Jason Bryk 

Phone: 204.956.3510

Fax: 204.957.0227

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October 2011

You are interested in buying a home and you find one in what appears to be a very attractive district of older (but well kept up) homes in a heavily treed neighbourhood. The particular property you are interested in has all the amenities that you and your young family (three growing children) could ever want. The price and terms are acceptable to you, and you make an offer which is quickly accepted. Before contracting to buy, you had two or three "walk-throughs" on the property and you didn't notice any existing or potential problems. However, after you move in, you discover that behind the recently installed drywall in the basement rec room and underneath the rugs on the rec room floor, there are a number of cracks/fissures. Not only is moisture slowly seeping in, but there is strong evidence (visually and odiferously) of the existence of black mould on the walls and the floors. You consult with foundation experts and are told that there are severe structural (and mould) problems with the home and that it will cost at least $100,000 to remedy the situation. Even then, the "experts" tell you that there are no "guarantees", because an underground river runs directly beneath the property. It is quite clear that your vendor intentionally misled you with respect to these problems by hiding them, utilizing the aforementioned drywall and strategically placed rugs, such rugs having been put underneath extremely heavy furniture which the vendor had in place at the time of your inspections. Most people (lawyers and laypersons) would agree that you have a remedy against your vendor on the basis that the vendor has intentionally deceived you by hiding these defects - which were not easily ascertainable by you when you made your inspections - because these "latent" defects constitute a substantial impediment to your enjoyment of the property, at least without your incurring a very high remediation cost.

            But what if the "defect", also latent in the sense that it would not be ascertainable upon a reasonable inspection of the property, is something external to the property? This very question came before the Ontario Superior Court of Justice (judgment March 11, 2011) in the Dennis v. Gray case (the "Gray Case"). In the Gray Case, the "defect" ascertained by the purchaser after the purchaser had committed to buy was the fact that a convicted child pornographer lived across the street. When the purchaser learned of this fact, the purchaser became concerned for the well being of his children and didn't want to complete the purchase transaction. The hearing was not a full blown trial to decide the merits of the plaintiff's case, but rather the determination of a preliminary motion by the defendant in which the defendant sought to convince the Court to strike out the plaintiff's claim on the basis that there should be no trial because "it is (not) "plain and obvious" that such a fact does . . . in law amount to a "latent defect" of such a nature that it must be disclosed to a purchaser." However, the Court concluded that it was not so plain and obvious and thus, regardless of whether or not the plaintiff would ultimately succeed in its claim, it was appropriate for the claim to at least go forward to trial. The defendant argued that the existence of the convicted child pornographer was generally known in the neighbourhood, but the Court observed that in fact, the criminal record of the neighbour could not be ascertained from any routine inspection, at least not ascertained with certainty. The Court also observed that what has been held by the Courts to be an actionable latent defect has generally expanded somewhat over time, and thus it is not necessary to foreclose completely the possibility of considering as latent defects, elements which are external to the actual property.

            It will be interesting to discover what happens with the Gray Case if it does proceed to a formal trial, perhaps followed by one or more appeals. There are certainly other elements external to certain properties which, if known to a potential purchaser at an early stage, might very well discourage the purchaser from committing himself/herself. Examples might be noises emanating from a manufacturing/processing facility, even though the facility is situated several miles away. Consider odours emanating from such a source, again, notwithstanding that the source is situated several miles away (think of the old sugar beet processing facility in Fort Garry, or a sewage treatment facility). Another possible irritant to a potential purchaser - although this would not be external to the property - is the fact that the home to be purchased is reputed to have been haunted by ghosts for many years. Surely all of these would be expansions - perhaps reasonable expansions, perhaps not - of what the law views as being an actionable latent defect.

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October 2019

You are in the business of making real property mortgage secured loans, and you are approached by a person requesting a loan to be secured by a mortgage of such person's title to particular land.  You make what are currently considered to be prudent "credit checking" investigations with respect to the contemplated loan - in particular, you order, obtain and review a search of the proposed borrower's title to the subject land (which confirms that the title is in the name of who the borrower claims to be) and you request and obtain and review at least two pieces of the borrower's identification, including one piece of "photo identification" (which also confirms that the person indicated in such identification is one and the same as the person the borrower purports to be).  You may also make enquiries of the borrower as to how the borrower came to acquire the property, and the borrower advises that he/she acquired it by a previous purchase or acquired it by inheritance.  Although you do not make further inquiries in order to verify the alleged facts behind such acquisition (most lenders would not do so unless they had some reason to be suspicious, and this doesn't appear to be the case here), you have no reason to doubt the accuracy of the borrower's explanation of its acquisition of the land.

You approve the loan, take and register a mortgage of the borrower's land and advance funds. 

Subsequently, you discover that the land was previously in the name of person "A" and that a fraudster (person "X") forged a transfer of title to "X"'s co-fraudster (person "Y"), "Y" being your borrower.  Your borrower has not misrepresented himself/herself to you as someone other than the real person "Y", namely the co-fraudster, but, as noted, you did not believe and had no reason to believe that "Y" was a fraudster and was involved in what amounted to the theft of the land from the original (and proper) owner "A".

Two questions arise here:

(i)               is "A" entitled to have "Y"'s title cancelled and title to the land restored in "A"'s name? and

(ii)              is your mortgage - obtained by you bona fide and for value - also to be cancelled or should your mortgage "follow" the title back from "Y"'s name to "A"'s name, with the result that "A" is now (clearly unfairly) saddled with your mortgage and the obligation to repay "Y"'s mortgage loan?

Two recent (March, 2009) British Columbia Court of Appeal cases (the "Gill Case" and the "Oehlerking Case") deal with these questions.  In both of these cases, the Court held that the innocently deprived landholder ("A") was entitled to a cancellation of the title held by the co-fraudster "Y" and to the restoration of title back in "A"'s name, but that the innocent mortgage lender was not entitled to have its mortgage "follow" title back into the hands of "A".

The Court's holding that the innocently deprived landholder was entitled to get its title back from someone involved in fraud is based on British Columbialand law which appears to be similar to that in other Canadian common law jurisdictions operating under Torrensland title systems.  The holding that the innocent mortgage lender who has advanced value loses its mortgage is based on the current state of British Columbialand law which may - or may not - be the same as the land laws of such other Canadian jurisdictions. 

Most Canadian jurisdictions (including British Columbia) will protect a bona fide and for value purchaser - as opposed to a bona fide and for value mortgage lender - who acquires title (ie. ownership, as opposed to a mortgage security) from a person who has been involved in fraud whereby the original owner is deprived of title, provided that such subsequent bona fide and for value purchaser acquires his/her title before the innocently deprived original owner learns of his/her loss and registers notice his or her claim to reinstatement against the title.  In other words, as long as a subsequent purchaser acquires from a fraudster bona fide and for value before the innocently deprived title holder can act, such purchaser will be able to acquire and keep his/her title to the exclusion of the innocently deprived owner.  But where the subsequently acquiring party acquires an interest bona fide and for value which is less than fee simple ownership, such as a mortgage, such subsequent bona fide and for value interest holder will lose its interest in favour of the innocently deprived owner.  That is the situation in British Columbia under its current legislative scheme and may be the situation in otherTorrens system based Canadian common law jurisdictions, depending on the provisions of such other jurisdictions' legislation.

A reading of the Gill Case and the Oehlerking Case (and related earlier jurisprudence) additionally raises or may suggest these questions:

(1)             what would be the position (inBritish Columbiaand in jurisdictions with legislation similar toBritish Columbia's) of a bona fide and for value purchaser (or mortgagee) who dealt with a fraudster who had arranged for the wrongful transfer of title from an innocently deprived previous owner into the name of a fictitious person (whom the fraudster then impersonates)?; and

(2)             what would be the position (in British Columbia and in jurisdictions with legislation similar to British Columbia's) of a person who has acquired an interest (whether ownership or some lesser interest such as a mortgage) bona fide and for value but who loses his/her interest by virtue of the operation of applicable land law legislation, where such subsequent bona fide and for value person makes a claim against his/her jurisdiction's government operated Assurance Fund?

The second question is complicated somewhat by the fact that whilst it should be relatively easy to remedy the loss sustained by a bona fide and for value mortgagee who loses its interest (ie. the amount of such party's compensation would simply be the balance of its outstanding loan), in the case of a bona fide and for value purchaser who loses his/her ownership interest, quantification of such person's loss may be hard to determine because of the difficulty in valuing the loss.  Where the subsequent bona fide and for value purchaser is entitled by applicable law to keep his/her title to the exclusion of the original innocently deprived owner, then the question becomes how to compensate the original owner.  Valuation of the original owner's loss may be even more difficult to determine.

In British Columbia and in jurisdictions whose legislation is similar to British Columbia's (or is held by the Courts to be of the same effect as British Columbia's), the law appears to place a fairly onerous burden on mortgage lenders.  Even if a lender conducts "due diligence" along the lines of what is described in the first paragraph of this paper, the lender may lose its security and thus fail to recoup, in whole or in part, its loan.  Of course, where a jurisdiction permits an innocently deprived mortgage lender to recoup itself out of an Assurance Fund, the lender's situation will be substantially alleviated.

InManitoba, the Real Property Act Sections 59(1), 62(1)(c) and 182(1) deal with these matters.  Using the above hypothetical example, is the writer's view that:

(i)               person "A" is clearly entitled to get title to "A"'s land back from person "Y";

(ii)              perhaps the bona fide and for value mortgagee's mortgage will follow the land back from "Y"'s name to "A"'s name in which case the Assurance Fund would be available to pay out the mortgage thereby having it discharged, but it may also be arguable that the mortgage was a nullity from the beginning, and thus is not capable of following title back into "A"'s name, and if the mortgage is considered to be a nullity, then Section 182(1) may not apply so as to enable the mortgagee to make a claim.

Some lenders, wishing to protect themselves from the risk of loss due to land fraud and/or wishing to minimize the necessity of having to make a formal claim for reimbursement against the Assurance Fund, may attempt to shift the burden of ensuring the absence of land fraud in a mortgage transaction to the lawyer providing the legal services in connection with the transaction.  This would be done by the lender's instructions to the lawyer specifying that it is the lawyer's responsibility to ensure that the person or persons purporting to be the mortgagor(s) are who they claim to be and/or that the mortgagor(s) have acquired the mortgaged real estate, in effect, honestly and for value.  A lawyer will be hard-pressed to fulfill this obligation where - as is the case in many if not most mortgage lending transactions - the lawyer does not know the borrower(s) until he or she meets with them for the first time in connection with the real estate transaction.  Where the lender's requirement of the lawyer is as aforementioned, no amount of due diligence on the part of the lawyer in identifying and/or verifying the identification of the borrower(s) will suffice, because what the lender is asking the lawyer to do, is, in effect, "guarantee" the identity of the borrower(s) and the validity of their underlying acquisition of the mortgaged realty.

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December 2003

A recent (April, 2003) New Brunswick Court of Appeal decision (the "Stevenson Case") makes it clear that when a secured party is taking a security interest in serial numbered goods, in order to ensure priority over other competing claims, the secured party must ensure accuracy in its financing statement both with respect to the name of the debtor and with respect to the serial number or numbers of the serial numbered goods.  The provisions of the New Brunswick Personal Property Security Act upon which the Court based its decision are substantially the same as those in the Manitoba Personal Property Security Act.

            In the Stevenson Case, the secured party had included correct particulars of the goods' serial number and related information, but had included an incorrect spelling of the debtor's name.  The secured party argued that anyone interested in acquiring an interest in the goods in question should be obliged to search both the debtor's name and the serial number of the goods, with the result that if there was an error in part of the registration (the name or the serial number particulars), but not in the other part of the registration, the party searching would be put on notice of the secured party's security interest by virtue of the presence of the correct information in the registry.

            The Court pointed out that the legislation makes it clear that a registration is invalidated if there is a seriously misleading error or omission in either the debtor's name or the serial number.  The Court also noted that in considering whether or not a seriously misleading error has been made, it is not appropriate to determine whether or not a third party was actually mislead (a subjective test), because the legislation makes it clear that the test is an objective one.  So even if a third party was not mislead by the error - because, for example, the secured party had searched both the name and the serial number and noted the secured party's security interest - the registration would be invalid.

            Thus it would appear that if you are anticipating inquiring an interest in someone's serial numbered goods, it is not necessary for you to search both the serial number and the person's name.  While this appears to be a logical conclusion from the Stevenson Case, it is the writer's "gut" instinct that a person conducting a search with respect to serial numbered goods should in fact search the owner's name and the serial numbers of the goods.  The costs of making the additional search are not substantial.  Also, the jurisprudence in other provinces also suggest that a person searching with respect to serial numbered goods is obliged to search both the owner's name and the serial numbers, so that an error in one will not invalidate an earlier registration provided that the earlier registration is correct in the other.  Searching both the name and the serial number completely eliminates any possible subsequent argument (which might be based on a change in how the Court's view the legislation) that a correct name overcomes an incorrect serial number or vice versa.

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After entering into a contract - which is otherwise binding on the parties to it - one of the parties may have a change of mind or, having for the first time thought out the consequences of the contractual commitment, decides that release of that person from their commitment would be in their own best interests.  Such persons may be able to convince a Court to extricate them from their agreements' obligations, reasons or excuses to so extricate vary from situation to situation, but a number of them are - in essence - that the party wishing to withdraw was misled by the other party, or that the party wishing to withdraw didn't understand the language in the written document or had not had the wording adequately explained to her/him.  A recent illustration of this situation is found in the Ontario Court of Appeal judgement Country Wide Homes Upper Thornhill Estates Inc. v. ge (2020 ONCA 400), judgement issued June 22, 2020 (the "Country Wide Case").  In the Country Wide Case, the vendor and the purchaser entered into an agreement for a sale to the purchaser of a substantial parcel of land (basic purchase price being $2,800,000.00).

Prior to closing, the purchaser took the position that the agreement was not binding.  The Court noted that "there was no issue with the agreement, its contents or the steps taken after it was signed.".  The purchaser's rationale for requesting confirmation of termination of the agreement included these allocations:

(i)    the agreement was lengthy and was signed by a non-English speaker;

(ii)   the agreement was signed without the purchaser having a solicitor of the purchaser's choosing review the agreement before the purchaser signed;

(iii)  the purchaser simply did not understand the contents of the agreement.

The Court rejected the purchaser's arguments and confirmed that the agreement was binding.  In particular, the Court pointed out:

(a)  Mandarin-English speaking real estate agent with whom he was able to fully communicate;

(b)  the purchaser was not a novice to the real estate market;

(c)  the purchaser had initialed every page of the agreement of purchase and sale and its schedules and had initially deleted the area where a purchaser could fill in the name of the purchaser's own lawyer; and

(d)  each page of the agreement of purchase and sale contained the following prominently displayed statement: "ORAL REPRESENTATIONS DO NOT FORM PART NOR CAN THEY AMEND THIS AGREEMENT".

