismissing a Superior Court
judgment2, thereby granting an application for
declaratory judgment and striking off “exclusive
use” clauses drafted in the form of servitude agreements
restricting the types of business that could be carried out on a
property. As a result, this case puts an end, in commercial
transactions, to the use of servitude agreements to protect certain
exclusive businesses or commercial uses from third parties in a
given location.
Exclusive use clauses have long been included in leasing
agreements, such as those in shopping centers, to define the
permitted uses of the leased property and prohibit or limit one
tenant from carrying on the same type of business or
“principal use” as another tenant. The bottom
line is to protect the market within a property and ensure the
commercial success of all tenants. The Civil Code of Quebec
(C.C.Q.) does not currently define or regulate such clauses
directly; these are usually the result of negotiations between the
landlord and the tenants. Exclusive use clauses have also been used
in commercial real estate transactions, in the form of servitude
agreements. Under Quebec civil law, Article 1177 C.C.Q. defines a
servitude as “a charge imposed on an immovable, the
servient land, in favour of another immovable, the dominant land,
belonging to a different owner.”
The Duguay matter is the most recent case in which the
Quebec courts had to determine whether exclusive use agreements in
commercial real estate transactions were valid in civil law. In
this case, the Respondents owned a shopping centre and various
contiguous or nearby lots, which they leased for commercial
purposes. In 1998 and 2000, the Respondents sold two of those lots
to a third party for the purpose of opening a clothing store. The
notarized deed of sale included a servitude agreement stipulating
that the buildings of the shopping centre owned by the Respondents
could not be used to carry on business activities that would
compete with those of the buyer (i.e. a family clothing store),
while the properties acquired by the buyer could not, for their
part, be used for the principal business activities then taking
place at the Respondents’ shopping centre and on the
neighbouring lots they owned (i.e. a grocery store, drugstore,
movie theatre and department store). In 2012, the two properties
were sold by the initial buyer to the Appellant, with the new deed
of sale providing that both properties remain subject to the
exclusive use servitudes set out in 1998 and 2000. Following this
subsequent sale, the Appellant asked the Superior Court to declare
that the “servitude agreement” was not enforceable and to
order its striking out on the grounds that it did not constitute
servitudes, but rather, personal obligations.
The Court of Appeal found that, since the purpose that the
Respondents claimed to be pursuing through these exclusive use
agreements, namely to promote the commercial diversity of their
shopping centre, served largely to ensure that the businesses in
the shopping centre they owned were not subject to commercial
competition, they could not be construed as constituting valid
servitudes under the C.C.Q. The Court of Appeal found that the
rights flowing from these agreements do not relate to the
Respondents’ real estate property, but rather to the
Respondents’ financial and commercial interests.
As a result, although the exclusive use servitude agreements
could be deemed creative in commercial real estate transactions,
the Court of Appeal of Quebec ruled in favour of the Appellant,
finding that such agreements restricting commercial use do not
constitute valid servitudes, as they do not encumber the dominant
land as required by Article 1177 C.C.Q., but only apply to the
servient land. According to the Court of Appeal, these stipulations
must be characterized as personal obligations binding on the first
buyer and the Respondent but not the Appellant as the subsequent
buyer. Moreover, the Court of Appeal found that the Respondents had
not demonstrated that the Appellant agreed to undertake these
agreements as personal obligations when purchasing the
properties.
Footnotes
1 Société immobilière Duguay inc. v.
547264 Ontario Limited, 2020 QCCA 571
2 Société immobilière Duguay inc. v.
547264 Ontario Limited, 2018 QCCS 2099 (CanLII)
Originally published by August-September 2020 issue of
Canadian Lawyer InHouse magazine
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.
