August, 2012

Over the last 10 years, the use of property disclosure statements in residential real estate transactions has substantially increased in Canada.  Manitoba is no exception.  Essentially, a property disclosure statement (a/the "PDS") is a series of statements by a seller to a potential (or actual) purchaser of the seller's residential property pertaining to the seller's knowledge (or lack of knowledge) of various elements of the property which would, in most cases, be of interest and/or concern to the purchaser.

The current form of residential real estate offer to purchase mandated for use where a real estate agent or broker is involved (a/the "Standard Offer") contains a promise by the seller that the seller will, within a short period of time (typically, 24 to 48 hours) provide the purchaser with a PDS.  The purchaser then has a short period of time (again, typically, 24 to 48 hours) to decide if the purchaser is - or is not - satisfied with the contents of the PDS.  If the seller fails to deliver the PDS, or the purchaser is not satisfied with the contents of the PDS, then the contract is terminated.  The Standard Offer also provides that immediately upon provision of the PDS to the purchaser, the PDS "forms part of this agreement".  Additionally, the Standard Offer contemplates that if the parties are agreeable to this, the seller is not obligated to provide any PDS to the purchaser.

On a related note, the Standard Offer additionally contains a promise by the seller that (again) within a short period of time, the purchaser is entitled to have the property inspected and that if the results of the inspection are not satisfactory to the purchaser, the agreement is terminated.  Again, the parties can agree to the removal of this promise from their agreement.

After a residential real estate transaction has been consummated and the purchaser moves in, the purchaser may discover certain "defects" in the property.  The defects may be sufficiently serious (at least in the purchaser's mind) that the purchaser will want to undo the transaction.  Or the aggrieved purchaser may wish to receive compensation from the seller for the costs incurred in remedying the defects (or, in effect, to lower the purchase and sale price by virtue of the loss in value created by reason of the existence of the defects).  When such an aggrieved purchaser has had the seller's PDS incorporated into the contract, what is the legal effect of such incorporation?  The British Columbia case of Hanslo and Barry (British Columbia Supreme Court, judgment given November 29, 2011, hereinafter, the "Barry Case") provides a very useful analysis of the role which is typically played by the incorporation of a PDS into a purchase and sale of residential real estate contract.  The Barry Case contains a useful review of the role of caveat emptor ("buyer beware") and the exceptions to that rule which the Courts have worked out over the years.

In essence, caveat emptor means that as a general rule, a buyer of real estate runs the risk of acquiring it subject to defects and that it is up to the purchaser to do/conduct its own inspections and due diligence to ensure the absence of defects before unequivocally committing himself/herself.  The seller is - again, as a general rule - not obligated to "disparage" the seller's own property and generally has no obligation to divulge the existence of defects.

What are the exceptions to the caveat emptor rule?  A review of the relevant jurisprudence, a fair amount of which is cited by the Court in the Barry Case, would indicate the following exceptions:

1. where the seller fraudulently misrepresents or conceals a defect;
2. where a seller knows of a latent defect rendering house unfit for human habitation;
3. where a seller is reckless as to the truth or falsity of the seller's statements made relating to the fitness of the property for habitation; and
4. where the seller knows of a latent defect rendering the property dangerous (clearly, this is fairly similar to #2 above).

Although not really an exception the caveat emptor rule, it should be remembered that where a seller actually promises, as a term of the contract, that a defect does not exist, or if it does exist, that it will be remedied at the seller's cost by closing, the seller cannot then rely on the rule of caveat emptor if such promise is breached.

The facts in the Barry Case were fairly simple and not in dispute (there was some question as to credibility which the Court decided in favour of the plaintiffs).  The defendant's home was situated on land located downstream from a creek; before the creek reached the defendant's property line, it ran into an underground culvert which carried the creek water under the defendant's home.  On more than one occasion, the creek had overflowed with the result that the culvert was not able to contain all of the expanded creek water and this resulting in flooding into the defendant's home.  Mould had built up in those areas where such flooding had occurred.  The plaintiffs entered into an agreement with the defendant to purchase the defendant's home, and as part of the transaction, the defendant provided the plaintiffs with a PDS.  In the PDS, the defendant stated that he was not aware of the existence of any moisture and/or water problems in the walls, basement or crawl space, that he was not aware of any damage due to wind, fire or water, and, that he was not aware of the existence of any unregistered easements or unregistered rights-of-way.  The Court held that the defendant's said statements were false and that the plaintiffs had relied on the truthfulness of such statements to induce them into obligating themselves to purchase the defendant's property, with the plaintiff subsequently suffering loss as a result of such reliance (the costs to repair the flooding/mould damage).

The Court had to decide what was the effect of incorporating the PDS into the contract. 

It was argued for the plaintiffs that incorporation of the seller's statements in the PDS constituted those statements as contractual warranties.  After reviewing previous relevant case law, the Court held that, at least in this case, the seller's statements did not constitute contractual warranties.  Citing an earlier British Columbia case, the Court held that, notwithstanding the incorporation of the PDS into the contract, the same was "…not necessarily a warranty.  Its main purpose is to put purchasers on notice with respect to known problems.".  On the other hand, the Court determined that the seller's PDS statements constituted representations, and that it was reasonable to conclude that the purchasers had relied on same and were thereby induced into entering the contract, ultimately to their detriment.  The Court stated that if the seller had made correct statements, it is almost certain that the purchasers would have made investigations which would have lead them to become aware of the flooding problem and of the fact that what amounted to an unregistered right-of-way (for the culvert carrying water under the house) affected the property. 

From the perspective of a "traditional" legal analysis, the concept of a representation forming part of a contract is somewhat odd; statements pertaining to the subject matter of a contract which are actually included within the "body" of the contract are usually considered to be warranties (or promissory conditions).  Statements relating to the subject matter of a contract which are not incorporated into the contract, but which nevertheless are relied upon by one of the parties, thereby inducing such party to commit itself, are considered to be representations.  Nevertheless, for the purpose of the Barry Case, whether "incorporated" into the contract or not, the Court held that the defendant was responsible to the plaintiffs for the plaintiffs' flooding/mould damage remediation costs, on the basis of misrepresentation(s).

The provisions in the form of residential property offer to purchase utilized in British Columbia and in the Standard Offer, as well as the provisions contained in the form of PDS used in the Barry Case and in the more or less standardized form of PDS used by realtors in Manitoba are  fairly similar.  In particular:

(a)          both forms of contract specify that there are no "representations, warranties, promises or agreements" other than what is set forth in the contract and what is set forth in the PDS, if PDS is incorporated into the contract;

(b)          both forms of contract provide that where the parties agree upon it, the PDS is incorporated into or forms part of the contract; and

(c)           the Manitoba form of PDS specifically says that the seller's statements do not constitute warranties as to the actual condition of the property (notwithstanding that such statements are incorporated into the contract), and, the seller's statements in the British Columbia form of PDS were confirmed by the Court in the Barry Case to constitute representations, not contractual warranties.