There are undoubtedly situations where the above "background factors" leading to execution and delivery of the contract may taint the "meeting of the minds" process that a Court will excuse contractual performance.  But people contemplating entering into contracts and the counsel should tread carefully!

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February 2017

This paper has to do with a problem (the "Problem").

The Problem arises where a chartered bank (the "Bank") provides credit to an agricultural producer ("Producer") which is utilized, in whole or in part, to facilitate/effect the operation of the Producer's agricultural production business, in particular, the growing and production of crops ("Crops").  Typically, the Bank will take from the Producer to secure the obligations from time to time owed to the Bank by the Producer with respect to such credit, one or both of a security interest in the Producer's Crops governed by The Manitoba Personal Property Security Act (the "MPPSA") (usually in the form of a general security agreement, hereinafter a/the "GSA") plus a security assignment by the Producer to the Bank of the Producer's Crops pursuant to and as governed by Section 427 of the Bank Act (Canada) (hereinafter, the "Bank Act Security").

The Producer uses the value advanced by the Bank to produce the current year's crops, and (presumably) on an ongoing basis, the Bank advances further values year after year to the Producer on the ongoing security against each successive year's crops as created under the GSA and the Bank Act Security.

This paper assumes that the Bank will, in a timely manner, have made all registrations and taken all steps necessary to perfect it's security interests (under its GSA and under its Bank Act security) so as to achieve, at the earliest possible date, the highest possible priority.

The essence of the Problem arises when after the Bank has done all of the foregoing, someone else - typically an agricultural products support business ("Crops Inputter") - additionally provides inputs to assist the Producer to produce its Crops (on credit) and takes a security interest in those Crops.  Crops Inputters will usually provide such items as seed, fertilizer and pesticides.  The security taken by the Crops Inputter is governed by the MPPSA, the Crops Inputter being legally incapable of obtaining security under Section 427 of the Bank Act of Canada. 

Again, assume that the Crops Inputter has made registrations and done all that it can to achieve, as soon as possible, the highest possible priority for its security interest in the Crops.  Is it possible for the Crops Inputter, notwithstanding that it provides value to the producer and takes security after when the Bank has provided value and taken security in the same Crops from the same Producer, can obtain a retroactive priority over the Bank's security in the Crops?

If the Bank's provincially governed security interest could not "fit" within the classification of a "purchase money security interest" under the MPPSA and the Crops Inputter's provincially governed security interest could be so classified (and assuming that the Crops Inputter had done all that it needed to do under the MPPSA in order to achieve a retroactive purchase money security interest priority), then the Crops Inputter would indeed take priority in the Crops over the Bank, notwithstanding that the Bank had registered its provincially governed security interest before the Crops Inputter had registered its provincially governed security interest.  But is this really the case?

If the Bank's security interest could be classified as a "purchase money security interest" under the MPPSA, so that both the Bank's security interest and the Crops Inputter's (provincially governed) security interest would be classified as "purchase money security interests" under the MPPSA, then, depending on how the Crops Inputter advanced value, the Bank's security interest may - or may not - hold priority over the Crops Inputter's security interest.  If the Crops Inputter sold its inputs to the Producer on credit and took security therefor, then the Crops Inputter's security interest would hold its security over the prior the Bank security.  This is because the MPPSA says that where there are two purchase money security interests affecting the same collateral at the same time and one is "vendor credit" and the other is "lender credit", then - regardless of who has registered first - the holder of the security interest representing "vendor credit"  will win the priority contest.  On the other hand, if the Crops Inputter utilizes some subsidiary, affiliate or other financial institution to advance value to the Producer which the Producer then uses to buy inputs from the Crops Inputter, the Crops Inputter's (or more accurately, its subsidiary's affiliate's or connected financial institution's security interest) would - like the Bank - be a purchase money security interest securing "lender credit".  In that case, with the Bank having registered its "lender credit", purchase money security interest first, the Bank's security interest would hold priority over the Crop Inputter's (or its affiliate's) security interest.

But arguably, although the security interests held by each of the Bank and the Crops Inputter appear to be in the nature of purchase money security interests, in fact, they are NOT strictly speaking, "purchase money security interests", but rather a species of security interest which is sometimes colloquially called a "production value security interest" and which is dealt with specifically under Section 34(10) of the MPPSA.  In fact, the Bank's security interest under its GSA will most likely be in part a purchase money security interest, in part a production value security interest governed by Section 34(10) and in part, a security interest securing obligations which do not fall within the concepts of the values secured by purchase money security interests or production value security interests.

The answer to the above question is, in our opinion, "no".  This is essentially for two reasons:

  1. As mentioned above, a "production value security interest" is not dealt with in exactly the same way as a "purchase money security interest" under the MPPSA.  Section 34(10) of the MPPSA provides:

"A perfected security interest in crops or their proceeds given for value to enable the debtor to produce the crops and given while the crops are growing crops or during a period of six months immediately before the time the crops become growing crops (and continuing thereafter, until the crops start growing), has priority over any other security interest in the same collateral given by the same debtor." (the underlining is the writer's, for emphasis purposes).

Where the Bank provides value that does in fact enable a Producer "to produce the crops" and the Bank does everything it is supposed to do to achieve priority as required by said Section 34(10), and, a Crops Inputter perfects (registered) after the Bank has registered, then, insofar as the Producer's Crops are concerned (although not necessarily with respect to other collateral covered by the Bank's GSA), priority should go to the Bank.  Note that Section 34(5) of the MPPSA - which, in effect, provides that a vendor credit security interest will take priority over a lender credit security interest, only applies to purchase money security interests, and (again, as stated above), the production value security interest dealt with in Section 34(10) of the MPPSA is not - strictly speaking - a purchase money security interest.  That means that priority, as between the Bank's security interest and the Crops Inputter's security interest must be determined by the MPPSA "residual rule" (Section 35(1)) which provides that the first to register wins a priority contest.  In this example, the Bank has registered first so it "wins".  Obviously, if the Crops Inputter had registered its production value security interest before the Bank had registered, then the Crops Inputter would "win".

There is one question which we still have to resolve.  That is, just how broad is the meaning of the words "to produce the crops" found in Section 34(10)?  Is it restricted to what a Crops Inputter normally provides, such as seed, pesticides and fertilizer, or, is it broader to also include costs paid for (with the Bank's loaned monies) relating to employing farm hands, electricity consumed, costs of servicing and operating farm equipment and machinery, and for that matter, all costs generally of the Producer's agricultural production business?  If "to produce the Crops" is in fact limited to provision of inputs (on credit) such as seed, fertilizer and pesticides, then there may be a need to apportion the use by the Producer of the credit extended by the Bank amongst what are clearly direct production inputs and other inputs (paid for with the Bank's credit) which are less directly connected with the creation of the Crops.

  1. Where the Bank has acquired its Bank Act Security on the Producer's Crops and taken all steps required under the Bank Act to establish its priority, and, this occurs before the Crops Inputter perfects its security interests against the Crops, then the priority of the Bank's security in the Crops, as specified in Section 427 of the Bank Act, clearly gives the Bank priority over the provincially governed Crops Inputters security interest.  In this regard note:

(a)          Section 4(k) of the MPPSA provides that the MPPSA does not apply to a security arrangement governed by the Bank Act provided that the Bank Act "deals with the rights of parties to the (security) agreement or the rights of third parties affected by a security interest created by the agreement".  Clearly, Section 427 of the Bank Act (in particular, subsections (2)(d) and (4) so "deal with the rights of (the) parties…and…rights of third parties";

(b)          the Bank Act does not have any rules providing for two or more banks providing value to a Producer on the security of the same Crops, other than that if the Bank's Bank Act Security was competing with another Canadian chartered bank's Section 427 security on the same Crops, the bank which would "win" the priority contest between the two banks would be the bank that filed its Notice of Intention (to grant the Bank Act Security) first.

The foregoing considerations also raise the following issues and conclusions:

  1. Where the Bank has taken its security and registered first before a Crops Inputter's MPPSA financing statement registration, the Bank should "win" the priority contest.
  2. Where the Bank takes both a provincially governed GSA and a Bank Act Security assignment, the Bank's security would initially, under the GSA, extend to the seeds, fertilizer and pesticides which the Bank has financed the Producer's acquisition of (Section 427 (1)(d) of the Bank Act appears to limit the Bank's security to the Crops themselves), and thereafter, upon the seeds, fertilizer and pesticides being "put" into the soil, would also extend to the Crops commencing to grow therefrom, the Bank's GSA and its Bank Act Security would both extend to the Crops.  That does give a "window of opportunity" to the Crops Inputter, in that during the period of time that the Producer holds seed and/or fertilizer and/or pesticides (before the Producer puts those into the ground), the Crops Inputter's security interest - provided that the Crops Inputter is extending "vendor credit", not "lender credit" - would have priority over the Bank's GSA security interest in the same collateral.
  3. Perhaps the best practical advice that can be given in this scenario of competing/overlapping secured creditors with respect to a producer's crops is for all concerned creditors (including chartered banks, Crops Inputters and any other parties advancing or considering advancing credit to an agricultural producer), to get together and work out a reasonable intercreditor agreement.  Such agreement would spell out the types of credit being provided by each creditor and define all creditors' respective priorities with respect to the Producer's crop inputs, crops and proceeds of those crops.
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January 2002

Two recent cases (Schwab Construction Ltd. before the Saskatchewan Court of Queen’s Bench, judgment given March 27, 2001 [the “Schwab Case”], and Mega Pets Ltd. before the British Columbia Supreme Court, judgment given December 29, 2000 [the “Mega Case”]), illustrate the different approaches which can be taken by Courts in sorting out priority issues over entitlement to proceeds of disposition of assets held by a common debtor who is indebted to Canada Customs and Revenue Agency (formerly Revenue Canada, hereinafter, “CCRA”) for amounts deducted from employees for income tax, Canada Pension Plan premiums and Employment Insurance Plan premiums, and, indebtedness owed to private creditors.

Under the Income Tax Act (Canada), the CCRA claim to the assets of the common debtor (and in particular to the proceeds of disposition thereof) is given priority over a number of specifically listed commercial arrangements, including a “debenture,” a “mortgage,” a “lien,” a “pledge,” a “charge,” a “deemed” or an “actual trust,” an “assignment” and an “encumbrance” “of any kind whatever.” These are given as species of what that Act refers to as a “security interest.” In the Schwab Case, the Court held that it was not necessary or even appropriate to follow the rules contained in provincial personal property security legislation and in the cases dealing with same for the purpose of determining whether or not a particular commercial arrangement was or was not a “security interest” within the meaning of the Income Tax Act. In the Mega Case, the British Columbia Court came to the opposite conclusion.

Consequently in the Schwab Case the Saskatchewan Court, which had to consider several competing private claims in addition to that of CCRA, held as follows:

  1. Where the private creditor’s arrangement was structured in the form of a lease of goods, since the creditor at all times held ownership of the goods (as lessor), the private creditor should prevail.  Whether or not the lease would have been considered a financing lease or a “true” lease under provincial personal property security legislation is irrelevant.
  2. Where the private creditor’s arrangement was structured as a conditional sale contract, again with ownership of the goods at all times remaining with the creditor, the creditor’s claim should also prevail.  Again, it was irrelevant that the applicable provincial personal property security legislation would have treated the conditional sale arrangement as a security interest.
  3. Where the private creditor’s interest was clearly some other form of an ownership interest, again the private creditor should prevail.

On the other hand, the British Columbia Court in the Mega Case dealt with a conditional sale contract, and since this Court decided that, in categorizing a commercial arrangement as being or not being a “security interest” within the meaning of the Income Tax Act, it was appropriate to apply provincial personal property security legislation principles, the conditional sale contract clearly being a “security interest” under provincial legislation, so this Court held that CCRA should prevail.

Since it appears to be the objective of the federal government taxing authority to simply strip competing claimants of their property claims in the common debtor’s assets without compensation (in other words, expropriation without compensation), we can expect that if the Saskatchewan Court’s view of this matter gains any substantial judicial following, the federal government will - as it has done before - simply get Parliament to change the rules in its favour.  Don’t be surprised if the government does so on a retroactive basis as it did following the disappointing (to the government) result of the Supreme Court of Canada decision in the Royal Bank and Sparrow Case.

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Section 77 of the Manitoba Real Property Act (the "MRPA") provides, in effect, that where title to land which is subject to a "mortgage" or an "encumbrance" is transferred, the transferee is deemed to covenant to the holder of the "mortgage" or "encumbrance" that the transferee will pay and perform all obligations contained in the "mortgage" or "encumbrance", and, that the transferee will additionally be deemed to covenant to the transferor that the transferee will so pay and perform and will indemnify the transferor from liabilities sustained by the transferor by virtue of the transferee's failure to so pay/perform in favour of the holder of the "mortgage" or the "encumbrance".  Additionally, Section 77 specifies that "one or more (or all) of these "deemed covenants" may be negatived (i.e., eliminated) by the simple unilateral act of the transferor including a negativing statement or declaration within the transfer instrument.  These provisions raise the following questions:

(a)          it doesn't seem reasonable that the transferor can by its own act, eliminate the deemed covenant which would otherwise have to be undertaken by the transferee in favour of the holder of the "mortgage" or the "encumbrance", and that the transferor could no doubt do this without the mortgagee or holder of the encumbrance even knowing about this.

(b)          "mortgage" is defined in Section 1 of the MRPA to be "a charge on land created for securing a debt, existing, future or contingent, or a loan, and includes an hypothecation of the charge".  Given that Section 77 limits itself to titled real estate, it is reasonable to assume that in the overwhelming majority of cases, "mortgage" will mean a real property mortgage in the form prescribed under the MRPA.  "Encumbrance" is also defined in Section 1 of the MRPA to be "a charge or lien on land other than a mortgage, and includes an hypothecation of the charge or lien".  Does this latter definition include:

(i)            a builders lien or a judgment lien? - probably "yes";

(ii)           an easement, a negative covenant or a building scheme? - probably "no";

(iii)          the portion or those portions of a municipal subdivision agreement, zoning agreement or development agreement which obligate the property owner and its successors in title to pay certain amounts of money, in particular, where the agreement includes wording to the effect that the obligation to pay such money is "charged" against the ownership of the land? - uncertain; and

(iv)         those portions of a lease which obligate the lessee to pay certain monies (whether expressed as rental or otherwise)? - probably "no".

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November 2003


            A person (the “Creditor”) provides value to/extends credit to another person (the “Debtor”) and the resulting indebtedness is evidenced by a promissory note (the “Note”) issued by the Debtor to the Creditor specifying the amount of the value advanced or credit extended.  It is agreed that the indebtedness will be payable on demand, and, because the parties are not dealing at arms’ length, or for some other reason (for example, the Debtor may have provided some other consideration or accommodation to the Creditor), they agree that either no interest whatsoever will be payable by the Debtor on the indebtedness, or, that interest will only be payable after demand.  The terms of this agreement are reflected in the Note.

