2019 QCCA 531, 2019 QCCA 531

9135-3086 Québec inc. c. Montebello Residential 2019 QCCA 531 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL N o : 500-09-026867-176 (500-17-066368-112) MINUTES OF THE HEARING DATE : March 1, 2019 CORAM : THE HONOURABLE NICHOLAS KASIRER, J.A. ROBERT M. MAINVILLE, J.A. JOCELYN F. RANCOURT, J.A. APPELLANTS COUNSEL 9135-3086 QUÉBEC INC. EL-AD GROUP (CANADA) INC.

Mtre Matthew Liben (Stikeman Elliott s.e.n.c.r.l., s.r.l.) RESPONDENT COUNSEL THE MONTEBELLO RESIDENTIAL LIMITED PARTNERSHIP Mtre ANTONIO IACOVELLI (Miller Thomson SENCRL / LLP) On appeal from a judgment rendered on June 8, 2017 by the Honourable Justice Chantal Lamarche of the Superior Court, District of Montreal. DESCRIPTION :

Interpretation of a limited partnership agreement - Contribution to a limited partnership – Prescription – Appropriate remedy.

Clerk : Mihary Andrianaivo Courtroom : Antonio-Lamer HEARING 9:30 Continuation of the hearing of February 25, 2019. The presence of the Parties is not required, today. BY THE COURT : Judgment – See page 3.

Mihary Andrianaivo Clerk BY THE COURT JUDGMENT [ 1 ] The appellant, 9135-3086 Québec inc. (“ 9135 ” or the “ Special Partner (9135) ”), appeals from a judgment rendered June 8, 2017 by the Superior Court, District of Montreal (the Honourable Chantal Lamarche), [1] ordering it to pay to the respondent, The Montebello Residential Limited Partnership (the “ Limited Partnership ”), (a) $5,290,060 for the purpose of replacing the outer envelope of an eleven storey residential building on Côte-Saint-Luc Road in Montreal known as the Montebello (the “ Montebello ” or the “ Building ”), with an added adjustment based on an annual inflation rate of 3.2% as of April 23, 2012; and (

b) an additional $609,304 in reimbursement of the costs incurred for emergency repairs carried out to the outer envelope of the penthouse and top floor of the Montebello, with legal interest and the special indemnity calculated as of January 1, 2014. [ 2 ] The trial judge also ordered the Special Partner (9135) to pay to the Limited Partnership an additional amount of $461,374 in solidum with El-Ad Group (Canada) Inc. (“ El-Ad Group ”) in reimbursement for the costs of repairing various other deficiencies related to the Building. This award is not appealed.

CONTEXT [ 3 ] No immovable in the urban agglomeration of Montreal comprising at least one dwelling may be converted into divided co- ownership, unless an exception is granted by the council of the municipality in whose territory the immovable is situated [2] .

In such an event, the owner of the immovable must send each tenant a prior written notice of intent. [3] From the date of that notice and until such time as a majority of voting rights in the general meeting of co-owners are held by occupant co-owners, no work may be performed on the immoveable without the authorization of the government rental board, except maintenance work and urgent and necessary repairs. [4] [ 4 ] In the rare event the conversion is allowed, the owner of the immovable must, before the first sale of each dwelling, “ provide the prospective purchaser with an expert’s report and an information circular ” containing, among other information, “ an appraisal of the wear of the common parts of the immovable and of their conformity with structural solidity, sanitation and safety standards ”, “ an indication of major repairs likely to be needed within five years and an estimate of the cost thereof ”, and “ a general appraisal of the compliance of the building with safety and fire standards ”. [5] Purchasers of the dwellings are entitled to a reduction of their obligations if the expert’s report, the information circular or the deed of sale contains false, misleading or incomplete information on a substantial element or if no report or circular is provided. [6]

[ 5 ] As found by the trial judge, the scheme put together by El-Ad and 9135 with respect to the Montebello sidestepped the moratorium with respect to the conversion of a rental apartment building into divided co-ownership. [7] [ 6 ] In 2004, 9135 acquired the Montebello for $10,550,000. The Building was erected in 1961 and comprises 100 residential units, which were rented to individual tenants at the time of the acquisition.

The El-Ad Group, acting through 9135, planned to renovate and convert it, by means of an elaborate scheme, into a project that would closely resemble a residential condominium. [ 7 ] The Limited Partnership was formed in November, 2007 while the Montebello was undergoing extensive renovations.

Its stated purposes were to acquire and hold title to the Montebello and to lease the residential units therein to third parties under long-term leases, with a view of pursuing the eventual conversion of the Building into divided co-ownership on behalf of the long-term tenants. [ 8 ] 9135, which is controlled by the El-Ad Group, is the special partner of the Limited Partnership. The Limited Partnership acts through its general partner, The Montebello Residential Inc. (the “ General Partner ”).