Thus it appears (at least in British Columbia and Manitoba) that when statements contained in a PDS, although not warranties, are relied upon by a purchaser, and it turns out that they are falsely made (at least when so made intentionally, recklessly or negligently), and the purchaser relies on same and thereby suffers loss, the purchaser will have a remedy against the seller.

A few other elements of the Barry Case which should be of interest to potential sellers, buyers, realtors and counsel are:

(i)         the defendants argued that when, after the plaintiff had been provided with a PDS which the plaintiff was satisfied with, the plaintiff then signed a confirmation "removing" the plaintiff's requirement of obtaining a satisfactory PDS, this meant that the PDS no longer existed for the purposes of the contract.  Not surprisingly, the Court held that such "removal" was not a complete waiver of the purchaser's rights under or with respect to the PDS, but merely a confirmation of fulfillment of the seller's obligation to provide a satisfactory PDS.

(ii)        the plaintiffs argued that the seller's answer to the question: "Are you aware of any damage due to wind, fire or water?" should have included information, not only to existing damage, put also to past damage, even if the past damage had been repaired.  The Court disagreed and held that the question refers only to existing damage.  In support of this argument, the Court pointed to several other questions in the PDS where a seller is asked to advise as to whether or not there has "ever" been a problem or problems of certain types.

(iii)       the defendants argued that because the plaintiffs obtained a building inspection report for the property and did not terminate the transaction by virtue of the information provided therein, the plaintiffs had ceased to rely on the statements contained in the PDS.  The Court disagreed and held that, at least in the Barry Case, the plaintiffs did not cease relying on the PDS, and were in fact, entitled to rely on both the PDS and the building inspector's report.

February 2016

Most practicing Manitoba lawyers know that if a corporate client wishes to carry on business in Manitoba, where the corporation has been incorporated in a jurisdiction outside of Manitoba, it is necessary for the client to be registered under The Manitoba Corporations Act (Section 187 of the Act).  What exactly does "carrying on business" mean?

Section 187(2) of the Act provides that a corporation is "deemed" to be carrying on business where:

(i)            it has a resident agent or representative, or, a warehouse, office or place of business in Manitoba;

(ii)           its name and a Manitoba address is listed in "a Manitoba telephone directory" (increasingly insignificant with the rise of internet communications);

(iii)          its name and a Manitoba address are included in any "advertisement advertising the business or any product of the (corporation)";

(iv)          it is the registered owner of "real property" situated in Manitoba; or

(v)           it otherwise "carries on its business or undertaking" in Manitoba.

It appears that it is an extra-provincial corporation's "presence" or degree of connection in or with Manitoba that requires registration in this province.

But what about the case of a corporation which has been incorporated in, say, Ontario, which is the true or beneficial owner of an asset (typically, but not necessarily, real property), situated in Manitoba, where the property is registered in the name of a Manitoba corporation which has formally declared that it holds the property as a trustee for the Ontario corporation?  Does it matter that the (express) trust is a "bare" trust, where the trustee has no management, administration or discretionary rights or powers to deal with the trust property, all of the same belonging to the Ontario corporation?  Assume further that none of the above indicia of a Manitoba presence or connection are applicable (in particular, the Ontario corporation is not itself the registered owner of the subject realty, does no advertising and has no place of business, agent or representative in Manitoba).  The only question is whether or not the Ontario corporation can be described as "otherwise carrying on its business or undertaking in Manitoba"?

The Manitoba Companies Office (which administers the Act) has advised the writer that it has no particular policy guidelines to answer this question.  There is a paucity of case law on this matter, however there have been several Court decisions which deal with related or analogous situations.  Consider the following:

1. In Huber v. Pocklington Financial Corp. Ltd. (Nova Scotia Supreme Court Trial Division, 1982), the question was whether or not a corporation which was not incorporated in Nova Scotia,  had no place of business and did not in any normal sense of the words, "carry on business" in Nova Scotia, should nevertheless be held to be carrying on business in Nova Scotia indirectly by reason of its holding virtually all of the issued capital stock of another corporation which was clearly resident in and carried on business in Nova Scotia.  The Court held that the shareholding corporation was not carrying on business in Nova Scotia.  The two corporations were separate legal entities.
2. In Wilson v. Hull (Alberta Court of Queen's Bench, 1993), the question was whether or not an Alberta corporation was "ordinarily resident" in the State of Idaho in the context of a judgment obtained by an Idaho corporation which sold goods to the Alberta corporation, with the Alberta corporation breaching its contractual obligations under the arrangement and consequently sustaining a default judgment obtained by the Idaho corporation in an Idaho Court.  The Idaho judgment creditor sought to have its judgment registered in Alberta.  Under relevant Alberta law, the judgment debtor could stop registration of the Idaho judgment in Alberta provided that it could establish that the Alberta corporation was "neither carrying on business nor ordinarily resident within the jurisdiction of the original court (Idaho)".  The Court held that the Alberta corporation was carrying on business in Idaho on the basis that "…part of carrying on business is paying for debts that are legitimately owed", and, the debt was payable in Idaho.  The principal of the Alberta corporation had attended at the Idaho corporation's place of business to conduct negotiations at the beginning of the contractual relationship, but otherwise didn't "carry on business" in Idaho.  In considering this case in the context of the question posed at the beginning of this paper, one should bear in mind firstly, that the matter did not relate to the question of carrying on or not carrying on business in relation to the need for corporate registration, and, secondly, that substantial justice was accomplished in this case because the Alberta corporation had clearly reneged on its contractual obligations without any valid excuse.
3. In the Nova Scotia Power Corp. v. AMCI Export Corp. (Nova Scotia Court of Appeal, 2005), the question was whether or not a particular American incorporated corporation (operating out of Pennsylvania) was "resident out of the province of Nova Scotia").  Nova Scotia Power alleged that the Pennsylvania corporation was in breach of a contract between the parties under which the Pennsylvania corporation had agreed to sell coal to Nova Scotia Power.  Nova Scotia Power launched a lawsuit in Nova Scotia against the Pennsylvania corporation claiming $11,000,000.00 damages.  To secure its position, Nova Scotia Power sought to attach certain assets of the Pennsylvania corporation which were situated in Nova Scotia, but would only be entitled to the attaching order if it could be established that the Pennsylvania corporation was resident outside of the province.  The Court held that the Pennsylvania corporation was resident in Nova Scotia, and with its assets in Nova Scotia, was resident, or at least sufficiently resident in the forum's jurisdiction so as to substantially eliminate the risk of the plaintiff not being able to realize on any judgment it obtained by virtue of the Pennsylvania corporation being outside "reach" of Canadian Courts.  As with the Wilson v. Hull case, it must be kept in mind that this was not really a "carrying on business" case relating to the need (or the absence of the need) to extra-provincially register. 

