Canada: Characterization Of A Contract Relating To A Resort Hotel Project Involving A Rental Pool: Lease Or Contract For Services?

Summary

In the recent decision in Station Mont-Tremblant v. Banville-Joncas,¹ the Court of Appeal was asked to characterize a contract between the developer of a resort hotel project and the owners of condominium units. The contract provided that the units were to be made available to a rental pool managed by the developer.

The crux of the debate at the trial level was the unit owner's option of resiliating the contract. That option was different based entirely on whether it was a contract for services or a lease. The issue was therefore whether the contract was a contract for services or a lease.

The trial judge had held that it was a contract for services, and this meant that the unit owners could exercise their unilateral right to resiliate under article 2125 of the Civil Code of Québec ("C.C.Q.").

In a unanimous decision, the Court of Appeal concluded instead that the real cause and object of the contract demonstrated that it was a lease, and thus reversed the trial judgment.  

INTRODUCTION

On June 13, 2017, in Station Mont-Tremblant v. Banville-Joncas,² the Court of Appeal allowed the appeal by Station Mont-Tremblant ("Tremblant") from the judgment of the Superior Court delivered by Justice Michel Déziel on February 3, 2016,³ allowing, in part, the originating application for a declaratory judgment brought by the respondents (the condominium unit owners) (the "Owners").

A contract had been entered into by Tremblant and the condominium unit owners (the "Contract") that contained an agreement entitled [Translation] "Lease" (the "Lease"), to which was appended a document entitled [Translation] "Rental Pool Agreement" (the "Agreement"). The issue was, therefore, whether the Contract was a lease within the meaning of article 1851 C.C.Q. or a contract for services within the meaning of article 2098 C.C.Q.

Justice Déziel concluded that the Contract was a contract for services within the meaning of article 2098 of the Civil Code of Québec ("C.C.Q."), which meant that it could be unilaterally resiliated by the owners under article 2125 C.C.Q.

The issue on appeal was whether the trial judge erred by characterizing the Contract between the parties as a contract for services.  

TRIAL JUDGMENT AND EVIDENCE

At trial, Justice Déziel held that Tremblant had promoted the "Ermitage du Lac" project (the "Project") as an investment in a resort hotel. Tremblant explained to the buyers/investors that the condominium units were offered as investments with a total value of over $23,000,000, each consisting of an apartment and participation in a rental program.

When each purchaser/investor signed the deed of sale, they had to sign, concurrently, a 20‑year lease with an option to renew for ten years, to which the "Rental Pool Agreement" was appended.

The deed of sale included a real and perpetual servitude entitled [Translation] "Rental Pool Service" under which the property could be used only as a resort hotel unit participating in the Rental Pool operated by Tremblant (the "Pool").

The pre-trial examination of three of the owners showed that their understanding of the Contract was that they placed their units under the control of a manager, who would look after everything, and that the Pool was an enterprise engaged in the business of renting out the condominium units. The Tremblant representative testified at the trial that the Project had always been sought after as an investment in a resort hotel, and so it was necessary for Tremblant to retain control of the units in the long term.

The prospectus stated that the investment involved 67 units, [Translation] "each composed of an air-conditioned condominium apartment and the obligation to participate in a rental program for the periods when the unit owner does not occupy their condominium apartment". The document also provided that Tremblant would operate the Pool.

The declaration of co-ownership signed by the parties expressly provided that (i) the Project was to remain a resort hotel and (ii) each unit had to remain a resort hotel accommodation unit participating in the Pool.

The Contract provided for the rental of the unit to Tremblant for rent of $1 plus the share of the net revenue from subletting of the unit by Tremblant, which was to assume several obligations relating to the promotion of the Project, collecting rent, providing concierge and housekeeping services, maintaining insurance policies, and so on. The owners retained the option of reserving their own units for personal occupation.

At trial, Justice Déziel concluded that notwithstanding Tremblant's intention of retaining control over the operation of the Project units as hotel accommodation, the Contract was essentially a management contract. It is important to note that he was of the opinion that the contracts between the parties had to be characterized as contracts of adhesion, and so they had to be interpreted in favour of the owners, in accordance with article 1432 C.C.Q.

The title of the Contract and registration of the Contract in the land registry were not considered to be determining factors. The trial judge found that the "Lease" was merely accessory to the "Rental Pool Agreement" under which Tremblant is [Translation] "a business and a service provider that undertakes to the co‑owners to operate the Rental Pool in return for a price, on the terms and conditions provided" (para. 111 of the trial judgment).  