Both the Special Partner (9135) and the General Partner signed the limited partnership agreement constituting the Limited Partnership. [ 9 ] The limited partnership agreement, dated November 22, 2007, provides for a capital contribution by the Special Partner (9135) of $33,000,000 in kind by way of the assignment and transfer of the Building to the Limited Partnership. As a result, on November 27, 2007, a deed of sale of the Building for $1.00 was entered into between the Special Partner (9135) and the Limited Partnership.

That deed provides that the agreed value of the Building for the purposes of transfer duties is $33,000,000. [ 10 ] Third parties interested in acquiring an interest in the project (the “ Unit Holders ”), were required to buy shares in the General Partner for a nominal price. The shares carried with them a right to occupy a residential unit in the Montebello. The shares allowed the Unit Holders to vote for the members of the board of directors of the General Partner.

In this manner, the effective control of the General Partner and of the Limited Partnership would, with time, be transferred to the Unit Holders. [ 11 ] Concurrently with the acquisition of the shares, the Unit Holders and the Limited Partnership would enter into three successive 100-year leases with respect to a specific residential unit in the Montebello. [8] Each Unit Holder would then pay in advance the predetermined rental amounts under the long-term leases (the “ Prepaid Rent ”).

The amount of Prepaid Rent varied in accordance with the characteristics of each residential unit and was essentially determined in relation to its market value had it been converted into a divided co-ownership property. The Prepaid Rent was almost immediately funnelled to the Special Partner (9135), which retained a 99.9% interest in each residential unit until its first attribution to a Unit Holder.

The final amounts collected in Prepaid Rent (which the parties refer to as “sales prices”) from all the residential units was $32,646,857. [9] [ 12 ] Under the long-term leases, each Unit Holder was required to pay annual additional rent similar to condo fees and equal to a proportionate share of the real estate taxes, operating costs and capital expenses incurred with respect to the Montebello. [ 13 ] The project encountered difficulties. In June 2011, the Limited Partnership sued its Special Partner (9135) for $2,500,000 as a result of deficiencies in the Building.

The amount was claimed in fulfillment of the capital contribution of 9135 as special partner and also claimed under the vendor’s warranty. The claim was modified and increased over time to take into account further deficiencies affecting the Building’s outer envelope and for expenses incurred with respect to emergency work.

In its final form, the total claim amounted to $7,810,845 (not counting adjustments and interests) comprising (a) $5,296,369 for the cost of replacing the outer envelope of the Montebello; (b) $609,304 for the cost of emergency work that was executed in the summer and fall of 2012 to repair the outer envelope of the penthouse and top floor of the Building; and (c) $1,905,172 for the cost of repairing various other deficiencies. [10] [ 14 ] The Special Partner (9135) denied liability and counter-claimed for an amount of $3,954,806 with respect to (

a) repair work which it carried out on the roof of the Building and which it deemed should have been undertaken by the Limited Partnership ($125,252); (

b) losses with respect to alleged initial price reductions in the Prepaid Rent agreed with new Unit Holders as the result of the negative publicity ensuing from the proceedings ($273,819); and (

c) additional losses resulting from alleged additional price reductions in the Prepaid Rent following a final bulk sale of the remaining 35 “unsold” residential units ($3,555,735). JUDGMENT OF THE SUPERIOR COURT [ 15 ] The trial judge concluded that the Special Partner (9135) had failed to fulfil its contribution to the Limited Partnership.

She found that the contribution which was required by the partnership agreement was that of “ a renovated, defect free, building ”. [11] What had in fact been contributed was a deficient and partially renovated building. [12] The thrust of the trial judge’s reasoning is set out in the following excerpts of her reasons: [13] [59] The evidence shows that the building representing 9135’s contribution is not the Montebello in any state or condition.

It is the Montebello renovated. [60] 9135 acquired the Montebello for $10.5M in 2004 and transferred it to [the Limited Partnership] three years later to fulfill its contribution in kind of $33M. The difference in the value of the Montebello is not the result of a real estate market increase in three years. [61] All parties acknowledged that 9135 was in the course of renovating the Montebello in 2007. [62] Mr.

Gross[ [14] ] testified that when he moved-in, on January 2008, the renovations were not completed yet. [63] Therefore, when the [limited partnership agreement] was signed, renovation work was still in progress. [64] If Defendants’ argument prevails, it would mean that 9135 had no obligation to complete the renovations and could have delivered the building as its contribution towards [the Limited Partnership’s] common stock in the state it was in 2007. This makes no sense. In 2007, Mr. Gross’ unit was not even ready for him to move in.

[65] The fact that Defendants continued to renovate the Montebello and undertook to repair some deficiencies well after the date of its transfer to Plaintiff on November 27, 2007 proves that 9135’s contribution consisted in the Montebello fully renovated and free of any deficiencies resulting from the said renovations. [66] Furthermore, an evaluation of the Montebello was done by Altus Group (“ Altus ”) at EL-AD Group’s request to determine its value. The figure of $33M mentioned in the [limited partnership agreement] comes from that appraisal conducted in September 2007.