            More than six years expire after the issuance of the Note and then the Creditor decides that it wants its money back and demands payment from the Debtor.

            If the Debtor doesn’t pay, can the Creditor commence an action to be paid, or is the Creditor statute-barred under the provisions of The Limitation of Actions Act (Manitoba) (the “Act”)?  Section 2(1)(i) of the Act makes it clear that an action for recovery of money (except money charged upon land) must be commenced within six years “after the cause of action arose.”

            It may seem logical to think that a cause of action would not arise against the Debtor until the Creditor had made a demand for payment and the Debtor failed to pay.  If the policy behind the Act is to induce a potential claimant to commence legal action sooner rather than later (i.e., within the statutorily-specified time periods referred to in the Act) following the point in time where a “wrong” has been done to the claimant (in this case, the failure of the Debtor to make payment when the Creditor required it to do so), surely no “wrong” has been done to the Creditor until after it chooses to make demand under the Note and the Debtor doesn’t make payment.

            While such thinking may be logical, it is clearly not reflective of the law.  In fact, it has been long settled that the cause of action in favour of a promisee under a demand promissory note arises against the maker thereof forthwith upon the issuance of the note, and not at a later time when the promisee makes demand.  While the Act does provide that the cause of action starts again, whether before or after the six-year period starting with the issuance of the note, on the occasion of each acknowledgement of the indebtedness by the maker, such as payment of periodic interest, remember that in the above example, no interest is owed or payable by the Debtor until after the Creditor makes demand.

            If you have acted as the Creditor’s lawyer in the formulation of the Note, and you have failed to warn the Creditor that an action under the Note will be statutorily barred six years after issuance in the absence of the Creditor getting some acknowledgment of the indebtedness, or unless the terms of the underlying indebtedness are somehow changed so that the debt is not payable on demand (e.g., the debt is converted into a term loan requiring periodic payments to be made), are you liable to the Creditor in negligence?  In this writer’s opinion, the answer is probably “yes”.

            If you are the intended promisee under a contemplated promissory note, or you are the lawyer acting for such intended promisee, what can you do to avoid the possibility of the debt becoming statute-barred?  Assuming that the intended parties to the Note wish the indebtedness to be repayable only when the Creditor requires that it be repayable, there are several possibilities:

  1. The parties could agree that interest will be payable both before and after demand, so that on the occasion of each interest payment, the limitation period will again start to run.  This way, by the end of the six-year period starting with issuance of the note, and assuming that the interest payments have been duly made, the promisee would have another at least five and possibly six years in which to start an action against the debtor.  If the Debtor doesn’t really want to pay substantial interest and the Creditor is agreeable to not requiring that substantial interest be paid, the interest could be at some very low rate, with it being payable once a year, rather than the usual more frequent requirement for interest payments.
  2. The terms of the indebtedness and the Note could be structured so that the Creditor’s cause of action would not arise immediately upon the issuance of the note.  This could be done by having the note provide that in order to require that payment be made to the Creditor, the Creditor would not only have to, in effect, demand repayment, but the Creditor would also have to physically present the Note to the Debtor.  This may or may not work, because there is some ambiguity in the case law on this matter. It seems clear that a note which is stated to be payable on presentment without the maker being entitled to any period of time within which to make payment is considered to be equivalent to a demand promissory note.  However, there is case law that holds that if a note requires that payment be made at a specified place, then the promisee’s cause of action against the maker will not arise until the promisee has properly presented the note for payment at that place.  Thus it would appear that a promissory note which requires that payment be made immediately upon presentment at a specified place would allow the promisee to delay commencement of the limitation period running against it until it has made actual presentment at the specified place.  Nevertheless, the case law is also somewhat ambiguous on this point so the course of conduct suggested in paragraphs 1 above and 3 below would be safer.
  3. The Note could be structured so that it was clearly not evidence of a demand obligation.  This would necessitate specifying that the time for payment was neither “on demand”, nor “on presentment”, but rather that payment was due at the end of some specified period of time following presentment.  The period of time after presentment could be a relatively short one so as to approximate a demand obligation for practical purposes.  Presumably, the promisee’s cause of action would not arise until presentment had been made and the specified period of time had elapsed without any payment (or other acknowledgment of the indebtedness) having been made by the maker.  Although the writer is not aware of any case law on this particular point, he does have a concern about this sort of arrangement.  Because in substance, a note structured in this manner would perform virtually the same function (in terms of the time when payment is due) as would a demand note (or a note payable immediately upon presentation), a Court might hold that such a note was in substance equivalent to a demand note with the result that the promisee’s cause of action would in fact be held to arise immediately upon the issuance of the note and not at some later point in time.

            For those holding existing demand (with interest payable only after demand, if at all) promissory notes and their lawyers who have failed to counsel such holders as to the above potential problem under the Act, what can be done?  The writer suggests that such holders’ lawyers advise them now as to the potential problem and that attempts be made to solicit current acknowledgments of the indebtedness from the note-makers.

            The rationale behind the rule that the promisee’s cause of action arises, and thus the limitation period starts to run against him, forthwith upon the issuance of the note, rather than at some subsequent time when the promisee actually makes demand, probably relates to the fact that the maker could - if it chose to do so - wait an inordinately long period of time after issuance of the note, and certainly far longer than six years from the note issuance, before getting around to making a demand.  If time doesn’t start to run against the creditor upon issuance of the note, the creditor could in theory create its own limitation period for the note indebtedness by not demanding for, say, ten, twenty or thirty years.  That being the case, it would seem logical to conclude that as against a creditor under a guarantee, time would start running against the creditor immediately upon the issuance of the guarantee to it, and not when the creditor demands under the guarantee.  While logical, such thinking is not correct as the cases clearly indicate that time does not run until the creditor makes a demand under the guarantee.  The rationale behind this rule may be that in most cases, a creditor will not be entitled to demand under the guarantee until the principal debtor defaults in its obligations owed to the creditor.

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February 2016

When a couple makes their home on realty where one only of the pair holds title/registered ownership (the "on-title spouse"), The Homesteads Act (Manitoba) (the "MHA") gives certain rights to the other spouse who is not on title (the "off-title spouse").  Where both spouses are on title, each of them has homestead rights in the realty.  The rights with which this paper is concerned are the spouses' entitlements to insist that he or she either consents to any "disposition" of the realty (where one only of the spouses is on title), or, that no "disposition" be made unless both spouses execute an appropriate transfer (which would be the case where both spouses are on title).  "Disposition" is defined in the MHA to include the "usually" encountered conveyances, namely transfers, mortgages, leasings, commitments to sell, options to purchase, grants of easements and the imposition of restrictive covenants of/upon realty.  Interests in the nature of unilaterally or legally imposed liens (ie, judgment and builder's liens, etc.) are not considered to be "dispositions" for this purpose.

Where a third party proposes to deal with an on-title spouse and thereby acquire an interest in the realty, should the third party be concerned with the possibility that the transaction might be held to be void under the MHA by reason of the lack of a consent to the proposed transaction required to be given by the off-title spouse?  The answer is "yes".  Similarly, where a third party contemplates dealing with both spouses (both spouses being on title), the third party should be aware of the possibility that one of the persons being held or holding themselves out as being the other owner's spouse is not in fact the spouse of the co-owner.  There have been a number of cases in which on-title spouses have misrepresented either the identity of their spouse, or the status of the realty in relation to the MHA requirements.  Not that long ago, a case came before the Manitoba Courts in which an owner fooled his own lawyer into believing that a woman was his spouse, when in fact she was (along with him) a fraudster.

Section 5 of the MHA makes it clear that provided that the on-title spouse provides a third party with an affidavit, statutory declaration or a statement deemed to be given under solemn oath or affirmation by virtue of it being included/incorporated into a prescribed form of Manitoba Land Titles instrument, in which the on-title spouse states:

(i)            that he or she is not married and not in a common-law relationship; or

(ii)           that the person who has consented to the disposition is in fact the on-title spouse's spouse; or

(iii)          that the land is not the on-title spouse's "homestead" (within the meaning of the MHA);

then, provided that the third party does not have knowledge to the contrary, the disposition in favour of the third party will not be void.  Similarly, and although not specifically stated in the MHA, it would appear that where a third party deals with both spouses - both spouses being on title - the third party's acquisition cannot be challenged provided that the third party obtains (and relies on bona fide) an affidavit, declaration (or the equivalent) from both spouses that they are in fact spouses within the meaning of the MHA.

A careful reading of Section 5 of the MHA, including, in particular, subsection (3), indicates that not only can a bona fide third party rely on the provision of such sworn, declared or affirmed statements by the spouse(s) ("Homestead Evidence"), thus preserving the integrity of the disposition in favour of the third party, but also that the District Registrar at the relevant Land Titles Office is also entitled to rely on such Homestead Evidence.  Note however that in order to be able to rely on such statements, they must be "…made by the person who executes the document or instrument respecting the disposition or by his or her attorney, or, if a person is not mentally capable, by his or her committee or substitute decision maker for property.".

Real estate lawyers are generally familiar with the foregoing, and in particular, when acting for purchasers or mortgagees, will require proper completion of a transaction's transfer or mortgage so as to include, in essence:

(a)          an off-title spouse's consent, duly witnessed and acknowledged as required by the MHA, together with a statement (under oath or the equivalent of being under oath) that the person who consents is the on-title spouse's off-title spouse; or, as the case may be,

(b)          a statement under oath (or the equivalent of being under oath) to the effect that the subject realty is not the transferor's (or mortgagor's) "homestead", or that the transferor (or mortgagor) has no spouse of any kind, or that, where both spouses are on title, that the spouses are in fact "spouses" (as defined in the MHA).

But what about the situation where a title holder has granted an easement or imposed a restrictive covenant on his/her land, or the title holder has granted an option to purchase his/her land, and, the grantee/dominant tenement or benefitted property owner (or optionee) registers its interest by way of caveat?  Unlike a transfer or a mortgage - which clearly has to be signed by the on-title spouse (and by the off-title spouse where the off-title spouse's MHA consent is required), or, where both spouses are on title, has to be signed by both spouses, the grantee or beneficiary or optionee - not the grantor(s) - is the person who signs the caveat.  The caveat is merely notice of the caveator's claimed or alleged interest - it does not itself create the interest.  Execution and delivery of a mortgage, transfer, grant of option or grant of easement is what creates the interest.  As an aside, execution and delivery as well as registration of a statutory easement are all required in order for a statutory easement to create a land interest.

In paragraph #4 of the current form of Land Titles Office mandated caveat, the government requires the caveator to state that:

"This caveat is not being filed for the purpose of giving notice of a disposition that is prohibited by section 4 of The Homesteads Act".

So if you are advising a third party taking - or proposing to take - an interest in land, in particular, where the land is in the name of one or more natural human beings, what can you do to minimize the risk that the caveat's paragraph #4 statement turns out to be incorrect?  Before attempting to answer this question, bear in mind the following:

(a)          Under The Manitoba Real Property Act, liability for filing a caveat claiming an interest when in fact no interest lawfully exists is based on a "reasonableness test".  You must consider what is reasonable - in the circumstances - to claim the interest of which the caveat is to give notice, even if it later turns out that, for whatever reason - including failure of one or both of the on-title spouses to comply with the requirements of the MHA - there was no legally valid land interest in existence.

(b)          In order to be criminally liable for making a false statement under oath (or under the equivalent of being under oath), the person making the statement must have knowingly (and probably in the alternative, recklessly) made a false statement.

(c)          Section 5(4) of the MHA clearly provides that a disposition is not invalid "except against a person who, at the time he or she acquired an interest under the disposition, had actual knowledge of the untruth (of the statement) or actually "anticipated or colluded in fraud in respect of the disposition".

The crux of the problem that I am attempting to focus in on is the fact that as between the caveator and the spouse (or spouses) creating or granting a land interest in favour of the caveator, it is surely the spouse or spouses who have a better knowledge of their domestic situation than (at least in more cases) the caveator would have.

Counsel might consider the following:

(1)          Where your client is acquiring a land interest under a grant or agreement, you can completely eliminate the need for you (or your client) to sign and register a caveat giving notice of your client's interest by ensuring that the grant or agreement itself is in the form approved by The Land Titles Office for the purpose of permitting the grant or agreement itself to be registered.  The grant or agreement will be signed by the on-title spouse and can thus include the MHA statements required under Section 5 of the MHA.  This will not, however, "work" in all cases, because some land interests are not capable of being registered by way of direct registration of the constituting grant or agreement against title, for example, most leases and options to purchase.  In these cases, these interests can only be recorded on title by way of a caveat.

(2)          It has been long recognized that where a lawyer counsels her/his client to sign a caveat, it is the client - not the lawyer - who should do the signing.  However, the problem with this "solution" is that in many cases, your client will not have much more knowledge than you do as to the truthfulness and accuracy of the "other side's" statements.

(3)          Ensure that the actual grant or agreement creating the land interest (which must in any event be signed by the grantor(s), or by one grantor with the grantor's off-title spouse properly consenting), includes therein appropriate MHA Section 5 statements, together with a space/provision for the off-title spouse to sign her/his consent, with an appropriate "acknowledgement".  If that is done, then the recipient of the land interest can, at least with a substantial degree of assurance, make the statement contained in paragraph #4 of the caveat. 

(4)          Obtain a title insurance policy which indemnifies a caveator against loss arising by virtue of the caveator unintentionally making a false statement in paragraph #4 of the caveat.  Presumably, a caveator would not make a paragraph #4 statement without at least getting some assurance from the registered owner that the MHA didn't apply or that its requirements were being met, so that the statement being made by the caveator would have been made honestly, but in reliance upon false assurances from the owner.  However, in relying on a title insurance policy indemnification, counsel should be very careful to ensure that the "fine print" of the policy actually covers this situation.  It may not always do so.

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July 2010

You are a financial institution and you have decided to advance credit to someone (the "Borrower").  In addition to the Borrower's undertaking to pay you back (with interest), and, in addition to whatever real and/or personal property security the Borrower gives you to secure performance of its obligations, you also require the Borrower to get someone else (the "Third Party") to mortgage/charge/grant a security interest in some of the Third Party's realty and/or personalty.  The understanding between you and the Third Party is that if the Borrower fails to repay its debt, then you can realize upon the Third Party's assets charged to you (typically, by way of your selling or foreclosing upon, that is, becoming the owner of, the Third Party's charged assets).

