Appeal of a lower court judgement - Action by co-owner to annul a building bylaw regarding rentals - Power of the syndicate to restrict the exercise of the right of a co-owner to rent his fraction - Question of the commercial nature of rental activities - Justified limitation of co-owners rights due to the destination of the building
• In a lower court, the co-owner tried unsuccessfully to annul a bylaw adopted by the syndicate which restricted his right to rent his apartments, after which the co-owner filed the present appeal.
• In the beginning, the syndicate's building was built as a residential rental building. In 1982, it was converted into a co-ownership comprising 132 privative residential units.
• The co-owner, his wife, his daughter and a company under his control own eight apartments acquired between 1990 and 1993. The co-owner occupies and his family occupy one of the apartments and the other apartments are rented.
• Generally, the Kilzi group seeks to rent its apartments for one-year periods, but when that is not possible, it agrees to do so for shorter periods of time.
• Several co-owners were unhappy with the renting activities of the Kilzi group which they saw as a threat to the peace and tranquility of the building and a negative impact on the market value of their apartments.
• In April of 1994, the syndicate adopted a bylaw governing rentals.
• This bylaw impacted the activities of the Kilzi group in three circumstances:
? It forbids renting for a lease term of less than one year (except in particular circumstances subject to the discretionary power of the syndicate's board of directors);
? Important restrictions apply to any rentals in excess of three in the case of an owner who owns more than three units (reanting will only be allowed to immediate family members);
? A company cannot rent its apartments to third parties.
• The declaration of co-ownership specifies that the destination of the building is residential.
• At the time when the declaration of co-ownership was signed and published, the Civil code of Lower Canada was in effect. At the time the bylaws governing rentals were adopted, the Civil code of Quebec was in effect. The Court points out that the relevant provisions of the two Codes must be taken into consideration, as well as of the transitory provisions of the Act respecting the application of the reform of the Civil code.
THE LOWER COURT JUDGEMENT
• To adopt the bylaws governing rentals, the syndicate was motivated by what it saw as the commercial nature of the rental activities, which can be seen by the preamble to the bylaw. The judge of the lower court was of the opinion that a judgement could be rendered on factors other than the commercial nature of the activities carried on by the Kilzi group;
• The lower court took the position that the bylaw was valid since it did not modify the “destination” of the building. For this purpose, it considered the expectations of the co-owners and “the history” of this building, by comparing it to a nearby rental building built at the same time by the same developer;
• The lower court also dismissed Kilzi's argument that the syndicate's decision was partial, discriminatory, was taken with the intention to harm and violate acquired rights. While recognized that the bylaw had been adopted as a reaction to the Kilzi group's activities, the Court ruled that the syndicate's board of directors had acted in good faith, in the interest of the co-owners, and with respect the law and the provisions of the Act of co-ownership;
KILZI'S ARGUMENTS IN APPEAL
• the Act of co-ownership contains no restrictions relating to the renting of the privative portions; quite to the contrary, it expressly recognizes the co-owners' right to do so and regulates how it may be done;;
• At the time when the eight apartments were acquired, there were no other limitations on rentals. Thus the syndicate cannot deprive co-owners of the rights granted to them by the Act of co-ownership and property deeds;
• Kilzi argues that the syndicate's decision was based discriminatory, taken with the intention to harm the co-owners and deny them their acquired rights, and that in addition the bylaw was adopted without obtaining the majority of votes required by the act of co-ownership.
CLAIMS OF THE SYNDICATE IN APPEAL
• According to the syndicate, the purchase of several apartments and renting them constitutes a commercial activity, something which is prohibited by the declaration of co-ownership, and that the syndicate was thus perfectly justified in seeking to prohibit these commercial activities;
• The bylaw was adopted in good faith and in the general interest, and it is justified by the “destination” of the co-ownership.