So what might we conclude concerning the above-stated original question?  The writer's cautious conclusion is that the Ontario corporation, which does not meet with any of the indicia above stated (in The Manitoba Corporations Act) and which is a mere beneficial owner of the Manitoba realty registered in the name of the bare trustee Manitoba corporation, would not be required to be extra-provincially registered in Manitoba.  The lack of discretionary and management powers held by the trustee (the hallmark of a bare trust) re-enforces this conclusion.  But the word "cautious" is required because there is a meaningful - at least to the beneficial owner - "connection" between the beneficial owner and the Manitoba realty being held for it.  A Court may at some time consider that that "connection" is sufficient to hold the Ontario corporation as "carrying on business" in Manitoba.

November 2009 

Persons giving or taking interests in real property, or contemplating doing so, in particular, with respect to real properties situated outside of areas affected/covered by public/community wastewater collecting and processing systems, including buyers, sellers, mortgage lenders and realtors and lawyers advising same, should be aware of the requirements specified under the "Onsite Wastewater Management Systems Regulation" (Manitoba Regulation #83/2003, registered April 28, 2003 and the "Onsite Wastewater Management Systems Regulation, amendment" (Manitoba Regulation #156/2009, registered September 28, 2009), both of these Regulations having been enacted under the Environment Act (Manitoba) (the "Act").  Hereinafter, the "combined" aforementioned Regulations will be referred to as the "Amended Wastewater Regulation".

Before considering the requirements imposed on property owners under the Amended Wastewater Regulation, it is important to take note of certain of the definitions set forth at the beginning of the Amended Wastewater Regulation, in particular:

1. "Wastewater" means either one or both "greywater" and "sewage", in other words, in a typical household, either one or both of "used" water that drains out of a kitchen or bathroom sink, bathtub or shower, and, the effluent that is placed in or runs through toilets.
2. "Onsite wastewater management system" means all or any part of a system for the "holding", "treatment" and/or "management" of wastewater, "including, but not limited to:

(a)          an aerobic treatment unit;

(b)          a composting toilet system;

(c)           a disposal field;

(d)          a greywater pit;

(e)          a holding tank;

(f)            a septic tank; and

(g)          a sewage ejector."

Although not specifically stated as such, the intent of this definition appears to be to describe a wastewater management system which is designed or intended to service a particular property only, as opposed to a "community" (or multi-property) wastewater management system.

1. "Wastewater collection system" means a sewer system used for the collection and conveyance of wastewater.  Again, although not specifically stated as such, it would appear that the intent of this definition is to cover wastewater management systems, or perhaps more accurately, the "collection" portion thereof, which is used or intended to be used to service multiple properties.  Also, although it is not clearly specified, it would appear that "wastewater collection system" is intended to refer to systems which are owned by a level of government or some entity controlled by a level of government, most typically, by a local government.

Although there are many rules in the Amended Wastewater Regulation that specify (often detailed) requirements for the installation, maintenance and operation of onsite wastewater management systems, the purpose of this memorandum is to highlight certain requirements/obligations of landowners which came into effect via Manitoba Regulation #156/2009, namely:

1. Sections 8.1 and 8.2 provide:

(a)          A person who, on the day that the Amended Wastewater Regulation came into force, owns land in an area that is serviced by a wastewater collection system, but who has not connected his/her wastewater sources to the system must both connect his/her wastewater sources to the wastewater collection system and take any onsite wastewater management system that the person has (or any privy located on the land) out of service and decommission it, before the earlier of five years from the date that the Amended Wastewater Regulation came into force and the transfer or subdivision of the person's land.

(b)          In the case of a person in a similar position to that described in subparagraph (a) immediately hereinabove, but who does not have a wastewater collection system available to be hooked up to on the date that the Amended Wastewater Regulation came into effect, but whose property is subsequently commenced to be serviced by a wastewater collection system, such person must similarly connect to the installed wastewater collection system and take out of service any onsite wastewater management system (or privy) located on such person's land and decommission it, by the earlier of five years from the day upon which the (newly installed) wastewater collection system has been installed and the transfer or subdivision of the person's land.

Both Sections 8.1 and 8.2 go on to specify that where a person transfers his/her land without doing the required remediation work before transfer, the new owner/transferee must complete the required remediation within "two years after the transfer".  Presumably this means two years after the date upon which registration of a transfer of land is giving "accepted" status by the Land Titles Office.  Also presumably, an "old" owner who transfers title before doing the required remediation work will be in breach of the Amended Wastewater Regulation and thus subject to fines, penalties, etc., notwithstanding that the new owner/transferee does the required remediation work within the two year time span given to the new owner/transferee.

1. Section 14.2 of the Amended Wastewater Regulation provides that the owner of land on which a sewage ejector system is located must take such system out of service and decommission it before the earlier of the transfer of the land on which the sewage ejector system is located and the subdivision of the land on which the sewage ejector system is located.  As similarly specified in Sections 8.1 and 8.2 pertaining to transfers of ownership of land serviced by a wastewater collection system, it is further provided that where the owner of land with a sewage ejector system on it transfers ownership without taking the ejector system out of service and decommissioning it, the transferee/new owner then has the obligation to do the required remediation work within two years after the transfer.  Again, it would appear that even where the transferee/new owner does the required remediation work within the two year period, the old owner/transferor is in breach (or perhaps more accurately, continues to be held to be in breach) of its obligation and is thus subject to fines, penalties, etc.
2. The original Wastewater Management Systems Regulation specified (in Section 8) that, in effect, a person was not entitled to install (or modify) an onsite wastewater management system on his/her land without first submitting a proposal for same and having the director (under the Act) approve same.  Section 8(2.1) of the Amended Wastewater Regulation now specifies that, not only must the director refuse any such proposal where there is an existing wastewater collection system available to be hooked up to, but that the director must also refuse any such proposal if the applicant's property "is expected to be serviced by a wastewater collection system within five years after the day that the proposal was received".  In this regard, Section 8.3 of the Amended Wastewater Regulation now provides that:

(a)          If there is a dispute or difference of opinion as to whether or not a landowner's property is - or is not - in an area that is serviced by an (existing) wastewater collection system, or, as to whether or not the property is "expected to be serviced" by a wastewater collection system within five years, the director may determine the matter in dispute; and

(b)          The director may also at any time inform a landowner as to whether or not the owner's land is in an area that is serviced by an existing wastewater collection system or is expected to be serviced by a wastewater collection system within five years.  Property owners, realtors, mortgage lenders and their legal advisors may wish to make appropriate "searches" or enquiries of the director in this regard.