DECISION OF THE COURT OF APPEAL

In a unanimous decision written by Justice Bernard Godbout, the Court of Appeal reversed the decision at trial and concluded that the Contract is a lease.

The Court of Appeal began by referring to its analysis in Montréal, Maine & Atlantique Canada Cie/Montreal, Maine & Atlantic Canada Co. (M.M.A.)(Arrangement relatif à)⁴ ("MMA"), in which it had determined whether the contract in issue was a lease or a contract for services.

The Court of Appeal reiterated that characterization of contracts is based on a methodology that involves determining the purpose of the parties and the essential prestation that is the crux of the agreement. When a contract includes a number of obligations, [Translation] "the contract may be examined, but its purpose may also be sought, and may be apparent from the intention of the parties when the contract was negotiated,"⁵ in order to identify the nature of the essential prestation.

In this case, the Court of Appeal held that the trial judge had committed a palpable and overriding error by failing to consider certain essential evidence, including the prospectus, the preliminary contract, the declaration of co-ownership, and the titles of ownership, to determine what the real object and cause of the Contract were.

It is of the essence of the obligation that there be a prestation that forms its object and a cause that justifies its existence (art. 1371 C.C.Q.). The cause of a contract is "the reason that determines each of the parties to enter into the contract", and it need not be expressed (art. 1410 C.C.Q.), while the object is "the juridical operation envisaged by the parties at the time of its formation" (art. 1412 C.C.Q.).

In this case, the Court of Appeal concluded that the governing reason (the cause) at the time the Contract was signed was seemingly contradictory. In Tremblant's mind, it was to ensure stability for operating the Project, while in the owners' minds, it was to [Translation] "place their condominium unit under the control of a manager, and nothing more."⁶

However, the issue is not settled by considering only the motivation of one of the parties, or the purpose of one of the parties in signing; rather, it is necessary to [Translation] "identify the real cause or causes of the contract."⁷ In the opinion of the Court of Appeal, the governing cause when the Contract was signed was clear: the operation of a resort hotel.

On the question of the object of the Contract, an analysis of the text of the contract documents signed by the parties showed that the concept of "Rental Pool" was pervasive. Both the preliminary contract and the titles of ownership expressly provided that the owners had to sign a lease with the Rental Pool [Translation] "in order to be included in the rental pool for the project." The 20‑year lease with an option to renew for ten years was the method by which the owners were to fulfil their obligation to place their condominium units in the Pool.

If the owners had simply wanted to place their units under the control of a manager, they could have purchased a condo in any property, and chosen the manager, whereas, in this case, they chose instead to invest in a resort hotel project with a partner, Tremblant.

The Court of Appeal therefore ruled that the object of the Contract was to include the condominium units in a rental pool. The essential prestation that was central to the Contract was the owners' rental of their condominium units to Tremblant, in order for them to be included in the Pool. The Agreement was merely accessory to the Lease that resulted from the Contract.  

CONCLUSION

The reasoning stated by the Court of Appeal in this decision clearly sets out the procedure that must be followed in order to characterize a contract: by determining the purpose intended by the parties and the essential prestation that is central to the agreement. On that point, the Court of Appeal reiterated what it had said in the 2014 MMA decision, but went one step further, by associating its procedure with the concepts of the cause and object of the contract, as set out in articles 1410 and 1412 of the Civil Code of Québec.

It is worth noting that the Court of Appeal is not alone in recently referring to the concepts of the cause and object of a contract to resolve a contractual dispute. The Supreme Court of Canada recently had occasion to address the issue, in Jean Coutu Group (PJC) Inc. v. Canada (Attorney General),⁸ a decision dated December 2016, in which the issue was the true intention of the parties to a contract.

The particular business model consisting of operating a resort hotel project composed of condominium units is likely to raise a number of interesting legal questions in the future. It would therefore be wise to keep an eye on the judgments that may be rendered by our courts concerning this type of real estate project.

Footnotes

1 2017 QCCA 939.

2 2017 QCCA 939.

3 Banville-Joncas v. Station Mont-Tremblant, s.e.c., 2016 QCCS 416 (CanLII).

4 2014 QCCA 2072.

5 Montréal, Maine & Atlantique Canada inc. (Arrangement relatif à), 2014 QCCA 2072, para. 34.

6 Station Mont-Tremblant v. Banville-Joncas, 2017 QCCA 939, para. 65.

7 Id., para. 84.

8 [2016] 2 SCR 670.

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