ANALYSIS BY THE COURT OF APPEAL
• All the prohibitions or restrictions imposed by the the bylaw stem from the alleged commercial nature of the Kilzi group's activities, whereas the co-ownership has a residential vocation;
• The Syndicate is undoubtedly right to claim that the Kilzi group carries out commercial activities by buying seven apartments to rent them. It is easy to see the commercial nature of these activities, within the meaning of the old Code, or to affirm that they constitute the running of a Company, within the meaning of the new Code.
• On the other hand, the question to be determined is not whether the ownership of several apartments constitutes a commercial activity, but whether the activities inside the apartments constitute a residential or commercial occupation;
• The act of co-ownership seeks to prohibit the carrying on of commercial activities inside the apartments and not at preventing a business owner from owning an appartment when it states: “the exclusive portions (housing units) must not be used for the exercise of any trade or commercial undertaking”;
• The activities of the Kilzi group cannot be prohibited on the basis that they constitute, within the meaning of the act of co-ownership, “the exercise of a trade or a commercial activity”;
• In theory, there are no limitations to the right of the co-owner to rent his fraction. Like any owner, he can use it and enjoy it freely (1063 C.c.Q.). The above-mentioned provisions from the Civil code of Lower Canada as well as from the Civil code of Quebec create explicit rules to govern the three-way relationship between the co-owner, the tenant, and the syndicate. Moreover, the declaration of co-ownership refers explicitly to the act of renting. Lastly, it should be said that the bylaw in question does not prohibit all renting;
• If, in theory, the right to rent isn't brought in question, the situation is quite different regarding the limitations imposed on this right. This problem stems from a legal principle governing the exercise of it: the destination of the building;
• The destination of the building is a criteria which simultaneously limits the prerogatives of the community and the individual rights of the co-owners. Articles 1056 and 1063 of the C.c.Q. are important in this regard.
• While making this notion is a cornerstone of divided co-ownership, the Civil code of Quebec fails to define it, and the notion of the “destination of the building” is at the centre of a controversy among legal scholars;
• The important place given to this notion by lawmakers requires that it be given a wide and liberal interpretation. Without such an approach, it will be impossible to determine whether a co-owner is acting within his rights or whether the limitations of his rights are valid;
• In the present a wider definition of what constitutes the destination of the building must be adopted.
• The bylaws in question do not have the effect of changing the destination of the building, but it is it rather an extension of its destination. Consequently, the vote to adopt it did not require a unanimous vote of the co-owners;
• The bylaw is valid to the extent that it does not deny co-owners the right to rent, but establishes rules of exercise which can justified by the destination of the building;
• The bylaw in question deals with three different situations: renting when the owner is a legal entity, ownership of more than three units, and short-term rentals;
• The article of the bylaw dealing with renting when the owner is a legal has the effect denying the owner's right to rent, rather than regulating the exercise of it and it must thus be declared invalid. In practical terms, forbidding a legal entity from renting to third parties effectively prevents it from renting the privative portion it owns;
• The bylaw article limiting to three the number of apartments that a physical person or legal entity may own and rent cannot be justified since it denies the right to rent, rather than governing the exercise of the right;
• The three other articles seek to prohibit the renting for periods shorter than twelve months, except in exceptional circumstances;
• The argument that the bylaw was adopted as a response to the commercial nature of the rental activities is not founded, but the destination of the building allows restrictions regarding short-term rentals. It is not the court's place to impose its judgement on what constitutes a short-term rental in place of a decision by the majority of the co-owners: three months, six months or nine months;
• These restrictions confirm the residential character of co-ownership and aim at ensuring a reasonable exercise of the right to rent. The co-owners, in the majority, share this point of view and the articles in question could legally be the object of a regulation and they were legally adopted by the syndicate;
• Kilzi's argument that the decision was partial and taken with the intention to harm was dismissed by the lower court and Kilzi did not prove that the judge committed an error in law on this point..
• In view of the fact that the bylaw states that nullity of one article does not imply the nullity of the others, and given that the various restrictions are distinct, the appeal must be granted in part and the articles regarding rentals by a co-owner that is a legal entity, as well as that limiting the number of apartments that a person or entity may own, declared null;