You decide - or are convinced by the Borrower and/or the Third Party - to accept the Third Party's charge of its assets without the Third Party, in any way whatsoever, undertaking responsibility for the satisfaction of the Borrower's obligations owed to you.  That is, you take the charge from the Third Party on its assets without also obtaining a (more or less concurrently granted) guarantee, indemnification or other obligation from the Third Party to "stand good" for the Borrower's debt.  You make this decision because:

(i)            the Third Party is closely related and/or controlled by the Borrower (for example, the Third Party is a close friend or relative of the Borrower, or the Third Party is a corporation, all of whose issued capital stock is held by the Borrower and all of whose directors and officers are nominees of the Borrower); and/or

(ii)           the Third Party holds the assets charged to you as a bare trustee only, for and on behalf of the Borrower (here, the Borrower would probably argue that because the Third Party is merely the "alter ego" of the Borrower, they are essentially one and the same person, so that no separate obligation undertaking personal responsibility by the Third Party is required, as any charging of its assets by the Third Party should be considered to be a charging of the same assets by the Borrower).

After having taken security from the Third Party without obtaining a concurrent obligation by the Third Party and after advancing funds to the credit of the Borrower, one or both of the following occur:

(a)          the Borrower fails to repay its debt and you decide to realize your security against the Third Party's charged assets; and/or

(b)          the Borrower fails to repay its debt and when you go to proceed against the Third Party's charged assets, the Third Party has become bankrupt under the Canada Bankruptcy and Insolvency Act.

As a further "twist" in the above-described fact scenario, also assume that some time after taking security from the Third Party and advancing credit to the Borrower, you agree with the Borrower to certain variations in the terms of your arrangements with the Borrower. You agree to release some of the security given to you by the Borrower and/or you and the Borrower agree to an increase in the rate of interest payable by the Borrower and/or you and the Borrower agree to one or more other variations of your arrangements, any and all of which increase the risk to the Third Party that you will have to proceed against the Third Party's assets - without, in any of these instances, either notifying or seeking and obtaining the consent in writing of the Third Party.

What are your rights vis-à-vis the Third Party, and in particular, the Third Party's assets charged to you?  The answer or answers to these question(s) are of considerably more than mere academic interest.  Two frequently encountered instances of the occurrence of the above-described arrangements are:

(1)          where a financial institution obtains a "pledge" from a third party of "collateral" to secure payment of indebtedness owed by someone other than the pledgor (ie, the Third Party).  The standard forms of "hypothecation and/or pledge of collateral" utilized by many financial institutions make it clear that the Third Party is pledging collateral whether or not the Third Party then or subsequently provides any form of guarantee to the financial institution.  In this context, "pledge" almost always implies the actual physical delivery of some sort of personal property to the financial institution, and, "collateral" typically implies personal property such as certificated securities, documents of title/bills of lading which entitle the holder to claim goods, either generically or specific goods, and precious metals such as gold bars, valuable gemstones, etc.

(2)          one or more "investors" buy a revenue generating property (perhaps an apartment building or small commercial development) and for various reasons, put title to the property in the name of a corporation which they create for the sole purpose of holding title, with the corporation undertaking to hold the asset in trust, as a bare trustee only, for the investors.  They then approach a lender requesting that a loan be made to them on the security of the property.

It is the writer's understanding that in theUnited States, grants of security without any underlying obligation are quite common.  Thus in a multi-jurisdictional transaction involving bothU.S.and Canadian jurisdictions,U.S.counsel may expect to implement such arrangements as a matter of course, and consequently expect Canadian counsel to opine on the enforceability of them. 

When acting for a lender, it has always been the writer's approach to require the Third Party to undertake some sort of an obligation to the creditor to "stand good" for the borrower's debt.  I say "some sort" because the Third Party could be made a co-borrower or could be made an unlimited guarantor or indemnifier (meaning that if the Third Party fails to pay, then the creditor can proceed, not only against the assets charged by the Third Party to the creditor, but also against the Third Party's other properties and assets by way of post-judgment execution and/or realization under a judgment lien filed against (other) real property belonging to the Third Party).  Depending upon how negotiations "go", and at the very least, the writer would require the Third Party to provide a "non-recourse" guarantee to the creditor (meaning that the creditor would agree that the only way it can enforce the Third Party's guarantee obligation is to proceed against the charged assets put up by the Third Party).

While the writer still believes that it is prudent for a creditor to obtain at least a non-recourse guarantee from the Third Party (which then, in effect, "supports" the granting of security on the Third Party's assets), there is certain case law and certain wording in the Personal Property Security Acts which indicate that a Third Party can, at least in some instances, grant security without undertaking any underlying obligation.  This is pointed out and discussed by Mr. Robert M. Scavone (of McMillan LLP) in a paper he presented at a meeting of the Ontario Bar Association (Professional Development) dated April 21, 2010.

The concept was enunciated in Re Conley (1938) 2 All ER 127(CA), and a review of the judgments in this case clearly indicate that the principle was accepted by English Courts much earlier than 1938.  Additionally, most, if not all, Canadian Personal Property Security Acts define and contemplate that a "debtor" can mean someone who owns (or has interests in) secured collateral without also being obligated to the secured party for payment/performance of the secured obligation.

However, and as noted above, it would be prudent for a creditor to nevertheless acquire some sort of an obligation from a Third Party to support its granting of security even if only on a "non-recourse" basis.  The reasons for this are as follows:

  1. As Mr. Scavone points out, although a Court may uphold a grant of security by a Third Party without the necessity of the creditor requiring the Third Party to undertake an obligation for the debtor's debt, or, a Court may imply the existence of a guarantee or guarantee-like obligation on the part of the Third Party, the creditor will not - or at least not necessarily - have the benefit of the various creditor exculpatory provisions traditionally contained in guarantees.  In particular, the creditor may be in a position where virtually any move it makes vis-à-vis the debtor or security provided to the creditor by the debtor (or by any other person) will release the Third Party's security.  It is possible that a Court will treat the Third Party as being in the same position as a guarantor who is thus entitled to the various equitable defences available to guarantors.
  2. As also pointed out by Mr. Scavone, if the Third Party has no underlying obligation whatsoever - other than its grant of security - to the creditor, and the Third Party becomes bankrupt under the (Canada) Bankruptcy and Insolvency Act, it is very likely that the Third Party's security grant will not constitute the creditor as a secured creditor in the bankruptcy.  This is because currently, a "secured party" in a bankruptcy must have some sort of obligation due or accruing due to the creditor which underlies the grant of security.
  3. Although the Personal Property Security Acts contemplate that a "debtor" and a person owning or having interests in secured personalty can be two different persons, the writer is unaware of any legislation which would allow the mortgaging of real property interests in the absence of an underlying obligation, at the very least, a contingent guarantee obligation.  There is in fact a difference of opinion amongst lawyers advising lenders taking security in real estate interests as to whether or not such security can validly exist without an underlying obligation.

It is thus the writer's view that a guarantee (or as the case requires, an indemnity or some other obligation) must be issued by a Third Party in conjunction with the Third Party's grant of security to the debtor's creditor.  This may be on a non-recourse basis, although in the case of bare trustee corporations whose sole raison d'être is and will always be to hold legal title to specific realty and/or personalty, the non-recourse feature is probably meaningless.

The one situation where the writer would consider taking security without any supporting obligation is where the holder of the collateral is legally prohibited from giving any guarantee, even on a non-recourse basis, but is not prohibited from granting security in its assets.  Such a situation would no doubt be infrequently encountered, but where it is, it behooves counsel to think long and hard about the viability and enforceability of any security so given.

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January 2009

You own a parcel of land (the "Property") and have decided to sell it to someone (the "Purchaser") on the understanding that the Purchaser uses the Property for a specified purpose and develops the Property with particular/particular types of improvements.  A more or less common example of this situation is where the current owner (you) subdivides a Property into a number of building lots and then enters into purchase and sale contracts with a number of buyers who promise that they will use their lots solely for, say, recreational purposes, and additionally promise you that they will, within a specified period of time, build cottages on the lots, with the cottages having to be constructed to meet, to a greater or lesser degree, your specifications.  Such an arrangement may be encouraged or indeed required by the municipal/local government for the jurisdiction in which the Property is situated.

You know that you can enforce the Purchaser's promises by court action brought against the Purchaser, but you also know that positive - as opposed to negative - covenants (promises) are not considered interests in land which are capable of being enforced against a successor in title to the original contracting Purchaser, absent the original Purchaser's successor undertaking to you directly to be bound by the original Purchaser's promises to you.  Instead, you accept the suggestion of a lawyer, who has a little, but not sufficient knowledge of these matters, to include an option in your favour to buy back the Property from the Purchaser, if and when the Purchaser breaches its promises to you.  The lawyer tells you that such an option is an interest in land and thus, if properly recorded (caveated) against the title to the Property, will indeed bind all successive title holders of the Property.

The use of options to purchase in this situation is fairly common, and while it is true that a "pure"/"unadulterated" option to purchase does constitute an immediate interest in land, an option in the above-described situation - which is really a conditional option which will only arise in the future upon the occurrence of some event which may or may not happen (ie., the original Purchaser's breach of its promise(s) to you) - is not an interest in land.  The arrangement is binding between the immediate parties to it, but will not "follow" the title into the hands of subsequent owners, barring an undertaking by a subsequent owner to be bound by the arrangement (ie., the conditional option).  The case law makes it clear that this type of a (conditional) option is really akin to a first right of refusal (which is also not an interest in land, although some people think it is and even try to caveat it), because unless and until the Purchaser breaches its promises to the promisee, the promisee has no unequivocally existing right to compel (at its choice) reconveyance of the Property.

Can an original land owner enter into any sort of arrangement with its Purchaser which would enable the original owner to get the Property back where the Purchaser's promise(s) is/are breached by a successor in title, with the original owner being able to enforce the promise(s) against a successor in title?  The answer is "yes", although counsel for the original owner will have to be very careful how he or she drafts the contract.

Before dealing with the law pertaining to this matter, please keep in mind that there are two elements of the Purchaser's promise(s) referred to above, namely:

(i)            the promise to only use the Property for a specified purpose; and

(ii)           the promise to develop/construct specified improvements on the Property.

Common law recognizes two similar, but in fact, in terms of legal consequences, substantially different, types of fee simple estates in land, namely:

(i)            a determinable fee simple.  This is a grant of fee simple ownership by the original owner to the transferee to last and exist during a period of time in which, or only for so long as, the transferee uses the Property for a specified use or uses.  Upon the Property ceasing to be used for the specified purpose or purposes, the fee simple ownership of the Property automatically reverts to the original owner, that is, reversion occurs without any exercise of discretion, an option, etc. on the part of the original owner.  The determinable fee simple is an interest in land and as such is caveatable against the title to the subject Property and will bind successors in title.

(ii)           a fee simple which is terminable upon a condition subsequent.  Here, where the Purchaser breaches its promise(s) to the original owner, then the original owner has a right or choice to require forfeiture of the Property back to the original owner.  Such an arrangement is enforceable between the parties but is not an interest in land which would bind successors in title.

Case law and legal commentators have made it clear that "the law has been jealous in its scrutiny of conditions subsequent and will readily hold them void as offending pubic policy, as incapable of performance, or for uncertainty".  In such a case, when the Court holds the condition subsequent to be void, the result is that the fee simple estate becomes absolute in the hands of the (then current) owner.  On the other hand, in the case of a determinable fee simple where the Court holds that the requirement specified to end the estate is void, typically due to uncertainty, the transferred estate will be held to have terminated, with the result that ownership will automatically revert to the original owner (ie., the result would be the same as where the terminating requirement was held to be valid and enforceable and that such event had occurred).

So, going back to the original example, if you are contemplating the sale of your Property, and you wish to induce performance of the purchaser's use/development promise(s) to you with the threat of forcing the return of the Property to you, and you would in fact want the Property back in your hands if the Purchaser (or its successor in title) ceased to use it in accordance with the Purchaser's promise(s) to you, how should the contract be worded?

The key is to word the agreement/transfer of ownership so that the conveyance is to be "for so long as" or "during when" the conveyed lands are used for one or more specified purposes only, or possibly "for so long as" or "during when" the lands are used in accordance with certain specified (typically, development) requirements.  The writer uses the word "possibly" here because when you move from characterizing the transferred ownership as being required to be utilized for a specified use or uses, to specifying compliance with requirements other than "purely" usage obligations, you start to get into the area of what may be, in any particular instance, requirements which obligate the owner to take specific actions and/or expend monies in order to meet the requirements.  The Courts have traditionally frowned on promises binding successors in title whereby the owner is obliged to take certain actions and/or expend monies.  In other words, it is one thing to require that the land be used only for "recreational purposes", but perhaps quite another to require that the owner (and its successors in title) build a cottage (in accordance with certain specifications) by a certain deadline.  The latter requirement, which would obligate the owner (or its successor) to take certain actions and/or expend funds, are requirements which are substantially akin to the imposition of positive - as opposed to (passive) negative - covenants/promises on or against land, and as such, may not be enforceable against successors in title.

Nevertheless, the dividing line between a grant of ownership "for so long as"/"during when" the land is used only for specific purposes, and a grant of ownership "for so long as"/"during when" the land is used in accordance with specific (development type) requirements, is a fine one.  Thus, counsel would no doubt be better advised to at least attempt to arrange for a conveyance of ownership "for so long as"/"during when" the land is utilized in accordance with specific development type requirements, than attempt to establish an arrangement whereby the vendor has a conditional option to re-acquire the land where the Purchaser (or its successor) breaches the obligation to develop the Property in accordance with specified development type requirements.

Land owners contemplating the imposition of usage/specific development type requirements on one or more purchasers from them by way of the establishment of determinable fee simple arrangement(s), should take into account the likely reaction of a Purchaser's (or its succesors') mortgage financier(s).  No mortgage lender would want its security to suddenly disappear by virtue of reversion of ownership of the mortgaged land back to the mortgagee's mortgagor's vendor, free and clear of the lender's security.  At the very least, a mortgagee would want its mortgage security to "follow" ownership of the Property back to the vendor, with some assurance that the vendor would be bound - at least on a non-recourse basis - under the mortgagee's security.  Whether the original owner/vendor would be willing to be bound by a Purchaser's mortgage financing may be a difficult question to answer, but it is certain that no mortgagee in its right mind would advance money to a mortgagor where the mortgagor's ownership could suddenly disappear through no fault of the mortgagee.

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Readers are referred to the writer's earlier memorandum entitled "NEW PROVINCIAL GOVERNMENT RULES FOR WASTEWATER MANAGEMENT SYSTEMS" ("Original Memorandum").  Since sending out the Original Memorandum, the writer has received a number of comments thereon which he believes are worth sharing with interested persons.  Words and expressions used in this memorandum which have been given defined meanings in the Original Memorandum shall have the same meanings herein as given to them in the Original Memorandum.

