Jason Bryk 

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March 2013


Most mortgagors repay their indebtedness to their mortgagees. Sometimes, however, a mortgagor is unable or unwilling to fulfill its obligations to its mortgagee and the mortgagee must consider enforcing or realizing its mortgage security. This usually involves a sale of the mortgaged realty by the mortgagee, and sometimes it involves the mortgagee becoming the owner of the mortgaged property (foreclosure), and occasionally it involves the mortgagee, either by itself or utilizing an agent or receiver, taking possession of the property (usually pending a sale or foreclosure) and collecting the rents or other income derived from possession and control of the mortgaged property.

When a mortgagee attempts to realize its mortgage security, there will sometimes be certain defences which the mortgagor can raise which, if accepted by a Court considering the matter, will block the mortgagee from proceeding further. Two of these defences were considered in the Prince Edward Island Court of Appeal case between Ella and Orville Lewis (the mortgagors) and Central Credit Union Limited (the mortgagee), judgment in this case having been issued May 31, 2012, (hereinafter the "Lewis Case"). The Court agreed with the mortgagors' defences which were:

(i)            that at least one of the mortgagors (Ella), on the basis of the evidence presented to the Court, did not have a sufficient understanding of the mortgage and related financial transactions in order to have provided a valid consent to participating in the mortgage, and that she was in a particularly vulnerable position with her son (the other mortgagor, Orville), in effect, taking advantage of her willingness to join in the mortgage; and

(ii)           that the mortgagor Orville did not receive consideration or value in exchange for mortgaging his interest to the mortgagee.

An interesting aspect of the first-mentioned defence is that lack of any consideration, value or indeed any benefit flowing to the mortgagor Ella was a substantial component of her defence of not having provided a sufficiently "informed" consent to the mortgaging transaction and that she was in a vulnerable position. In fact, the case law clearly reveals that lack of informed consent, vulnerability and giving up something of value without getting anything in return are factors that frequently appear together in cases like this. This can be particularly seen in the situation of a  guarantor of the obligations of another person who, by virtue of the other person's relationship to the guarantor, gets something of value from the guaranteed transaction, whereas the guarantor gets nothing, with the guarantor often being susceptible to being "pressured" into participating in the guarantee transaction out of motivations such as love or fear.

It is informative for lenders to consider the Court's review and analysis of the mortgage transactions dealt with in the Lewis Case. Note in particular:

  1. The defence of absence of informed consent and vulnerability. This defence was successfully raised by Ella. To quote the Court in its recitation of the facts of this case: "Ella Lewis is the mother of Orville Lewis and is over 80 years of age. She had little formal education. She was not knowledgeable in business affairs. She stated that she had deep regard for her son and relied heavily on his advice and ability. She was never involved in the appellant's (her son's) business (a farming operation). She stated that she was aware the appellant was having financial difficulty but was not fully apprised of his debt situation". Mortgaging her interest in the property benefited her son (Orville) in his (financial) relationship with the mortgagee credit union. Ella received absolutely nothing of value for so mortgaging. The Court emphasized that the mortgagee credit union was fully aware of Ella's situation, including, in particular, her vulnerability (in relation to her son's wishes) and her lack of business/financial understanding. With such knowledge, the mortgagee became obligated to try and minimize the effect of such vulnerability and lack of business/financial understanding, which the court observed would have been most likely accomplished by insisting that Ella obtain independent legal advice before committing herself. This the mortgagee did not do. The mortgage was prepared by Orville's lawyer so that any legal advice obtained by Ella came from a source which was not independent of the interests of Orville (and the mortgagee credit union). In this particular case, there was an additional factor which weighed against the mortgagee; at a later date when another mortgage was granted to the mortgagee involving Ella, the credit union did take the trouble to ensure that Ella had truly independent legal advice.  An interesting variation on this type of scenario is where a vulnerable guarantor receives legal advice and the Court concludes that, notwithstanding that the lawyer providing such advice was not independent (of one or both of the primary debtor and the creditor), the advice given wasadequate and sufficient in order to enable the guarantor to provide informed consent to the guarantee transaction.
    1. The defence of absence of consideration or value. This defence was successfully raised by the mortgagor, Orville. The need for consideration is applicable to real property mortgages and to contracts generally, excepting possibly for covenants given under seal. In the Lewis Case, Orville borrowed $220,000.00 from the mortgagee credit union in November of 2003. The mortgagor did not then require that it be provided with any security.  In July of 2004, the mortgagee, by then not feeling comfortable with its (lack of) security position, asked Orville to mortgage his interest in some land.  The Court acknowledged that the mortgage was given in exchange for the mortgagee "continuing to allow the loan to exist without taking any collection action". However, the Court observed that "there (was) no evidence of default or of enforcement or forbearance from enforcement (by the mortgagee)". The mortgage was stated to be payable on demand, but (again) there was "no evidence (before the Court) that (the mortgagee) had demanded or was going to demand repayment at this…time". Of critical importance to lenders in this situation is the need to go through the "formality" of either making a formal written demand, or making a demand with the proviso that such demand will be withdrawn (or no demand will be made in the immediate future) in exchange for the debtor providing security. Forbearance from enforcing security has long been recognized as valid consideration in this type of a situation.  "Reading between the lines", one suspects that the credit union did make it clear to the mortgagor that it would not maintain the loan, and at least, by implication, that it would require repayment of the loan, unless security was then provided, however, officers of the credit union simply omitted to document what they had communicated to Orville.

The judgment in the Lewis Case is also of interest to mortgage lenders by reason of these additional matters:

(a)          In an action by the mortgagee credit union under another related mortgage granted by Orville, Orville argued that his commitment should be vitiated by reason of the fact that he was under " financial duress" when he provided the mortgage. The Court quickly disposed of this, pointing out that while Orville was, no doubt, under considerable stress because of his financial situation, that stress was "of his own doing". If that kind of defence was accepted by the Courts, then very few mortgages given in "workout" situations would be valid.

(b)          Orville also defended on the basis that the amount of the debt secured and the interest rate applicable thereto did not appear in the mortgage document. This defence was not pursued with any vigour, and the Court did not comment on it further. Hopefully, such a defence will never be accepted, otherwise utilization of "all obligations" mortgages will have to cease. If it becomes legally necessary to include in the mortgage document the precise amount loaned and the interest rate applicable thereto, in other words, if the terms of any loan to be secured by a mortgage have to be included in the mortgage, then this type of mortgage can only be used to secure presently existing loans where the precise terms thereof have been fully worked out. The flexibility available to both creditors and debtors in utilizing "all obligations" mortgages would be lost.

(c)          In considering the defence of vulnerability and lack of informed consent, the Court distinguished between these situations:


(i)            where a creditor loans to one person and takes a guarantee (typically secured) from another person, the guarantor being often, although not necessarily, the spouse of the primary borrower; and


(ii)           where a creditor structures a loan so that it is made to both the person who would otherwise be the primary borrower plus another person (again, typically, but not necessarily, a spouse) who is vulnerable, with security being taken from the vulnerable person alone, or from each of the vulnerable person and the other borrower.

The Court pointed out that lenders must be vigilant to assure themselves that the guarantor referred to in the first of the above-described situations receives - if necessary - independent legal advice.  It is this writer's view that lenders should also be vigilant in situations similar to the second of the above-described scenarios, that is, where both parties are named as joint borrowers.  This is because some lenders and their (primary) borrowers will seek to minimize a subsequent attack on the guarantor's promise (and the security provided by the guarantor for such promise) by making it appear that the guarantor is not merely a surety, but rather a co-borrower obtaining the benefit of the loan, along with the other obligant.  In fact, in this scenario, it is frequently the case that the nominal borrower (who in substance is really a guarantor) receives absolutely no benefit from the loan.

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2019


1. Perspective of this paper.  The writer of this paper is not deeply familiar with the provisions and application of the Canada Income Tax Act (the "ITA") or of the various regulations made thereunder ("Regulations").  Rather, the writer is a Manitoba lawyer whose practice has included - and continues to include - acting for buyers and sellers of real estate and real estate interests.  "Real estate interests" clearly goes beyond fee simple (ie, unlimited or indefinite) ownership of lands or lands with improvements.  But in acting for buyers and sellers of real estate interests, the writer's experience has been that overwhelmingly, his clients have sought legal services for the purpose of facilitating sales and purchases of lands or lands and premises owned by - or sought to be owned by - the client in fee simple or freehold ownership.  In other words, the writer's experience is similar to that of the vast majority of Manitoba practitioners, most of whom, to a greater or lesser extent, are called on to assist clients in entering into and closing real estate purchase and sale contracts.  In most cases, lawyers like the writer (an "average commercial lawyer") does not have to have an in-depth understanding of the ITA or its Regulations.  When such knowledge is needed, the average lawyer can seek it out from those who are more expert in the field.  But what should the average lawyer know about, at least generally, and in advance, so as to be able to know when she or he has a need to seek out expert advice in the context of the application of the ITA and its Regulations to a sale or purchase of real estate?

As one gains experience in the practice of law, it becomes very obvious that an average lawyer does need to have at least a rudimentary understanding of the application of the ITA and its Regulations in assisting one's clients in various dealings in real estate interests.  Failure by an average lawyer to have - and utilize - this rudimentary knowledge, or with such rudimentary knowledge in hand, failure by an average lawyer to consult and retain the assistance of a more expert lawyer (or perhaps an accountant) can result in:

(a)          loss to the client (ie, adverse income tax consequences);

(b)          loss to the average lawyer arising by virtue of breach of professional duties and responsibilities owed by the average lawyer to her/his client; and

(c)          loss suffered by the average lawyer's colleagues, as partners in a law firm, depending of course on whether or not the firm is constituted as a limited liability partnership and the degree of the average lawyer's partners' involvement in/responsibility for the average lawyer's breach of its obligations owed to the average lawyer's client.


2. The ITA "problem".  The problem considered in this paper is related to the taxation by the Canadian government (the Canada Revenue Agency or the "Tax Authority") on the increase in value of a real estate holding which is realized by the holder when the holder sells the holding to a buyer for a consideration in excess of the amount that the holder originally paid to acquire the holding plus the value of the improvements made to the holding by the holder during the course of the holder's holding.  Thus, if "A" being a resident in Manitoba sells to "B", who is also a resident of Manitoba, "A"'s landholding situated in Manitoba for a price of $1,000,000.00, and, "A" originally acquired the landholding for $100,000.00 and thereafter put another $100,000.00 improvements into the landholding, "A"'s gain in value (ie, "A"'s capital gain) is $800,000.00.  Under the ITA, "A" is liable to pay an income tax on one-half of "A"'s gain, namely a tax on $400,000.00.  In this situation, assuming the highest marginal rate of income tax being applicable to the calculation of "A"'s income for income tax purposes, "A" would have to pay the Canadian government income tax of $200,000.00.*

The average lawyer does not have to be concerned about ensuring that the gain made by "A" is properly accounted for to the Tax Authority and paid or otherwise satisfied to it.  That goes for the average lawyers acting for each respectively of "A" and "B".  Of course both lawyers should generally remind their clients to keep track of and maintain appropriate records to reflect the real estate transaction just completed. And lawyers should either advise their clients to consult with their accounting advisors, and, with the clients' authorizations to do so, send particulars of the recently concluded transaction to each party's accountants.  There are other"income taxation aspects" to the above-

described real estate transaction which need to be considered by both the clients' accountants and by the clients' lawyers - average or expert - as well, but this paper is focused on the Canadian government income tax treatment of real estate gains.

Now, imagine the same fact scenario as described above, but with "A" not being a resident of Canada.  "A" may be a resident of the United States, Australia, Russia, China, France, Iceland, etc. - anywhere but Canada.  The taxation rules relating to this alternative scenario are, in one way, exactly the same as they would be where "A" was a Canadian resident.  Notwithstanding that "A" is not a resident of Canada, under Canadian law, "A" is liable to pay tax on "A"'s gain on its sale of the Canadian situated real estate holding to "B".  Note that the initial responsibility would appear to be placed on "A". This seems logical and reasonable, because that it is "A" who gets the benefit of the gain on the sale, not "B".  But "A" is beyond the clutches of the Tax Authority and if "A" ignores "A"'s legal - and arguably moral - responsibility to pay the tax "A" owes, the Tax Authority will lose out.  If a large number of non-resident owners of Canadian properties sell their holdings and escape - without paying Canadian taxes - on their, perhaps, substantial gains, the Canadian government will be out a very considerable amount.  Arguably, this will strain the resources of the Canadian government to perform the tasks and duties it is allocated by law, its constitution and convention.  So what does the Canadian government do, or more accurately, what has the Canadian government done in order to remediate this situation and avoid these potential losses?  Clearly, the answer is that, based on a conclusion of what is best "public policy", the government has determined that if it can't make "A" pay the tax it initially owes, it will place the burden on "B" who continues to be resident in Canada and thus within the clutches of the Tax Authority.

But how is this done?  Essentially, it is done by Canadian law requiring "B" to either ensure that "A" makes arrangements with the Tax Authority in advance of the closing of the sale and purchase transaction, to pay for or put up security for the tax applicable to the anticipated gain on the sale and purchase, or, it requires "B" to deduct a certain amount of the proceeds of sale that "B" would otherwise pay to "A", and instead, pay those monies to the Tax Authority to be applied by it on account of the taxes to be owed by "A".  One could argue that this is not a fair or equitable solution, insofar as "B" is concerned, but it appears to be the only workable solution from the government's perspective.  In fact, this rule - or group of related rules - dealing with the taxation of the sales of Canadian property by non-residents has for some time been and continues to be "carved in stone".  It is something that we must all accept and deal with.

But how do we deal with it?  Fortunately, the ITA has some additional rules relating to what a buyer can do to protect itself from having to be forced to pay twice for the property it buys from the buyer's non-resident seller (the buyer first pays the entire purchase price to the non-resident seller and then later pays the seller's Canadian tax on the seller's gain to the Tax Authority).  As noted above, the buyer can protect itself by ensuring that the seller makes its peace with the Tax Authority before the closing; this involves getting a "Certificate of Clearance" from the Tax Authority which the buyer will need to have a copy of to facilitate its own dealings with the Tax Authority.  Or, the buyer itself must make a payment on account of the seller's anticipated tax to the Tax Authority, thereby reducing what the buyer has to pay to the seller by that amount.  These are the alternatives available to the buyer where the buyer knows that the seller is a non-resident of Canada.  But what if the buyer does not know that the seller is a non-resident or is uncertain as to the seller's residency status?  The ITA does contemplate this situation, and if a buyer "fits within the rules", the buyer will not be responsible for the seller's tax even though it turns out that the seller was not a resident of Canada and the seller fails to pay the tax.


3. Does or should the buyer know that the seller is a non-resident of Canada? Section 116(5)(a) of the ITA states that "Where in a taxation year a buyer has acquired from a non-resident person any taxable Canadian property (other than depreciable property of excluded property) of the non-resident person, the buyer, unless, after reasonable inquiry, the buyer had no reason to believe that the non-resident person was not resident in Canada … is liable to pay … as tax … on behalf of the non-resident person … (the non-resident person's capital gain tax) …".  I believe that there are two situations contemplated here:

(a)          where a buyer knows, virtually at the outset, perhaps from past dealings with the seller or from currently available information, that the seller is a non-resident; and

(b)          where the buyer does not know, one way or the other, whether the seller is a non-resident person, or, the buyer has some indication/some information which perhaps suggests that the seller is a non-resident person.

