2021 QCCQ 11900, 2021 QCCQ 11900

Zaffir c. 9312-8031 Québec inc. 2021 QCCQ 11900 COURT OF QUÉBEC CANADA PROVINCE OF QUÉBEC DISTRICT OF MONTREAL TOWN OF MONTREAL Civil Division No: 500-22-247799-185 DATE: November 10, 2021 ______________________________________________________________________ PRESIDED BY THE HONOURABLE DAVID L.

CAMERON, J.C.Q. ______________________________________________________________________ Zvi ZAFFIR Plaintiff v. 9312-8031 QUEBEC INC. -et- Olivier LECLERC Defendants ______________________________________________________________________ JUDGMENT ______________________________________________________________________ The parties and the proceedings [ 1 ] The Plaintiff, Mr. Zvi Zaffir, a business person involved in immovable-property matters, sues the Defendants 9312-8031 QUEBEC Inc. (“9312”) and Mr.

Oliver Leclerc seeking recovery of 60,000 $ pursuant to an agreement entered into by the parties on July 17, 2015. [ 2 ] The agreement (P-1) referred to in the proceedings as the “Covenantor Agreement” provided that Mr.

Zaffir acted as surety in regard to the obligations of 9312 for loans made by the HSBC Bank Canada (“HSBC”) to refinance the acquisition by 9312 of rights under series of three 100-year leases on each of eight units in the building known as 3, Westmount Square, the lessor being the Westmount Square Residential Limited Partnership. [ 3 ] The agreements put in place were complex and elaborate, but the gist of it was that the suretyship provided by Mr.

Zaffir, a person of means, was instrumental in 9312 obtaining the loans at favourable interest rates as compared with the financing that had been put in place with a private lender at higher rates of interest when 9312 initially invested in these units and a number similar units in the number 2 and 3 towers of the complex in 2014. [ 4 ] In July 2015, 9312 was able to refinance eight units by the eight loans made by HSBC, for an aggregate amount of $ 5,061,735.60 at an interest rate between 2% and 3%, as opposed to a rate of around 8% with the previous private lender.

The Mortgage Loan Agreement and Cost of Borrowing Disclosure Statement states an Annual Percentage Rate of 2.636 % (P-4F) [ 5 ] As part of these agreements to refinance the eight units, Mr. Zaffir obtained security in the shares and in other titles that embodied the rights in respect of the units, by means of a movable hypothec in subordinate rank to that granted in favour of HSBC. There were other valuable considerations that flowed in the complex relationships, given the risk that Mr. Zaffir accepted of being liable in case of default of the borrower.

Notably, there was the Commitment Fee stipulated in the Convenantor Agreement, a yearly non- refundable fee of $ 42,250.00$. [ 6 ] The Covenantor Agreement had an initial term of two years, corresponding to the term of the loans falling due on July 17 2017. The conflict that has arisen in the present matter is Mr.

Zaffir’s claim, and its contestation by the Defendants, that he is entitled to an additional fee of $ 60,000.00 because of the extension of the initial term. [ 7 ] The parts of the Covenantor Agreement pertaining to the defined terms, the Fee , the Initial Term , the Additional Term and the Additional Fee read as follows:

ARTICLE 2 - COMMITMENT FEE 2.1 In consideration of Zaffir acting as convenantor under the Loan Agreements, 9312 agrees to pay to Zaffir, a yearly non- refundable fee of forty-two hundred fifty dollars ($41,250.00) (hereinafter “ Fee ”), which shall be paid to Zaffir concurrently with the execution and delivery hereof and which said Fee shall also be subsequently paid on the first anniversary date of this Agreement, Zaffir acknowledges to have received from 9312 concurrently with the execution hereof, an amount of forty-two thousand two hundred fifty dollars ($42,250.00). 2.2 In the event that the Initial Term (as defined below) is extended in accordance with

Section 3.2 below, 9312 shall pay to Zaffir

during the Additionnal Term (as defined below), a yearly non-refundable fee of ten thousand five hundred dollars ($10,500.00) per Unit still financed by HSBC under a Loan Agreement for a minimum aggregate annual fee of $60,000.00 (hereinafter the “ Additional Fee ”), which said Additional Fee shall be paid to Zaffir concurrently with the commencement of the Additional Term an which Additional Fee shall also be subsequently paid on the first anniversary date of such Additional Term.

ARTICLE 3 - TERM 3.1 The initial term of this Agreement shall be two (2) years commencing on the date hereof unless the Loan Agreements are sooner terminated in accordance with their terms (the “ Initial Term ”). 3.2 Provided that 9312 and Leclerc are not then in material, continuing default beyond any applicable notice and cure period under any of the Documents (as defined herein) and with the consent of Zaffir, upon a thirty (30) days prior written notice, the Initial Term may be extended by an additional two (2) years unless the Loan Agreements are sooner terminated in accordance with their terms (the “ Additional Term ” and together with the Initial Term, the “ Term ”). [ 8 ] On the maturity date of the loans, July 17, 2017, 9312 had repaid to HSBC four of the eight loans, i.e. those pertaining to units sold by 9312 from time to time prior to that date.