Altus determined a prospective market value of the Montebello at $35 M after conversion of the building to CO-OP ownership. According to information provided by EL-AD Group to Altus, “ a complete retrofit and renovation program was started in 2005. […] the investment for the property’s upgrade will sum up to approximately $19,000,000 by the end of 2007 ”.

To assess the value of the building at $35M, Altus assumed that the renovations would be completed. (…) [70] Even if Montebello was to be a mid-range product, it does not mean that the product would have deficiencies such as, leaking roofs over penthouses and mechanical room, an outer envelope that lets water penetrate inside the units, bricks falling off, ventilation in the chiller room not in compliance with the standards of the Régie du bâtiment du Québec and shower sills angles allowing water to run out and seep under the shower floor. [71] Whether, the Montebello was to be a mid-range or a luxurious product, the deficiencies involved in the present case are not related to the degree of luxury.

The deficiencies illustrates renovations badly executed or not executed at all. [72] The Court concludes that insofar as Montebello constituted the Defendants’ contribution to the partnership, it had to be renovated. 9135 had to complete the contemplated renovations and could not leave the building either unfinished or suffering from deficiencies. (References omitted) [ 16 ] On a subsidiary and alternative basis, the trial judge also concluded that the Special Partner (9135) incurred liability under the legal warranty of the vendor against hidden defects. [15] That warranty extends to a special partner’s contribution to a limited partnership by the combined operation of articles 1726 , 2199 and 2249 of the Civil Code of Quebec (“ C.C.Q . ”) .

She also found that the Special Partner (9135) was bound by a contractual warranty which flowed from the representations it had made with respect to the condition of the Building. [16] She further found that 9135 was a professional seller which had a legal obligation to divulge all the deficiencies of the Building, failing which such deficiencies were presumed to be hidden from the Limited Partnership. [17] [ 17 ] The trial judge rejected the defense of prescription raised by the Special Partner (9135).

She found, as a matter of fact, that corrective works with respect to the deficiencies were carried out until the summer of 2010, when all work stopped. Since the Special Partner (9135)’s capital contribution included the ongoing renovations to the Building, it was only when these renovations stopped that the prescription period could begin to be opposed to the Limited Partnership. [18] The initial proceedings, filed in June 2011, were thus well within the prescription period provided by

article 2925 C.C.Q . [ 18 ] The trial judge further concluded that as long as the Special Partner (9135) controlled the board of directors of the General Partner, it was impossible for the Limited Partnership to act against it. [19] She found that this control was relinquished sometime after August 2008, following a sufficient number of “sales” to third party Unit Holders. [20] [ 19 ] Finally, on the question of prescription, the trial judge also concluded that the real extent of the problems affecting the outer envelope of the Building only became apparent in 2012, after the institution of the initial proceedings, and could not therefore be time- barred. [21] [ 20 ] Regarding the value of the claim with respect to the outer envelope of the Building, the trial judge had to decide between various options concerning the scope of the corrective work.

Each option was supported by expert testimony and involved substantially different costs.

The trial judge rejected the options proposed by 9135’s experts and decided in favour of “Option 1” proposed by the experts acting for the Limited Partnership. [22] That option provides for the complete reconstruction of the Building’s exterior brick wall, for repairs to the defects in the back-up wall and improvements to its seismic resistance, repair works to the window sills and, finally, the installation of a waterproof membrane. [23] This would ensure the aesthetic uniformity of the Montebello and add a 75-year lifespan to the Building, which would be brought to 2010 construction standards. [24] [ 21 ] The total costs of implementing that option were estimated at $5,900,000, including the amount already expended by the Limited Partnership for the emergency work carried out in 2012, leaving an amount of $5,290,060 to complete the replacement of the outer envelope. [25] [ 22 ] She indexed this amount of $5,290,060 by a construction inflation rate of 3.2% per year, starting April 23, 2012, the date the Limited Partnerships sent a demand letter requesting the Special Partner (9135) to carry out work with respect to the envelope. [26] [ 23 ] The trial judge also allowed the Limited Partnership’s claim in reimbursement of emergency work carried out in 2012 on the outer envelope of the penthouse and the roof for an amount of $609,304. [ 24 ] She further allowed, in part, the Limited Partnership’s claims with respect to other miscellaneous deficiencies and ordered the payment of a total amount of $461,374 for these purposes. [27] She found that El-Ad had undertaken to carry out these corrective works and was therefore liable in solidum for this amount. [28] The trial judge, however, declined to extend El-Ad’s liability further to the outer envelope of the Building. [29] [ 25 ] Finally, the trial judge dismissed 9135’s claim for the cost of the repairs to the roof and its alleged losses with respect to price reductions in the Prepaid Rent. [30]