In either of these cases, the buyer has to conclude that the seller either is or is not a non-resident person.  They buyer may be able to so conclude immediately without any necessary inquiry.  If no such inquiry is required, then the writer would argue that no inquiry is a "reasonable" inquiry.  But if there is any doubt in the mind of the buyer, the buyer must then make a further inquiry in order to be in a position to make a more definitive conclusion as to the residence or non-residence of the seller.  And that inquiry has to be "reasonable".  Presumably, "reasonable" means "reasonable in the circumstances".

The real question here is what should the average lawyer do when confronted with a situation where the average lawyer's client wishes to purchase a real estate holding from a seller and the buyer and the buyer's average lawyer don't have a clue as to the residency (or non-residency) of the seller or one or both of them have information or could easily access information which would - perhaps - enable one or both of them to make a more accurate conclusion as to the residency/non-residency of the seller?


4. Current practice to determine residency/non-residency in real estate sales and purchases.  The common practice for lawyers handling real estate transactions is to have the parties agree to include a term in the purchase and sale contract which essentially is a warranty by the seller that the seller is not a non-resident of Canada and will not be such continuously down to closing.  This should be accompanied by a further promise by the seller to provide a statutory declaration at closing which states that, at closing, the seller is (or continues to be) not a non-resident of Canada.  And a properly completed closing statutory declaration should be obtained.

The question raised in this paper is whether or not it will always be sufficient - to protect the buyer - for the buyer's lawyer to simply require receipt at closing from the seller or the seller's lawyer of a statutory declaration dealing with the seller's residency/non-residency?  All lawyers are aware of the concept of "constructive" knowledge.  If I have no knowledge of a particular fact ("Unknown Fact") because I have shut my mind to/ignored various other facts or suggestions which, were I to consider/think about them, would likely result in my becoming fully and consciously aware of the Unknown - but then fully known - Fact, a Court will hold that I am in the same position as if I had complete awareness of the fact from the outset.  This concept of not being able to intentionally shut one's mind to matters because they are or might be "unpleasant" would apply to buyers and buyers' lawyers relying on residency/non-residency statements in closing statutory declarations. 

If the residency/non-residency of a seller is the primary fact or matter to be determined, what sort of warning signs or "red flags" should a lawyer - and in particular, an average lawyer - be on the lookout for in providing legal guidance to a buyer?  Before dealing with the Kau case (see hereinbelow), it would be useful to categorize warning signs/red flags as follows:

(a)          warning signs/red flags which are evident "up-front", and obvious when the buyer's lawyer first reads the contract, the broker listing agreement, the initial title and other search information obtained by the buyer's lawyer, etc. ("Up-Front Red Flags"); and

(b)          warning signs or red flags which are not immediately apparent but become so to the buyer's lawyer as the buyer's lawyer digs more deeply into the subject matter of her/his retainer, including ongoing communications with various parties - including the seller's lawyer and the real estate broker - over the period of time commencing with when the buyer's lawyer first gets the contract, and ending with the closing ("Later Discovered Red Flags").


5. The Federal Court of Canada case Anibal Kau and Her Majesty The Queen, 2018 TCC 156, August 27, 2018, with the Court sitting in Halifax, Nova Scotia.  This case (the "Kau Case") deals with a real life scenario impacted by the above-referenced ITA rules regarding the responsibility of a real estate buyer for the buyer's seller's capital gain tax on the sale of the seller's real estate.  In particular, it deals with and gives some meaningful guidance as to the sorts of Up-Front Red Flags and Later Discovered Red Flags which average lawyers should be aware of.

These are the pertinent elements of the Kau Case:

(a)          Mr. Kau (the "Buyer") entered into a purchase and sale agreement on June 15, 2011 for a Toronto situation condominium unit.

(b)          The Buyer retained a lawyer to handle the real estate transaction (the "Buyer's Lawyer").  The Buyer was a Canadian resident, the property was located in Canada and the Buyer's Lawyer was also based in Canada (in Toronto).

(c)          The seller was a Mr. Yetka (the "Seller"), and the Seller also engaged Toronto counsel (the "Seller's Lawyer") to handle the Seller's interests in completing the purchase and sale transaction.

(d)          The Buyer knew from a prior visit to the condominium unit that the Seller didn't live there and that it was in fact an investment property for the Seller.

(e)          In short order, the Buyer's Lawyer determined through searches and other preparatory work for the closing that the Seller purchased the property in 2009 and that his then address for service was an address in Danville, California.  This (California) address (for service purposes) was the same (California) address given to the Buyer in connection with the current transaction.

(f)            On June 17, 2011, the Seller's Lawyer advised the Buyer's Lawyer that the Seller would be signing the closing documents in California.  Subsequently (on June 22, 2011), the Seller's Lawyer revised the closing documents and indicated to the Buyer's Lawyer that they too would be signed in California.

(g)          On June 22, 2011, the Buyer's Lawyer sent the Seller's Lawyer a list of closing requisitions.  Included was a requirement to provide "satisfactory evidence of compliance with … Section 116 of the Income Tax Act (Canada)".

(h)          On June 24, 2011, the Seller signed a "one sentence unsworn" statement before a California notary public in Danville, California, which was described as an "affidavit".  The Seller's statement therein was that "I am not a non-resident of Canada within the meaning of Section 116 of the Income Tax Act (Canada) nor will I be a non-resident of Canada at the time of closing.".  In the jurat section of this "alleged" affidavit, the notary stated that the statement therein had been "Declared before me".  There was no reference to the statement being either a sworn declaration or a solemn declaration or that the statement had been declared under penalty of perjury.

(i)            On closing (June 30, 2011), the Seller's Lawyer delivered all documentation to the Buyer's Lawyer.  The Buyer's Lawyer did not withhold the required (25%) nor indeed any portion of the purchase price.  No "Clearance Certificate" was sought or obtained from the Tax Authority.

The Court concluded that the Buyer had "after reasonable inquiry … reason to believe that the non-resident person (ie, the Seller) … was not resident in Canada.

At the hearing, the Buyer's Lawyer stated that it was his understanding that "it was standard practice in Ontario to rely on affidavits for determination of residence.".  The writer believes that this is indeed essentially standard practice in Manitoba.

The problem is that in the Kau Case, not only was the so called "affidavit" improperly constituted and completed, but, given the above-described facts, it was also relatively easy for the Court to conclude that the Buyer's Lawyer had ignored or in any event was not sufficiently alert to the existence of a number of Up-Front Red Flags and Later Discovered Red Flags.

So the "lessons" of the Kau Case would appear to be that it is necessary for lawyers - especially buyer's lawyers - to be on the lookout for various Red Flags.  The Kau Case illustrates a number of potential Red Flags, but in any given scenario, there may be others.

What to do when you either know for sure that a seller is a non-resident OR you have some suspicion that the seller may be a non-resident?  If you know for sure (that is, the facts clearly indicate non-residency), then it is not likely that the seller's lawyer will in any way balk at your requiring - before closing - confirmation that your client can withhold the required portion of the purchase price (and account for it to the Tax Authority) or that you require the seller's lawyer to make peace with the Tax Authority and get a "Clearance Certificate".  As previously mentioned, most real estate purchase and sale transactions will not involve a non-resident seller....

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March 2011


Although 20 years old now, the Wales Management Co. v. Goodland Developments Ltd. case (British Columbia Supreme Court, 1991, hereinafter, the "Wales/Goodland Case") is instructive to lenders who may wish to deal, to a greater or lesser extent, with a Borrower's own customers or other third party contractors.  As it turned out, in the Wales/Goodland Case, the lender was not held responsible to its borrower's third party contractor, but that was because the Court determined that the lender had not - contrary to what the third party contractor alleged - conducted itself so as to incur responsibilities to the contractor.

The commercial setting and the "players" in the Wales/Goodland Case involve an oft repeated scenario in commercial lending.  The lender entered into an agreement with a developer (Goodland) to provide financing to Goodland to enable it to develop a subdivision of residential lots.  Concurrently, Goodland entered into an agreement with a third party contractor/purchaser (Wales) to sell some - although not all - of the lots in the contemplated subdivision toWales.  The lender's commitment to lend and theWales' commitment to purchase were conditional upon each other.  Development/subdivision by Goodland did not proceed as expeditiously as originally contemplated with the result that the lender was not in a position to make its first advance by the deadline stipulated therefor inWales' purchase agreement.  Goodland gotWalesto agree to an extension of the deadline for the first advance in exchange for Goodland agreeing to sellWalesmore lots in Goodland's subdivision.  The lender, whose loan agreement entitled it to approve of the form and content of Goodland's sale agreement with Wales, accepted the "extra lots" amendment but insisted that the sale agreement be broken down into two agreements, one for the lots originally agreed to be purchased and the other for the additional lots to be purchased, the lender's basis for this requirement being that it did not want to be taken in any manner to be considered as financing the development of anything more than the original lots agreed to be sold. Walesaccepted the lender's requirement.  Although the lender made several advances, Goodland encountered further problems in its development and subdivision which led to further delays in completing the development.  Eventually, the development work stopped and the developer's general contractor registered a lien against the property.  Subsequently, the lender demanded repayment of its loan, and when this was not forthcoming, it foreclosed on the property and thereafter sold same for an amount which not only satisfied the loan, but also gave the lender an additional profit. Walesthen sued the lender forWales' purchase deposit monies, expenses andWales' lost profits. 

Wales framed its claim on several different basis, all of which had in common the position that the lender excessively inserted itself into Goodland's project, and in particular, into Goodland's arrangements with Wales, with the result that the lender took on responsibilities to Wales, over and above or in addition to those which the lender may have owed to Goodland as borrower under the loan agreement.

It is important to understand just what was the lender's involvement withWalesand Goodland.  The Court observed:

(i)            from the outset, each ofWalesand the lender were well aware of the others' concerns.  Wales did not want to commit to buy subdivision lots from Goodland unless it could be reasonably certain that Goodland had the lender's financing, and, the lender did not wish to provide financing to Goodland unless it had reasonable assurance that someone of Wales' (good) reputation had committed to by Goodland's subdivision lots;

(ii)           the lender required that its solicitor review the purchase agreement and ensure that Goodland's rights under that agreement would be enforceable againstWales.  In furtherance of this, the lender's solicitor requested a number of changes be made to the agreement, both at the beginning and later on when, as described above, Goodland agreed to sell additional lots toWales.  Wales agreed to all of the requested changes, although, as the Court noted and emphasized, the main terms of the original sale agreement pertaining to the lots originally agreed to be acquired by Wales were not changed; and

(iii)          after the development work stopped representatives of the lender,Walesand Goodland met at the site to discuss the situation, and thereafter,Walesagreed to have an investigation made for the purpose of ascertaining if and how the project could be saved.  The investigation indicated that more money would have to be put into the project than the lender had originally agreed to provide.  The lender askedWalesto guarantee the loan, butWalesrefused to do so without having additional investigation done, but further investigation required that more monies be made available for same and while the lender agreed to "consider" making such additional monies available, it never agreed to do so.

Clearly, the lender involved itself in the Goodland -Walesrelationship and in Goodland's subdivision/development to some degree, such involvement, from the lender's perspective, being absolutely necessary to monitor and manage its risk.  But did the lender go too far?

The Court concluded that the lender did not so involve itself as to become obligated directly toWales.  In this regard, the Court noted that:

(a)          contrary to what Walesalleged, the lender did not enter into a separate contract with Waleswhich would have obligated the lender to advance the rest of its loan contrary to the terms of the lender's loan agreement with Goodland.  The lender's agreement was with Goodland, not some separate or additional agreement with Wales.  There was no proof of the terms of such alleged or additional contract and no proof that the lender had agreed to bind itself to Walesin any way.  In its dealings with Wales, all the lender agreed to was that if Walesaccepted to the lender's solicitor's modifications to the original sale agreement, the lender would fund the loan to Goodland in accordance with the terms of the lender's loan agreement with Goodland.  The lender did not undertake to guarantee performance of Goodland's obligations toWales under the Goodland - Wales purchase agreement.

(b)          the lender did not undertake fiduciary obligations toWales.  EvenWales' representative acknowledged that the lender indicated that it would be acting only in its own interest in the lender's involvement.

(c)          the lender's rights under its mortgage of the project took priority overWales' unregistered interest as a purchaser of the subdivision lots.

(d)          in answer to Wales' position that in first foreclosing upon the project and then selling same for a profit, the lender thereby became unjustly enriched, while it is true that the lender was enriched (by making a profit, in addition to getting its loan repaid out of the sale proceeds), this was not "unjust" because the lender had a valid "juristic reason" for making such profit, namely that it (legally) foreclosed under its mortgage and thereby became entitled to ownership of the property, for better or worse.

What does the Wales/Goodland case suggest for lenders considering project (and other) financing where what one or more third party contractors of the borrower do or don't do is or may be of concern to the lender?

It is tempting to simply state that a lender should do what the lender did in the Wales/Goodland Case.  But what did that lender do - or perhaps more to the point, not do - which convinced the court that it had not taken on any obligations toWales?  Consider:

(1)          The lender - and presumably the lender's solicitor - did not, in writing, by conduct or deed undertake to - or as the Court held, did not act so as to induceWalesinto thinking that it had undertaken to - look out forWales' interests or otherwise make sure thatWalesgot what it bargained for under its purchase agreement with Goodland.

(2)          Although the judgment does not indicate that the lender did this in the Wales/Goodland Case, it might be useful for a lender, when dealing with a borrower's third party contractor, to get a written acknowledgment from the third party contractor that the lender is not undertaking any sort of obligations to the third party contractor.

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December 2003


Initially, the Ontario Courts in the Transport North American Express case (the “Transport Case”) held that where a credit agreement obligated the borrower to pay a rate of interest which was determined to be in excess of sixty percent per annum, contrary to Section 347 of The Canadian Criminal Code, a judge should be entitled to effect a “notional” severance of the interest payment provision in the agreement by “reading down” the rate to sixty percent per annum.

            This initial decision (made in May of 2001) was a departure from previous decisions concerning illegal interest under Section 347 in that where a Court determined that the illegal interest payment portion of a contract should be severed from it, keeping the “legal” principal payment portion of the contract intact, the Courts would simply eliminate the obligation to pay any interest at all, allowing the creditor to obtain repayment of its principal monies (but only the principal monies) advanced.

            In the Ontario Court of Appeal decision for the Transport Case (released in June of 2002), it was held that this flexible - and creditors would certainly argue reasonable - approach should not be taken because the statute (the Criminal Code) and the case law pertaining to same didn’t really justify same.  This holding makes it all the more critical for lenders to include properly drawn severance clauses in their loan agreements so that the Courts will have a basis on which to permit a creditor to charge and collect a lesser (and “legal”) amount of interest (something equal to or less than sixty percent per annum), while disallowing the creditor’s claim to anything in excess of sixty percent per annum.  However, it must be kept in mind that even with a properly drawn severance clause, the Courts may not necessarily uphold that clause where the Court is of the opinion that to do so would be to subvert the policy behind Section 347. A Court would likely believe that such policy would be subverted where it viewed the creditor’s conduct as an outrageous attempt to extract unreasonable consideration such as, where the arrangement really was one which could be viewed as “loan sharking”.  Indeed in the Transport Case, the Court noted that the transaction under challenge was a commercial one rather than loan sharking, the parties’ intention was not to contravene or evade Section 347 and they had bargained from relatively equal positions, and, each party had separate and informed legal advice.