  1. Might the Amended Wastewater Regulation apply to leased property?  Given the number of cottages/recreational properties utilizing (private) onsite wastewater management systems, this is much more than an academic question.  Sections 8.1 to 8.3 refer to a/the "land owner" and to a/the "transfer of (the) land".  The Amended Wastewater Regulation does not define "owner" nor does it define "transfer", so that arguably, the lessee under a (typically, although not necessarily, long-term) lease of land and any transfer, assignment, etc by the lessee to an assignee might well be caught up under the Regulation's requirements for onsite wastewater management systems.  The same analysis applies to Section 14.2 of the Amended Wastewater Regulation dealing specifically with sewage ejectors.  If lessees are caught, it is the writer's view that a lessee plus the lessee's lessor would be both obliged to comply with and would both be subject to sanction under the Amended Wastewater Regulation.
  2. Should purchasers, mortgagees and their counsel require the inclusion of one or more appropriate statements in a seller's/mortgagor's typically taken (at closing) statutory declaration as to possession ("Closing Declaration")?  A statement or statements pertaining to the status of the property in relation to onsite wastewater management systems and/or the availability of a ("public") wastewater collection system contained in a Closing Declaration couldn't "hurt".  However:

(a)          a written statement/advice as to the availability of a ("public") wastewater collection system and/or the likelihood of one becoming available within the next five years issued by Manitoba Conservation would be preferable to a statement to that effect by the seller/mortgagor; and

(b)          because a Closing Declaration is not typically taken until just before or concurrently with a closing of a transaction - ie., long after when the  sale or mortgage contract is first entered into - the practical usefulness of relying solely on statements in a Closing Declaration is probably minimal.  The time when an intending purchaser or mortgagee would want to learn of the status of the property in relation to these matters would be at the time of, and in fact preferably before, when the contract is entered into.  That way the contract (sale agreement/mortgage commitment letter agreement) can be adjusted to specify the appropriate warranties and to properly specify who is to do what (and when) in relation to compliance, and in particular, non-compliance, with the applicable requirements of the Amended Wastewater Regulation.  Such matters would likely have a bearing on the purchase and sale price or the amount and the timing of advancement of a mortgage loan.

  1. Septic tanks and fields will be banned for properties which are less than two acres or which have less than 60 meters (198 feet) frontage, and this is so even if there is no available ("public") wastewater collection system.  This is a new requirement under the Amended Wastewater Regulation which was not mentioned in the Original Memorandum.  While it is possible for a property owner to apply to the government for permission to install a septic tank or septic field type system, there certainly is no guarantee that an applicant would be successful.  This is of course of concern to any cottage/recreational property owners who frequently have less than two acres land or less than 60 meters (198 feet) frontage.  The Amended Wastewater Regulation does not specify what "frontage" means here - does it mean frontage on a public or road or a private road?
  2. In the Original Memorandum, the writer suggested that persons who contracted for the sale of affected property before and without knowledge of the coming into force of the amending regulation #156/2009 consider "splitting the difference" of the costs of compliance.  It has been suggested to the writer that a seller might reasonably agree that a "50 - 50 split" doesn’t make sense for the simple reason that the purchaser will be getting a substantial benefit from the remedial action that the seller is forced to make prior to closing, and that consequently, the purchaser should pay for most if not all of such benefit.  Difficult negotiations may well be in store for sellers and purchasers in this position.

Generally speaking, in considering the matters raised in this memorandum and the Original Memorandum, the writer strongly believes that the following should be done:

(i)            As noted above, the time when a (potential) purchaser or mortgagee should be aware of the status of the seller's/mortgagor's property in relation to onsite wastewater management systems is before the underlying contract is entered into.  If the underlying contract fails to properly deal with the matter, then by the time that lawyers become involved, it will, in most if not all cases, be too late.  Thus the need for potential buyers and potential mortgagees - as well as potential sellers and mortgagors - to be properly educated on the Amended Wastewater Regulation.  Hopefully, one can assume that most businesses purchasing real estate or advancing value on the security of real property mortgages will so educate themselves either directly, or through their legal advisors.  For the vast majority of others involved, in particular, "ordinary" sellers and buyers of real properties outside of areas served by ("public") wastewater collection systems, that will mean that the usual "gatekeepers", namely REALTORS must be educated so that they can advise and assist their seller and buyer clients to properly complete purchase and sale agreements.  The writer is aware of certain efforts being made - and which have already been made - to so educate realtors, and this effort must be kept up and be ongoing.

(ii)           It is necessary for the government to clarify certain of the questions which have arisen and which will no doubt arise in the day-to-day application of the Amended Wastewater Regulation.  The original memorandum and this memorandum have raised some of those questions, and no doubt those "in the field" will, through experience, raise others.  Ideally, these questions should be clarified by further amendment to the Amended Wastewater Regulation, but even the publication of written statements of policy or intention by Manitoba Conservation would be helpful.  One significant question raised by one of the writer's correspondents has to do with such correspondent's understanding from Manitoba Environment regarding the disconnection and decommissioning of sewage ejectors.  It is this person's understanding that where an owner sells its property to a purchaser who specifically agrees to undertake to disconnect and decommission the ejector within two years from closing, the seller would not be prosecuted.  Unfortunately, the way that the Amended Wastewater Regulation currently reads, this doesn't appear to be the case, and in fact, even where a purchaser undertakes responsibility and then fulfills that responsibility to remove the ejector, the seller is still open to prosecution.  Clearly, the government should clarify this matter, perhaps by a policy statement.

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The recent Manitoba Court of Appeal decision (Kadyschuk and Sawchuk, hereinafter the "Kadyschuk Case") confirmed what has been established law for quite some time relating to first rights of refusal.  That is, that such arrangements are purely contractual in nature and do not constitute interests in land, and thus cannot - apart from further contractual assignments and undertakings - bind a successor in title to the original land owner who grants a first right of refusal. The theory underlying this is that, unlike an option to purchase which gives the optionee the right and power to compel the optionor to sell its land to the optionee (upon the optionee properly exercising the option), under a first right of refusal, the grantee thereof does not have such right and power within its control, but must await the occurrence of one or more acts and/or decisions taken by the grantor of the first right of refusal, which acts/decisions are entirely within the control or discretion of the grantor, and in particular, are not within the control or discretion of the grantee.

At first instance in the Kadyschuk Case, the motions judge, in referring to the first right of refusal which the parties had agreed to, stated that "…that right needs to be placed not only in this agreement but on the title or registered somewhere such that an innocent party without notice is not caught in this legal argument that there is a first right of refusal. …I am not going as far as saying that (the grantee of the first right of refusal) has an interest in the land…but he certainly has a right that has to be registered and that right, in this court's opinion, can be registered on title in the Winnipeg Land Titles Office…".

As the Court of Appeal pointed out, the problem with the motion's judge's position was that registration of the grantee's rights of first refusal can not be made against the grantor's title (by way of caveat or otherwise), because under the Real Property Act (Manitoba), a caveat can only be used to register an interest in land and a first right of refusal is not an interest in land. However the motions judge did raise an interesting question as to whether or not a third party contemplating taking an interest in the grantor's land (after the grantor has provided a first right of refusal to a grantee thereof), namely someone who the motions judge would refer to as an "innocent party", who searches the title and finds no record of the first right of refusal, would be prejudiced by its existence where such "innocent party" contracted to purchase the land and then got caught up in an argument as to whether or not the first right of refusal took priority over the "innocent party's" purchase rights. One could argue that if the first right of refusal is not a registrable interest in land and the third party purchaser has no knowledge of it and is thus not bound by it, by being not bound by it and being able to close its purchase free and clear of the first right of refusal, the "innocent" third party purchaser is not prejudiced. Also, it is probably reasonable to assume that in most cases, in accepting a third party purchaser's offer to purchase, an owner would make it clear that its acceptance was subject to the first right of refusal, and that the sale transaction could only be completed if the holder of the first right of refusal failed to exercise its rights. The writer has often heard from other counsel and people in the land development business that clients/developers would not be amendable to spending the time required to consider the possible purchase of a land owner's property and to engaging counsel to draft an offer to purchase, if they knew at the outset that their time, trouble and expense could be all for naught and would merely establish a benchmark price and sale terms for a sale by the owner to the holder of the first right of refusal. In this situation, and assuming that a first right of refusal was legally capable of being registered against the owner's title, the potential third party purchaser would not be prejudiced because, seeing the first right of refusal caveated against the owner's title, he would simply "walk away" and not make an offer to purchase.  However, the owner would be prejudiced because the existence of notice of the first right of refusal on the title would no doubt "scare off" most potential purchasers. But wouldn't that prejudice to the owner/grantor of the first right of refusal "come with the territory" when the owner agrees to a first right of refusal and is thereafter open to receiving and/or soliciting offers to purchase from third parties?

The other party possibly prejudiced by the fact that a first right of refusal is not currently capable of being registered on the owner/grantor's title is the grantee of the first right. As stated above, it is the writer's assumption that most grantors of first rights of refusal will honour same and make it clear to any third party purchaser that acceptance of purchaser's offer is subject to the first right of refusal.  But what about the first right of refusal grantor who fails (carelessly or fraudulently) to advise a subsequent third party purchaser - or for that matter, anyone else contemplating acquiring a subsequent interest in the land, such a mortgagee - of the existence of the first right of refusal? Under current law, the subsequent third party purchaser, mortgagee or other person acquiring an interest in the land would no doubt acquire free and clear of the first right of refusal. This would leave the grantee of the first right of refusal with a claim for damages against the owner.  Such a claim may not be adequate redress for the aggrieved first right of refusal holder.

PerhapsManitobalegislation should be amended so that holders of first rights of refusal are able to register, record or otherwise place notice of their rights against the owner's title so as to bind persons subsequently acquiring any interest in the owner's land.  Such amendment could specify that:

             (i)                in order to so register, record or otherwise place notice on title, the agreement creating the first right of refusal must clearly specify that it is the intention of the owner and grantee that the rights given to the grantee are intended to bind successors in title to and other persons acquiring interests in the owner's land; and

            (ii)                the agreement must itself be a legally valid agreement or grant (this may go without saying, but - and as noted by the Court in the Kadyschuk Case - it was open to argument that the first right of refusal agreement in question was void for uncertainty in several respects).

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-               When financing a borrower's acquisition of equipment, and taking security on that equipment, the following matters should be kept in mind:

(i)            to obtain the highest possible priority for your security (which means it will have retroactive priority over most previous security interests), you must file your financing statement in the Personal Property Registry no later than 15 days after the day upon which the borrower acquires possession of the equipment;

(ii)           If the equipment is "serial numbered goods" within the meaning of The Personal Property Security Act (Manitoba) (the "PPSA"), then in your financing statement, you have to include an accurate statement of the serial number (or numbers) together with statements pertaining to the make, model, manufacturing year and the "type" of equipment involved; and

(iii)          If the equipment is "mobile equipment", then you must perfect (typically, register a financing statement in) the jurisdiction in which the borrower is "located".  For an individual borrower, that would be the borrower's place of residence.  For a corporate borrower, that would be the jurisdiction in which the borrower has its office, and if it has more than one office, then in the jurisdiction in which the borrower's chief executive office is located.

-               For equipment that isn't "serial numbered goods", your financing statement should still include the serial number - if one is available - but it doesn't have to be included in the "serial numbered goods" portion of the financing statement.  As with any secured collateral, your financing statement should describe the collateral in a way that enables third parties to - relatively easily - identify it, and, to be able to distinguish it from other equipment (or other collateral) which the borrower holds but which is not subject to your security.

-               "Mobile collateral" is - obviously - motor vehicles. But it also includes less obvious "moveable" goods such as:

(i)            outboard motors on motor boats;

(ii)           aircraft;

(iii)          certain kinds of trailers;

(iv)         forklifts; and

(v)          heavy construction equipment that is "mobile", even if it doesn't move very fast and only (typically) moves short distances within an area within which it is being used.

-               Most farming equipment - even if it is "mobile" is not considered to be mobile equipment.  However, the two main exceptions to this are:

(i)            harvesting machines; and

(ii)           tractors.

-               Where the equipment you are financing is to be incorporated into real estate and as such, the equipment, when so incorporated, would be considered to be a "fixture" within the meaning of the PPSA, additional steps should "usually") be taken.  Generally, fixtures are any tangible goods which are built into, incorporated into or affixed into land and/buildings, excluding:

(i)            building materials; and

(ii)           elements or portions of a building or other improvement which, if removed, would adversely affect its structural integrity or the removal of which would expose the building to adverse effects of the elements.

-               Where what you are financing is or is to become a fixture, then in addition to filing a financing statement in the Personal Property Registry, you should also file a "Notice" against the title to the underlying land which states your interest in fixtures/goods which are described in your registered financing statement.  The priority you hold with respect to the affixed fixture depends on the alacrity with which you file your Notice against the title.  In this regard:

(i)            if your security interest attaches to the equipment before the equipment is affixed to the realty, then your security interest will hold priority over anyone with a competing interest in the land who has registered their claim or interest prior to the fixtures affixation date. However, a pre-existing registered mortgagee who makes an advance under its mortgage subsequent to when your financed equipment becomes a fixture may hold priority over your interest in the fixtures;

(ii)           where your security interest does not attach to the equipment until after the equipment has become affixed to the realty, you will be subordinate to:

(A)          all pre-existing real estate registered interests; and

(B)          any subsequent arising real estate interest who registers its interest before you register your Notice against title.

-               In my experience, where security is taken by a lender to finance a debtor's acquisition of equipment that becomes affixed to land, the required registrations - including registration of a Notice against the title to the underlying land - are not done until after the equipment has become affixed.  Thus in most cases, in addition to registering against the underlying land's title, you should do a search of the title before advancing value so as to ensure that there are no pre-existing competing mortgages or other interests.  Or if there are any of the same, you should not advance until you have  postponements or consents to advance from the prior registered land interest holders.

-               Where the debtor defaults and you wish to realize against your security, you are entitled to enter upon the land and remove the affixed equipment provided that you don't cause any damage in effecting the removal.  You do have to provide prior notice to all interested parties. Anyone who has an interest ranking in priority to your interest in the affixed equipment is entitled to require you to put up security to cover any damage to the property you cause by removal.

-               Where you are financing a debtor's acquisition of equipment which is not affixed - or to be affixed - to the realty, you should proceed in the ordinary course.  However, if the debtor doesn't own the underlying land but is merely a tenant holding from somebody else, you should get some sort of a subordination/consent from the landlord to permit you to remove the goods and liquidate them for your own account, in particular, with reference to the landlord's right to levy distress against goods on the premises for rent arrears.

-               If you are financing a tenant's "leasehold improvements" - which may or may not include fixtures - you should (again) obtain a postponement/consent from the landlord.  However additionally, you should review the lease between the parties so as to determine what your rights are should you find yourself in a position where you wish to realize on your security.  Matters of particular interest to consider in a lease in this context are:

(i)            What does the lease say about the ownership of leasehold improvements (fixtures and non-fixtures) in the contexts of termination of the agreed to lease term by virtue of the tenant's default or the landlord's default under the lease?

(ii)           Does the lease outright prohibit the taking of any security in the leasehold improvements?

(iii)          What are the rights and obligations of the involved parties consequent upon damage or destruction to the property?