ISSUES IN APPEAL [26] As previously noted, the award of $5,290,060 for the replacement of the outer envelope of the Montebello and the award of$609,304 with respect to related emergency work are under appeal. 9135 raises four issues in appealing these awards, which it describesas follows: (

a) Did the trial judge commit a palpable and overriding error in concluding that 9135 was bound by an express or implied contractualobligation to replace or substantially renovate the Building’s envelope? (

b) If not, did she err in mixed fact and law in failing to rule that any right of action based on such an obligation was prescribed as of thedate the proceedings were commenced? (

c) If not, did she commit an error of law in concluding that as a professional vendor, 9135 had an obligation to divulge all deficiencies,otherwise those deficiencies were considered hidden, without limiting such obligation to defects as defined for the purposes of thevendor’s legal warranty against latent defects as well as to defects of which the vendor had knowledge? (

d) If 9135’s obligation to deliver a new or substantially renovated envelope for the Building indeed exists, did the trial judge commit apalpable and overriding error in concluding that damages should be awarded on the basis of the most expensive option available tosatisfy that obligation? ANALYSIS First Issue: Did the trial judge commit a palpable and overriding error in concluding that 9135 was bound by an express orimplied contractual obligation to replace or substantially renovate the Building’s envelope? [27] 9135 proposes a literal and narrow

interpretation of its undertakings.

In essence, it submits that since no specific contractuallanguage in either the deed of sale or the limited partnership agreement provides for the repair or replacement of the outer envelope ofthe Building, the trial judge erred in reading such an undertaking into these agreements in the absence of a finding as to the ambiguity ofthe contractual terms. [28] Moreover, 9135 adds that should such an ambiguity be found to exist, then there was absolutely no evidence supporting the trialjudge’s conclusions with respect to the outer envelope, particularly when account is taken of the “entire agreement clause” set out insection 12.2 of the limited partnership agreement.

That clause provides that the agreement “contains the entire understanding betweenthe Partners” and that there “are no representations, warranties, agreements, arrangements or understandings, oral or written, betweenthe Partners relating to the subject of this Agreement which are not fully expressed herein”.[31] [29] These submissions on behalf of 9135 do not consider the overall context in which the limited partnership agreement was enteredinto and ignore the factual conclusions of the trial judge, as well as the abundant evidence supporting those conclusions. [30] The

interpretation of a contract is a question of mixed fact and law.[32] The

interpretation of the limited partnership agreementby the trial judge in this case is therefore to be reviewed on appeal in accordance with the standard of “palpable and overriding error”,unless the judge clearly made an error in identifying the applicable rules of construction, their scope or their meaning, in which case anerror of law may have been committed.[33] Moreover, the findings of a trial judge with respect to whether a contractual provision is clearor ambiguous are also entitled to deference on appeal.[34] The Supreme Court of Canada recently reiterated these principles in Uniprixinc. v. Gestion Gosselin et Bérubé inc.: [35] [41] Indeed, contractual

interpretation involves the consideration of a multitude of facts. It is a question of mixed fact and law inrespect of which courts of appeal may not intervene in the absence of a palpable and overriding error (Larouche v. Néron, 2016 QCCA692, at para. 5 ; Lamco II s.e.c. v. Québec (Ville), 2016 QCCA 757, at para. 2 ; see also Sattva Capital Corp. v. CrestonMoly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 47-50).

The same is true for [translation] “[d]etermining whether a contract isclear or ambiguous”, which “is a discretionary process” in respect of which “a court of appeal must show restraint and deference”(Immeubles Régime XV inc. v.

Indigo Books & Music Inc., 2012 QCCA 239, at paras. 9-10 ; see also Éolectric, at para. 16;Baudouin and Jobin, at No. 413; Lluelles and Moore, at No. 1579). [42] The characterization of a contract can also be considered to be a question of mixed fact and law in certain circumstances.Although certain authors see it as a pure question of law (Gendron, at pp. 16-17; Lluelles and Moore, at No. 1738), the fact remains thatthe characterization of a contract can depend on evidence of the parties’ common intention as regards its nature and its content.

When itis necessary to consider evidence of that intention, the Quebec Court of Appeal rightly recognizes that, in such cases, the characterizationof the contract is a question of mixed fact and law (MMA, at para. 20; Banville-Joncas, at paras. 63-64; Cie canadienne d’assurancesgénérales Lombard v.

Promutuel Portneuf-Champlain, société mutuelle d’assurances générales, 2016 QCCA 1903, at para. 17). [31] There is no substance to the submission that the trial judge would have somehow erred in concluding as she did because shewould have failed to specifically state in her reasons that the terms of the limited partnership agreement were ambiguous. The trial judgemade no error in law in interpreting the contract as she did. She was of the view that the contract was unclear as to what 9135 had tocontribute to fulfil its undertaking to the Limited Partnership.

To decide the matter, she properly considered extrinsic evidence of theparties’ intention. [32] The undertaking of 9135 was to contribute $33,000,000 in kind to the Limited Partnership. The question which was before thetrial judge was whether 9135 had fulfilled that undertaking. The parties diverging views on how to answer that question brought to lightthe inherent ambiguity in the words “[t]he initial Capital Contribution shall be […] the sum of $33,000,000 to be contributed by theSpecial Partner in kind by way of the assignment and transfer [of the Building]” found in the limited partnership agreement.