            The Transport Case is now being considered by the Supreme Court of Canada.  Thus in the near future, we should find out if the trial Court’s flexible approach to dealing with “criminal” rates of interest will be upheld.


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August 2003


Section 347 of The Criminal Code of Canada, which prohibits contracting for or collecting interest on a debt in excess of sixty percent per annum, defines “interest” so broadly that it includes payment by the debtor to its creditor of amounts which are not normally considered to be interest.  The recent British Columbia Court of Appeal case Boyd v International Utility Structures Inc. (the “Boyd Case”) judgment, August 1, 2002, is a case in which “interest” under the legislation was held to include payments made by the debtor based on the debtor’s level of production and sales utilizing technology where the technology was acquired using the proceeds of the creditor’s loan.

            In 1991, the creditor loaned about $50,000.00 to the debtor which the debtor used to acquire the technology it needed to manufacture utility poles.  The debtor agreed to pay its creditor interest at a rate of thirty percent per annum, repay the loan in four months, and also pay the creditor a royalty of $2.00 for every pole manufactured and sold using the technology.  The loan was repaid with interest at thirty percent per annum in approximately six months, the stipulated royalties were paid for the years 1994, 1995 and 1996, but thereafter, the debtor refused to pay any further royalties and resisted the creditor’s claim on the basis that the arrangement provided for interest in excess of the sixty percent per annum criminal rate.

            It is interesting to note that each party had separate knowledgeable counsel and it would appear that each party, in particular the debtor, fully understood the price it was going to have to pay to obtain the loan.  The debtor company was in desperate need of the loan and it appears that only the creditor was prepared to advance it.  The creditor had originally asked to obtain shares in the debtor as well as being able to make the loan at thirty percent per annum but was told that no shares were available.  The loan was documented by a loan agreement and the royalty arrangement was documented by a separate royalty agreement.

            These facts would argue for the creditor being able to legally get its loan interest plus the royalty payments, but the Court held that the arrangement contravened Section 347.  Notwithstanding that the debtor’s obligation to pay the royalty payments was dependent upon future and thus unknown production levels, the Court held that such payments were to be made as part of the consideration for the making of the loan, and thus had to be included in “interest” in determining whether or not Section 347 was applicable.

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May 2019


Berg and Marks were adjacent property owners, Berg owning 9 Mill Street East and Marks owning 7 Mill Street East in New Tecumseth, Ontario.  The two properties were separated by a laneway which was (privately) owned by Marks.  Berg's property had an expressly created easement over the laneway which easement provided for ingress and egress to and from Berg's property.  The wording in the easement was that Berg's property had an easement "in, over and upon" the laneway.

At the north end of the laneway was a catchbasin with a sewer pipe which connected the catchbasin to the municipal storm sewer system.  Clearly, the catchbasin (and its connection to the storm sewer system) drained excess surface water from the laneway and adjacent properties.  However, Marks decided that the catchbasin sewer cover/lid had not been installed safely and that consequently, it constituted a hazard.  Marks had concrete poured over the catchbasin and this resulted in flooding to Berg's property (as well as the laneway).  The question before the Court was whether or not the easement included the right to have the catchbasin maintained and operating for the benefit of Berg's property.  The Court held that, based on precedent authority, an easement grant "…includes a grant of ancillary rights" which are reasonably necessary to the use and enjoyment of the easement which was contemplated by the grantor".  Clearly, the easement, as expressed in the language of the grant, included the right of access along the laneway for the benefit of Berg's property, but it also, in the Court's view, included the following ancillary rights:

(i)            the right to have the catchbasin exist and to function in the manner in which it was intended to function (ie, drain the laneway and the adjacent lands); and

(ii)           the right to use the laneway to make repairs to the side of the building on Berg's property.

The justification for the ancillary right to have the catchbasin maintained was simply that "A submerged laneway would make it impossible for the right of access (which was specifically set forth in the easement grant) to be exercised".

While the essence of this decision appears to be that, in the appropriate circumstances, Courts will expand the meaning of the express words in a grant of easement where the Court considers that such expansion is necessary in order for the grantee to be able to make reasonable use of the specified easement right(s), this writer cautions those attempting to draft easements to not overly rely upon the "generosity" of a future court decision.  Where at all possible, drafters of easement agreements and grants should at least attempt to envisage the totality of the various elements of what is - and will be - required to be protected for the use and benefit of the grantee.


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Februray 2020


Sometimes, laypeople fear that lawyers and judges give meanings to contracts which are inexplicable.  However, as legally trained contract interpreters, lawyers and judges are bound to follow the various rules specifying how to garner meaning from ambiguously written agreements.  These rules have developed via the organic growth of the common law over many centuries.  When ambiguously worded contracts are entered into by non-legally trained persons, the true meaning of the contract's meaning is sometimes so difficult to determine that a Court, called upon to interpret it has no choice but to hold that it is completely void due to vagueness.  Such a holding would - itself - be one of the rules of contractual interpretation slowly developed over many years. 


Even lawyers and governments may, on occasion, enter into or otherwise "create", contracts which are either ambiguous or which contain contradictory terms.  When subsequently, the parties to the arrangement get into an argument about what the contract means, the Courts may have to attempt to determine that meaning.  Broadly speaking, in interpreting the meaning of contracts, the Courts will follow these general principles:

(i)            the meaning - or the true meaning - of a provision in a contract is to be based on what were the intentions of the contracting parties at the time they entered into the contract;

(ii)           if, from wording of the contract, the parties' intentions are quite clear, that is, there is no ambiguity, then the ordinary meaning of the words used determines the issue; and

(iii)          when - but only when - there is an ambiguity in the meaning of the words used by the parties to their contract, a Court will admit evidence - other than the wording of the contract itself - as to what the parties' original intentions were.  This may include studying the "factual matrix" of the situation(s) in existence at the time that the parties contracted.


As stated, the foregoing are basic or general rules of contractual interpretation.  There are other rules of interpretation designed to govern different - and usually not frequently encountered - situations where parties have entered into a contract but the meaning is not entirely clear.  One such rule is that where a contract has been drawn by one only of the contracting parties, or more likely, one only of the contracting parties' lawyers, ambiguities will be interpreted against the interests of the contracting party who - or whose lawyer - prepared the agreement.  Another rule is that where two or more provisions of a contract contradict each other - or are inconsistent with each other - thus resulting in what amounts to an absurdity - a Court should attempt interpret the contract so as to remove or ignore the absurdity.


These last mentioned contractual interpretation rules were applied in the recent Ontario Superior Court of Justice case of Reddy v. 1945086 Ontario Inc., judgement issued April 29, 2019 (hereinafter, the "Reddy Case").  The Reddy Case involved a purchaser of condominium units in a project in Ontario.  Because the parties and the condominium units were situated in Ontario, Ontario (statutory) law required that the purchase and sale agreement (the "Agreement") include an "addendum" which contained certain terms to be included in the contract.  One of those required terms provided, in effect, that where the seller - after entering into a purchase and sale agreement - determined that it was unable to obtain appropriate and sufficient financing (from one or more third party lenders) to finance the overall condominium project, the seller was entitled to terminate the contract on a "no fault" basis.  "No fault" would, in this context, mean that the purchaser would be able to get its deposit back and neither of the parties would be entitled to enforce compliance by or claim damages from the other of them.  In effect, the parties were to be placed back in the positions they were in before they entered into the agreement.

In wording the "no financing termination clause", the seller had added to the statutorily specified termination condition (which provided simply that if the seller was unable to obtain its required financing, the seller could terminate on a "no fault" basis) to the effect that it was to be in the "sole absolute and unfettered discretion" of the seller as to whether or not the seller had taken reasonable efforts to obtain its required financing.  After unsuccessfully attempting to get the financing it wanted, the seller notified the buyer that the seller was unable to obtain financing that and accordingly, the contract between the parties was at an end.

The buyer argued that by adding the "sole, absolute and unfettered discretion" concept to the (basic) statutory early termination condition, the entire early termination condition should be held to be invalid and unenforceable.  That would have left the seller in the position of being obliged to complete the project (and complete the sale of the purchaser's bargained for condominium units) without adequate financing.  The Court observed that there were two possible conflicting interpretations of the early termination clause:

(i)            that the seller could terminate in its sole, absolute and unfettered discretion based on - or allegedly based on - the seller's inability to obtain appropriate financing.  In this scenario, it wouldn't matter if the seller had exercised any efforts to obtain financing, regardless, the seller could terminate simply based on the fact that it did not have financing for the project.

(ii)           that the seller could terminate, but only if it had exercised reasonable efforts to obtain the required financing.  In this case, the seller would - if challenged - have to show that it had exercised reasonable efforts to at least to have tried to get its financing.

The Court held that with these two possible interpretations in conflict with each other, and, with the purchaser's argument, if accepted, resulting in an absurdity (as above-noted), the proper interpretation of the contract was that to ignore the "sole, absolute and unfettered discretion" wording in the clause.  Somewhat ironically, if the purchaser's argument had been upheld, it would have resulted, in some cases, in a hardship for purchasers.  If a seller could terminate future contractual obligations on a whim (which, in effect, the "sole, absolute and unfettered discretion" wording would permit), buyers could be stripped of their bargains by the unilateral and unjustified decisions of their sellers.  Although, the purchasers did not get what they wanted in the Reddy Case (which in effect, would have been damages for inappropriate loss of their bargain), the Court observed that where there are two possible but conflicting interpretations of the wording in a contract, the one most favourable to the consumer will be upheld.  In most similar contractual arrangements, the purchaser's argument in the Reddy Case would have actually harmed purchasers.

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OCTOBER 2013


The following-described scenarios may, at first glance, seem to be questions which might be raised at a Law School to test the analytical capacity of law students.  In fact, they represent "real life" scenarios that the writer has recently encountered.

  1. May one hold a security interest in a debtor's collateral without the debtor owning any obligations (of any type) to the security holder?

A extends credit to B (either by way of a sale or a loan) and to secure B's obligations arising out of the indebtedness, B creates a security interest in B's personalty (presently owned and after-acquired), but grants that security interest not to A, but rather to C with C holding the security for A.  Is this legally feasible, given the fact that a security interest cannot legally exist unless it secures payment or performance of obligations and given that in this situation, the debt obligation is owed to A, not the holder of the security, B?  Note that such an arrangement would not be one where A first got the security interest itself from B and then assigned the debt and the security interest to C.  Nor would this be a situation where A assigns the debt to C and then C takes the security interest directly from B.  A careful reading of the definition of "security interest" in The Manitoba Personal Property Security Act reveals that such an arrangement would indeed be legally possible.  The definition does not provide that the security interest has to be held by the person to whom the obligations secured are owed, merely that the security interest has to secure obligations.  Thus there is no legal - or for that matter policy - reason why a creditor can't have someone else hold a security interest granted by the creditor's debtor.  Such an arrangement will be advantageous to all concerned where multiple creditors band together to provide credit to a debtor, and rather than having the debtor provide separate security interests in its assets to each of the creditors, or having all of the creditors named as grantees of the security, all the creditors and the debtor agree that the debtor's security interest will be provided to either one only of the creditors, or to a separate entity which will hold as a "collateral agent".  Needless to say, there will have to be an agreement amongst the participants - especially amongst the creditors and with the "collateral agent" if there is one - that spells out the rights of the holder of the security and the obligations that holder will have to the other creditors with respect to the security, in particular, in a realization/enforcement situation.

  1. Change of ownership of collateral subject to a general security agreement.

A grants a security interest in all of A's presently owned and after-acquired personal property to B's Bank X.  X properly register's a financing statement in the Personal Property Registry giving notice of its security interest in A's assets.  B grants a security interest in all of its presently owned and after-acquired personal property to its bank, Bank Y, and, Bank Y duly registers its security interest in the Personal Property Registry.  Subsequently, A sells its business and all (or virtually all) of its assets, including its personal property, to B.  Bank X's security interest, covering, as it does, all of B's after-acquired personalty, would, upon B's acquisition from A of A's personalty, extend to and charge A's personalty now held by B.  But wouldn't also Bank X's security interest "follow" A's assets into the hands of B and charge A's personalty, now in the hands of B?  Would Bank X's security, pursuant to the terms of its security agreement, also extend to the personalty that B acquires subsequent to its acquisition of A's personalty?  Who would have priority - Bank X or Bank Y over (i) the personalty now held by B which it has just acquired from A, and, (ii) B's personalty that it currently owns other than the personalty it has acquired from A, and, (iii) personalty that B acquires in the future?

The "threshold" question to ask here is whether or not Bank X consented to the transfer of A's assets to B.  Under the PPSA, if Bank X did consent to A's disposition, then Bank X's security interest in the transferred assets is extinguished.  Bank X would have a security interest in any proceeds obtained by A for its disposition to B, but Bank X would no longer have any security interest in the transferred assets.  Unless B had confirmed or regranted a security interest in B's other personalty and/B's subsequently acquired personalty, Bank X would (also) have no security interest in such other assets of B.

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February 2020


When you obtain a document from a Manitoba Land Titles Office/Manitoba Registry Office (a "Document"), you pay a fee.  Such payment is long accepted by lawyers and by others who, for their own purposes, choose to obtain Documents directly from a Land Titles Office.  The quid pro quo for such charge is in part related to the costs incurred in operating the land titles system, including the receipt, processing, storage and regurgitation of Documents and other information "officially" provided to the system.  It is also in part based on the fact that the operator of the land titles system either holds or operates under the copyright which attaches to Documents - or at least to certain Documents.


The types of documents obtainable from a Land Titles Office may be broken down - generally - into these categories:

(i)            statements, declarations or confirmations of certain of the information held by the system pertaining to particular types of interests in land, the most common being ownership ("Land Ownership Confirmation").  The most frequently requested form of Land Ownership Confirmation is the document currently called a "Status of Title Certificate".  It not only contains a current (as at the date of its issuance) summary of (certain of) the system's recorded/held information pertaining to the ownership of a particular parcel of land, but additionally comprises a certification by the system that such information is substantially correct.

(ii)           copies of documents which, in one manner or another, affect dealings with land interests ("Conveyancing Documents"). Examples of frequently obtained Conveyancing Documents are mortgages, caveats, easements, transfers and discharges.

(iii)          plans prepared by properly licenced surveyors which, when recorded/registered in a Land Titles Office, become "official" determinants used by lawyers, courts and other officials to ascertain the precise boundaries and the extent of parcels of land ("Ownership Delineation Plans").  A plan of subdivision delineating two or more parcels of land would be the most frequently encountered/dealt with Land Ownership Plan.