-               If you are financing a tenant's leasehold improvements and the tenant has a "long-term" lease, it may be appropriate for you to take security against not only the leasehold improvements, but also - and perhaps in particular - against the tenant's leasehold interest.  In other words, you want a mortgage of the borrower's leasehold interest.  In that case you will definitely have to review the terms of the lease to see what - if anything - the lease says about granting of such security by the tenant.  You have to consider carefully, keeping what's in and what's not in the lease - about what you would want to have happen where:

(i)            the tenant defaults to the landlord and the landlord has the right to terminate the lease;

(ii)           the tenant as your borrower defaults in the performance of its obligations owed to you and you wish to realize your security.  This would no doubt mean your selling the balance of the term of the lease (and the right to hold and use the improvements you have financed) over the balance of the term, to a new lessee.

(iii)          the tenant becomes bankrupt?

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February 2019

If I, as the owner of land, engage a single person to make improvements to my land, the respective rights and obligations of the two parties will usually be set out clearly in the contract we enter into for this purpose. If the other contracting party does not engage any others to assist in effecting the improvements, then what can - and usually would - happen where the improvements are properly effected but I, for some reason, fail to make payment therefor, is that the other contracting party can sue me for breach of contract, get a money judgment and then use that judgment to realize against (i.e., liquidate) so much of my assets as is necessary to recoup the judgement debt. If the other party's monetary entitlement is very high - a rather unlikely situation in the case of a one-person contractor - the other party can - if I'm agreeable - extract a mortgage against my property to better assure the payment of what I owe.

However, in the "real world", with respect to the vast majority of construction/development projects, no such simple two-party/one contract arrangement is possible. The owner of real estate engages what is commonly known as a general contractor to effect substantial - and often costly - improvements to the owner's property. The general contractor performs its tasks by engaging and coordinating the activities of multiple other parties, usually called "subcontractors". One or more - or all - of each of those subcontractors may in turn engage sub-subcontractors and so on "down the line to the bottom". The "bottom" refers to the notional construct of the grouping of the parties involved and takes the shape of a pyramid, with the owner at the top, the general contractor immediately below the owner, and subs and sub-subs, etc. spreading out below the general contractor to the bottom level of subcontractors. At each level, starting with the general contractor, each of the parties inputting the improvements will typically engage a number of employees and purchase supplies from other parties. Unlike the "two party/one contract" arrangement described above, there will not be contracts between the various parties situated at different "separated" levels of the "pyramid".  Parties situated at lower levels of the "pyramid" will be separated by one or more other levels of parties within the "pyramid". Thus the owner, while it will have a contract with the general contractor, won't have any contracts with any of the subcontractors or with the sub-subcontractors. The general contractor will have contracts with the level of subcontractors immediately beneath its level in the "pyramid" but it will not have contracts with any of the lower level participants. This means that where the owner makes a payment of part of what it owes to the general contractor, but the general contractor fails to pay one of its direct subcontractors, absent "remedial legislation", the unpaid subcontractor has no source of recoupment of what is owed to it, other than by making a claim against the general contractor. Again, absent "remedial legislation", if the general contractor has become insolvent (or bankrupt), the unpaid subcontractor would have no claim against the owner and no security in the project which it has assisted in improving.

However, as we all know, there is "remedial legislation", namely the Builders' Liens Act (the "BL Act"). The BL Act provides more than one "mechanism" to assist parties improving or assisting in improving real estate that do not have a direct contractual relationship with the owner (the ultimate beneficiary of the improved real estate) or any effective security for the payment of what is owed to them. The builders' lien is one such mechanism.

This paper deals with another mechanism, namely the BL Act's creation of a trust or trusts imposed by the BL Act on the various levels of participants in the construction "pyramid" with respect to funds received by each of them for the benefit of those situated below their level in the "pyramid". Generally speaking when funds are acquired by an owner, a general contractor, a subcontractor, or a sub-subcontractor, etc., those funds are received by the recipient subject to a trust obligation to ensure that they are used firstly to pay those immediately below them in the construction pyramid before any of the funds are used for any other purpose including any "personal" usage thereof by the funds recipient (eg, including repayment of debts owed by the funds recipient to its creditors).

The application and operation of the trust provisions of the Manitoba BL Act and of other similar legislation in other jurisdictions is often cumbersome and somewhat ineffective. The expectations of the various parties in a construction pyramid - starting with the owner - are often unrealistic and construction disputes are a common feature of much real estate related litigation. With that problem in mind, private business interests have for many years worked out an alternate mechanism to provide some assurance to at least some of the participants in construction pyramids, in particular, those at the lower levels of the pyramid.  This mechanism involves the issuance of "bonds" by specialized underwriters.  There are two general categories of Bonds:

(i)            a Performance Bond - a contract entered into by a general contractor and a surety corporation in which the general contractor and the surety corporation guarantee the project owner that the general contractor will perform its obligations under the general contractor's general construction contract with the owner. Where the general contractor fails to perform, the owner may claim against the surety corporation under the bond for the costs of completing the project and certain related costs, up to the maximum amount specified in the bond; and

(ii)           a Labour and Material Payment Bond - a contract entered into by a general contractor and a surety corporation which guarantees that the general contractor will pay its subcontractors, suppliers and labourers on a specific project. If the general contractor fails to honor its payment obligations, then the subcontractors, suppliers and labourers may claim against the surety corporation for payment under the bond up to the maximum amount specified in the bond. In a large construction project, such bonds may be issued by a surety corporation and a subcontractor to provide assurance to the general contractor that the subcontractor will pay its sub-subcontractors, suppliers, and labourers on the project.

A bond of the second of the above-described types (a Labour and Material Payment Bond) was the subject matter of a dispute which was recently decided by the Supreme Court of Canada in the Valard Construction Ltd. v. Bird Construction Co. case (judgment issued February 15, 2018 hereinafter, "Valard Case"). In the Valard Case:

(i)            Suncorp was the owner of an oil sands project in northern Alberta and wished to expand/improve its existing project;

(ii)           Suncorp entered into a (general) construction contract with Bird Construction to effect the improvements;

(iii)          Bird Construction entered into a contract with Langford (a subcontractor) to perform/assist in performing the general contractor's project improvement obligations owed to Suncorp;

(iv)         Langford entered into a contract with Valard (as a sub-subcontractor) pursuant to which Valard was required to provide certain inputs to assist/facilitate Langford in the performance of its obligations owed to Bird Construction. Valard did what it was supposed to do under its sub-subcontract with Langford, but Langford failed to pay what was due to Valard and then Lanford became insolvent and completely unable to pay what it owed to Valard. Subsequently - and this related to the core issue before the Court - Valard discovered that to protect itself, Bird Construction had obligated Langford to produce a surety corporation backed Labour and Materials Bond to Bird Construction. Valard then made a claim against the surety corporation for what was owed to it, but was legitimately turned down by the surety corporation on the basis that the bond specifically required that claims be made within 120 days and that that deadline hadn't been met.

At the lower Court level, Valard argued that it couldn't make a claim within the 120 day limit because it had no knowledge of the existence of the Labour and Materials Bond. The Court of Appeal held that, in this situation, that was simply Valard's "tough luck". Although there was some dissent, the Supreme Court disagreed and confirmed Valard's claim.

The Supreme Court held that because the parties who could make claims under the Labour and Materials Payment Bond were, in effect, beneficiaries of or under the bond, the holder thereof (here, Bird Construction) owed trustee duties to the beneficiaries.  This included an obligation to exercise at least reasonable efforts to notify the beneficiaries of the existence of the bond.  That should have included Valard.  Bird did not exercise such efforts, which might have included, at the least, posting a notice at the construction site of particulars of the bond.  Consequently, Bird was liable to Valard for its loss.

The Court's judgements acknowledged that industry practice, at least in the context of the Alberta oil sands developments, was for the holders of Labour and Material Payment Bonds to not have to communicate such bonds' existences to the bond beneficiaries.


(i)            as a result of the Valard Case, it wouldn't be too surprising if bonding/surety companies increased their premiums/charges for bonds, in particular, Labour and Material Payment Bonds.  If the Valard Case results in bond holders making efforts - or greater efforts - to communicate the bonds' existences, it stands to reason that there will be more claims made.  If more claims are made, it is likely that the "price" of construction bonds will rise.

(ii)           in its recent report and review of the BL Act, The Manitoba Law Reform Commission recommended that bonding become mandatory for construction projects/contracts in excess of $500,000.00 where public works are involved.  As the Commission has stated, there are certain advantages to the use of construction bonds to ensure payment to those involved in real estate improvement which are not available when relying on the remedies available under the BL Act.

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July 2017

Many businesses operate, in whole or in part, out of leased premises.  A business owner may lease fully developed and fully completed premises in an existing building with all services and amenities already in place.  At the other end of the spectrum, a business owner may lease - typically on a long term basis - vacant undeveloped land on the understanding that the business owner will improve the land with the facilities - including making arrangements with local government utility service providers - and for the services that the owner requires in order to operate its business.  In the latter situation, the business owner/tenant will usually need to have much work and materials done and brought and incorporated on to and into the site in order to be in a position to "open its doors" and commence to carry on its business.  But even the business owner who leases space in a fully developed building will usually require some renovations or design alterations to the existing premises in order to "customize" the space for the owner's particular needs and desires.  Businesses in both types of situations will also need to acquire equipment, business furnishings and the like, and ,office "supplies" will, in almost all cases, be needed.  For a business that is producing and/or selling goods (retail and/or wholesale), the owner will have to acquire, usually on an ongoing basis, inventories.

All of this costs money.  Frequently, in commercial leasing arrangements, the landlord will, as "part of the deal", pay for the cost of acquisition and/or installation of some - and sometimes virtually all - of the tenant's required improvements.  In many cases, the business owner will have to finance such acquisition and installation.  Thus banks, credit unions and other professional lenders will often be called upon to provide credit to a business tenant in order to enable it to improve the leased realty, and additionally, to financing the business's acquisition of equipment, office supplies and inventory.  It follows that the lender which provides value to the commercial tenant so as to enable it to acquire and install what it needs to carry on its business, will wish to take security in the subject matters of what it finances.  Thus, lenders will take security in the business's inventories (including the "proceeds" thereof, typically accounts receivable) and will take security interests in the business's equipment, furnishings etc.  A lender who is called upon to finance a tenant's improvements will wish to take security in:

(i)            what can perhaps be best described as the "bundle" of rights that the tenant obtains under or by virtue of the lease (or what is often called the tenant's "leasehold interest"); and

(ii)           the tenant's leasehold improvements themselves.

The efficacy of security held or acquired by a lender depends on the ease with which it can liquidate the security's subject matter so as to generate funds which can be applied on account of the secured debt.  Some leasehold improvements are more easily capable of being so liquidated than others.  Clearly, improvements that have become attached or affixed to or incorporated into the building (of which the leased premises form part), but which may be removed and taken away to be sold and used in another location, without undue cost and difficulty, are most valuable to the lender as security.  Unfortunately, it often happens that when a commercial tenant's business fails, and both the tenant's landlord and its lender wish to end their relationships with the tenant, disputes arise between the landlord and the tenant's lender as to just what, and to what degree, the lender should be entitled to remove the tenant's improvements and sell them to someone else, or, if convenient, sell those improvements to the landlord or to a new tenant that the landlord brings into the premises to replace the previous tenant.  Complicating such disputes are these two particular factors:

(a)           the fairly ancient common-law rule that when the owner of tangible property attaches, affixes, or incorporates such property into real property (land and/or buildings) belonging to someone else, the owner of the tangible personal property loses its ownership and such items become the property of the realty owner, but with the exception of what have been called "trade fixtures".  Trade fixtures are goods that a tenant brings onto and incorporates into the landlord's realty but which have a particular or a peculiar connection to the tenant or  the tenant's business operations, so that on termination of the lease, it is considered reasonable for the tenant to remove and retain the same as its own property; and

(b)           the often conflicting and confusing terms found in commercial leases dealing with what is to happen regarding tenant's improvements on termination of the lease (the provisions often varying within the same lease, depending on the cause or reason for the lease's termination).

The recent Ontario Superior Court of Justice case The Toronto-Dominion Bank and The Hockey Academy Inc. (and others), judgement given August 2, 2016, (hereinafter, the "Hockey Academy Case") illustrates the difficulties that can arise on lease termination where a tenant's landlord and its lender each claim entitlement to improvements made to the leased premises which have been financed by the lender for the tenant.

The facts in the Hockey Academy Case were that Hockey Academy entered into a lease of premises from its landlord (Champagne Centre Ltd., hereinafter the "Landlord"), and as contemplated by, and pursuant to, the terms of the lease (the "Lease"), Hockey Academy developed a commercial hockey rink facility.  The Lease was twice amended.  To finance its said facility, Hockey Academy borrowed a substantial sum from The Toronto-Dominion Bank (the "Bank"), and in consideration thereof, Hockey Academy entered into a general security agreement (the "GSA") with the Bank, pursuant to which it granted the Bank a security interest in all of Hockey Academy's present and after-acquired personal properties, including Hockey Academy's rink and related equipment facilities.  Subsequently, the Landlord terminated Hockey Academy's lease, and following default in payment of its obligations owed to the Bank, the Bank demanded repayment in full and proceeded to realize its security under the GSA.  The Bank and the Landlord then argued over which of them was entitled to the rink equipment or the realization proceeds thereof.  That dispute led to the Hockey Academy Case.

The Court neatly summarized the "essence" of the dispute as follows:

"At the heart of the main dispute is whether, on a lease termination, the debtor (Hockey Academy) retained ownership of the disputed items or whether these items became fixtures of the premises and therefore owned by the Landlord.  It is common ground that this dispute principally falls to be determined by an interpretation of the debtor's lease with the Landlord (as amended)."

In reviewing the matter, the Court took note of the following terms of the Lease;

(i)            The Lease provided that "nothing herein prevents or bars the tenant from pledging and borrowing against its leasehold improvements";

(ii)           The Lease further provided that "all alterations and additions to the premises made by or on behalf the tenant, other than the tenant's trade fixtures, shall immediately become the property of the landlord without compensation to the tenant. The Lease defined trade fixtures as items designated as such on a plan of the premises.

(iii)          The original iteration of the Lease allowed the tenant to make alterations and additions and to designate any of the same as "trade fixtures", with trade fixtures not to become the property of the Landlord. Additionally, it permitted the tenant to remove trade fixtures at the end of the Lease term, and required the tenant, upon any termination of the Lease, to remove all rink equipment and fixtures not permanently attached to the premises.  The subsequent amendments to the provided that on "expiration or (any other) early termination of the Lease", the tenant was not required to remove additions or improvements, except for "rinks, sand, boards, piping, refrigeration, and related rink equipment". It further provided that the tenant had the right to remove "other trade fixtures" and equipment not permanently attached to the premises.