These new rules/requirements raise certain questions which we will all have to consider and take into account when advising clients:

(I)            As noted above, it appears that even where a potential seller and buyer are aware of the Amended Wastewater Regulation's requirements as they apply to the seller's land, an arrangement between the parties to the effect that the purchaser will do the required remediation work (presumably two years from the date of transfer), and presumably with an "adjustment" in the sale and purchase price, may not relieve the seller form exposure to fines, penalties, etc. which may be imposed on the seller by virtue of his/her/its failure to do the required remediation work by the time of transfer.  Should such arrangements thus be avoided at all cost, or should a seller and buyer be advised that, provided that the buyer does the required remediation work within the required two year period (and the purchaser will not be exposed to fines, penalties, etc.), the seller, despite such potential exposure, is not likely to be prosecuted by the authorities simply because the "evil" intended to be eliminated by the Amended Wastewater Regulation will have been eliminated?  Would such advice itself be unethical because one would be counselling the seller to, in effect, "break the law"?

(II)          Regarding the triggering occurrences of "transfer" and "subdivision" of land:

(a)          Does "transfer" include change of ownership arising by virtue of operation of law, such as where a surviving joint tenant acquires ownership, change of ownership by way of devise, inheritance, corporate amalgamation, winding-up, transmission on bankruptcy or changing of ownership by virtue of the issuance and registration of a vesting order given by a Court?

(b)          If there is the disposition and acquisition of an interest in land which does not constitute a "subdivision" within the meaning of the Manitoba Planning Act and/orthe City of Winnipeg Charter, would the same not constitute a "subdivision" for the purposes of the Amended Wastewater Regulation?

(III)         As noted above, this writer suspects that a wastewater collection system means a wastewater collection system which is owned by a level or entity of government, but this is not entirely clear.  Would the expression include a collection system which is privately or communally owned? 

(IV)        What about those unfortunate persons who entered into contracts to sell and buy lands before the Amended Wastewater Regulation came into effect, but with a closing after such effective date?  In some cases, such persons' purchase and sale contracts may be legally "frustrated", but unless the cost of the required remediation is substantial in relation to the purchase and sale price, this may will not likely be so.  Perhaps the only practical way to deal with these situations is for the buyer and the seller to more or less equally split the cost of the required remediation - but what about a buyer who refuses to do so?

(V)          Are there enough competent tradespeople available to take onsite wastewater management systems out of service, decommission them and where appropriate, hook up a property owner's wastewater sources to a new (or existing) wastewater collection system servicing the neighbourhood?

(VI)        What will be the cost of taking an onsite wastewater management system out of service, decommissioning it, and, connecting a property's wastewater sources to a wastewater collection system servicing the neighbourhood?

November, 2016

The Manitoba provincial government originally proclaimed its (new) New Home Warranty Act and Regulation thereunder to come into force as of January 1, 2017.  However, this date has now been pushed back to January 1, 2018.  Although we have a year to go, it's not too early for those in the home building business (including both contractors and their financiers) to start preparing for what will be required of them under the legislation.

The following is an overview of the regulatory scheme:

(i)            In most cases, a builder is prohibited from building a new home unless:

(a)          the builder is registered as a builder under the legislation; and

(b)          a "warranty provider" (registered as such under the legislation) has committed to provide a home warranty for the home in accordance with, and containing the undertakings required by the legislation.

(ii)           In most cases, a "warranty provider" will be an insurer licenced to carry on business as an insurer under the Insurance Act.

(iii)          All warranty providers - even insurance companies which are already licenced under The Insurance Act - must additionally register as warranty providers under the Act.

(iv)          If a builder constructs a new home and sells it to an owner without the builder arranging for the provision of a warranty to the owner, then the builder itself is "deemed" to have provided the required warranty to the owner.

(v)           Provision is made for aggrieved owners to make claims under their warranties and for the mediation of disputes.

(vi)          Builders who fail to fulfill their obligations under the legislation are liable to prosecution with the maximum penalties being a fine of up to $300,000.00, imprisonment for a term of not more than three years, or both.

(vii)        Additionally, the legislation provides for the imposition of "administrative penalties" on those breaching the legislation's requirements.

(viii)       There are detailed specifications regarding what a new home warranty is to cover, set forth in both the Act and its Regulation.

(ix)          Local governments are generally prohibited from issuing building permits for new homes unless and until the builder provides the permit issuer with proof that the builder has been registered under the Act and that a warranty provider has committed to issue a warranty for the home.

(x)           The rights originally given to the first buyer from a builder continue to be enforceable against the warranty provider and/or builder by the first buyer's successors in title, subject to the coverage time limitations specified in or for the original warranty.

(xi)          In addition to new self-contained detached or semi-detached homes, the legislation also applies to:

(a)          residential condominium units and the common elements of a residential condominium regime;

(b)          a manufactured home;

(c)           a former non-residential building that is converted to residential use(s); and

(d)          a multi-unit project, including a co-operatively organized project, but excluding life lease projects (although a life lease project builder would still have to get project specific permission to build the project and to not have to provide any warranties);

However, hotels, motels, dormitories, mobile homes, residential camps, and, personal care homes are exempt.  Also, builders of apartment buildings may apply for authorization to construct a rental apartment building without having to arrange for warranty protection.

The foregoing is a "bare bones" summary, and persons interested in this matter would be well advised to study the Act and its Regulation in detail.

Builders will find it difficult to attempt to deflect the application of the new rules from their operations.  In particular, note:

(1)          The Act makes it clear that builders, home owners and warranty providers are not entitled to contract out of the legislation's requirements, in whole, and generally speaking, even in part only; and

(2)          The Ontario Superior Court case of Tarion v 15181621 Ontario Inc. and Turner (judgment released October 27, 2015) is instructive.  Here, a builder refused to provide or honour a new home warranty and claimed that by its simply not registering as a builder under the Ontario legislation, the legislation should not apply to it.  The Court held that the builder was required to comply with the legislation, even though it had not registered.  Additionally, the Court held that the builder's sole shareholder, director and officer, being the "guiding mind" of the builder, was liable.  In fact, the Court stated that while both the builder and its sole shareholder "concede…that the alleged breaches of the Act occurred (and) they acknowledge that they violated the statute, they deny any legal responsibility for its consequences".

Given that the Act and its Regulation are obviously consumer protection legislation, it is unlikely that the government will change its mind and do away with the new rules.  Some legislative "tinkering" and/or a delay beyond January 1, 2018 as the effective commencement date may occur, but in all probability we will have the existing legislative regime - or something fairly close to it - in effect sooner or later.  As initially stated, affected parties should prepare for this.  

Some additional matters

(A)          a builder can build a new house without being registered provided that the builder will be using the home for "personal" use and gets "authorization" to do so.