On the onehand, 9135 argued that its obligation was limited to the assignment and transfer of the Building as it then was, while the LimitedPartnership contended that a building worth $33,000,000 had to be contributed, that is to say a fully-renovated and upgraded building.

[ 33 ] The trial judge resolved the ambiguity by concluding that, in order to meet its undertaking, 9135’s was contractually bound to provide a renovated and defect-free building. For the reasons set out below, she committed no palpable and overriding error in so finding. [ 34 ] The further submission based on the “entire agreement clause” must also be rejected. Clause 12.2 of the limited partnership agreement cannot be raised to shield 9135 from fulfilling its undertaking to contribute $33,000,000 in kind to the Limited Partnership. That undertaking is specifically set out in the limited partnership agreement.

The questions before the trial judge were not whether 9135 had to fulfil undertakings which were not found in the contractual language. Rather, the questions to be answered were the extent of 9135’s capital contribution under the limited partnership agreement and whether it had fulfilled that contribution.

Clause 12.2 of the limited partnership agreement had no bearing whatsoever on those questions. [ 35 ] In interpreting an agreement and discerning the intention of the parties, it is appropriate to take into account the overall circumstances in which it was entered into as well as its intended purpose, as provided by

article 1426 C.C.Q . In this case, the purposes of the limited partnership agreement and the circumstances in which it had to be understood and interpreted were specifically set out in clause 2.6 of the limited partnership agreement: [36] 2.6 Purposes and Scope Subject to the provisions of this Agreement, the sole and exclusive purposes of the Partnership are (

i) acquiring and holding title to the Property; (ii) leasing Apartments and Spaces in the Property including pursuant to Leases and transferring ownership of Apartments and Spaces in accordance with the terms of such Leases; (iii) pursuing conversion of the Property into divided co-ownership for and on behalf of tenants; (iv) operating, managing, maintaining, using the Property and marketing and disposing of Apartments and Spaces comprising the Property in its business activities; (

v) offering services to tenants under Leases (i.e. cleaning services, valet services, carwash services, interior maintenance and repairs, security and supervision, front desk/concierge services, etc.); and (vi) doing any and all other acts and things which may be incidental or necessary-to carry on the business of the Partnership as contemplated in sub- paragraphs (

i) to (

v) inclusive of this

Section 2.6. [ 36 ] The evidence in the record abundantly confirms these purposes and circumstances.

As an example, Exhibit P-32 [37] , a document prepared by the El-Ad Group and provided to prospective “buyers” of the residential units of the Montebello, explains how the overall scheme was to work: INTRODUCTION THE MONTEBELLO “CO-OP’’ As a first step to the establishment of The Montebello residential ‘’co-op’’ structure, The Montebello will be transferred to The Montebello Residential Limited Partnership (the ‘’ Partnership ’’), a partnership to be hereinafter constituted, which will have, as its sole general partner, The Montebello Residential Inc. (the ‘ ’General Partner ’’), and, as its sole limited partner a member of the El-Ad Group of Companies.

The transfer of The Montebello will be made free and clear of all mortgages. Each person wishing to acquire an interest in a specific apartment, a parking space and a storage space will sign with the Partnership a series of three (3) successive long-term (100 years each) leases in exchange for payment to the Partnership at closing of a lump sum amount. In addition, each person will subscribe for shares in the capital stock of the General Partner for nominal consideration.

Each such long-term lease will provide for the obligation of each person to pay, in advance, on a quarterly basis, his or her proportionate share of operating expenses, capital expenses and real estate taxes allocated to each apartment. The operation of the co-op will be carried out by the General Partner in its quality as the general partner of the Partnership.

The shareholders of the General Partner are the individual apartment residents who have adhered to the unanimous shareholders’ agreement providing for the mechanism for the approval of various matters including approval of annual budgets and capital expenditures. The El- Ad Group of Companies is not a shareholder of the General Partner but has various continuing approval rights, acting reasonably, for a period of five (5) years, including approval of the annual budgets and capital or major expenditures.

The current manager of The Montebello, the Cogir Group, will sign a property management agreement for a period of five (5) years in order to manage the property. Each person interested in proceeding to acquire the said interest in an apartment will sign an offer to lease in the form included in the binder. A deposit of 5 % of the lump sum payment will be required to be made, which deposit will remain in trust with El-Ad’s attorneys until closing. Needless to say, the foregoing is a rather brief

summary of the documentation. We have included in this binder a copy of the draft unanimous shareholders’ agreement and limited partnership agreement as well as drafts of the offer, the long-term lease, the subscription agreement, the pledge of shares in favour of the General Partner and the income tax opinion to be delivered to each acquirer by the law firm Stikeman Elliott LLP. We would be pleased to respond to any inquiries concerning the information included in this binder.