From time to time, questions arise as to who holds the copyright for various types of Documents and if so, who is entitled to enjoy the various rights (subject to the legal obligations) which flow from copyright ownership.  The recently decided Supreme Court of Canada decision in Keatley Surveying Ltd. and Teranet Inc., judgement issued September 26, 2019 (hereinafter the "Keatley Case") dealt with this issue.  An Ownership Delineation Plan was prepared by a "private" surveyor and then recorded in a land registry office.  The land registry office and the land titles system were owned by the Province of Ontario (the "Province") and by way of an arrangement between the Province and Teranet Inc., was operated by Teranet Inc. acting in part, as an agent of the Province.  Part of the arrangement between Ontario and Teranet involved Ontario providing a licence to Teranet to make use of the copyright which Ontario claimed in the Land Ownership Plan.  The Province's (and Teranet's) position was that by Section 12 of the Copyright Act (Canada) (the "Act"), the Province owned the Land Ownership Plan's copyright and that it had properly licenced that copyright to Teranet.  Keatley argued that it should not lose its copyright merely because the plan was recorded in the land titles system.  It's position was that, although Section 12 of the Act did enable the Province to, in effect, expropriate a surveyor's copyright in plans which he/she had prepared and recorded without compensation, claiming copyright in this situation was an "overreach", and that the intent of the drafters of the Act (in 1921) was not to give such broad expropriation rights to the Province (or the federal Crown).

The Supreme Court agreed that Section 12 was not intended to give unrestricted freedom to the Crown to expropriate copyright (without compensation).  However, it was not an "overreach" to conclude that, on a proper application of Section 12, copyright in Land Ownership Plans did, upon recording in the Land Titles system, completely pass to the Province.  Given the Province's interest in ensuring the integrity of Land Ownership Plans (once officially recorded in the system) and the degree to which the Province - through legislation and regulations - governed the manner in which Land Ownership Plans were to be prepared, and perhaps most significantly, given the public interest in maintaining assurance that recorded Land Ownership Plans would continue to officially and unequivocally determine the boundaries between parcels of land, a proper reading of Section 12 was that copyright did pass from the surveyor to the Province.

It is necessary to take a "deep dive" into the meaning of Section 12 and then apply the meaning(s) thereby garnered to the particular situation under consideration in order to properly answer a question regarding the Province's entitlement to copyright in any particular recorded Document.  The Court held that the meaning of Section 12 was that where:

(i)            a "work" has been prepared under the direction of  or control of Her Majesty; or

(ii)           published by or under the direction of or control of Her Majesty;

copyright in the "work" passes to the Crown, in effect, upon the occurrence of such preparation or the occurrence of such publication.

The Court further held that:

(a)          a "work" is prepared by the Crown when "… its agent or employee brings the work into existence for and on behalf of the Crown in the course of his or her employment or when the Crown essentially determines whether and how a work will be made, even if the work is produced by an independent contractor";

(b)          whether or not a work is published with sufficient governmental direction or control "… necessitates and inquiry into the Crown's interest in the work at the time of (and often, after) publication".  Where the following-described situations/circumstances can be proven to exist, it will be held that the work was so published, namely, inter alia, the presence of a statutory scheme transferring property rights in the work to the Crown, a statutory scheme which places strict controls on the form and content of the work, where the Crown physically possesses the work, where exclusive control is given to the government to modify the work and where there is a necessity for the Crown to make the work available to the public.  Presumably, if none - or only a very few - of the aforementioned situations/circumstances exist, then a work prepared by an independent contractor (ie, not a government employee or agent) may be held to have its copyright maintained in the author.  This may be so even though the work is "published" by or at the direction of the Crown.

Where an Ownership Delineation Plan, typically prepared by a private surveyor on engagement by a private person or business, has been placed the plan on record at a land/property registry, copyright passes to the Crown.  No one in the Keatley Case challenged the Crown's right to licence that copyright to Teranet as part of Teranet's contract with the Crown to operate the property registry.  While some may object to this decision on principle (ie, that it is inequitable for the surveyor to lose its copyright without compensation in this manner), this is - absent a change of mind by the Supreme Court or an amendment to the statute - a ruling we must accept.

Note in particular in the Keatley Case:

(a)          the Crown has established rules (some statutory, some regulatory and some merely policy or protocol rulings) in directing surveyors what information must be included in plans and how that information is to be presented;

(b)          once on record in the property registry, the content of plans cannot be altered without formal statutory procedures and/or guidelines; and

(c)          it was pointed out that third parties rely on the accuracy and currency of the information in recorded plans for the purpose of determining the extent of property rights.

Common sense suggests that without the above-mentioned "controls" and limitations, fraud and ultimately, chaos, would occur - or at least that it would be more likely to occur.

Given the Court's reasoning in the Keatley Case, it is interesting to speculate as to whether or not other Documents, once recorded in a property registry, would, upon such registration, have their copyright pass form the originator of any such Document to the Crown?  What about Land Ownership Confirmations and Conveyancing Documents?  Consider the following:

(A)          Land Ownership Confirmations certainly appear to meet the above-described criteria and they are, in any event, wholly created by the property registry.  Thus, assuming that a Land Ownership Confirmation is a "work", copyright in it almost certainly belongs to the Crown.

(B)          Conveyancing Documents are - like most Ownership Delineation Plans, prepared by privately engaged lawyers.  They too appear to meet the above-described criteria provided that they are legally "works".  However, if I as a practicing lawyer obtain a copy of a mortgage previously registered in the property registry, neither I nor (I believe) most other practitioners would consider me as breaching copyright by making further copies of same and distributing same to interested - or potentially interested parties.  Perhaps this question requires further clarification from the Courts.

It is also interesting to speculate on whether or not the Crown has copyright in information produced by the Personal Property Registry.  This may have to be clarified by the Courts in the future.

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May 2014 



Mr. and Mrs. Jones have farmed a Section of land for virtually all of their adult lives, but they are now thinking of retiring and would like to turn over the farm operation to their two sons who wish to carry on as agricultural producers.  The Jones family home is situated on a portion of one of the quarters of the Section, and the Jones (mother and father) wish to continue to occupy (and if possible, "own") the home while transferring ownership of the rest of the farm land to the sons.  The mother and father do not wish to retain any of the land itself underlying their home.  They also have no desire to transfer ownership of the home to anyone else during the course of their lifetimes, and upon the death of the last of them to pass on, they would want to transfer ownership of the home to their sons.  The sons are quite willing to go along with this arrangement.


The Jones family attends upon you as their counsel and ask you if you can document the transmission of "ownership" of the home to the Jones for a period ending with the death of both the father and mother.  The Manitoba Planning Act would permit the parents to "sever" the land underlying their home and surrounding without subdivision control approval, provided that the area of the land so severed was not less than 80 acres.  But as previously stated, the Jones do not wish to retain any of the land.  What considerations are relevant and what can you do?


Canadian case law over at least the last 100 years clearly indicates that the Courts have been willing, as long as the intentions of the parties are clear, to allow a home - which is otherwise clearly attached to and forms part of the underlying land - to be treated as if it was a chattel, separate and apart from the underlying land.  Therefore, one way to document the Jones' arrangement would be for the mother and father to transfer all of their real property to their sons, with their sons then transferring the home (and only the home) back to the parents, that is, excluding any of the underlying or surrounding land.  Land Titles records would show the sons as the owners of all of the realty, and arguably, the parents could register a caveat against the sons' title giving notice of their ownership of the home.  Presumably, the legal description contained in the parents' caveat would be all of the land contained in the sons' title, as the parents would not be claiming any ownership interest in the land underlying the home (at least in this scenario).  A variation on the foregoing would be for the sons to execute a written declaration of trust whereby they state that they are holding the home as trustees only, for and on behalf of the parents, with the parents then being able, again, arguably to caveat the whole of the sons' title to give notice of this trustee - beneficiary relationship.

It would almost certainly be necessary for the sons to additionally grant a right of access, to and from the home so as to allow legal ingress and egress to and from the adjacent public road or highway and - arguably - an additional caveat could be registered by the parents against the sons' title to give notice of this easement.



However:

  1. Would the foregoing arrangements run afoul of the subdivision control rules in The Manitoba Planning Act?  At first blush, one would think that the subdivision control rules would have no application to the arrangement, because no interest in land - only an interest (ie, ownership) in the home - is granted to the parents.  However, the definition of "land" in The Planning Act includes what are referred to as "messuages" and "hereditaments".  I have found a definition of "messuage" as being "a dwelling house together with its buildings, cottage and the adjacent land appropriated to its use".  This suggests that a "messuage" must combine both one or more buildings and the land underlying or adjacent to it (or them) reasonably necessary for its (their) normal use.  However additionally, I have found a definition of "corporeal hereditament" as being "a permanent tangible object that can be seen and handled and is confined to the land".  Thus, at least arguably, a conveyance of ownership of a (corporeal) hereditament (a house) is a "subdivision" within The Planning Act.  "Subdivision" is defined to mean "the division of land by an instrument…".  Therefore it appears that even though one can lawfully otherwise convey ownership of or create other interests in a home, exclusive of any dealing with the underlying land, such a "bare" dealing with the home may nevertheless constitute a form of "subdivision" within the ambit of the legislation, thereby necessitating compliance with the - no doubt time consuming, onerous and expensive - subdivision control rules.
  2. If the home itself alone, without including any of the underlying or surrounding land, is conveyed, or held in trust by the sons for the parents, then arguably, the parents do not acquire any interest in land.  If they don't acquire an interest in land, they shouldn't be filing a caveat against the sons' title.  Lest anyone think otherwise, the parents could not file a Personal Property Security Act fixtures notice against the sons' title on the basis that what has been conveyed to them is a "fixture", simply because the conveyance of "ownership" of the home does not constitute a security interest within the meaning of The Personal Property Security Act.  That is, there is no secured transaction.
  3. In all likelihood, the purported grant of easement by the sons to the parents to provide access to and from the home to the nearest public road is not in law an easement at all.  Thus, it is not caveatable.  This is because to create an easement against land (ie, against a "servient tenement"), there must (at least in this type of situation) be a dominant tenement, and the home alone, in effect, severed from the underlying land, would not - in this context - constitute land.

The writer is not aware of any case which has considered the issue of whether or not conveyance of an interest (in particular, an ownership interest) in a house, conceptually divorced from the underlying land, would - or would not - be a "subdivision" within the meaning of The Planning Act.  The writer doubts that it was the Legislature's intent to "catch" this type of a "subdivision" (assuming that it is a subdivision), yet given the current wording in the legislation, it is possible that a Court might hold that subdivision approval is needed for this type of an arrangement.

But consider this alternative - instead of the sons conveying ownership of the home (separate and apart from the underlying land) to the parents, the sons could instead long-term lease the home, severed or divorced from the underlying land, to the parents.  The parents could then - arguably - file a lease caveat against the sons' title.  There would be no subdivision control problem because the definition of "subdivision" in The Planning Act specifically does "not (include) a lease respecting only floor space in a building".  A lease could also contain a (non-registerable) license (not an easement) to the parents (co-extensive with the continuing existence of the lease) for access to and from the closest public road.  The lease would no doubt specify a nominal rent and would obligate the parents to be responsible for the payment of taxes, insurance, maintenance, etc.  However, again, it is necessary to be concerned about whether or not the parents' lease caveat would really be giving notice of an interest in land.  The subject matter of the lease is - presumably - only a chattel.


Neither the lease approach nor the conveyance of the home as a chattel divorced form the land would allow the parents to mortgage their rights in the home to a financier utilizing the "usual" LTO prescribed form of (freehold) real property mortgage.  A lender willing to advance value to the parents against the home would have to take (where a lease was used), a leasehold mortgage.  Arguably, such a leasehold mortgage would, at least in part, be a species of security agreement and the lender could register a Personal Property Security Act fixtures notice against the sons' title.  The leasing solution is probably the safest way to deal with the Jones' situation, unless and until an amendment is made to The Planning Act to make it completely clear that conveyance (not just a lease) of a building, divorced from the underlying land, is not a species of "subdivision".


Assuming the same basic fact situation as outlined at the beginning of this paper (the Jones parents wish to retire, pass the farming operation to their sons but retain their home), another approach would be for the Jones to incorporate a corporation to which they would transfer ownership of all of the buildings and improvements on the farmland except for their home and also except for all of the land.  The Jones would then lease all of their land to their corporation.  The corporation would grant a licence to the Jones providing for access to and from their home to the nearest public road.  The corporation would then register a caveat giving notice of its lease rights against the title to the whole of the land (which would include the land underlying the Jones' home).  Transfer of ownership of the corporation from the Jones parents to their sons would be effected by the sons acquiring shares (no doubt "equity" shares) in the corporation.  There should be no problem with the corporation's lease caveat because clearly, the lease constitutes an interest in land.  However, the question remains as to whether or not the Jones' retention of ownership of the home alone (divorced from the underlying land) constitutes a subdivision.  Similarly, does the conveyance by the parents to the corporation of ownership of all of the buildings and improvements other than the home constitute a subdivision?  As stated above, the writer doubts that conveyances of buildings alone was intended to be "caught" by the subdivision control rules in The Planning Act.  But so far, we just don't know for sure.


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August 2015


People enter into all sorts of agreements and arrangements pertaining to the use, disposition and security pledging of interests in real estate.  Some of such contracts or arrangements immediately create interests in the subject realty, such as, an unconditional contract for the sale and purchase of realty, a mortgage charging realty to secure payment of a debt, a leasing of realty and a grant of usage in the nature of an easement.  Other contracts and arrangements create legally enforceable rights and obligations between parties pertaining to realty, but do not (and will not likely ever) create realty interests, such as, a permission to enter (and perhaps to some degree use) realty, typically, for a limited period of time, that is, a permit to allow the recipient to do what would otherwise be an unlawful trespass.  The essential difference between the first and second types of contracts or arrangements is that in the case of the first type, an interest is created in the subject realty, and because it is an "interest", it will "follow" successive ownerships of the realty (in other words, it will bind the successors and assigns of the party whose realty is originally affected by the interest).  In the case of the second type of contract or arrangement, the party granted the rights in relation to the subject realty is not able to enforce those rights against a successor in title to the realty owner who first granted the rights.  The rights are purely personal between the original parties.


The holder of an interest in land is entitled to give notice of its interest and in particular, give notice to persons subsequently acquiring interests in the realty of the holder's interest, by filing a caveat against the current owner's title.  In the case of a right in land in the nature of a "mere" permit, because it is not a land interest, the holder is not entitled to register a caveat.  Even if such a holder was able to register a caveat, a subsequent owner would not, in most cases, be bound to recognize the permit holder's rights.


For the purpose of this review, we need to take note of what amounts to a third type of contract or arrangement pertaining to realty which initially results in the creation of rights enforceable between the parties to the contract or arrangement only, with there being no interest in the subject realty being immediately created, but with the contract or arrangement providing for the arising or possibly arising in the future of an interest in the subject realty, depending on whether or not a condition or contingency is fulfilled.  Hereinafter, I will refer to these as "contingent land interests".


