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Restrictive covenants and real estate: Can they survive recent case?

restrictive convenants

In a recent decision rendered in late November of 2018 by the Quebec Superior Court (under appeal), restraint of trade principles normally applicable in employment and sale of a business contexts were applied to restrictive use covenants in real estate (Complexe Commerciale de l’Ile inc . V . Provigo Distribution).

While it is generally understood that such covenants could not form the basis of real or for the most part personal servitudes (easements), the consensus view was the covenant itself was valid, could be secured by a hypothec or mortgage and could form the object of an obligation to have subsequent purchasers assume the covenant (often contained in the deed of sale and thus providing notice to third parties).

The court of first instance in this case, applying principles of restraint of trade, declared the restrictive use covenant against public order for not meeting the requirements of non-compete clauses, namely not having a term.

Assimilating real estate restrictive use covenants to true non-compete clauses is a novel departure. The public policy components applicable to employment and freedom to work are not entirely applicable to restrictive uses of real estate. Restrictive use clauses are usually consented to by sophisticated parties where quite often the restriction is required to facilitate trade and an orderly development of real estate. The nullity based on the absence of a term in this context is difficult to reconcile with the Supreme Court of Canada’s recent recognition of perpetual contracts in Quebec civil law.

It will also be difficult to apply the requirements of reasonableness of term or duration in a real estate context.

It will be interesting to see whether the Court of Appeal agrees with this reasoning and if this is followed in other jurisdictions.

By D. James Papdimitriou and Martin Boodman

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McCarthy Tétrault LLP

McCarthy Tétrault is a Canadian law firm that delivers integrated business law, litigation services, tax law, real property law, labour and employment law nationally and globally.McCarthy publishes a series of blogs to share information with companies to help them comply and manage their businesses. On the Inside Internal Controls blog we will share some of those blog posts sharing their expertise among others, in the areas of Competition/Anti-trust, Corporate and Commercial Law, Intellectual Property, Privacy, Environmental Law, Technology and Litigation. Read more here
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