(B)          re warranties themselves:

(i)            generally, a new home warranty is to cover defects in materials, labour and design for 12 months and material Building Code violations and defects re electrical, plumbing, heating and HVAC systems for 2 years and structural elements for 7 years;

(ii)           generally, a warranty provider can put dollar limits on claims made under its warranties, but the limits can't be less than $100,000.00.

(C)          warranties do not have to cover:

(i)            "normal" wear and tear;

(ii)           defects created by persons other than the builder;

(iii)          contaminated soil, unless the builder supplied it and knew - or should have known - of the contamination;

(iv)          failure by anyone - other than the builder - to comply with warranty requirements for appliances, equipment or fixtures manufacturers;

(v)           Acts of God ("pure" accidents which are usually capable of being insured);

(vi)          fire, explosion or smoke; and

(vii)        flooding or sewer backup.

(D)          there are rules re what a warranty provider can - and cannot - specifically exclude form a new home warranty.

(E)          commencement date of a new home warranty is the date upon which the owner/purchaser becomes entitled to occupy it.

(F)          the government is obliged to establish a "public registry".  Accordingly, anyone should be able to search/examine the registry and will find particulars of:

(i)            each new home built by a registered home builder for which a warranty provider has committed to provide a warranty;

(ii)           each home builder who is registered as such;

(iii)          each new home constructed by an owner/builder who has received authorization to do so; and

(iv)          each apartment building constructed without a new home warranty with confirmation that the building is not covered by a home warranty.

(G)         new home builders' and new home warranty providers' registrations are for one year and must be renewed annually.

September, 2001

The Manitoba Personal Property Security Act (the “PPSA”) is primarily designed to govern interests held in personal property which (i) secure the payment or performance of an obligation of the owner of the collateral affected, and (ii) are consensually created (i.e. by the collateral owner’s conscious intentional act).  PPSA “purists” (of which the writer is not one) were no doubt appalled by the extension of the PPSA’s regime to “true” (i.e. non-financing) leases of chattels for a term of more than (or capable of being for more than a term of) one year - although all Manitoba personal property security legislation from the beginning (September of 1978) always did apply to certain interests which did not meet the above criteria.  For example, the interest that a person obtains when he or she acquires an interest in an account or chattel paper, not as security for the payment or performance of an obligation, but rather in the nature of acquisition of ownership of the account or the chattel paper. 

Such “purists” will be further appalled by the fact that under Bill 33 of the Second Section of the Thirty-seventh Legislature of Manitoba, an amendment is proposed to the Manitoba Highway Traffic Act which will allow a financing statement to be filed in the Manitoba Personal Property Registry (the “PPR”) to give notice of the forfeiture of a motor vehicle consequent upon its involvement in the commission of certain offences, and, that pursuant to an amendment to The Family Maintenance Act, which is now actually proclaimed in force, a financing statement will be capable of being registered in the PPR giving notice of a statutorily created security interest in the personal property of a person indebted for maintenance, following any default in the payment of the same.  Note however that these are not the first governmental inroads made into the security interest regime provided for under the PPSA; for example, the government previously gave itself the power to acquire a security interest in a motor vehicle (and to file a financing statement in the PPR with respect to the same) to secure payment of certain fines owing by a person. 

The proposal under the Highway Traffic Act provides that once a financing statement giving notice of a forfeiture is registered, any subsequent transfer of the vehicle or any subsequently created security interest in the vehicle “is void upon forfeiture of the vehicle…”  The arrangement contemplates that the government can first file a financing statement against a vehicle before conviction, and then subsequently, if and when a conviction is obtained and the actual forfeiture occurs, the result is that the government obtains the vehicle free and clear of any interest acquired in it which arose between the time of such registration and the time of conviction for the offence.  The proposal also provides that if the vehicle was damaged during commission of the offence, insurance proceeds must be paid to the government pending the outcome of proceedings arising out of the offence. 

The statutorily created security interest under The Manitoba Family Maintenance Act will, upon registration in the PPR by the government on behalf of the claimant, have priority over any other claim or right in any or all of the property or assets of the person in default in paying maintenance, whether created or arising before or after the default, excepting only for:

(i)            a purchase money security interest perfected (most typically, by way of registration in the PPR, but this could also include perfection by possession) before the government files the maintenance claim financing statement; and

(ii)           a purchase money security interest arising after the government has filed the maintenance claim financing statement, provided that the purchase money security interest creditor registers its financing statement no later than 15 days after the debtor obtains possession of the financed collateral.

Some questions arise from the language of these new Family Maintenance Act provisions:

1. The legislation says that upon registration of the maintenance claim financing statement, the security interest thereby created “is a lien and charge on the property and assets of the person required to pay maintenance…”  Clearly, such lien and charge would apply to the property and assets of the debtor existing at the time financing statement is registered, however, does it extend to subsequently acquired personal property?  One would think that the intent of the Legislature was to attach both present and after acquired property, however, this is not explicitly stated. 
2. The legislation states that the security interest secures arrears of maintenance which exist at the time of registration of the maintenance claim financing statement and arrears of maintenance which accrue after that financing statement is registered.  If a person obligated to pay maintenance has a history of going into - and out of - default in payment of his or her obligations, will the government keep its original maintenance claim financing statement continuously registered indefinitely, even during periods of time when the debtor happens to have paid up his or her arrears?  Related to this question is whether or not a debtor who has paid off all maintenance arrears is entitled to require a discharge of the maintenance claim financing statement.  Under the PPSA a debtor in a registration for a “normal” financing statement is entitled to require a discharge of the financing statement when the obligation secured has been paid off or satisfied.  In this regard, although these new provisions of the Family Maintenance Act say that a maintenance claim security interest is “deemed to be security interest under the Personal Property Security Act”, and that the official who registers the financing statement in the PPR on behalf of the maintenance claimant is “deemed to be a secured party under the Personal Property Security Act, and the person in default is deemed to be a debtor under that Act”, the legislation does not say that the maintenance claim security interest is “subject to the provisions of the Personal Property Security Act”, or words to that effect.

If, once a person has gone into arrears of the payment of maintenance and a financing statement is accordingly registered against him or her, and the government’s policy is to keep the financing statement registered indefinitely, then the debtor’s ability to access credit may be permanently reduced or eliminated. 

August 2008

Lawyers familiar with real property mortgage security will be aware that where a debtor, being the owner of an interest in real property ("Realty"), promises its creditor that the debtor will provide the creditor with a mortgage or charge against the Realty, such promise is treated as creating an immediately existing (security) interest in the Realty.  That is, a promise is treated as being a kin to the creation of a mortgage charge even before the debtor - at some point in the future - fulfills its promise by providing an actual mortgage charge in favour of the creditor.  Such immediately created interest in the Realty is frequently referred to as a species of "equitable mortgage".  As such, the making of such promise by the debtor is sufficient to justify and support the filing of a caveat against the debtor's title, such filing thereby establishing the priority of the creditor's "equitable mortgage" thus created.