[ 37 ] The trial judge consequently appropriately interpreted the limited partnership agreement by taking into account the overall scheme it was meant to facilitate. Read in context, the

interpretation of that agreement by the trial judge was both reasonable and logical. [ 38 ] Indeed, the limited partnership agreement sets out that the contribution of the Special Partner (9135) to the Limited Partnership is that of a building worth $33,000,000: [38] 4.2 Capital Contributions The initial Capital Contributions shall be the sum of $1,000 to be contributed by the General Partner and the sum of $33,000,000 to be contributed by the Special Partner in kind by way of the assignment and transfer to be Partnership of all of the right, title and interest of the Special Partner in the Property as contemplated in

Section 2.5 [the Montebello]. [ 39 ] If the value of a capital contribution in kind is in fact less than what was agreed to, then the Limited Partnership may be entitled to compensation. [39] As noted by authors Antaki and Bouchard: [40] 411. Fiction et surévaluation – De même apparaît-il important de ne pas confondre le caractère fictif d'un apport avec sa surévaluation possible. La fiction de l'apport est relative à l'inexistence d'une condition essentielle à la formation du contrat de société, alors que dans la surévaluation, il y a augmentation fictive de la valeur réelle de l'apport .

La surévaluation d'un apport ne donnera donc pas ouverture à l'action en nullité, puisque l'obligation de l'associé – aussi minime soit-elle – est effectuée. Elle pourra cependant se voir sanctionnée par des dommages-intérêts . (…) 418. Évaluation de l'apport en nature – L'évaluation de l'apport en nature doit se faire avec le plus grand soin au moment où il est consenti à la société. En effet, une surévaluation des apports en nature pourrait compromettre l'équilibre entre les associés .

Par ailleurs, une augmentation fictive du capital social – dans le but, par exemple, d'obtenir plus facilement du crédit – pourrait s'avérer dangereuse pour les créanciers de la société, qui seraient susceptibles de voir leur gage s'évaporer en un rien de temps. (Emphasis added) [ 40 ] In this case, the Montebello had been purchased three years earlier for less than one third of the amount set out in the limited partnership agreement.

The trial judge conclusively found, as a matter of fact, that this threefold increase in value in that short time was not the result of a sudden upswing in the market, but rather the result of the commitment by 9135 to substantially renovate and upgrade the Building so that it could meet the intended purposes of the partnership, namely the long-term leasing of the residential units with a view of eventually converting these into divided co-ownership.

That factual conclusion was amply supported by the evidence. [ 41 ] The Montebello had been appraised by qualified professionals, the Groupe Altus, a few weeks before the limited partnership agreement was entered into in 2007. That appraisal set its market value at between $32,800,000 and $35,000,000 on the understanding that it was undergoing a “ complete retrofit and renovation program ” [41] and on the assumption that it was “ structurally sound ” [42] and “ in good condition ”. [43] The appraisers also stated that their assumption was that “ the investment in the property’s upgrade will sum up

to approximately $19,000,000 ” based on “ the available information provided by the El-Ad Group (Canada) Inc. ”. [44] It was admitted at trial that this appraisal report by the Groupe Altus was the basis relied upon to determine the value of $33,000,000 contribution set out in the limited partnership agreement. [45] This was also reflected in the public representations made about the Montebello, including representations that the purpose of the upgrade was to bring the Building to 2010 while preserving its 1960’s character, [46] so as to provide “ luxurious apartments ”. [47] [ 42 ] It merits noting that, at trial, 9135 did not submit evidence as to the total expenses actually incurred in renovating the Montebello. [ 43 ] Contrary to the submissions made on behalf of the appellant, the trial judge did not conclude that the obligation of the Special Partner (9135) was to replace the envelope of the Building.

Rather, the trial judge’s conclusion was that 9135 committed to provide a capital contribution to the Limited Partnership consisting in a building, including an exterior envelope, that was sufficiently fit for the use for which it was intended, that is leasing the residential units on a long-term basis (100-year leases) pending the eventual conversion into divided co-ownership.

Since the Limited Partnership was under an obligation, as the lessor, to deliver the residential units to the Unit Holders “ in a good state of repair in all respects […] throughout the term of the lease ”, [48] it was reasonable for the trial judge to conclude that 9135’s undertaking under the limited partnership agreement was to contribute a building that was fit for that purpose. [ 44 ] As aptly noted by the trial judge, “ a building that has been represented and sold as having undergone substantial renovations from 2005 to well after 2008, should not need to have its outer envelope redone five years after being transferred. ” [49] That is a reasonable conclusion which is fully supported by the evidence.

The obligation of 9135 under the limited partnership agreement was to provide a renovated and defect-free Building which could be reasonably fit for its intended use, including an outer envelope which reasonably met that purpose.

Second Issue: Did the trial judge err in mixed fact and law in failing to rule that any right of action based on that obligation was prescribed as of the date the proceedings were commenced? [ 45 ] 9135 submits that when the limited partnership agreement and the deed of sale were executed in November 2007, it was then apparent that the outer envelope of the Building was neither new nor renovated.

