In a decision issued on August 27, 2013 (4053532 Canada Inc. c. Longueuil (Ville de), 2013 QCCA 1428), the Québec Court of Appeal analyzed the nature of the rights of the parties to a deed of emphyteusis and examined the issue of the transfer duties payable in connection with the sale of the rights held by the owner (the emphyteutic lessor). In this case, after the sale by the owner (the emphyteutic lessor) of its rights in several immovables which are subject to contracts of emphyteusis, for a price of $4.2 million, the municipality (the respondent) had issued accounts for a total of $484,395.44 in transfer duties, based on the total value entered on the roll for the immovables sold. The purchaser contested the accounts and, after the Superior Court dismissed its claim seeking to have the accounts cancelled, the purchaser appealed.
Was the sale of the emphyteutic lessor’s rights a “transfer of the right of ownership on a property” giving rise to the payment of transfer duties?
The Court of Appeal answers in the affirmative, stating that emphyteusis is a dismemberment of the right of ownership, not a transfer of such right. Similarly, the “reconstitution” that occurs at the end of emphyteusis is not a transfer of the right of ownership. Even though, during emphyteusis, the emphyteutic lessee has all the rights attaching to the status of owner, it does not actually have that status. The person whose property is affected by the emphyteusis remains its full owner and becomes the owner, by accession, of all the improvements made to such property.
The Court also dismisses the theory that an emphyteutic lessee has, as superficiary, a full right of ownership over the structures it erects on the owner’s land. It emphasizes the fact that the right of superficies is a mode of the right of ownership, while emphyteusis is but a dismemberment of such right. Thus, emphyteusis does not give the emphyteutic lessee greater rights over improvements than it has over the land.
The Court concludes that the appellant had become the owner of each immovable in its entirety (land and buildings), even if the exercise of its right of ownership was limited by the emphyteusis.
What basis should be used to calculate the transfer duties?
The Court agrees that some interpretation is required, stating that using the value entered on the roll for the immovables, as the municipality had done, leads to a highly inequitable result.
It states that, in the context of emphyteusis, the market value of an immovable must be determined in the hands of the owner because it would be unfair to impose another market value which, in this case, would be the value of the immovable in the hands of the emphyteutic lessee.
These two values cannot be the same, and this duality is justified by the specific ownership regime created by emphyteusis. During emphyteusis, the market value of the immovable in the hands of the owner must necessarily reflect the dismemberment of the right of ownership, which, not surprisingly, reduces that value. In the hands of the owner, the immovable does not constitute a unit of assessment entered on the property assessment roll; consequently, section 1.1 of the Act respecting duties on transfers of immovables (which uses the value entered on the roll as the basis for computing the market value) does not apply. However, in the hands of the emphyteutic lessee, the market value of the immovable will be the value entered on the roll.
The Court recalculated the transfer duties based on the $4.2 million selling price, which it identified as being not only the consideration stipulated, but also the consideration paid and the market value of the property sold (that is, the value of the immovables in the hands of the owner). Consequently, the transfer duties were reduced to $61,500.
The Court states that the extent of the interpretation effort involved in reaching its conclusion was an indication that it is time the legislature consider the matter – as well as all aspects of the dismemberment of ownership – and, if necessary, reform the rules governing duties on transfers of immovables applicable in such situations.
Joseph Jarjour is a partner in the Corporate/Commercial, Commercial Real Estate and Mergers & Acquisitions practices of Davies Ward Phillips & Vineberg LLP. Joseph acts regularly in various commercial and real estate financings and frequently advises clients in connection with the acquisition, disposition and financing of commercial real estate.