The other four were paid in full on October, 5 2017 when 9312 had sold off the remaining four units. The issue to be decided [ 9 ] Between July 17, 2017 and October 5, 2017, 9312 therefore remained indebted to HSBC and it is common ground between the parties that Mr. Zaffir continued to be exposed as Covenantor during that time. Is he entitled to the Additional Fee because of an extension of the Term , i.e. an Additional Term ? That is the issue for the Court to decide in the present case. Some essential facts [ 10 ] As the end of the terms of the loans and that of the Covenantor Agreement approached, Mr.

Leclerc, the principal of 9312, had ongoing discussions with his counterpart at HSBC, Julie Hachem, reaching an understanding that it would be possible for 9312 to renew the loans without the necessity of Mr. Zaffir being a Covenantor. [ 11 ] He understood the situation to be one where HSBC was tolerating the default as of July 17, 2017 in anticipation of a new loan, as opposed to implementing an immediate renewal of the loan on the anniversary date. Since he was assured that Mr.

Zaffir’s suretyship would not be required for the renewal of the loan, he did not act to trigger the extension of the Term of the Covenantor agreement. [ 12 ] He also believed that, had he been in default after July 17, 2017, Mr. Zaffir would not have been liable. He made that argument on November 20, 2017 in an exchange of emails (P-11) with Mr. Zaffir that preceded the formal letter of demand of January 17, 2018 (P-12): I’m still waiting for news from Isabelle Lamy.

As discussed, it is clear to me that you weren’t a garantor after July 17 th , if I did miss a payment the bank could not go after you, your engagement was for a strict period of time. [ 13 ] This is, of course, inaccurate: if 9312 was in default, before or after the term, HSBC could hold surety liable until the principal obligation debt was extinguished. [ 14 ] In that same exchange(P-11), Mr. Zaffir responded: It was completely not clear to us from the responses we’ve received from HSBC and Isabel. Anyways, I’ll wait to hear from you. [ 15 ] 9312 and Mr.

Leclerc never went ahead with a new loan, although an application file was opened. The opportunity to sell the four remaining units arose. 9312 completed the sales in early October 2017 and the loand were paid off October 5, 2017, as confirmed to Mr. Zaffir by Anita Wong, premier officer at the HSBC, (P-9). [ 16 ] Ms. Wong testified as to the status of the file after the July 17 maturity date. From her reading of the bank’s records (P-20), Julie Hachem started the application process on July 12, 2017. An entry in the bank’s system on that date reads: “CAPTURE APPLICATION DETAILS”. [ 17 ] Her

interpretation of an entry of August 24, 2017 made by Caroline Hum, the “underwriter” is that, in the context of this new application, the release of Mr. Zaffir was approved at a higher level, subject to conditions, notably, fresh proof of a favorable rental value analysis and Mr. Leclerc’s statement of assets. An entry of September 12, 2017 reads, under the heading, “to Status”:PENDING CONDITION FULFILLMENT. [ 18 ] These conditions precedent to the loan approval had not been fully realised when the application was cancelled on October 4, 2017.

The officer who had initiated the application file and carried it up to the conditional approval of August 24, Julie Hachem, left her position at HSBC, and the Court’s source of information is the testimony of Ms. Wong, and her reading of the electronic file. [ 19 ] The Court accepts Ms. Wong’s understanding of the matter as accurate. The point of the new application, which was in progress but never completed, was to refinance the loans without Mr. Zaffir as Convenantor. The bank’s internal processes had resulted in a confirmation that this would be possible, under conditions.

The application would have been prepared on the premise of a five-year term. The rate applicable would be thought of as a reference, with the customer choosing the term and the rate from a number of options upon finalising the application, once all the conditions were met. [ 20 ] The Court considers it probable that Ms. Hachem and Mr. Leclerc both treated the matter as settled, since approval had been

secured for the release of Mr. Zaffir. They may have considered that Mr. Zaffir was no longer exposed to liability, to use Mr. Lecler’s expression “il n’était plus au batte”. [ 21 ] Maître Isabelle Lamy remembers having had discussions with Mr. Leclerc and with Julie Hachem in the summer of 2017. She recalls both of them stating their belief that there would be no further need for Mr. Zaffir’s covenant. [ 22 ] Nonetheless, the Bank would not have released Mr.