(iv)         Thus under the Lease, as amended, the tenant was both required and permitted to remove its equipment. Lest anyone might wonder if the specification of a tenant's obligation to remove its equipment/trade fixtures did not also, at least by implication, give the tenant the right to remove same, the Court clearly enunciated that an obligation to remove encompasses a right to remove.

(v)          Clearly, the tenant would not be entitled to, in effect, remove the whole building, or the structural elements thereof, but as the Court observed, "…it is…entirely reasonable for the tenant to retain the ownership of the rink equipment because it was the tenant, not the Landlord, that was in the hockey rink facility business".

(vi)         Thus, since the tenant's equipment was held to be its property, and not that of the Landlord, the Bank's security interest in the same trumped the Landlord's interest therein. 

What then does the Hockey Academy Case suggest for those considering leasing realty and lenders considering advancing credit - often substantial credit - to such prospective tenants, on the security of the tenant's leasehold improvements and equipment?

The Court noted that "at the heart of the main dispute", the question was, upon lease termination, did certain tangible items remain with and form part of the realty, thus subsumed into the realty owned by the Landlord, or, did such items continue to be owned by the tenant, and thus subject to the Bank's prior ranking security interest?  The Court also stated that the dispute "principally falls to be determined by an interpretation of the debtor's lease…".

Applying the principle that when interpreting a contract, a court is to determine the intentions of the parties, in the first instance, by looking at the "plain meaning" of the words used by the parties in their contract, and, considering the above-noted contract terms, the items in dispute did not revert to the Landlord (as part of its real property ownership), but were in fact the property of the tenant removable by the tenant on lease termination.  None of the removable items were improvements which "entirely (had) to do with the building itself, such as: column and removal, structural framework, drains for washrooms, cinder block walls and provision for exterior access to the building's sprinkler system".  Rather, the removable items all had to do with the tenant's operation of the premises as a hockey rink facility business.  It should be emphasized that these conclusions were based essentially on the wording contained in the contract, but the Court also observed that it would have held the tenant's items to have been its property and not "fixtures" at common law (ie, not part of the Landlord's reversionary interest), even if the Court's decision based on the contract wording was later held to be incorrect.

Landlords, tenants and tenants' leasehold improvement financiers (and their respective counsel) should carefully review the terms of a proposed commercial lease before committing themselves to same.  It is this writer's experience that, depending upon the precedent used, most typically by a landlord or its counsel, the wording pertaining to rights and obligations relating to leasehold improvements - and in particular, those relating to the a tenant's right to remove or pledge same - will differ from lease to lease.  The particular wording proposed in each lease should be carefully reviewed and considered by each of the parties, and not merely "glossed over".

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January 2005

Under the version of The Personal Property Security Act (Manitoba) in force prior to September 5, 2000, serial-numbered goods were limited to motor vehicles (broadly defined) and aircraft.  Under the current version of the legislation (the "MPPSA"), serial-numbered goods include not only motor vehicles and aircraft, but also trailers (i.e.; whether or not they are self-propelled), boats, outboard motors for boats, tractors and combines.

A question sometimes raised is whether or not a secured party who acquires a security interest in serial-numbered consumer goods or equipment must comply with the MPPSA registration requirements for both a debtor's name and the serial numbers and related information for the goods.  It has been argued that if a secured party registers with the correct name of the debtor but either with no serial numbers or with incorrect serial number information or if a secured party registers with correct serial number information but with an incorrect or incomplete name of the debtor, the secured party's registration should nevertheless be considered valid.  This is based on the view that anyone who is thinking of taking an interest in the debtor's serial-numbered goods (typically, someone who is thinking of extending credit and taking a new security interest in the goods, or who is contemplating purchasing the goods) should, as a prudent person, search in the Personal Property Registry both with respect to the debtor's name and the serial numbers of the goods.

While such a position is logically attractive, it appears that on the basis of Section 43(8) of the MPPSA, this position is not really correct.  Section 43(8) provides, in effect, that where the secured goods are serial-numbered consumer goods, the secured party must indeed include complete and correct information for both the debtor's name and the serial numbers and related information for the goods.  If it fails to fulfill both of these requirements, then the secured party's registration is completely invalid and unenforceable against any third party.  However, Section 43(8) does not mention serial-numbered goods which are equipment - it only refers to serial-numbered consumer goods.  Thus if the serial-numbered goods are equipment, the secured party's registration will not be completely invalid if the serial information is omitted or is incorrect, provided that the information pertaining to the name of the debtor (and all other registration information required by the MPPSA) is properly completed in the secured party's financing statement.

Nevertheless, based on a combined reading of Sections 43(8), 30(6) and 35(4) of the MPPSA, it appears that if a secured party with a security interest in equipment which is serial-numbered goods does not include proper serial-numbered goods information in its registered financing statement, then such secured party:

(a)        will not hold priority over the interests of an "ordinary course of business" purchaser or lessee of the goods from the debtor who is unaware of the secured party's security interest;

(b)        will not hold priority over the interests of other competing secured parties who hold security interests in the goods (and who properly perfect their security interests before the first-named secured party properly perfects - if indeed it ever does - its security interest);

(c)        will not be able to obtain what amounts to retroactive priority where the secured party has inadvertently discharged its security interest or allowed it to lapse but re-registers within thirty days following the inadvertent discharge or lapse;

(d)        will not have the benefit of the rule in the MPPSA which provides that the secured party's security interest will continue to enjoy its priority in the goods where the goods are transferred by the debtor to someone else and the secured party makes a supplementary registration against the transferee within a limited period of time; and

(e)        will not enjoy the retroactive priority given to a secured party whose security interest constitutes a purchase money security interest in relation to certain pre-existing security interests, provided that the secured party perfects within a limited period of time after when the debtor acquires possession of the goods.

The secured party's security interest in the debtor's equipment will only be validly enforceable against execution creditors and the bankruptcy trustee of the debtor.  Thus, for all practical purposes, a secured party taking a security interest in serial-numbered equipment should - just like a secured party taking a security interest in consumer goods - include both complete and correct information as to the debtor's name and as to the serial-numbered goods in its financing statement.

Given that the MPPSA does not provide for any adverse priority consequences for a secured party whose registered security interest is in serial-numbered goods which are "inventory", one might ask why the MPPSA even provides for the possibility of registering serial numbers in financing statements covering inventory.  Inventory usually comes and goes into and out of a merchant's hands fairly quickly, and having to keep serial number particulars of inventory correct in the Personal Property Registry would, in most cases, be a time-consuming and expensive task.  Why not treat inventory the same as non-serial-numbered goods?  The writer suggests that there may be situations - probably few and far between - where it is to the secured party's advantage to place the maximum amount of information pertaining to inventory goods in the secured party's financing statement, simply for the salutary purpose it will or may have on third parties who choose to search against both a debtor's name and against the serial numbers.  Consider the example of an aircraft manufacturer who sells a $100,000,000.00 aircraft on credit to someone who, in effect, acts as an intermediary (a "retailer") between the manufacturer and the ultimate user of the aircraft (typically an airline or a government, and sometimes a private business).  Even if the intermediary intended to hold the aircraft for a relatively short period of time before reselling it, given the substantial amount of the credit probably extended by the manufacturer to the intermediary on the security of the aircraft, it would probably be a wise investment of time and money (and not much of either would be required) for the manufacturer to include the correct serial-numbered goods (as well as correct debtor name) information for the aircraft in its financing statement.

Even where equipment being financed by a secured party for a debtor has serial numbers but is not prescribed as "serial-numbered goods" under the MPPSA, the secured party may wish to include particulars of the serial numbers and related information such as make, model, year of manufacture, etc.  The secured party would include such information in its financing statement simply to better identify the goods so that they could be more easily ascertained amongst the debtor's possessions to the exclusion of other goods not being financed by the secured party - in particular, in anticipation of realizing its security.  However, in this situation, it would not be proper for the secured party to include such information in the serial-numbered goods portion of the financing statement.  Rather, such information should be included in the general description of collateral portion of the financing statement.

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August 2013

Most readers will be familiar with the concept that certain land interests, although duly registered against the title to the affected land, will lose their registration priority where ownership of the land changes by reason of:

  1. a municipal property tax sale;
  2. a prior registered mortgagee's sale; or
  3. an acquisition of title from a prior registered mortgagee in a foreclosure proceeding.

It has been long accepted that, on a policy basis, it is appropriate for a prior registered monetary interest, when realized, to extinguish subsequently registered monetary interests ("first come, first served").  Thus the purchaser at a property tax sale, the purchaser from a selling mortgagee and a foreclosing mortgagee will acquire title "free and clear" of subordinately registered mortgages and judgments.  Again, as a matter of policy, perhaps not universally accepted, but certainly acquiesced in, the purchaser at a property tax sale acquires title free and clear of previously registered mortgages and judgments, notwithstanding that the default in payment of property taxes arose only after the prior registered monetary interest was obtained for value and recorded against the property's title.

As a general rule, the same result will occur where a property tax sale purchaser, a foreclosing mortgagee or a purchaser from a selling mortgagee acquires ownership of the property subject to a pre-existing pre-registered non-monetary real estate interest.  However, the Legislature has recognized that there are certain types of land interests which, even if created and registered subsequent to the registration and acquisition of a monetary interest, should not be extinguished upon the occurrence of a property tax sale, mortgage sale or mortgage foreclosure.  These interests are listed in Section 45(5) of The Real Property Act (Manitoba) (the "MRPA").  Such interests survive sale and foreclosure ("Surviving Interests") usually, although not always, because their continuing/ongoing existence, will, to a greater or lesser degree, benefit the land affected.  Even if they do not benefit the land affected (and merely "burden" such land), the Legislature has concluded that the "greater public good" is best served by permitting Surviving Interests to continue to exist, notwithstanding that the occurrence of the aforementioned non-consensual - as well as fully consensual - property ownership changes.

Clearly, a Surviving Interest must be duly registered against the title to the affected land.  But is there a difference - or should there be a difference - between where a Surviving Interest is registered:

(a)          by way of the recording of the agreement or instrument which itself creates the Surviving Interest ("Direct Registration"); and

(b)          by way of the recording of a caveat (or notice) against the title to the affected land, giving notice of the Caveator's rights and interests which constitute and comprise the Surviving Interest ("Caveat Registration")?

It appears that certain Surviving Interests will only survive mortgage realization or tax sale if the Surviving Interest is recorded by Direct Registration, not Caveat Registration.  These are:

(i)            easement agreements, including party wall agreements right-of-way agreements;

(ii)           statutory easements;

(iii)          rights analogous to easements as defined and referred to in The Real Property Act Sections 111.2(1) and 111.2(5);

(iv)          building restrictions covenants;

(v)           unilateral declarations under The Real Property Act Section 76(2); and

(vi)          development schemes. 

In each of these cases, it appears that if the Surviving Interest is recorded by Caveat registration - which is clearly permissible - such registration will not survive mortgage realization or tax sale.  However if these interests are recorded by Direct Registration, they will so survive.

On the other hand, other types of Surviving Interests will survive mortgage realization and tax sale even though they are recorded "merely" by way of Caveat Registration.  These are:

(i)            caveats relating to zoning or subdivision matters;

(ii)           caveats relating to development agreements made under The Planning Act or The City of Winnipeg Charter;

(iii)          caveats relating to an expropriation;

(iv)          a notice (which is obviously like a caveat) registered under Section 12 of The Energy Savings Act;

(v)           notices filed under Section 7(1) or liens described in Section 36(4) of The Contaminated Sites Remediation Act; and

(vi)          notices under Sections 4(4), 5.4(3) or 5.10(2) of The Condominium Act.

Why can't all Surviving Interests be capable of surviving mortgage realization or tax sale when recorded against title by Caveat Registration?

In part, the answer appears to be based on the requirements (set out in Sections 76(1), 76(2) and 76.2(1) of The Real Property Act).  When a Surviving Interest of the types described above which will survive if recorded by Direct Registration, (excepting for statutory easements, rights analogous to easements and building restriction covenants) is registered, no such Direct Registration is permitted by the Land Titles Office unless all persons holding pre-existing registered interests against the affected title provide their written consents to the Direct Registration.  If a pre-existing registered mortgagee or holder of a judgment lien consents to the subsequent registration of a Surviving Interest by Direct Registration, then such consent is taken to be the equivalent of a subordination by the pre-existing registered interest holder.  This is understandable.  But what isn't understandable is the fact that no such consent (from pre-existing registered interest holders) is required to effect the Direct Registration of statutory easements, rights analogous to easements and building restriction covenants.  It also doesn't explain why caveats and notices of the types described above as surviving, even though recorded "merely" by Caveat Registration, gain this survival advantage without the need for the party on whose behalf the caveat or notice is being filed having to get the consents of all pre-existing registered interest holders.

Whether or not the above "regime" seems reasonable, the important thing for practitioners (and their clients) to remember is that the above-noted differences in the ability of certain land interests to survive - or not to survive - mortgage realization and tax sale must be kept in mind when acting for persons taking, granting and otherwise dealing with interests in real property.

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July 2020

English law has - for centuries - paid special attention to protecting rights in real property.  The expression "A man's home is his castle" reflected the prevailing view of judges and lawyers (in particular, conveyancers), at least insofar as royalty/the aristocracy/the landed classes were concerned.  In disputes between rival claimants to land - or an interest in land - the system favoured the current owner/occupant and made it difficult for a challenger to dislodge the current owner/occupier.

As nations became more sympathetic to "progressive" and "collective" viewpoints, this deference to the sanctity of property rights has been eroded.  An illustration of this can be seen in the (relatively) recent repatriation of Canada's constitution (from the UK Parliament) in which property rights protections were conspicuous by their absence.  However, notwithstanding the loss of enthusiasm for protecting property rights, they are still substantially protected under current Canadian law.  Illustrations of the Courts' hesitancy to overlook vested property rights can be found in certain cases dealing with easements, restrictive covenants and profits à prendre.  Consider the following holdings:

(i)            St. Boniface Warehousing Ltd. v. BBD Holdings Ltd. (2019 MBQB 181, judgment given December 9, 2019, hereinafter the "St. Boniface Case").  This case involved a claimant trying to establish easement rights against a neighbour's land, in part referable to an earlier easement grant and in part referable to a claim for a prescriptive easement (ie, an easement right based on long and unchallenged use of the neighbour's property).

(ii)           RPM Farms Ltd. et al v. Laurence Jay Rosenberg et al (2019 MBQB 140, judgment given September 27, 2019, hereinafter the "RPM Case").  This case involved a property owner claiming prescriptive easements against several of its neighbours' lands.

(iii)          Emil Stephen Delnea and Leslie Kim Delnea v. Richard Vanhouwe and Michelle Vanhouwe (2019 SKQB 255, judgment given September 27, 2019, hereinafter, the "Delnea Case").  This (Saskatchewan) case involved a property owner claiming rights against its neighbour's property with reference to certain improvements which the property owner had inadvertently placed on the neighbour's land.  The property owner's claim was based on Saskatchewan legislation which is substantially similar to Sections 27 and 28 of The Law of Property Act (Manitoba).