But what about a situation where a debtor owning real property promises its creditor that the debtor will not mortgage, charge or create any similar security interest in the Realty?  Does such (negative) promise, often called a "negative pledge", create an immediate interest in land in favour of the creditor sufficient to entitle the creditor to register a caveat against the debtor's title?  The writer is aware of some solicitors who believe that a negative pledge creates an immediate interest in land sufficient to justify the registration of a caveat, and, that in the past, the Manitoba Land Title System has on occasion permitted the filing of caveats based on negative pledges. However, it is the writer's view that a negative pledge - without more - does not create an interest in land, thus eliminating the possibility of a creditor filing a caveat against the debtor's title; additionally the writer has been advised that the Land Titles system will not currently accept a caveat based on a negative pledge.  This is not to say that a negative pledge is an invalid undertaking between the parties to it - it is a legitimate covenant (or perhaps contractual undertaking) between the creditor and the debtor.  A negative pledge is sometimes used where the breach of the covenant by the debtor allows the creditor to accelerate repayment in full of the debtor's indebtedness, with the consequent entitlement of the creditor to commence to realize its real and/or personal property securities.

Note the writer's use of the words "without more" above. If a negative pledge is combined with a promise by the debtor to actually provide mortgage security in favour of the creditor at some point in the future, such an arrangement, or at least the part comprising the promise to provide the security at some point in the future, would constitute an interest in land caveatable by the creditor against the debtor's title.  But the creditor and its solicitor must be very careful in the wording they employ in this situation; if the debtor's promise is to provide mortgage security to the creditor upon the creditor making a demand to receive such security, such a promise would not be an interest in land, unless and until the creditor actually demanded that the mortgage security be provided to it.  On the demand being made, an interest in land would arise and the creditor could then file a caveat, although if the mortgage security was forthcoming after the demand was made, registration of the actual mortgage security would be sufficient (in most instances) without the creditor having to file a "preliminary" caveat.

Given the foregoing, a creditor would be well advised to combine a negative pledge with a promise by the debtor to provide mortgage security against the debtor's Realty by some specified deadline (presumably not too far in the future).  If the deadline arrived and the creditor felt sufficiently comfortable in continuing the existence of the debt without the acquisition of actual mortgage security, the creditor could agree to extend the time by which it had to receive mortgage security to some (again not too far in the future) new deadline date.  However, such an arrangement might leave the creditor open to the argument that the priority originally established by the creditor's caveat becomes lost upon the expiry of the original promise and that the creditor should be obliged to discharge its original caveat and file a new one based on the "extended promise".  In this situation, it is arguable that the priority of the "extended promise"  (ie as an interest in the debtor's Realty) would be subordinate to all claims and interests against the Realty which have arisen between the filing of the original promise's caveat and the filing of the creditor's new caveat giving notice of the "extended promise".

March 2011

It is generally understood that where a lender takes a security interest in present and after-acquired goods which are - or which may in the future become - affixed to real estate, and the goods are not what are defined as "building materials" in Section 1 of the Personal Property Security Act ("PPSA"), to establish and protect the lender's priority in such affixed goods, the lender should both register a financing statement (describing the affected collateral) in the Personal Property Registry and additionally file a PPSA (Fixtures) Notice against the title to the relevant realty.  This is prudent - and I believe the normal - practice for situations where lenders are taking both a real property mortgage and a personal property security agreement from the debtor.  The rational for registering both a financing statement in the Personal Property Registry and a fixtures notice against the title to the relevant realty was explained in the Law Society of Manitoba publication “Highlights of the New Personal Property Security Act” published October 26, 1999.  The publication states that “There are special filing and priority rules regarding fixtures that will be covered later in this paper.  Those provisions act to reverse the common law rule that goods affixed to land become real property and are governed by real property laws.”  The paper goes on to state that “Due to the fixtures priority rules in the PPSA possibly dealing with claims of mortgagees of the land, there is a potential problem due to the PPSA priority not meshing with the priority rules under other legislation affecting competing land claims”.  The footnote for that statement references The Real Property Act and The Mortgage Act of Manitoba.  A review of the following provisions of the MPPSA supports this position:

(a)          Section 1 which contains definitions of "fixture", "goods", "personal property", "collateral" and "security interests";

(b)          Section 3(1)(a) which spells out what the PPSA applies to;

(c)           Section 36 which mandates that a secured creditor should register a PPSA (Fixtures) Notice to establish and maintain the creditor's priority with respect to fixtures; and

(d)          Section 69(2), which, in effect, provides that where there is a conflict between the PPSA and any other provincial legislation (other than consumer protection type legislation), the conflict is to be resolved in favour of the PPSA.

In other words, by virtue ofManitobahaving codified the law as it relates to the perfection of security interests in fixtures, one can no longer rely upon the common law rule that registration of a real property mortgage automatically attaches to goods that are, or in the future may become, fixtures.

For the reasons outlined above, where the lender is taking only a personal property security agreement which extends or could extend to fixtures, the lender should also register both a financing statement in the Personal Property Registry and a PPSA (Fixtures) Notice against the relevant realty.  But what about the situation where the lender takes only a real property mortgage and not a personal property security agreement?  On the basis of the general (or "common" law), one would reasonably expect that the mortgage - unless by its terms it expressly excluded affixed goods - would "automatically" include goods which are (or in the future become) fixtures.  Following this line of reasoning, one would expect that upon due registration of the mortgage, it should not be necessary to do any further registrations.  However it is this writer's view that counsel should in fact go further and file both a financing statement in the Personal Property Registry (which describes the present and after-acquired goods affixed/to be affixed to the subject realty), plus, based on such Personal Property Registry registration, additionally register a PPSA (Fixtures) Notice against the title(s) to the subject realty.

Frankly, this situation calls out for reform, and it would behoove the provincial government to amend one or both of the PPSA and the Real Property Act to make it clear that due registration of a real property mortgage which does not specifically exclude present and/or after-acquired goods affixed/to be affixed to the mortgaged realty, should be sufficient to establish and maintain the mortgagee's security priority in fixtures.  As to what that priority should be, the writer believes that once a real property mortgage has been duly registered, that should establish (subject to Section 17 of the Manitoba Mortgage Act), the mortgagee's priority for the mortgage's charge against both the real estate other than fixtures and for fixtures.  That priority should apply to goods which were already affixed to the realty when the mortgage was registered.  As to goods which become affixed after the mortgage has been registered, the mortgage should also have priority over same, subject however to "super priority" rights which should be given to purchase money financiers.