Zaffir prior to the new loan actually reaching its definitive unconditional approval and disbursement made to replace the previous loans or, a repayment in the context of a sale. Mr. Zaffir was still a surety. [ 23 ] The existing loans were not in default. The term used by HSBC to define its status was “auto-renewed”. Ms. Wong explains that the bank would have sent out to the borrower terms of mortgage renewal for the remaining capital amount giving the customer the option of choosing from among different terms and interest rates applicable to these terms.

A rate is given for a six-month open term, and if the customer does not convey his option for a specific term, the bank may choose to automatically renew the loan for six months, open, at the stated term. This is a situation more beneficial to both parties than the tolerance of a default: the customer has time to consider a renewal for a different term and interest rate and has the freedom to pay without penalty because it is term that is open.

The bank gets a higher rate of interest than a renewal for a longer term. [ 24 ] She firmly believes this was done, though the bank’s records do not enable her to find the documentation, since the loans were acquitted. There is evidence that this auto-renewal occurred, as opposed to the toleration of a default, because, at the settlement of the debts upon closure of the sales of the four units, interest was charged and paid as having accrued at the six-month open rate since July 17, 2017.

This appears from the rélevé de remboursement de prêt hypothécaire forwarded by HSBC to the professional acting in the transactions, Maître Isabelle Lamy, just prior to the closings of October 2017 (P-8 en liasse ). All the details of the loan, including an interest of 6.2 % per annum and the due date of January 21, 2018, correspond to a six-month auto-renewal. The payments were made to the bank from the proceeds of the sale on this basis.

This is ample confirmation that 9312 accepted being bound under those terms. [ 25 ] The application for a new loan, in this case a renewal on terms different from the original loan, i.e. with the elimination of the suretyship from Mr. Zaffir, would not have had any effect on the auto-renewal, which remained in effect during the six-month period, up to the closings of October 5, 2017. [ 26 ] Mr. Zaffir’s assistant had been asking for confirmation that he was no longer a covenantor since at least August 7, 2017. Ms. Wong replied that date to her email (P-5): I confirm receipt of your email.

It was nice talking to you. I will advise Mr. Zaffir once we obtain approval to remove him as covenantor. [ 27 ] Attorney Neil Bindman of the firm Stikeman, acting for Elad, the owner of Westmount Square, sought to obtain a release in a communication with Mtre Isabelle Lamy on September 6, 2017. [ 28 ] Only on closing of the sales did the bank confirm through Ms. Wong that “the mortgages extended to 9312-8031 Quebec Inc. by HSBC have been repaid in full and therefore Mr. Zaffir is no longer liable as convenantor over subject mortgages.” (P-14 (b)).

A more formal release was not given, since the main-levée of the security, a movable hypothec on shares with dispossession, did not require publication on the register of immovable properties. [ 29 ] Mr. Zaffir, as early as July 18, 2017, called upon 9312 to pay the $ 60,000 by sending an invoice (P-10) posted “To: the sum owing as and from July 1 pursuant to the obligations as stated in the aforementioned agreement”, with reference to Clause 2.2 of the Covenantor Agreement. [ 30 ] Mr. Zaffir alleges in his Application to institute proceedings: 11.

During the first part of July 2017 (exact date unknown), Plaintiff had a discussion with Defendant Leclerc regarding the renewal of the aforementioned loans and the guarantee thereof by Plaintiff; 12. Defendant Leclerc expressed his hope to Plaintiff that the loans would be renewed by HSBC without requirement for Plaintiff to continue to act as Covenantor; 13. Plaintiff stated to Defendant Leclerc at that time that if he was released as Covenantor no later than August 1, 2017 then he would be willing to forgo the fees owed under the terms of Clause 2.2 of Exhibit P-1 cited hereinbelow at paragraph 22; […] 25.

Due to the ongoing discussions in the month of July 2017 between Plaintiff, Defendant Leclerc and HSBC regarding the attempt by Defendant to have Plaintiff’s commitment as Covenantor removed for the additional term of the loans, the parties did not comply with the requirement of a 30 day prior written notice pursuant to clause 3.2 of the of the Loan Agreement (P-1). [ 31 ] Mr. Leclerc has no clear recollection of discussions with Mr. Zaffir. [ 32 ] Mr. Zaffir’s testimony on the allegation in paragraph 13 is noteworthy.

In chief, he initially said he had no recollection of more contact after having learned from Mr. Leclerc that he hoped his track record with HSBC would enable him to extend the loans without the need for Mr. Zaffir’s guarantee. He testified that he was in a “no-man’s land” and had the impression that Leclerc was “trying to avoid” him. [ 33 ] He made his own enquiries for a release from the HSBC. In mid-August, he had a communication with Ms. Hachem: “she doesn’t give me a release”. [ 34 ] Finally in his testimony, he referred obliquely to what was alleged in paragraph 13 stating: “I said if you release me before

August 1, it’s ok”. The Court took this to mean that he said that in a conversation over the summer with Mr. Leclerc. The testimony falls short of being an explicit reference to what is alleged, a commitment to forgo the fees owed under clause 2.2 if he was released as a Covenantor no later than August 1, 2017. [ 35 ] Be that as it may, the allegation, if supported by clear testimony, would be somewhat of a self-serving statement that implies that the fee was owed. It would have been made in a context where Mr.