An understanding of the difference between a contract or arrangement which immediately creates a land interest, and a contract or arrangement which provides for a contingent land interest can be gleaned from the examination of the elements of an unconditional option to purchase realty, and the elements of what is commonly called a "first right of refusal".  In the case of an unconditional option to purchase, "A", being the owner of a real estate interest, enters into a contract with "B" pursuant to which "B" is given a clear and unequivocal right to choose (within a specified period) to purchase the realty from "A" on clearly specified terms as to payment.  "B" is free to exercise its option to purchase by simply fulfilling its obligations to do so as specified in the contract, typically, to give proper notice of exercise of the option and to pay the purchase and sale price on the specified closing date.  An unconditional option to purchase creates an immediate interest in land which in this example, "B" can immediately caveat by registering notice of the option against "A"'s title.  In the case of a first right of refusal, "A", being the owner of the subject realty, enters into a contract with "B", whereby "A" promises "B" that if and when "A" receives an offer to purchase the subject realty, which "A" is otherwise prepared to accept, "A" will not so accept without first going to "B" and giving "B" a limited period of time within which "B" can choose to either "match" the third party offer which "A" has received (in which case there would arise a binding agreement of sale and purchase between "A" and "B", and, the original third party offer would be at an end), or, "B" can simply "walk away" from the deal and let "A" and its third party offeror conclude their sale and purchase transaction.  No interest in land is created upon the entering into of the first right of refusal contract between "A" and "B", although clearly, if "B" "matches" the third party offer received by "A", then an interest in land would arise in favour of "B" by virtue of the contract of sale and purchase between "A" and "B".  For the purposes of this review, it is important to note that the essential difference between an unconditional option to purchase and a first right of refusal is the fact that in the case of the unconditional option to purchase, immediately upon the entering into of the option contract, "B" has it solely within its power and discretion whether or not to exercise the option and acquire ownership of the subject land.  In other words, "B" has, from the outset, what amounts to "control" over whether or not "B" acquires "A" realty interest.  In the case of the first right of refusal, "B" has no immediate right whatsoever to acquire "A"'s realty interest unless and until a third party presents "A" with a viable (from "A"'s perspective) offer to purchase.  In other words, "B" has no "control" over the situation as there may never be any viable third party offer submitted to "A".


A first right of refusal is a type of contingent land interest.  No land interest is thereby immediately created, and it is possible that no land interest will ever be created.  A land interest will only arise if the specified contingency occurs.

With the foregoing in mind, it is interesting to analyze a number of frequently utilized forms of real estate disposition contracts which may, at first glance, appear to create immediate interests in land, but which in fact, only provide for contingent land interests.  For example, consider the following:

  1. "A" enters into a contract with "B", whereby "A" undertakes to sell and convey ownership of specified realty to "B", with the transaction to close in, say, eight months.  The eight month delay is specified because the transaction cannot be completed unless subdivision approval is given to permit "A" to convey the agreed upon parcel to "B", and indeed, the contract (and the parties' obligations to complete) are specified as being conditional upon subdivision approval being issued within the eight month delay period. This is a sale which cannot occur until a contingency (subdivision approval being issued) is fulfilled, and as such, no immediate interest in the land is created in favour of the purchaser "B".  Accordingly, "B" is not legally entitled to register a caveat against "A"'s title giving notice of "B"'s rights.
  2. "A" enters into a sale agreement with "B" for the sale of "A"'s realty to "B", but the parties' rights and obligations to complete are conditional upon "B" obtaining specified financing to enable it to finance its acquisition.  As in the case of the prior example, a substantial delay period is chosen, say, four months, to enable "B" to get its desired financing.  Whether or not a lender provides the desired financing to "B" is not - at least not entirely - within "B"'s control, so once again, "B" has what amounts to a contingent land interest, at least until it gets its financing.  Would it make any difference if the contract allowed "B" to waive its financing condition? Arguably, the answer would be "yes", and if, at any time within the four month delay period before closing, "B" had unfettered discretion to waive its financing condition, then a strong argument could be made that "B"'s financing condition is not a true contingency (in the context discussed), so that "B" would have an immediately arising interest in the land consequent upon entering into the sale and purchase contract with "A".  Note that in this case, as opposed to the example given in paragraph #1 above, the financing condition is at least potentially "waiveable", whereas in the prior example, neither "A" nor "B" are legally capable of waiving the need for subdivision approval.
  3. "A" enters into an option agreement with "B", whereby "A" agrees that "B" is entitled (at "B"'s choice) to purchase "A"'s realty (on specified terms) if "A" fails to fulfill some specified obligation undertaken by "A" to "B".  Whether or not "A" fulfills its obligation is clearly not within "B"'s control, so no immediate land interest is created.  An example of this sort of an arrangement would be where "B" is a land developer and sells and conveys a subdivision lot to "A", but with "A" undertaking to "B" that "A" will build a building on the lot within a specified time period to certain specifications.  If "A" fails to so build within the specified time limit, "B" has an immediately enforceable option to buy back the land from "A".
  4. "A" grants an option to purchase "A"'s realty to "B" within a specified two year period, but with that two year period not commencing for, say, one year after the option agreement is entered into. "B" does not have control over whether or not it can acquire "A"'s realty until the initial one year period has passed by.  In substance, this is not really a contingent land interest (there is in fact no contingency, as the one year period will inevitably pass by), but it is a like a contingent land interest in that "B" does not have an unequivocal right to acquire the land until after the initial one year period has expired.

In all of the above-described examples, with no immediate interests in land being created, "B" has no legal right to register a caveat against "A" title.  This may come as somewhat of a shock to counsel who have successfully registered caveats against titles where a delayed or contingent land interest only has been created.  In a recent discussion the writer had with a senior Manitoba Land Titles official, he was advised that this no doubt happens because counsel will typically file a caveat which simply describes an "option to purchase" or a "sale and purchase of realty transaction", without referring to the contingency or any delay period which must expire before the grantee (or purchaser) has an unequivocal right (ie, "control") to acquire ownership of the realty interest involved.  It is important to remember that just because the Land Titles Office permits a caveat to be registered, does not, of itself, mean that the caveator has in fact a viable land interest.  Whether or not the caveator has a land interest depends on the application of law, in particular, the common law land principles worked out by the Courts over many years.  A caveat is not an interest or right and does not create interest or right, but merely gives notice of what the caveator alleges is an immediately created land interest.


A question which sometimes arises, is whether or not a person searching an owner's title who sees that the title is subject to a caveat claiming an interest in land, when in fact there is no interest in land, is nevertheless bound (when he, she or it acquires their own interest in the land) to acquire subject to the caveator's rights?  If the person making such search and acquiring an interest from the owner is bound, when in fact no interest in land has been created, then the general rule noted above - that a successor in title to real estate will not be bound by a right which is not a land interest - appears to be subverted.  In other words, can the caveator, by registering (and getting the Land Titles Office to accept for registration) a caveat, thereby bind successors in title in the same manner as would have been the case if the caveated right was in fact an interest in land?  Common sense, and perhaps fairness, would suggest that if the acquiring person knows about the right, he, she or it should be bound by it, and be forced - as a matter of policy - to acquire subject to the caveator's rights.

The Manitoba Court of Appeal decision (Willman and Ducks Unlimited (Canada), October 8, 2004 with judgment having been delivered by Justice Martin Freedman) may provide guidance on this matter.  Mr. Willman owned a parcel of land in southwest Manitoba, and prior to his acquisition of title, Mr. Willman's predecessor owner entered into an arrangement with Ducks Unlimited permitting Ducks Unlimited to enter upon the property and conduct certain measures (including installation of certain facilities) to maintain and enhance the wetlands in and about the property.  Ducks Unlimited had registered notice of its rights under this arrangement against the predecessor's title, and Mr. Willman acquired his title subject to such notice (ie, a caveat).  Mr. Willman took the position that he was not bound by any obligations owed to Ducks Unlimited under the arrangement, and Ducks Unlimited argued that its rights constituted a land interest which was the proper subject matter of a caveat and thus bound Mr. Willman as successor-in-title to the party who had originally contracted with Ducks Unlimited.  Ducks Unlimited attempted to categorize its rights, variously, an easement, a lease and ultimately, a licence which, because it had been granted for value and pursuant to a contract, bound successors-in-title.  The Court held that the arrangement was not an easement, not a lease and it was in fact merely a licence (or a permit) which could not, in law, be magically transformed into a land interest by agreement between the parties and bind successors-in-title.  Mr. Willman was not bound and for our purposes, it is significant to note that he was not bound even though he had ample notice of the arrangement and its terms.  Not only was Ducks Unlimited's caveat on title when Mr. Willman acquired ownership, but also Mr. Willman had been provided with copies of the documentation comprising the Ducks Unlimited arrangement at the time he acquired ownership.  In fact, the Land Titles Office was in error when it accepted Ducks Unlimited's caveat and registered it.  In other words, if your arrangement is not an interest in land, but you somehow are able to get the Land Titles Office to register notice of your right, the fact that the notice has been registered does not, of itself, convert a non-land interest into a land interest.


Alert counsel may attempt to circumvent the somewhat restrictive rules on what does - and does not - bind title successors, by requiring a land owner granting a licence or permit to undertake to the grantee that the grantor will cause its successor-in-title to undertake to be bound in writing to the grantee (and its successors and assigns), with the proviso that the new owner, and indeed, each successive owner, is obligated to get the next succeeding owner to so bind itself to the grantee.  As long as the successive owners comply with this undertaking, the grantee will essentially have the same ability to enforce its rights against successive owners as if he had a land interest, and without filing any notice or caveat against the title.  Of course the problem with this solution is that if any one of the successive land owners (for that matter, including the very first one) fails to fulfill its undertaking, the next succeeding owner will not (at least not likely) be bound under the licence or permit.

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November 2010


THE SOMETIMES CONFUSING INTERPLAY BETWEEN SECURITY TAKEN UNDER

THE BANK ACT (CANADA), SECTION 427, AND, SECURITY TAKEN UNDER A PROVINCIALLY GOVERNED PERSONAL PROPERTY SECURITY ACT


Two recently released judgments by The Supreme Court of Canada, Innovation Credit Union (November 5, 2010, hereinafter, the “Innovation Case”), and, Radius Credit Union (also November 5, 2010, hereinafter, the “Radius Case”), both of these decisions upholding the previous decisions of The Saskatchewan Court of Appeal, highlight and analyze the dilemma referred to in the title to this paper.  The problem arises where one creditor takes security on collateral under Section 427 of the Bank Act (Canada) (only banks chartered under that Act can acquire this type of security) and, another creditor takes security on the same collateral under one of the common-law provinces’ Personal Property Security Acts (“PPSA”, any creditor can take this type of security).  In both the Innovation Case and the Radius Case, a bank and a credit union each took security on the same collateral, the credit union taking its security under the Saskatchewan PPSA and the bank taking its security under Section 427 of the Bank Act.  In both cases, the question to be determined was which of the credit union and the bank had priority with respect to the commonly secured collateral. 


The facts in the Innovation Case were:



(i)            first the debtor acquired the collateral;


(ii)           next, the debtor gave a PPSA governed security interest in the collateral to the credit union with, the credit union not filing (“perfecting”) its security interest in the Personal Property Registry;


(iii)          next, the debtor gave security in the same collateral to the bank under Section 427 of the Bank Act, with the bank:


(a)           duly registering notice of its taking of its security under Section 427; and



(b)           having no notice of the existence of the credit union’s earlier acquired security interest (the debtor, whether intentionally or negligently, failed to advise the bank that it had previously given security to the credit union), and, although the bank searched the debtor’s name in the Personal Property Registry, with the credit union having failed to file notice of its security therein, that search by the bank revealed nothing about the credit union’s security.


The facts in the Radius Case were:



(i)            first, the debtor gave a PPSA governed security interest in the debtor’s present and after-acquired personal property to the credit union, with the credit union not filing (“perfecting”) its security interest in the Personal Property Registry;


(ii)           next, debtor gave a security interest in (part of) its present and after-acquired personal property to the bank, with the bank:


(a)           duly registering notice of its taking of its security under Section 427 of the Bank Act; and



(b)           having no notice of the existence of the credit union’s prior security agreement (again, the debtor, whether intentionally or negligently, failed to advise the bank that it had previously granted security to the credit union), and, (again), with any search by the bank of the debtor’s name in the Personal Property Registry, the bank would not and could not have obtained notice of the credit union’s security because the credit union failed to register; and



(iii)          next, the debtor acquired collateral which became subject to both the credit union’s security and to the bank’s security (in the Court’s view, the credit union’s security and the bank’s security attached to the collateral simultaneously).


The only difference between the fact scenario in the Innovation Case and that in the Radius Case was that in the Radius Case, the debtor did not acquire the affected collateral until after it had entered into its security arrangements with (both of) the credit union and the bank.



Needless to say, the primary question in each case was which of the competing secured creditors had priority with respect to the affected collateral, the bank or the credit union?  The Saskatchewan Court of Appeal held for both of the credit unions, and The Supreme Court of Canada agreed with the Court of Appeal’s decisions.



Essentially, and in both cases, the Court held that:



(1)          In a dispute involving PPSA governed security and Bank Act, Section 427 security, you can’t look to the provincial legislation for a rule or an answer to determine this type of priority dispute;


(2)          When you analyze the Bank Act, while it is true that legislation does have some priority rules which would determine the outcome of priority disputes in some cases involving PPSA governed security and Bank Act, Section 427 security, the Bank Act itself does not have – at least in its present format – a rule which can be used to determine who has priority in these particular two cases;


(3)          The Bank Act requires one to examine the applicable provincial rules dealing with property rights and interests in order to determine what rights and interests the debtor had in the collateral at the times when it provided security to each of the credit union, and in particular, to the bank; and


(4)          UtilizingSaskatchewanproperty rights and interests laws – essentially common law rules and concepts:


(a)           In the Innovation Case, after the debtor had granted the credit union its security interest, the only rights and interests it retained in the collateral – which were then available to be granted to the bank – was the debtor’s equity of redemption (essentially, the debtor had nothing further available in the collateral to give to the bank, and the failure of the credit union to register its security interest didn’t and couldn’t change this); and


(b)           in the Radius case, although the debtor did not have any rights and interests in the subsequently-acquired collateral at the time that the debtor granted a security interest in such collateral to the credit union, the credit union nevertheless obtained what amounted to an “inchoate” right in the after-acquired collateral, as did the bank later on, but the credit union "wins" because it acquired its inchoate right prior in time to when the bank acquired its inchoate right. 


What do the Innovation Case and the Radius Case suggest for lenders and their counsel?  The writer suggests:


(i)            Parliament should amend the Bank Act, either to eliminate the security mechanism provided for in Section 427 completely, or, to provide that security interests taken under other personal property security regimes (such as the PPSAs) which are not duly registered in accordance with the requirements of such regimes will be subordinate to subsequently granted Bank Act security; or


(ii)           Whenever a bank takes Bank Act governed security, it should also take PPSA governed security and should perfect (ie, give public notice of) both of its securities under the respective federal and provincial legislation.  For banks wishing to take personal property security on assets situated inSaskatchewan,Saskatchewan counsel should be consulted due to the "peculiarities" of the Saskatchewan PPSA in its relationship with Bank Act governed security.


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As Chair of the Real Property Subsection Committee for the Manitoba Bar Association and as the Designated Representative for Manitoba Real Property for the Canadian Bar Association I am often contacted by solicitors who have general questions about real property law in Manitoba; pursuant to a recent inquiry, real estate solicitors may find the following to be not only informative but also practical.