In the St. Boniface Case, neighbour "A" ("Neighbour "A"") bought its property (Parcel "1") in east Winnipeg in 1998 and Neighbour "B" ("Neighbour "B"") bought the adjacent property (Parcel "2") in 1987.  Neighbour "B" needed access over part of Neighbour "A"'s land (Parcel "1") in order to access a railway spur track so as to load and unload (from railway cars) product that Neighbour "B" produced, stored and distributed on and from its property.  A predecessor in title to Neighbour "B" obtained a grant of easement from a predecessor in title to Neighbour "A'"s over Parcel "1" permitting the then required access.  Subsequently, Neighbour "B" started making use of an additional portion of Neighbour "A"'s land (part of Parcel "1") for the purpose of allowing its trucks to make required turns to move in and out of Neighbour "B"'s property in order to load and unload Neighbour "B"'s products delivered to Neighbour "B" by way of the railway spur.  Additionally, Neighbour "B"'s principal used part of Parcel "1" to park his personal vehicle and Neighbour "B" also used part of Parcel "1" for the storage of pallets and trailers.  When Neighbour "A" discovered that Neighbour "B" was, in effect, trespassing on Neighbour "A"'s property, Neighbour "A" demanded that Neighbour "B" cease such trespasses.  Neighbour "B" resisted and ultimately - after an unusually long period of time - the matter came before the Court for determination.  Neighbour "B" defended its position with respect to Parcel "1" by pointing to the previously granted easement over Parcel "1", and, defended its right to use additional parts of Parcel "1" on the basis of continuous unchallenged and open use for a period in excess of 20 years (ie, Neighbour "B" claimed a "prescriptive easement").  The Court rejected the bulk of Neighbour "B"'s claims, based on the following reasoning:

(a)          there was insufficient evidence of continuous (over a 20 year plus period) use of the additional portions of Parcel "1" claimed.  In particular, there appeared to be no evidence of meaningful use during the period 1984 to 1990.

(b)          there was - in the Court's words, "…(a) lack of precision as to what portions of Parcel "1" were claimed (for a prescriptive easement)".  The Court cited previous authority that "…to be capable of bearing a prescriptive easement, the land over which the easement is claimed must be capable of being described with some specificity.".

(c)          as to that portion of Parcel "1" covered by the older easement grant, the Court did recognize the binding nature of the easement grant previously obtained by a predecessor of Neighbour "B" against the title to Neighbour "A"'s land, but held that Neighbour "B" had unilaterally and in an unjustified manner expanded the "scope" of its easement over Parcel "1".  Based on the evidence before it, the Court concluded that the easement grant's original purpose - as reflected in its wording - was to allow the occupant of Neighbour "B"'s property access to the rail spur located just inside the boundary of Parcel "1", for the purpose of loading and unloading trucks.  The easement grant did not contemplate the expansion of Neighbour "B"'s business operations so as to require additional portions of Parcel "1" to facilitate Neighbour "B" being able to use very large transport trucks whose size would have necessitated their being moved onto and through much greater portions of Parcel "1".

In the RPM Case, the defendant's property (the "Defendant's Property") was adjacent to and bordered by neighbour "X" ("Neighbour "X"") on the north, the south and in part on the west sides of the Defendant's Property ("Neighbour "X"'s Property"), and additionally, on part of the Defendant's westerly boundary, by land owned by neighbour "Y" ("Neighbour "Y"", Neighbour "Y"'s property being hereinafter referred to as "Neighbour "Y"'s Property").  The Defendant claimed prescriptive easements in favour of the Defendant's Property over portions Neighbour "X"'s Property and over part of Neighbour "Y"'s Property in support of the Defendant's claims, and for the purpose of challenging same, witnesses were presented to the Court together with certain documentation including affidavit evidence.  The most substantial difficulty encountered by the Defendant - and this would appear to be typical in cases of this type - was the fact that ownership of the various neighbouring parcels had, over the twenty year period required to be established to validly claim a prescriptive easement, had changed from time to time.  In fact, for a five or six year period within the alleged twenty year period, one of the parcels had been leased by its owner to a tenant. It is often difficult to locate witnesses - or written confirmations of land usage - going back over twenty years; some witnesses will never be located, others will have died and the memories of most of them - the further back in time you go - will have faded.  As the Court observed, "…Here, the defendants seek to support their position by relying upon the hearsay evidence of unnamed people in the community…".  In particular, there was insufficient credible unambiguous evidence of continuous usage, and, insufficient evidence that Neighbour "X" and Neighbour "Y" had, with knowledge of their own property rights (ie, that what the owner/occupier of the Defendant's Property was doing constituted trespasses) combined with acquiescence by Neighbour "X" and Neighbour "Y", key requirements to establish prescriptive easements.  These particular holdings/observations by/of the Court are instructive:

(i)            Courts should be wary of recognizing prescriptive easements because to so will "…subject a property owner to a burden without compensation".

(ii)           No prescriptive easement can be held to have arisen where it is alleged to have commenced at a point in time where the servient tenement property was leased by a tenant.  Specifically, the "…a tenant may not grant a perpetual easement that would bind a registered owner after the expiration of the lease".

(iii)          One of the Defendant's claims for a prescriptive easement was based on the Defendant (predecessor in title to the Defendant's Property) having planted a tree line just beyond the northerly boundary of the Defendant's Property.  The Court held that the mere planting of a tree line should not form the basis of a prescriptive easement per se.

(iv)         In part, the Defendant's prescriptive easement claims were based on the fact that the servient tenement owner had given "informal permission" for the use of its land.  "Neighbourly permissions have not been recognized as creating a basis for a prescriptive easement".  Usage of the servient tenement property owner's land by the owners/occupiers of the Defendant's Property "…was permitted by neighbourly goodwill rather than simply acquiescence".  It was the Court's view that clearly, it is not in the public interest for the legal system to discourage neighbourly cooperation and the provision of neighbourly permissions.

In the Delnea Case, neighbours "X" and "Y" owned adjacent cottage properties.  Neighbour "X" ("Neighbour "X"") had installed an underground septic tank which encroached upon the property of "Y" (Neighbour "Y").  Based on Section 2 of The Improvements Under Mistake of Title Act (Saskatchewan) (similar to Sections 27 and 28 of The Law of Property Act (Manitoba), Neighbour "X" requested the Court to grant Neighbour "X" an easement covering the portion of Neighbour "Y"'s property that contained the tank.  The Court observed that there were two primary requirements that had to be fulfilled before Neighbour "X" would be successful in its claim, namely, firstly that the tank was a "lasting improvement" on Neighbour "Y"'s land, and, secondly, the installation by Neighbour "X" was done under the "…mistaken belief that the land (was) (Neighbour "X"'s)".  The Court concluded that although arguable, the evidence suggested that the tank was of a "permanent" nature, and that Neighbour "X" had genuinely believed that the tank was being installed on Neighbour "X"'s property.  In this situation, the Court has two remedial options, one, to place a lien on Neighbour "Y" property in the amount that the improvement enhanced the value of Neighbour "Y"'s property, or, two, to permit Neighbour "X" to acquire ownership of the encroached upon land, provided that appropriate compensation is paid to Neighbour "Y".  Clearly, the first remedial option was inapplicable in the circumstances of the Delnea Case.  The second option was appropriate, but the Court was not provided with evidence dealing with the matter of the quantum of compensation which should go to Neighbour "Y" for losing a (small) portion of its property.  The Court ruled that the parties would have a further short (30 days) period of time within which to address the issue of compensation.  Unlike the outcomes of the St. Boniface Case and the RPM Case where a claim against a neighbour's lands was rejected, the encroaching Neighbour "X" was successful in claiming rights in the neighbouring property.  However, this case illustrates the need for counsel to be fully prepared and to understand exactly just what sort of issues have to be dealt with and to craft a presentation of the necessary evidence accordingly.

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November 2008

Most lenders and informed lawyers are aware of the rule which provides that where a mortgagee forecloses upon mortgaged real estate - as opposed to exercising the mortgagee's right to sell the real estate - the debt secured by the mortgage is extinguished.  In Manitoba, this rule is found in Section 16 of The Manitoba Mortgage Act (the "MMA"), and is actually broader than specifying extinguishment of the mortgage secured debt by way of foreclosure; in fact, Section 16 provide, in effect, that the mortgage secured debt is extinguished where the mortgagee forecloses by court order, forecloses through the Land Titles system (without the assistance of the court) under The Manitoba Real Property Act (the "MRPA"), or the mortgagee "otherwise" becomes the owner of the mortgaged realty.  Section 16 also clearly applies to mortgages of interests in real estate less than freehold or fee simple ownership, such as mortgages of leaseholds, mortgages of easements etc.

The MMA Section 16 rule is of fairly ancient heritage and it is the writer's understanding that it is based on a matter of policy or principle to the effect that where a mortgagee ends up with ownership of the mortgaged property, the mortgagee then has the realty "for better or worse".  Thus if the value of the realty is less than the previously secured debt, the mortgagee - who will probably try to sell it sooner or later - will suffer a deficiency.  On the other hand, if the mortgagee waits until the value of the realty increases and such increase is in excess of the amount of the previously secured debt, the mortgagee gets to keep any "profit" it may make on its eventual sale of the realty (ie., all proceeds in excess of the previously secured debt).  Where a mortgagee merely sells the mortgaged realty as part of its mortgage realization process, any sale proceeds in excess of the debt owed to the mortgagee must go to subsequently ranking (ie.,subsequent to the selling mortgagee) monetary claimants to the realty, (and to the mortgagor).

What about a creditor who holds a security interest in personal property?  Section 61(2) of The Manitoba Personal Property Security Act (the "MPPSA") contains a rule applicable to personal property security interests which is somewhat the same as the rule for real property security in Section 16 of the MMA.  The rule for security in personalty is, in effect, that where, after default has occurred under the security agreement, the secured party gives notice to the debtor and certain other specified interested persons that the secured party intends to "take the collateral in satisfaction of the obligation secured", and, none of the persons to whom such notice is given object to such proposal within 15 days after receiving the notice, the secured party, immediately following the end of such 15 day period is "deemed to irrevocably elect to take the collateral in satisfaction of the obligation secured…".  Section 61 doesn't say that the debt is extinguished, but it comes pretty close to stating what amounts to the same thing.

Some questions which may arise in the application of Section 16 of the MMA and Section 61 of the MPPSA are:

(i)            what happens when a creditor holds two or more real property mortgages and/or security agreements covering multiple parcels of real estate and/or multiple items of personal property, with each of the securities securing payment of one particular loan only, and, the mortgagee/secured party acquires ownership of some, but not all, of the realty and/or personalty, with the thus acquired realty and/or personalty having an (aggregate) value less than the amount of the outstanding indebtedness?  Is the mortgagee/secured party now barred from acting under its then existing not yet realized real property and/or personal property security by virtue of the operation of either one (or both) of Section 16 of the MMA and Section 61 of the MPPSA?  Consider the situation of a creditor who is owed, say, $1,000,000.00 and has taken, say, a real property mortgage on one parcel of land worth $100,000.00, a further real property mortgage on a second parcel of real property worth $150,000.00, a further real property mortgage on a third parcel of realty worth $200,000.00, and, a personal property security agreement against certain equipment belonging to the debtor worth $300,000.00, each of these securities securing payment of the same $1,000,000.00 debt. Even if the creditor was to simultaneously (which may be impossible!) foreclose upon all three parcels of realty and the equipment, it would still suffer a shortfall of $250,000.00. What if the creditor foreclosed upon the equipment only? - if each of the three real property mortgages and one security agreement by their terms secured the same $1,000,000.00 debt, would the creditor be unable to realize under its real property mortgages by virtue of the operation of Section 61 of the MPPSA (i.e. it has taken the equipment "in satisfaction of the debt" so that there is nothing left for the real property mortgages to secure)?  Even if the aggregate value of the pledged realty and personalty was in excess of the amount of the debt (i.e. in excess of $1,000,000.00), is it really possible to coordinate the creditor's foreclosure proceedings such that it would be able to take title to the real estate and take ownership of the equipment at precisely the same point in time, thereby avoiding the debt extinguishment provisions contained in Section 16 of the MMA and Section 61 of the MPPSA? Would a possible solution to this dilemma be for the creditor to ask the Court to issue a vesting order vesting (foreclosing upon) all of the pledged realty and personalty simultaneously?

(ii)           what happens where one or more real property mortgages and/or one or more security agreements held by a mortgagee/secured party, by their terms secure all of the mortgagor's/debtor's present and future liabilities, indebtedness and obligations from time to time owed to the mortgagee/secured party, where the value of each security (ie the value of what is mortgaged/secured by each security) as well as the value of all of the securities is less than the total aggregate indebtedness owed by the mortgagor/debtor at the time that the creditor goes to/wishes to realize upon its securities?  Consider the situation of a creditor who has obtained the same security described in (i) above except that each security by its terms secures the payment of all present and future obligations owed by the debtor to the creditor, present and future; if the creditor is owed a total of $1,000,000.00 by the debtor and the creditor forecloses upon one or more (but less than all) or, even upon all of its securities, given that each of the securities provides that it secures all of the debtor's obligations owed to the creditor, upon any foreclosure, wouldn't all of the indebtedness (ie., $1,000,000.00) be extinguished?

Here are some possible solutions to these problems:

(a)          In the situation where there are multiple securities securing one only particular debt, consider:

(i)            utilize one security agreement only, such as a "debenture" which covers both realty and personalty, and which may be amended from time to time to add further, new or additional parcels of real property to be specifically mortgaged to secure the particular debt (this type of security is typically utilized in multiple jurisdictions and may also make it easier for the courts to order one or more (simultaneous) vesting orders where the creditor wishes to foreclose upon all of the property);

(ii)           have each mortgage and security agreement (where there are multiple mortgages and/or security agreements) specifically state that while each of them secures the same particular debt, each of them will, in the case of foreclosure, secure only that portion of the debt which is equal to the value of the pledged realty and/or personalty at the time of foreclosure (this may convince a court called upon to determine the effect of Sections 16 and 61 upon the foreclosure(s) to conclude that it is only portions of the total debt which are to be extinguished (or satisfied) upon each separate foreclosure;

(b)          in/for both real property mortgages and personal property security agreements, specify maximum principal or face amounts thereof where such face or maximum principal amounts approximate (or are only slightly higher than) the anticipated (i.e. anticipated near term) values of each respective property pledged; and

(c)          do not foreclose against any of the secured property until after all reasonable efforts have been made to sell the pledged assets, utilizing foreclosure only as a last possible resort. In some cases, it may be appropriate to sell everything except for secured assets which are only of very small value and, then simply discharge the remaining security; this would at least leave any yet to be satisfied debt remaining in existence.

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