Leclerc was not admitting at the time that the fee was owed, having not given the 30-day notice contemplated in clause 3.2 and having not asked for nor received Mr. Zaffir’s consent to an extension of the Covenantor relationship of an additional two years.

The Court’s analysis [ 36 ] The Commitment Fee and Term clauses provide for the possibility of an Additional Term in a rather precise way: upon the consent of Zaffir, upon a thirty (30) days prior written notice. [ 37 ] Obviously, the renewal of the loans could be for only some units, as the quantification is on a per-unit basis: $ 10,500 per Unit “still financed by HSBC under a Loan Agreement”. [ 38 ] Neither party is bound to the Additional Term : it depends upon mutual consent.

The text contemplates payment of the Additional Fee concurrently with the commencement of the Additional Term . [ 39 ] The allegations of Mr. Zaffir include the idea that the parties renounced the requirement of the 30-day notice because of their ongoing discussions in the month of July 2017 in a context where Mr.

Leclerc and 9312 were attempting to remove his commitment as Covenantor. [ 40 ] There is no evidence of an express waiver of the 30-day notice, just as there is no evidence of an agreement to extend the Term of the Covenant agreement. [ 41 ] It is, rather, a situation where 9312 did not have an intention to seek an additional term with the Covenantor’s support but, rather without it. The discussions focused on getting a release for Mr. Zaffir, not securing his consent to continue for an Additional Term . [ 42 ] Because he had not received a prior notice and given consent, Mr.

Zaffir was not bound to commit, and did not commit to a second two-year term, nor to any term for that matter. The reason he was still exposed to liability was that the original loans were not yet acquitted. If the loans had fallen into default before or after the term, he would have been exposed as a surety even though there was no renewal. This potential prejudice was part of the exposure that he had initially accepted in return for the Fee and the security he had taken as part of the consideration of the agreement. [ 43 ] The modalities about extension did not contemplate a fee for this. The situation that Mr.

Zaffir found himself in did not present any additional risk of prejudice. Because the loans had an automatic short-term renewal procedure of a six-month open term, it was feasible for 9312 to sell the remaining units and acquit the balance of the four units. It was a much softer situation that would have been the case if there was a period of tolerated default. [ 44 ] Mr. Zaffir asserts that he was willing to forgo the Additional Fee (assuming it was owed to him) so long as he was released no later than August 1, 2017.

While he has not succeeded in proving that he made known such a promise, it highlights the fact that 9312 and Mr. Leclerc believed that he was no longer at risk and did nothing to retain him on risk for an additional two-year term, seeking only confirmation that he was released. [ 45 ] In the Court’s view, the intention of the parties in drafting the stipulations in play here was to provide for the Additional Fee if and when Mr. Zaffir was asked, and accepted an extension of the Term of the Covenantor agreement to coincide with the renewal of the loans for an additional term with Mr.

Zaffir renewing his commitment to the Covenant. [ 46 ] They did not contemplate that he would be owed remuneration for the fact of being an undischarged surety during a prorogation of the initial loan as that term is intended in

Article 2354 of the Civil Code of Québec . This was a situation where he could not be discharged without the creditor’s consent. It was not a situation where he had been given an opportunity to refuse or to accept to an extension of the Term of his suretyship that was not already binding upon him as a mere prorogation of term. [ 47 ] Given the hefty minimum fee associated with the acceptance of an Additional term, $ 60,000 per year, it is not likely that the parties agreed that he would be owed that fee for an automatic prorogation of the term for a mere six months that was already part of the initial commitment.

There was no new consideration for such an onerous fee. [ 48 ] If the parties had intended a fee in the case of a prorogation, they would have drafted a clause to provide for this. The words used connote an intention to set the Fee for a true Additional Term that the Covenantor accepts having the right not to accept it. [ 49 ] Therefore, the fee claimed was not owed. [ 50 ] The Court thanks the attorneys for their able representations. BY THESE REASONS, THE COURT: DIMISSES the Plaintiff’s action, WITH COSTS in favour of the Defendants.

______________________ David L. Cameron, J.C.Q. Me Jonathan PEARL Pearl & Associates Lawyer for the Plaintiff Me Louis George BRUNET Gagnon, Brunet & Kilani Lawyer for the Defendants Dates of hearing: May 5, 6 & 7, 2021