Being a Manitoba solicitor and a Public Member of the Association of Manitoba Land Surveyors, the practical information that will be shared in this article must be qualified with a disclaimer that pursuant to The Land Surveyors Act C.C.S.M. c. L60 (Manitoba) no person other than a Manitoba land surveyor shall engage in the practice of land surveying and thereby no person other than a Manitoba land surveyor shall determine, establish, locate, demarcate or define a boundary used to reference, describe or delineate, inter alia, land.


On occasion a solicitor may encounter a title with a legal description whereby a Legal Subdivision is referenced in lieu of a plan number, for example:


LEGAL SUBDIVISIONS 3, 6, 11 AND 14 OF SECTION 22-13-8 WPM


The reference to "legal subdivision" may cause confusion and with no ability to order a "plan" the solicitor must consider standard Section measurements in determining "what land" the title is for.


Importantly:


(a)  1 square mile is equal to 5,280 feet x 5,280 feet;

(b)  1 Section is equal to 640 acres or one square mile;

(c)  4 Quarter Sections equal 1 Section;

(d)  1 Quarter is equal to 160 acres;

(e)  1 Legal Subdivision is equal to 1320 feet x 1320 feet akin to one quarter of a Quarter Section


As a Legal Subdivision is equal to 1320 feet x 1320 feet is akin to one quarter of a Quarter Section,  the next question is where within a Quarter Section and where within a Section is a Legal Subdivision located?  To answer, a diagram of a Section is of remarkable assistance:




SECTION 22-13-8 WPM

 




LEGAL SUBDIVISION 13








LEGAL SUBDIVISION 14




LEGAL SUBDIVISION 15




LEGAL SUBDIVISION 16




LEGAL SUBDIVISION 12








LEGAL SUBDIVISION 11




LEGAL SUBDIVISION 10




LEGAL SUBDIVISION 9




LEGAL SUBDIVISION 5









LEGAL SUBDIVISION 6




LEGAL SUBDIVISION 7





LEGAL SUBDIVISION 8




LEGAL SUBDIVISION 4









LEGAL SUBDIVISION 3




LEGAL SUBDIVISION 2




LEGAL SUBDIVISION 1



In considering this information we should keep in mind why it is important for a solicitor to know where the land they intend to convey is located; one must only consider the problems that have occurred within various condominium corporations throughout the Province of Manitoba where a condominium unit is incorrectly conveyed, for example, unit owner A is the registered owner of unit 1 but actually resides in unit 2, the registered owner of unit 2 being unit owner B; the incorrectly conveyed unit would most certainly have conveyed correctly had the solicitor, or for that matter the real estate salesperson, reviewed the condominium plan with the prospective unit owner prior to the conveyance and thereby identified the location of the unit not having relied solely upon the numerical designation for the physical condominium suite.   Notwithstanding that condominium units and Legal Subdivisions are different, the same principles apply whereby the solicitor, or for that matter the real estate salesperson, should ensure that the Legal Subdivision being conveyed is indeed the same physical land that the transferor believes it is transferring.


To conclude, you may still be wondering why the title of this article is "Are you looking for 20 chains?", importantly the "chain" was the manner in which our early River Lots, Outer Two Miles and Sections were measured and a Legal Subdivision being equal to one quarter of a quarter section is equal to 20 chains x 20 chains or 1320 feet x 1320 feet.  So, if you are conveying a Legal Subdivision it is prudent to "look for 20 chains" to ensure that the land being legally conveying is indeed the physical land that ought to be conveyed.

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May 2003


 

            When a lender makes a loan at a fixed rate of interest with the interest (and usually the principal) repayable in installments over a set period of time, an earlier than expected repayment of the loan may result in the lender suffering a loss.  Such loss would occur where at the time of early repayment, the rate of interest which the borrower promised to pay over the whole term of the loan is higher than the rate of interest which the lender could then charge if it immediately re-loaned the money to a new borrower.  Given the then market conditions, any new borrower would only be prepared to pay a lower rate of interest.  The lender’s loss is typically determined by reference to the value of the difference between the higher and lower rates over the balance of what would otherwise have been the remainder of the term of the original loan.


            Actuarial mathematicians can calculate what that value is in the form of a lump sum of money which the lender would want to receive to eliminate its loss (“Early Repayment Loss”).  Sometimes lenders will agree to an early repayment of their loan provided that the borrower concurrently pays such lump sum as compensation to the lender for the loss of the loan investment over its originally-intended term. 


            In the McMillan Fisheries Ltd. Case (the “McMillan Case”, British Columbia Supreme Court, in Bankruptcy, judgment filed March 3, 1998), a question arose as to whether or not a lender was entitled to obtain an Early Repayment Loss which the borrower had promised to pay in the event of an early repayment of the loan.  The Court pointed out that in general, where a borrower wishes to repay the loan before the time stipulated in the loan agreement, the borrower cannot force the lender to accept such monies, but it is certainly open to the lender to agree to an early repayment in consideration of the borrower agreeing to pay an Early Repayment Loss amount to the lender.  However, if there has been a default by the borrower and the lender has exercised its right to accelerate repayment in full, the cases show that the lender is usually not entitled to require the borrower to pay any Early Repayment Loss.  The reasoning here is that now that the lender wants its money back (i.e. having accelerated), it should not be entitled to be compensated for getting that money back earlier than expected.


            Notwithstanding this reasoning, the Court noted that earlier case law had held that where the parties’ agreement was that the loan’s “maturity date” was always to remain the last day of the term of the loan, and that the agreement specified that such maturity date was not to be brought forward to the date of acceleration following the borrower’s default, the lender was entitled to extract an Early Repayment Loss from the borrower.  Unfortunately for the lender in the McMillan Case, the parties’ agreement clearly specified that the loan “maturity date” was the earlier of the last day of the stipulated loan term and the date upon which the lender chose to accelerate an early repayment of the loan following the borrower’s default.  On that basis, the Court held that the lender was not entitled to any Early Repayment Loss.


            An interesting sidelight of the McMillan Case is that the borrower also argued that even if the lender was entitled to receive its Early Repayment Loss amount based on what the parties had agreed to, the lender should nevertheless be disentitled from receiving same on the basis of Section 8 of The Interest Act (Canada).  Section 8, in effect, provides that following default by a borrower of a real estate secured loan, the lender is not entitled to extract any fine, penalty or other amount which has the effect of increasing the rate of interest on the outstanding loan monies after default, to any rate higher than the rate of interest which was applicable prior to default.  However, the Court noted that prior case law had made it clear that the obtaining of an Early Repayment Loss by a lender even after default and acceleration did not offend the requirements of Section 8 because such an amount can be properly categorized as compensation for the lender’s loss (as described above), rather than a fine or penalty or increase in the rate of interest post-default.


            In another recent case (the “Pfeiffer Case”, British Columbia Court of Appeal, March, 2003), a question arose as to whether or not a mortgagee who agrees to accept an early repayment of a term loan can require the borrower to pay an extra amount which is not calculated with reference to the present value of the mortgagee’s lost interest over the balance of the term.


            In exchange for permitting early repayment  of the loan in the Pfeiffer Case, the mortgagee demanded an amount equal to the difference between the mortgage rate and the (then lower) prevailing mortgage rate multiplied by the amount prepaid (the entire balance of the loan) and calculated over the remaining balance of the loan term.  This amount was not discounted for the purpose of obtaining a present value lump sum amount, nor did the calculation take into account the fact that the principal balance of the loan would have been reduced over the remainder of the term by virtue of the scheduled periodic (monthly) combined principal and interest payments, if there had been no early repayment.  The borrower’s argument was, in effect, that, as a matter of law and notwithstanding the terms of the mortgage, the mortgagee’s entitlement to extra monies by virtue of the early repayment should be limited to the mortgagee’s actual loss over the balance of the term, discounted at the time of the early repayment.  The Court held that the mortgagee was not so limited and could, in effect, charge whatever consideration it wanted as the price for the borrower to make an early repayment of the loan. 


            An interesting question not addressed in the Pfeiffer Case is whether or not, in a particular case, a Court might hold that the consideration required by the mortgagee to permit early repayment is so unduly high that it constitutes an unreasonable penalty.  Aside completely from the operation of Section 8 of The Interest Act, the courts have long enjoyed an inherent right to relieve persons from having to pay unreasonable penalties.  Since most mortgage lenders do calculate early repayment consideration based on their anticipated loss of interest over the balance of the term, discounted so as to produce a currently payable lump sum, this potential problem may not arise very often.

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November 2010


Readers are referred to the writer’s earlier memoranda dealing with the above subject matters:


(i)            a paper entitled “New Provincial Government Rules for Wastewater Management Systems”; and


(ii)           a paper entitled “Further Thoughts on the New Provincial Government Rules for Wastewater Management Systems”.


In these memoranda (the “Original Memoranda”), I attempted to outline the application of the Manitoba Wastewater Regulation (passed under the Manitoba Environment Act), as amended by Manitoba Regulation # 156/2009 which was registered September 28, 2009, and, to raise certain questions relating to problems or potential problems which I thought would or could arise out of such application.

After considerable lobbying by concerned stakeholders, the provincial government has further amended the Onsite Wastewater Management Systems Regulation by Manitoba Regulation # 60/2010 which became effective May 25, 2010.


The writer has sought and obtained certain clarifications and advice from Manitoba Conservation Environmental Services (“Manitoba Conservation”) regarding the Regulation as most recently amended (the “Amended Regulation”) and now wishes to report to those interested, as follows:

  1. The general rules (originally specified in MR156/2009) apply with respect to wastewater management systems and sewage ejectors, namely:

(a)          if one’s property is serviced by a wastewater management system and the property is also capable of being serviced by a community wastewater collection system, then, if that was the situation on September 28, 2009, the property owner must decommission their wastewater management system and “connect” to the “community” wastewater collection system within the earlier of five years from September 28, 2009 and the transfer or subdivision of their property.  If one did not have a community wastewater collection system available to be connected to on September 28, 2009, but subsequently, such a collection system is put in place, then the owner must decommission and connect to the (new) collection system by the earlier of five years from when the newly installed collection system is available and the transfer or subdivision of the property;


(b)          where one has a sewage ejector on their property on September 28, 2009, the owner must take it out of service by the earlier of the transfer or subdivision of the property.

                        In both of the above situations, if the owner fails to remediate prior to transfer to a new owner, the new owner is obligated to remediate within two years from the change of ownership.

  1. The latest amendment to the Regulation now provides for certain exemptions applicable to property owners with sewage ejectors on them, although not for property owners with other types of wastewater management systems.  These exemptions are:

(a)          for where the property owner with a sewage ejector on it sells to a purchaser and the purchaser undertakes in writing to remove the sewage ejector after acquisition of the property (within the earlier of two years following acquisition and subdivision or transfer by the purchaser);


(b)          for where the sewage ejector:


(i)            is not located within certain restricted areas specified in the Regulation (which includes the "Red River Corridor" and provincial parks); and


(ii)           is in compliance with all regulatory requirements applicable to sewage ejectors;

and the property owner, not more than one year prior to contemplated transfer or subdivision, seeks and obtains a certificate of exemption from the government (if the exemption is issued, then, subject to the terms thereof, neither the owner or a subsequent owner needs to remove the ejector); and


(c)          for where the owner of the property on which a sewage ejector is situated decides to subdivide the property into two or more lots with one only of those subdivided lots having the ejector on it, the owner may, with the government’s approval, complete the subdivision and sell off all of the lots except the one with the ejector on it provided that the owner then removes the ejector on the retained property within up to a maximum of two years from subdivision.

  1. As noted, the above-described exemptions apply only to sewage ejectors, and not to wastewater management systems.  This means that where at the time of a sale, a wastewater management system on the property which is supposed to be removed by virtue of the sale is not removed by the seller, but instead is removed by the purchaser (with there no doubt being an adjustment in the purchase and sale price accordingly), then even though the purchaser properly remediates, the seller is still open to prosecution.  In this writer’s opinion, this is somewhat of an absurdity.  Unfortunately, at the present time, the government does not appear to have any plans to extend the sewage ejector type exemptions to wastewater management systems.
  2. Samples of the forms required by Manitoba Conservation to be used to apply for exemptions may be obtained at

            http://www.gov.mb.ca/conservation/envprograms/wastewater/index.html, and the fees for processing exemption applications range from $50.00 to $150.00.

  1. Manitoba Conservation is entitled to impose conditions on exemption orders. Manitoba Conservation has advised that the types of conditions imposed on any particular exemption order “will be consistent with the intent of the Act and would be determined on a case-by-case basis”.
  2. It is important to note that where a purchaser undertakes responsibility to remove a sewage ejector following closing, but for whatever reason, the sale and purchase transaction fails to close, the Regulation recognizes that the purchaser will be relieved - as far as the government is concerned- from its undertaking.  Needless to say, where the deal between a seller and a purchaser is that the purchaser will remediate after closing, the sale and purchase agreement should correspondingly specify that the purchaser is relieved of any obligation to remediate if the purchase and sale transaction fails to close for any reason whatsoever.

Some other matters to note are:


(A)          Manitoba Conservation provides a file search service for $94.50 (which includes GST).  Unfortunately, if the information which is provided when a search request is made does not:


(i)            indicate whether or not the particular property searched is serviced by a community wastewater collection system; nor


(ii)           indicate whether or not the local government with jurisdiction over the property searched has indicated to Manitoba Conservation that the local government intends to bring in a community wastewater collection system which would be available to service the subject property within the next five years.


Presumably someone interested in obtaining this information would have to first determine what is the relevant local government and then request that local government to provide this information.  Whether or not any particular local government will be willing and/or able to provide this information and at what cost is not known to this writer.


(B)          Regarding the meaning of the word “transfer”:


(i)            “transfer” is now defined in MR60/2010 as “including”, among other modes of change of ownership, “transmissions”.  Change of ownership from one person to another where both persons are spouses or common law partners are not considered to be a “transfer”.  But all other changes of ownership which occur by operation of law are caught within the definition. Thus, it is at least arguable that changes of ownership occurring by reason of bankruptcy, intestate succession (except amongst spouses and common law partners), corporate amalgamations, etc. would constitute “transfers”, thus triggering an obligation to remediate (in the absence of an exception).  The definition of “transfer” applies to both dealings with properties which have sewage ejectors on them and properties which have wastewater management systems on them.  Given the use of the word “include” in the definition of “transfer”, a Court called upon to analyze the language may – or may not – hold that non-consensual changes of ownership are “transfers” within the meaning of the Regulation.  Manitoba Environment advises that it will deal with each situation on a case-by-case basis;


(ii)           It is unclear as to whether or not “transfer” includes the leasing of a property, an absolute assignment of an existing leasing of a property and/or a transfer of the beneficial ownership interest in a property (where a title remains in the name of the “old” owner and the “old” owner takes a declaration of trust stating that it now owns the property as a bare trustee for the “new” owner).  Again, Manitoba Conservation advises that they will deal with such situations on a case-by-case basis.

Unfortunately, given the above, it will be somewhat difficult to predict in advance as to whether or not certain change of ownership transactions will be treated by Manitoba Conservation (and for that matter, the Courts) as  “transfers” under the Regulation;


(iii)          The Regulation, even as most recently amended, still does not indicate whether or not a privately owned community wastewater collection system would be treated as a wastewater collection system for the purposes of the Regulation.  While the vast bulk of wastewater collection systems are and will no doubt be owned by some level of government (typically a municipality), it is certainly conceivable that a number of property owners in proximity to each other might band together and establish their own wastewater collection system.