November 2014

Readers of my previous paper (the "Previous Paper") on this topic will recall that it contemplated a fairly common situation in which a farming couple wished to turn over ownership of their farm property to their offspring, but retain - during the balance of their lives - ownership of their home without retaining ownership of any of the land underlying the home.  The motivation for seeking out such an arrangement is to avoid the time and expense typically incurred were the retiring farm couple to transfer ownership of their farm property to their offspring (or to a corporation owned by their offspring), and then lease back the home (together with either the land immediately underlying the home's footprint, or some slightly larger area of land, in any event, something less than 80 acres.  Under The Manitoba Planning Act (the "Planning Act"), approval for such a lease arrangement would be required to validate the lease and allow the couple to caveat the affected land with notice of their leasehold rights.  The Planning Act exempts a long-term lease where the leased land is at least 80 acres, but in the situation envisaged, the parties do not wish to lease that great an area.  The Planning Act also exempts a lease of "floor space", but it is arguable as to whether or not a lease of the whole of the house, excluding the land immediately underlying the house's footprint, would be considered to be a lease of floor space in a building.

In the Previous Paper, the writer attempted to point out that, although conveyance of ownership of a house excluding the underlying land did not seem to be what the Legislature intended when it enacted the Planning Act's subdivision control rules and requirements, nevertheless, a strict reading of the legislation and a strict application of how the common law views an improvement to land, would suggest that such a conveyance (of a house alone) would be prohibited under the Planning Act, unless subdivision approval was given thereto.

It has been recently pointed out to the writer that there is probably another legal impediment to attempting to create a valid and enforceable conveyance of ownership of a house alone (excluding the underlying land).  This has much to do with the modern statutory framework of land ownership, in particular, as provided for in The Manitoba Real Property Act.  As noted in the Previous Paper, Canadian Courts have from time to time recognized dispositions of ownership of improvements to land made or provided to be made without a concurrent disposition of the ownership of the underlying land.  In other words, it appears to be theoretically possible to treat an improvement to land as a chattel, or at least to be able to convert the nature of a land improvement, from "real property" to "personal property".  Incidentally, such an arrangement should be contrasted with the situation where the owner of a building and the underlying land physically removes the building from the land and has it moved to another location where it is placed on and thus forms part of the land at the new location; this is an actual and physical separation of an improvement from the underlying land, but that is not what I was dealing with in the Previous Paper.  Where the land improvement, ownership of which has been conveyed separately from the underlying land, physically remains on the underlying land, there is simply no legally established public registry office in which the transferee of ownership of the building can record notice to "all the world" that the building is now under ownership which is separate from the ownership of the underlying land.  The (new) owner of the building would not be able to record a caveat against the underlying land owner's title giving notice of the building owner's rights and interests, simply because the building owner's rights and interests are rights and interests in a chattel, not in land.  So far at least, The Real Property Act does not provide for a system of titles to be issued to the owners of buildings only.

With there being no mechanism for the owner of a building, notionally separated from the underlying land, to give notice to third parties dealing or who may deal with the owner of the underlying land, of the building owner's rights and interests, it is arguable that a Court would give priority to third parties acquiring rights and interests in the underlying land from the underlying land owner, over the building owner's rights and interests.  The claims of the underlying land owner's mortgagees, lien claimants and bankruptcy trustee come to mind.  It may also be "telling" that the Legislature felt it necessary to statutorily intervene in real property law in order to validate dispositions of condominium units and air space parcels, separated from the ownership of the land underlying a condominium or air space parcel project.

It is the writer's view that the "real" problem in the retiring farm couple situation which the writer postulated in the Previous Paper is not the land law problems discussed above, but rather the lack of an unambiguous exemption in the Planning Act so as to permit a retiring farm couple to be able to long-term lease their home, with the land underlying the home and reasonably adjacent thereto, being less than 80 acres.  Until an appropriate legislative amendment is made to the Planning Act, counsel should be very cautious in encouraging their clients to enter into arrangements conveying ownership of a home without including the underlying land.

July 2019

Those who are familiar with the writer's various "case comments" and related papers will recall that a number of them have dealt with Section 8 of the Interest Act (Canada) (respectively, "Section 8" and the "Act").  A recent case dealing with Section 8 is Walia v. 2155982 Ontario Inc., 2019 ONSC 1059, judgement issued February 13, 2019 (hereinafter, the "Walia Case").  The Walia Case not only dealt with a facet of Section 8, but also considered what is commonly called the "indoor management rule".  Thus the Walia Case is a good source of guidance for commercial practitioners who frequently have to deal with both of these issues.

1. Section 8 of the Act.  2155982 Ontario Inc. as mortgagor (the "Mortgagor") mortgaged some Ontario realty to Mr. Walia as mortgagee (the "Mortgagee") with the secured indebtedness carrying interest at a rate of 12% per annum.  The parties agreed that (to quote from the judgement) "…upon default or if the mortgage is not paid in full by the due date…interest will accrue at the rate of 21% from the date of default or the due date until the balance is paid in full".  Both parties acknowledged that the stipulation for interest "upon default" at the (increased) rate of 21% ran afoul of Section 8.  But the Mortgagee argued that the stipulation for the increased interest rate "if the mortgage is not paid in full by the due date" did not run afoul of Section 8.  Section 8 refers to a post-interest rate increase which is triggered by a mortgagor's default, and should not invalidate an increase in the interest rate merely upon maturity of the secured debt.

The Court disagreed and posed the question: "Does the term "arrears" in the case of a mortgage in default apply only to missed monthly payments or does it also apply to the entire mortgage amount if not paid when due?".  The Court concluded that when a mortgage secured debt has matured, and it is not then - virtually immediately - repaid in full, the outstanding balance - which would usually be the entire outstanding balance - is "in arrears".  Thus what the parties had agreed to was contrary to Section 8.

However, readers should keep in mind the fact that The Supreme Court of Canada (in Krazel Corp. v. Equitable Trust Co., 2016 SCC 18) held that "…a rate increase triggered by the passage of time alone does not infringe Section 8…".  Presumably it is - and continues to be - permissible for the parties to contract for a rate at, say, 5% per annum for, say, the first two years of a mortgage secured loan's term, and then stipulate for an increase in the interest rate to, say, 8% per annum, for the third and following years of the term.

1. Application of the "Indoor Management Rule".  The Mortgagor and the Mortgagee had entered into what is commonly called a "commitment letter" pertaining to the financing secured by the mortgage.  A "commitment letter" is an offer of financing made by a lender to a borrower which, when accepted or agreed to by the borrower, becomes a form of loan agreement (hereinafter, a or the "Loan Agreement").  In the Walia Case scenario, the mortgagee had signed and one of two signatories of the corporate mortgagor had signed.  The mortgagor argued that because the corporate mortgagor's "internal" rules required a second authorized signatory to sign the Loan Agreement, the Loan Agreement was not duly executed, and thus not binding on the mortgagor.  The mortgagee counter-argued that based on the "indoor management rule", the mortgagee was entitled to assume that the mortgagor's "internal" corporate rules had been followed.  The classic judgement dealing with this concept was Royal British Bank v. Turquand, 119 ER 886.  The Court acknowledged the continuing validity of the indoor management rule, but pointed out that the rule "…was not intended to protect parties who knew or ought to have known that the person signing on behalf of the corporation did not have authority (or sufficient authority) to do so.".