Any claim related to an outstanding obligation to replace or substantially renovate that envelope would therefore have been time barred when the court proceedings were first initiated in June 2011 or when they were subsequently amended to mention the deficiencies with respect to the outer envelope.

The trial judge would have thus erred in finding that the ongoing renovation and improvement works carried out until 2010 had the effect of extending the period from which the prescription was to be calculated. [ 46 ] 9135 further submits that the trial judge erred in law by also concluding that the Limited Partnership was not able to act with respect to the Building’s deficiencies until August 2008, when control of the General Partner’s board of directors was secured by the Unit Holders. [ 47 ] It is not necessary to decide if the repairs and renovations regarding other aspects of the Building carried out from 2007 to 2010 had the result of delaying the limitation period.

Nor is it necessary to decide if the lack of effective control of the General Partner by the Unit Holders until August 2008 constituted an impossibility to act for the Limited Partnership suspending the prescription period under

article 2904 C.C.Q . [ 48 ] Indeed, the findings of the trial judge pertinent to this appeal were that (

a) as discussed above, the Special Partner (9135)’s undertaking was to provide to the Limited Partnership a renovated and defect-free building which would be fit for its intended use, including an outer envelope which met that purpose [50] ; and that (b) “ the deficiencies concerning the outer envelope have been discovered after the institution of proceedings and are not prescribed ” and that “ [t]he real extent of the problems affecting the outer envelope were only discovered in 2012 .” [51] [ 49 ] The factual findings of the trial judge are therefore that the real extent of the failure of the Special Partner (9135) to meet its undertaking to provide the Limited Partnership with a renovated and defect-free Building, including an outer envelope fit for the Building’s intended use, only became apparent in 2012, when the court proceedings with respect to other deficiencies had already been instituted.

The amendments to those proceedings adding the claims related to the emergency work and the replacement of the outer envelope were therefore made well within any applicable limitation period. [ 50 ] The Special Partner (9135) has not pointed to any persuasive evidence in the record which would allow this Court to set aside the trial judge’s factual finding that the real extent of the problems affecting the outer envelope was only discovered in 2012. As a result, the Special Partner (9135)’s appeal on the second issue dealing with prescription must fail.

Third Issue: Did the trial judge commit an error of law in concluding that as a professional vendor, 9135 had an obligation to divulge all deficiencies, otherwise those deficiencies were considered hidden, without limiting such obligation to defects as defined for the purposes of the vendor’s legal warranty against latent defects as well as to defects of which the vendor had knowledge? [ 51 ] The trial judge reached the following conclusions with respect to the status of 9135 as a professional vendor: [52] [112] There is no evidence that was made that Plaintiff knew about the deficiencies.

However the evidence shows that 9135 was aware of them. 9135’s activities are described in the CIDREQ as “ agence ou courtier immobilier, détention d’immeubles, gestion immobilière ” . It is therefore considered a professional vendor.

As a professional vendor, it had the obligation to divulge all deficiencies, otherwise those deficiencies are considered hidden. [113] As 9135 was renovating the Montebello, it knew the extent of the renovations, of the deficiencies affecting the building as well as the fact that some of the work done was only superficial, for example, the work done on the outer envelope. [114] According to expert Lemaire’s uncontradicted testimony, the dilapidated state of the brick wall had to be noticed when Defendants executed the said superficial repair work.

[115] There is no evidence that 9135 informed Plaintiff of these problems. [ 52 ] 9135 recognizes that there “ is no indication that this finding was anything but an obiter dictum, and no clear link between this conclusion and the sums awarded to replace the building envelope .” [53] Nevertheless, “ to the extent this conclusion is deemed relevant for the purposes of the present appeal ”, 9135 submits that the trial judge committed an error in law in concluding as she did on this matter. [54] [ 53 ] The Limited Partnership also acknowledges that the resolution of this issue is not required for the purpose of deciding the appeal. [55] [ 54 ] There is therefore no need to decide this issue.

Fourth Issue: Did the trial judge commit a palpable and overriding error in the determination of the damages awarded to satisfy 9135’s obligation? [ 55 ] 9135 submits that “Option 3” presented by its experts would completely satisfy the obligation the trial judge held it owed to the Limited Partnership.

That option was to “ renew all steel angles and secure 100% of the exterior walls with stainless steel connectors ”. [56] The costs of implementing that option were estimated at $2,548,500. [ 56 ] The trial judge recognized that Option 3 “ would guarantee that the brick wall is properly attached to the back-up wall ”. [57] However, she discarded the option because (

a) it “ would not entirely fix the problems with the back-up wall and more particularly its deterioration and the filling of all its joints (because it would not be all exposed as it would be in option 1 of Plaintiff’s expert) ”, [58] and (

b) it would not “ bring the outer envelope to 2010 construction standards ”. [59] [ 57 ] As a first point, 9135 submits that the trial judge erred in concluding that Option 3 would not entirely fix the deterioration of the back-up wall, more particularly by failing to provide for the filling of all the numerous gaps in that wall. This was an important issue since the evidence conclusively demonstrated that many of the joints in the back-up wall had not been filled and that there were therefore numerous voids in that wall.