Hopefully, the government/Manitoba Conservation will either further amend the Regulation to clarify the issues raised above, or at the very least, will, by way of one or more policy statements, give some guidance to stakeholders regarding these matters.

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September 2012 



In November of 2010, The Supreme Court of Canada held that where a provincially governed (Personal Property Security Act) security interest came in conflict with a security assignment taken by a chartered bank under the Bank Act (Canada), that is, where both the security interest and the security assignment covered the same property with each secured party claiming priority for its respective interest, the priority rules set out in the Bank Act did not provide an answer to the question, at least for the fact situations in the two cases the Court then considered.  In these two cases (the "Innovation Case" and the "Radius Case", hereinafter, collectively, the "Previous Cases"), in essence, the Court held that, due to the constitutional primacy of the federal Parliament over the provincial legislature, a provincial Personal Property Security Act could not set out rules to solve priority disputes; the Bank Act did set out rules for determining priority between these types of interests in some situations, but not the situations in the Previous Cases.

In both of the Previous Cases, a credit union took a provincially governed personal property security interest in certain collateral and failed to register notice of same in the appropriate Personal Property Registry.  Thereafter, a chartered bank took a Bank Act, Section 427 security assignment affecting the same property, and the bank did everything it was supposed to do under the Bank Act to establish the priority of its security assignment (including filing a Notice of Intention by the debtor to grant the security assignment to the bank in the appropriate registry office).  The Court held that the fact that the credit union had not registered a financing statement under the Personal Property Security Act did not adversely affect its priority position vis-à-vis the bank with respect to its Bank Act security assignment, because (as noted above), the Bank Act did not provide a rule to determine priority in this particular situation.  The Court then went back to basic principles to determine priority, including concepts such as "first come, first served" and "once you've given away all your rights in property, you have nothing further to give to anyone else".


The result of the Previous Cases was to put chartered banks taking only Bank Act security in a difficult position.  Even where a bank searched the debtor's name in the appropriate Personal Property Registry, the bank will not find any record an unregistered provincially governed security interest against the debtor's name.  In an earlier paper dealing with the Previous Cases, the writer suggested that one solution to this dilemma would be for a bank to take both Bank Act security and Personal Property Security Act security.  However, by far, the best solution would be for Parliament to amend the Bank Act to provide an appropriate priority rule for this situation.  This has now been done.

Sections 426(7), 426(7.1), 428(1), 428(1.1) and 428(2) of the Bank Act now make it clear that where a provincially governed security interest is not duly registered ("perfected"), a properly taken and subsequently acquired Bank Act security assignment will prevail over the charged secured property.  The legislation does however make it clear that if a bank takes a Bank Act security assignment with the knowledge that the affected collateral is already subject to a previously created but unregistered provincially governed personal property security interest, then the bank's security will be subordinate.  In the Previous Cases, the debtors, either intentionally or unintentionally, did not advise the banks of the previously granted provincially governed security interests.  Thus the banks didn't know about the pre-existing security, and searching in the Personal Property Registry would have told them nothing.

This is a big improvement in the law of secured debt transactions.


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March 2009 


On October 29, 2008, the Manitoba Court of Appeal delivered its decision in Re Ehrmantraut (Bankrupt), 2008 MBCA 127, affirming the Manitoba Queen's Bench judgment delivered on May 13, 2008 (the "Ehrmantraut Case").


This case involved a situation where a father wished to acquire certain improved real estate (the "Realty"). The father needed mortgage financing in order to complete his acquisition, but could not get same unless the lender also obtained the benefit of the father's son's covenant to repay the loan. The lender could have allowed the Realty to be put in the father's name alone and got a separate guarantee undertaking from the son, but instead, the lender stipulated that both father and son be put on title as owners/mortgagors. Although not stated as such in the Ehrmantraut Case judgment, one can only assume that the lender believed that the son's covenant to repay would be less likely to be avoided if the son was also shown on title as having an interest in the Realty. Financing was provided, the acquisition closed and father and son were listed on title as joint tenants.


Sometime later, the son became bankrupt and the son's trustee in bankruptcy found that the son's estate included the son's interest in the Realty or the value thereof. In support of the trustee’s position it was submitted that:


(i) a Declaration as to Possession for the Realty was sworn and signed by both the father and the son, containing declarations that they were both entitled to be registered owners in fee simple in possession of the Realty;


(ii) a Statement of Affairs was sworn by the son, declaring his joint interest in the Realty; and


            (iii) by pledging his credit, the son had given good value for the joint interest in the Realty.


The father opposed, maintaining that the son's joint interest in the Realty was held as trustee for his father. In support of the father's position, it was submitted that:


(i)         the Realty was leased and all of the rentals were deposited to the father's bank account (presumably, with the son not objecting to this arrangement);


(ii)        the son did not advance monies either for the purchase of the Realty or to cover its maintenance costs;


(iii)       the father made all of the mortgage loan payments and paid all expenses required for/related to the Realty;


(iv)       the father paid income tax on the rental income derived from the Realty; and


(v)        the arrangement between father and son was simply that the son was "lending his (the son's) name to enable me (the father) to obtain financing and that I (the father) would pay all the expenses for the purchase of (the Realty) and would be the beneficial owner of (the Realty)".


After reviewing the evidence, the Madam Justice McKelvey of the Court of Queen’s Bench (the “Court) noted that there was also no evidence of a (written) trust agreement/arrangement/declaration and no caveat had been registered against the title to the Realty giving notice of the father's alleged trust.


The Court held that although the above-described evidence (including the father's evidence of the intentions of himself and his son) suggested the possibility of a trust arrangement, there was insufficient evidence presented to convince the Court to hold that a trust did in fact exist. The Court suggested certain other possible indicia which could have been put forward (which were not presented by either the father or the trustee in bankruptcy) to argue for the existence of a trust, which included an affidavit from the son, an affidavit from the lawyer who handled the Realty acquisition transaction, an affidavit from an individual employed by the lender at the financial institution involved, an acknowledgement that the son received independent legal advice, an indemnification agreement by the father covering the son should the son be called upon to pay any of the mortgage payments and/or a caveat registered against the title to the Realty giving notice of the trust's existence. The finding of no trust meant that the son's interest in the property was both legal and equitable, and was thus available to the son's creditors in the son's bankruptcy. The Court also found that the son had given valuable consideration to the father (for acquiring his interest in the Realty) by pledging his credit as a mortgagor/owner.


The Ehrmantraut Case suggests that where someone is to be on title as an owner (or part owner) of real property and the arrangement is that such person is not to have any true or beneficial ownership interest in the property, the trust arrangement should be clearly documented and the beneficial owner (or owners) should register notice (by caveat) of their true or beneficial ownership interest in the property.


Express written trusts (and frequently trust notification caveats) are in fact frequently put in place by solicitors acting for one or more true or beneficial owners who decide to take title to real property in the name of a bare trustee corporation. However, in the Ehrmantraut Case, the son's bankruptcy trustee raised another challenge to the alleged trust's existence which frankly, this writer has never heard of or considered. This argument is based on the "indefeasibility of title/ownership" rule found in Section 59(1) of The Real Property Act (Manitoba)(the "MRPA"). Section 59(1) is, in this writer's opinion, at the very core and is of the essence of the MRPA's rules and concepts relating to the ownership of titled real property as it deals with the essential nature and extent of real property ownership. It is worthwhile to set it out in full:


59(1) Every certificate of title, so long as it remains in force and uncancelled, is conclusive evidence at law and in equity, as against Her Majesty and all persons, that the person named in the certificate is entitled to the land described therein for the estate or interest therein specified, subject, however, to the right of any person to show that the land is subject to any of the exceptions or reservations mentioned in section 58, or to show fraud wherein the registered owner, mortgagee, or encumbrancer, has participated or colluded and as against the registered owner, mortgagee, or encumbrancer; but the onus of proving that the certificate is so subject, or of proving the fraud, is upon the person who alleges it.


The trustee in bankruptcy argued on this point that since the existence of a trust is not specified as an exception to the declaration of ownership rights in Section 59(1), registered ownership by a person with a title under the MRPA cannot in law be subject to a trust (for the benefit of one or more off-title owners). This argument was bolstered by reference to certain rules/requirements in Sections 49(2) and 81(1) of the MRPA, which say, in effect, that a Land Titles Office is not, except in certain specified situations which don't concern us here, to make entries on a title or in the register of any trusts or the existence of any trusts, whether "expressed, implied or constructive".


Fortunately for the sake of persons (and their counsel) who have utilized and will in the future wish to continue to utilize express (typically "bare") trusts for the holding of title to real property, the Court appeared to disagree with this argument. The writer uses the word "appeared" here because the Court of Appeal did not specifically deal with this issue, and the trial judge seems to have dealt with the issue somewhat inconsistently.


Notwithstanding the holding in the Ehrmantraut Case - and perhaps due to the Court's lack of unequivocal pronouncements on the effect of Section 59(1) of the MRPA in the context of trusts - the writer is concerned that either in Manitoba or in another Canadian jurisdiction which has statutory language dealing with titled ownership similar to that quoted above, sometime in the future, a court may hold that the combination of these three sections does in fact bar the recognition or imposition of a trust on titled real property. Current Manitoba Land Titles system practice is in fact to permit a caveat to be registered against a title giving notice of a trustee -beneficial owner(s) relationship. But is such practice in fact contrary to Sections 49(2) and 81(1) of the MRPA? Presumably, the basis of the rules in Sections 49(2) and 81(1) is that the government doesn't want Land Titles personnel to have to review the (perhaps lengthy and complex) documents creating express trusts, whether with respect to the existence of the trust or as to the trustees' rights and powers thereunder so as to ensure that a particular dealing by the registered owner is in compliance with the obligations of the trustee(s) under the trust.


Perhaps the MRPA could be amended so as to confirm current Land Titles practice, but make it clear that registration of a caveat giving notice of a beneficial owner-trustee relationship (i) does not obligate the Land Titles system to review and ensure compliance with the limitations and powers on and held by the trustees (or even to ensure the existence of the trust), and (ii) does not of itself confirm or validate the existence of the "alleged" trust, nor constitute a confirmation that any particular dealing with the property by the registered owner thereof (the "alleged" trustee(s)) is authorized under the terms of the trust, these matters to be capable of being challenged by all interested parties. Currently, this is the situation with caveats in that someone who wishes to challenge the validity of the right, claim, or interest of which a registered caveat gives notice is entitled to bring the matter before a Court and argue the merits of the right, claim or interest in that forum.

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February 2011


The answer to the question posed in the heading of this paper is “sometimes”.  As unsatisfactory as such answer may be (from the point of view that predictability of the outcomes of legal questions should be an important feature of our legal system), it is necessary to keep in mind three rules found in the Personal Property Security Act (the “PPSA”):


(i)            the principles of common law, equity and the law merchant, except insofar as they are inconsistent with the provisions of (the PPSA), supplement (the PPSA) and continue to apply;


(ii)           the rights, duties and obligations arising under a security agreement, under (the PPSA) or under any other applicable law shall be exercised or discharged in good faith and in a commercially reasonable manner; and


(iii)          a persondoes not act in bad faith merely because the person acts with knowledge of the interest of some other person.


Generally, the PPSAs are intended to establish a regime where the priority of competing security interests can be clearly and easily determined. Thus, the general rule is that if you have a security interest and you want to come out ahead of any competitors, you had better register promptly (before a competitor registers) and, you had better register properly (in accordance with the rules for registration under the Act and its Regulations).


But what if a security interest is acquired by a creditor (“Creditor # 1”) who knows that another pre-existing secured creditor (“Creditor # 2”) has not registered, or has improperly/erroneously registered, with the result that Creditor # 1 ends up with an unexpected benefit, advantage or windfall?


Clearly, the third of the above quoted rules would appear to give Creditor # 1 an unexpected benefit where Creditor # 1 knew of the existence of Creditor # 2’s security interest and Creditor # 1 took advantage of Creditor # 2’s failure to register knowing that Creditor # 1’s registration would – in the absence of Creditor #2 properly registering – rank ahead of Creditor # 2’s interest.  Something more than mere knowledge on the part of Creditor # 1 (of the pre-existing security interest held by Creditor # 2) is required in order to subordinate Creditor # 1 to Creditor # 2.  In essence, that “something more” must comprise one or both of:


(a)          inequitable conduct (in the eyes of a Court) on the part of Creditor # 1; and/or

(b)          bad faith (in the eyes of a Court) on the part of Creditor # 1.


The application of these rules is illustrated in these three cases:

  1. The Furmanek v Community Futures case (The “Furmanek Case”), British Columbia Court of Appeal.  In the Furmanek Case, the vendor of a business “took back” a security interest in the purchaser’s assets and made a proper registration of its security interest in the Personal Property Registry.  The purchaser paid part of the purchase price in cash which it borrowed from Community Futures Development Corporation of Howe Sound (“Development”) and Development also registered its security interest in the Personal Property Registry, but in so registering, Development erroneously omitted to refer to the purchaser’s inventory in its financing statement.  When the purchaser failed to pay what it owed, a contest arose between the vendor and Development as to who had priority over the purchaser’s inventory.  The vendor (for obvious reasons) argued that the PPSA required that a secured party strictly comply with the applicable registration rules, failing which it should not be considered to have perfected its security interest, or, in other words, it should not be entitled to priority as against the vendor’s proper registration.  Development argued that it was always understood by all parties concerned that Development was to have a first charge on inventory.  The Court noted the following facts:

(a)          the vendor knew that without Development’s financing, the sale and purchase transaction would not have been completed;


(b)          the vendor was actively involved in the negotiations between the purchaser and the Development leading to provision of the Development financing, and the vendor represented to Development that the assets being acquired by the purchaser from the vendor were “free and clear” and that accordingly, Development expected to obtain a first charge on the inventory;


(c)          the vendor knew that if Development did not obtain a first position on the purchaser’s inventory, Development would not provide financing; and


(d)          in the sale and purchase agreement between the vendor and the purchaser, the security interest granted by the purchaser back to the vendor for part of the purchase and sale price was referred to as a “second mortgage”.

The Court held in favour of Development. On the basis of the facts in the Furmanek Case, justice was done as it was manifestly unfair to allow the vendor to take advantage of Development’s registration omission.  However, the Court based its decision on more than just what seemed fair or unfair.  In particular, the Court held that:


(i)            while generally speaking, registration of a security interest with knowledge of a prior unregistered security interest will not of itself constitute bad faith or operate as an estoppel against the registering party, the circumstances in the Furmanek Case went “beyond mere knowledge of the fact that Development was asserting a prior interest”;


(ii)           although the vendor did not expressly agree to subordinate its security interest in favour of Development’s security, the PPSA makes it clear that a secured party may subordinate its interest in ways other than inclusion of a subordination provision in a security agreement.  The statute provides that “Any secured party may, in a security agreement or otherwise, subordinate his or her security interest to any other interest…”; and


(iii)          in light of the first of the above stated rules, PPSA priorities may be determined by the application of equitable principles.


            The Court held that on the basis of the vendor’s knowledge and its conduct, the vendor’s security interest in the purchaser’s inventory was equitably subordinated to Development’s interest.