In order to contradict the trial judge’s conclusion on this point, 9135 refers in its appeal brief to that part of the testimony of expert Van Dusen where he states that the “ joint corresponds to where we are removing these angles or are maintaining them and that would allow us to fill them .” [60] However, that testimony related to a single joint identified by Van Dusen in an unnumbered photograph. 9135 asks this Court to infer that filling-in joints at some locations on the back-up wall implies that Option 3 would allow the filling-in of all the numerous voids in the wall. [ 58 ] Such an inference is unreasonable, particularly in light of the trial judge’s factual finding that Van Dusen’s assessment of the extent of the deterioration of the Building’s envelope “ is incomplete and very limited, when compared to the observations made by Plaintiff’s experts ”. [61] Moreover, the trial judge also found that “ expert Van Dusen’s testimony raised doubt as to his capacity to provide a fair, non-partisan and objective assistance to the Court ”. [62] [ 59 ] In any event, expert Van Dusen confirmed in cross-examination that under the options he proposed, most of the voids in the wall would not be filled [63] : Q.

This is one that you happened to see in the photograph that was included in your report, but you say that you observed other areas where the joints, either vertical or horizontal, were not filled in and your view is that it would be prudent to address those, to fill them in properly, correct? R. While you're doing these kinds of programs, yes, it's something that is routinely done, you fill in those joints. Q. But the only way you could really know whether those joints are filled in or not properly is by removal of the brick, correct? R. Obviously, you can only access them by removing the brick, yes. Q.

So, if I were doing targeted things, for instance, as... most of your two options or three options, I understand, is targeted and if you were doing targeted repairs on the basis of what you see on the brick or the lintels, the steel angles, you wouldn't be able to observe any other areas of structural horizontal or vertical joints not being filled in, correct? R. It's not that the structural joints aren't filled in, there are voids. Q. There are voids? R. The mason... but they are not full voids, there's other mortar. So, we do not care that there are some voids.

This one joint that we're talking about here is absolutely a critical joint, it is necessary to connect the block to the concrete. So, yes, we would focus on that joint and we would be making sure, as part of the overall program, that that (sic) was also confirmed and renewed as is appropriate. Q. But with your number 1, it's pretty targeted to the area around the steel angles, correct? And it's a limited surface area of brick that would be removed, you would look at the steel angle and you would look at the header bricks to see their condition and you would target that, correct?

In no way, if you would implement option number 1 in your report, would you be able to really see any other voids in horizontal or vertical joints in spots that weren't in those targeted areas, correct? R. That is correct, but we are not concerned about those other areas, we are only concerned or would only be focused on assuring that we have strength here. Furthermore, I also come back... the connection here is certainly something that we would focus on, but recognize that it is the entire wall that is firmly connected here that is providing them connection.

So, it is not... again, this is something that we would be looking at and it would be improving as part of the renewal of these angles, even though it has performed well for 50-some years now, I believe, 57, I guess. We would still… we would, as part of our program, take action to improve that so that we would have absolute confidence that there are no voids there.

Q. So, you are not necessarily concerned with the voids that aren't in those targeted areas, from a structural perspective, correct, that's what I understand? R. Correct. [ 60 ] As a second point, 9135 adds that there was no need to bring the outer envelope of the Building to 2010 construction standards.

That submission fails to take into account the trial judge’s conclusion that 9135’s capital contribution to the Limited Partnership “ was not limited to the correction of deficiencies but also to renovate and improve the building ”. [64] Furthermore, the trial judge accepted the testimony of the experts acting for the Limited Partnership “ that the envelope was at the end of its useful life when they inspected it in the spring of 2012 ”. [65] She further concluded, as a matter of fact, that the outer envelope was affected by serious structural deficiencies and that in “ order to bring the outer envelope to 2010 standards, both experts considered that the brick wall had to be entirely replaced ”. [66] [ 61 ] The trial judge gave detailed reasons, with reference to the expert evidence and to the undertaking of 9135 in the limited partnership agreement, as to why she selected Option 1 proposed by the experts acting for the Limited Partnership instead of Option 3 proposed by the experts acting for 9135.

She also ascribed less credibility to 9135’s experts and had serious reservations about the impartiality of 9135’s lead expert witness. Her conclusions on the appropriate corrective option are entitled to deference in appeal, especially considering her reservations with respect to the credibility of the expert testimony submitted on behalf of 9135. [67] FOR THESE REASONS, THE COURT: [ 62 ] DISMISSES the appeal, with legal costs. NICHOLAS KASIRER, J .A. ROBERT M. MAINVILLE , J.A. JOCELYN F. RANCOURT , J.A.