                        Note:


(A)          the Court pointed out that its decision in the Furmanek Case was simply another in that long line of cases where the Courts have held that an act of a legislature will not be permitted to be utilized as an instrument of fraud.  In doing so, a Court does not hold invalid the legislature’s legislation, rather, on the basis of equity, it imposes an obligation on the individual who is seeking to take what the Court believes to be an inequitable advantage against one or more others on the basis of the strict operation/application of the legislation;


(B)          the vendor’s knowledge and unfair conduct would not have protected Development if an innocent third party was involved.  Thus if the vendor had sold its debt claim and security interest to a bona fide assignee, that assignee would almost certainly be entitled to hold priority over Development (some might argue that an assignee would and should acquire its interest "warts and all", no doubt on the basis that the PPSA provides that an assignee of a security interest takes the assigned security interest, essentially, "as is", as to the matter of perfection, but in this scenario, there was nothing wrong with the vendor's perfection, the problem being the vendor's inequitable conduct vis-a-vis Development, something that an assignee would not be "guilty" of); and


(C)         the Court of Appeal observed that another possible rationale for holding that Development had priority over the vendor would be on the basis of an implied agreement or undertaking by the vendor to subordinate its security position to that of the Developer.  In this regard, remember the above-noted factual holding that in the purchase and sale agreement, the vendor referred to its security interest as a “second mortgage”.


  1. The Canadian Imperial Bank of Commerce v. A.K. Construction (1988) Ltd. Case (the “CIBC Case”), Alberta Court of Queen’s Bench.

In the CIBC Case, CIBC and RoyNat both loaned money to two debtor corporations related to each other (collectively, the “Debtor”) for the purpose of enabling the Debtor to acquire certain heavy construction equipment.  The equipment was “serial numbered goods” under the PPSA and its Regulations, but only CIBC properly registered its security interest against the serial numbers, RoyNat omitting to register against the serial numbers.  The Debtor became insolvent, the equipment was sold and a contest arose between CIBC and RoyNat as to who was entitled to the proceeds of sale.  CIBC argued that it had done what it was supposed to do under the legislation and RoyNat had failed to do what it was supposed to do, with the result that CIBC should be entitled to the proceeds of sale, not RoyNat.  RoyNat argued that there was an underlying understanding between CIBC and RoyNat to the effect that RoyNat was to have a first charge on the Debtor’s equipment and CIBC was to have a first charge on the Debtor’s accounts receivable and inventory.  There was at least one meeting between representatives of CIBC and RoyNat at which they discussed their respective security positions. However, the Court held that CIBC did not undertake to subordinate its security interest in favour of RoyNat (or treat RoyNat’s security interest as holding priority over CIBC’s security interest) so as to bar itself from relying on its (CIBC’s) rights under the legislation. The Court observed that knowledge held by CIBC of the existence of RoyNat’s security interest and its knowledge that if RoyNat had properly registered its security interest, it would have held priority over CIBC’s security interest (which had not been properly registered) was not sufficient to constitute “bad faith”.  For CIBC to have been subordinated to RoyNat, RoyNat would have had to have established something more which would constitute a waiver or an estoppel argument or involve CIBC in some nefarious conduct such as misleading RoyNat or hindering it in the perfection of its security interest. None of these could be “fastened” on CIBC in this case.

  1. The Carson Restaurants International Ltd. v. A-1 United Restaurant Supply Ltd. (the “Carson Case”), Saskatchewan Court of Queen’s Bench

In the Carson Case, the priority contest was between:


(a)          the debtor Yorkton Restaurant as franchisee (being a corporation controlled by a Mr. Dennis A. Skuter, hereinafter, “Skuter”), the secured party, Carson as franchisor (also a corporation controlled by Skuter), the secured party Shonavan (also a corporation controlled by Skuter) and Mr. Dennis Skuter himself (collectively, the “Skuter Group”); and


(b)          A-1, being a secured party of the debtor with no connection to Mr. Skuter.

The sequence of events involving these parties was as follows:


(i)            In September of 1986,Carsonacquired a security interest in Yorkton Restaurant’s present and after acquired personal property;


(ii)           In April of 1987, A-1 acquired a security interest from Yorkton Restaurant covering goods provided by A-1 to Yorkton Restaurant on credit;


(iii)          In June of 1987, with Yorkton Restaurant being in default in the payment of its obligations owed to A-1, A-1 demanded payment and following that demand, there was a meeting between representatives of A-1 and Dennis Skuter.  Mr. Skuter assured A-1’s representative that Yorkton Restaurant would pay its debt to A-1;


(iv)         In July of 1987, A-1 registered its security interest but misdescribed Yorkton Restaurant’s name in its registered financing statement;


(v)          On October 1, 1987, Shonavan, in anticipation of selling certain equipment to Yorkton Restaurant on credit and taking a security interest therein, obtained a PPR search of Yorkton Restaurant’s correct name, which of course did not reveal A-1’s security interest which had been registered against Yorkton Restaurant’s incorrect name;


(vi)         On October 26, 1987, Carsonregistered its security interest against Yorkton Restaurant’s correct name, and on the same day, Shonavan also registered its security interest against Yorkton Restaurant’s correct name;


(vii)        In November of 1987, Mr. Skuter registered his own security interest against Yorkton Restaurant’s correct name;


(viii)       On January 20, 1988, with Yorkton Restaurant being in default of its obligations owed to Carson, Carson seized all of Yorkton Restaurant’s assets; and


(ix)         On January 26, 1988, A-1 amended its PPR registration to correct the name of Yorkton Restaurant.

The Court held that as between A-1 and the Skuter Group, A-1 should prevail.  The Court noted that fraud was not alleged against Mr. Skuter or the Skuter Group.  Nevertheless, the Court observed that “…in (these) circumstances…, to permit (the Skuter Group) through Skuter, to use (the PPSA and its registry system) has an instrument to defeat a claim of which (Skuter) was not only aware, but which he deceitfully delayed by his representations to A-1 when it was pursuing its security interest against Yorkton Restaurant on or about June 18, 1987 (emphasis being the writer’s here), would be inequitable. Accordingly, the priorities which would otherwise result from a strict application of the legislation should not hold and should be overturned by the application of equitable principles. 


What is interesting about the Carson Case is that the facts as spelled out in the decision do not themselves indicate that Mr. Skuter made deceitful representations to A-1 at the time of the June 18, 1987 meeting.  However, we can only assume that such deceitful representations were in fact made and that they were made by Mr. Skuter with the objective of inducing A-1 to not take the steps necessary to achieve PPSA priority for A-1’s security interest.

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April 2021 Jason M.J. Bryk


I have recently been contacted by several solicitors in respect of the British Columbia Court of Appeal decision Griffin v. Martens, 1998 CanLii 2852 (BCCA).


By virtue of Griffin it has been suggested, and the writer does not agree, that if a condition precedent is boldly subjective it may render the entire contract unenforceable.


In Griffin the question in the appeal turned on the meaning of the following italicized clause in an interim agreement for the sale of land:

 

SUBJECT TO PURCHASER BEING ABLE TO ARRANGE SATISFACTORY FINANCING ON OR BEFORE FRIDAY, MAY 31, 1985, AT 6 P.M. THIS SUBJECT IS FOR THE BENEFIT OF THE PURCHASER AND SHALL BE REMOVED IN WRITING ON OR BEFORE 6 PM. MAY 31, OTHERWISE THIS OFFER IS NULL AND VOID.


The italicized clause is one which, in one form or another, is all too common in Manitoba real estate transitions.


There are real reasons why a contract may be unenforceable, void or voidable (illegality, unreasonable restraint of trade, minor, drunkard who promptly avoids a transaction upon sobriety) and thereby,  notwithstanding any application of severability, revocable; however in my opinion a boldly subjective condition precedent like the one written in italics above is not one of those reasons, nor should Griffin be used to support an opinion contrary to mine.


When reference is made to Griffin attention should be paid to the decision of Gordon Nelson Inc. v. Cameron, 2018 BCCA 304 (CanLII) in which the British Columbia Court of Appeal states:


"the case [Griffin] deals with a particular contract, does not lay down any general rule applicable to all financing conditions, and, expressly, does not purport to construct a contract for the parties to it. The case explicitly recognizes the right of parties to reach their own bargain. The most that can be said as a general proposition, in my opinion, is that the principle of good faith imposes a general duty of honest performance in all contracts: Bhasin v. Hrynew, 2014 SCC 71".


Thereby, Gordon Nelson has distinguished Griffin.


Notwithstanding Gordon Nelson distinguished Griffin, attention should also be paid to what a conditional real estate sales "contract" (i.e. residential or commercial form of offer) is; in my opinion a conditional real estate sales "contract" is one of the following:

(a)       an accepted "option" supported by consideration and thereby it is an "option given for valuable consideration" and is irrevocable (Friedman, "The Law of Contract in Canada", Sixth Edition, Carswell, 45) unless the parties bargained otherwise to permit revocation in certain circumstances; or

(b)      an accepted "offer" and thereby a contract and like an option, is also irrevocable (Friedman, The Law of Contract in Canada, 45) unless the parties bargained otherwise to permit revocation in certain circumstances.


Importantly, irrespective of the subjective or quasi-subjective meaning of "satisfactory", use of the word "satisfactory" within a purchaser's condition pursuant to an accepted conditional real estate sales "contract", whether it be an accepted option or an accepted offer and thereby a contract does not mean the "contract" is revocable and unenforceable but rather it means there is an implied term whereby there is a general duty of honest performance (Griffin, Gordon Nelson, Bhasin) which is a standard less than the standard of "best efforts" referenced in Griffin which decision is now distinguished by Gordon Nelson.



Jason M.J. Bryk

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March 2009


Sometimes when properties are surveyed, it is discovered that an improvement which is primarily on a particular parcel of land encroaches (ie., trespasses) across the property's boundary onto the adjacent/neighbouring property.  Encroachments by garages, tool sheds and other "out" buildings are common examples.  In older commercial areas where buildings are typically built up to or very close to the lot lines, encroachments of substantial portions of walls, roof overhangs, drainpipes and similar "appurtenances" frequently occur.  Aside from the fact that the owner of an encroaching improvement is thus committing a trespass against its neighbour which in many cases would entitle the neighbour to forcibly remove (or obtain a court ordered removal) of the trespass with attendant costs, dislocation and related problems - mortgagees, purchasers and persons contemplating taking mortgages in or purchasing the encroaching owner's property will be reluctant to complete their transactions, at least until the "encroachment problem" is solved.


A frequently utilized, and probably the least expensive manner of solving an "encroachment problem" involves the encroaching property owner (the "Dominant Tenement Owner") entering into an agreement with the owner of the property upon which the encroachment(s) exist (the "Servient Tenement Owner") in which the Servient Tenement Owner agrees with the Dominant Tenement Owner that the encroachment from the Dominant Tenement Owner's property can continue to exist on the Servient Tenement Owner's property, notwithstanding what would otherwise be a trespass, typically, during the remaining "lifetime" or existence of the building or other improvement of which the encroachment forms part.


In such an agreement ("Encroachment Agreement"), the parties purport to bind and benefit the respective future owners of the two properties and will usually describe the rights or interests granted to the Dominant Tenement Owner (and its successors in title) as an easement.  To ensure that all successors in title of both properties (and others acquiring or thinking of acquiring interests in them) are made aware of the rights and interests of the parties under the Encroachment Agreement, the Dominant Tenement Owner will usually register a notice of the Encroachment Agreement (ie., by way of caveat) against the title to the Servient Tenement Owner's property.  Under current Land Titles Office practice, particulars of the registration of that caveat will appear on the titles to both properties.


The question which the writer wishes to raise in this memo is whether or not the rights and interests granted to a Dominant Tenement Owner under an Encroachment Agreement are really a legally recognized easement which constitute an interest or interests in land which are capable of binding the successors in title to the original Servient Tenement Owner?  Clearly, if such an arrangement is an easement, it  is a species of interest in land which does "follow" successors in title - but can an easement be established/created for/to protect an encroachment?  Or does an Encroachment Agreement intended to protect an encroachment create only contractual rights enforceable between the immediate parties to the Encroachment Agreement, but which do not, as a matter of law, "follow" the titles to the properties affected - at least in the absence of successors in title specifically agreeing to be bound by the Encroachment Agreement?


The reason why the writer raises this question is because his recent review of the law pertaining to easements suggests that, while a right granted to a property owner to do something on its neighbour's land is generally recognized as an easement, the act, action, activity or usage made by the benefitted property owner must not amount to a right whose exercise completely excludes the neighbour's use of the affected property.  For example, if the owner of Parcel "A" grants its neighbour the owner of Parcel "B", the right to use a pathway over "A"'s land, "A" still has the right to use its land, including the pathway.  But where "A" grants it's neighbour "B", the right to maintain on "A"'s land, a part of a garage primarily situated on "B"'s land which encroaches over part of "A"'s land, then the encroaching portion of the garage, by the very nature of things, excludes "A" from in any way using the land underlying the encroachment.


In other words, for the period of time during which the Encroachment Agreement is in effect, what "A" has granted to "B" is probably what amounts to a right of exclusive use/possession of the land underlying the encroachment.  The writer submits that whatever such arrangement may be, it is strongly arguable that it is not an easement.

But if an Encroachment Agreement does not create an easement, does it create any rights or interests in the affected lands over and above contractual rights and obligations between the original parties to the Encroachment Agreement?  The writer submits that the answer to this question may, in many cases, be "yes", and that the rights or interests granted in the foregoing example are in the nature of a lease whereby "A" as lessor leases the land underlying the encroachment to "B" as lessee.  As we all know, a lease is in fact an interest in land which is legally recognized as being capable of binding successors in title to the lessor.


So if the parties to an Encroachment Agreement refer in it to the rights granted to the Dominant Tenement Owner as an "easement" (or "easements"), might a Court called upon to review the matter hold that the Encroachment Agreement is in substance a lease?  Perhaps - or perhaps not - but even if an Encroachment Agreement is characterized as a lease, rather than as an easement, this raises another problem for the parties concerned (and their counsel).  That problem is the existence of subdivision control rules (in The City of Winnipeg Charter Act and in The Manitoba Planning Act) which specifically exempt easements from the need to comply with subdivision control requirements, but which do not do so for a lease in excess (or capable of running in excess of) of 21 years.

The writer believes that his above argument that one cannot obtain an easement to protect an encroachment is supported by the existence of Sections 27 and 28 of The Manitoba Law of Property Act.  These Sections permit a (superior) Court to confirm or grant rights to an encroaching property owner in its neighbour's land to protect/with respect to encroachments made by the encroaching property owner on its neighbour's land.  Why would the Legislature have enacted these Sections if it was not recognized that an easement either couldn’t be legally obtained, or was difficult to legally obtain, to protect an encroachment?  In any event, these Sections make it clear that whether or not the Court provides relief to the encroaching property owner is in the discretion of the Court, so an encroaching property owner has no guarantee that it will achieve legal protection for its encroachment.

If the writer is correct in the foregoing analysis, then it would appear appropriate for the Legislature to vary subdivision control rules to exempt leases which merely protect encroachments (regardless of their length or potential length) from subdivision control requirements.

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