The Court noted that in this situation, the mortgagee knew that a second signatory was required in order to entitle and obligate the mortgagor to become indebted/borrow funds.  Additionally, it was acknowledged that the lawyers for the mortgagor and the mortgagee were father and son and that they worked out of the same office space; the Court concluded that both lawyers must have communicated with each other on an ongoing basis.  Additionally, the Loan Agreement had been prepared by the mortgagee's lawyer "…at the (mortgagee's) direction, with a place for both (the two authorized signatories of the mortgagor) to sign.".  Further, the mortgagee had provided documentation pertaining to various transactions entered into by the mortgagor and the mortgagee, and in almost all cases, the documents were signed by the two (required) authorized signatories of the mortgagor.  As the Court stated: "The glaring exception was the (Loan Agreement).  It contained two signature lines, one for (the authorized signatory of the mortgagor who did sign)" with the other signature line having been left blank. Accordingly, the Court held that the mortgagee was not protected by the "indoor management rule".

The Walia Case suggests that:

(1)          If you choose to act for both parties to a transaction, you will most likely diminish both of your clients' potential ability to rely - where a dispute later erupts - upon the indoor management rule;

(2)          The current practice amongst experienced commercial practitioners is to require one or both of the following from the "other side":

(a)          a certificate or statutory declaration containing statements by a knowledgeable representative of the party making the statements therein which contain positive statements pertaining to the due authorization, due execution and due delivery of documents by that party; and

(b)          a legal opinion from counsel for that party which confirms due authorization, due execution and due delivery.

(3)          If counsel for one party to a transaction has actual knowledge - or arguably, constructive knowledge - that something may be "amiss" with respect to the other side's authorization, delivery and/or execution of its documents, that lawyer will not likely be able to rely on the "indoor management rule".  The writer would go as far as to suggest that if you and I are opposite counsel in a commercial transaction and I get one or more of a "comfort assurances" certificate or statutory declaration from your client and a legal opinion from you, but I know that one or more of the material statements in such documentation is incorrect - or I have reasonable suspicions as to the correctness thereof or it can later be proved that I should have had the knowledge of the inaccuracy of such statements - I would not likely be able to be able to rely on the indoor management rule.  In most cases, my knowledge - or lack of knowledge - is, from a legal perspective, fastened on to my client.

June 2016

The Canada Interest Act (the "Act") provides, in essence, that any arrangement or understanding whereby a debtor is obliged to pay a "fine, penalty or rate of interest" on real estate secured indebtedness which has the "effect of increasing the charge" on any arrears of the indebtedness (ie, upon or after default by the debtor) is prohibited.  The Section goes on to provide that "interest on arrears of interest or principal" may be charged/collected, as long as the interest rate is not greater than the rate payable prior to default.  Section 9 of the Act additionally provides that where a debtor has paid more than it is obliged to pay under Section 8, the excess is to be paid back or credited to the debtor.

A frequently occurring motivation for a creditor to wish to stipulate for a post-default rate of interest higher than the pre-default rate, is to induce the debtor to pay on time.  However, in enacting Section 8, presumably, Parliament concluded that, as a matter of public policy, it was inequitable or unfair to allow creditors to "penalize" their debtors for failure to pay on time.

In pondering the application of Section 8 to credit transactions, consider the following scenarios:

1. Scenario #1 - a creditor ("C") extends credit (say $100.00) to a debtor ("D") for 12 months.  "D" agrees to pay interest at 5% per annum until default, and after default, until payment is made in full, "D" is to pay 8% per annum.
2. Scenario #2 - "C" extends $100.00 credit to "D" for a term of 12 months.  "D" agrees to pay interest at 5% per annum for the first 11 months, and thereafter, to pay interest at a rate of 8% per annum until all indebtedness is fully paid.
3. Scenario #3 - "C" extends $100.00 credit to "D" for 12 months.  Interest is payable at 8% per annum, but, the parties agree that if "D" actually pays interest at 5% per annum and repays the indebtedness in full when it is due, then at the time of repayment in full, "C" will forgive the difference between 8% per annum and 5% per annum.  If payment is not made in full when due, then the interest payable would be 8% per annum both before and after default.
4. Scenario #4 - "C" extends $100.00 credit to "D" for 12 months. In addition to "D"'s obligation to repay the $100.00, "D" agrees to pay a "finder's fee" or a "processing fee" of $10.00 to "C" at the end of the 12-month period, so that "D"'s obligation is to pay $110.00 at or by the end of the term.  Additionally however, "C" promises "D" that if "D" makes payment in full by the end of the term, then "C" will forgive the $10.00 fee.
5. Scenario #5 - "C" extends $100.00 credit to "D" for 12 months.  No interest is payable by "D" during the term, but if repayment in full is not made by the end of the term, then "D" is obligated to pay interest, from and after default, at a rate of 5% per annum.
6. Scenario #6 - "C" extends $100.00 credit to D for 12 months.  Interest is payable at 5% per annum, both before and after default.  Part way through the term, "C" sells its debt claim against "D" to "X" on the basis that "X" will "step into the shoes" of "C" and be able to require "D" to pay back the debt (with interest at 5% per annum) by the end of the term.  However, "C" agrees with "X" that "C" will only receive (from "X" for the purchase of "D"'s debt) $75.00.  Thus, by the end of the term, "X" thus will have collected (assuming "D" pays in full when due) $100.00 plus 5% per annum over the 12-month term.  But, "X"'s rate of return will be higher than 5% per annum, because he was able to purchase the right to get $100.00 by paying only $75.00.
7. Scenario #7 - "C" extends $108.00 credit to "D" for 12 months.  No interest is payable by "D" during the term and no interest is payable beyond the end of the term where "D" does not repay on time.  However, if "D" pays in full at the end of the term, "C" will forgive and release its claim of entitlement for $8.00.

Does Section 8 prohibit any - or all - of these arrangements?  Recently (judgement rendered May 6, 2016) The Supreme Court of Canada, in the Equitable Trust Company case (hereinafter, the "Equitable Case") considered directly, and probably by implication, all of the above scenarios.

Based on the majority judgement (the majority consisted of 7 of the 10 judges sitting) in the Equitable Case, and considering the reasoning put forward by the majority, this writer believes that Section 8 of the Act would apply to the above-described scenarios as follows:

1. Scenario #1 - would prohibit.  This is a "black and white" case, and there should be no doubt here.
2. Scenario #2 - complies with Section 8.  However, where the higher rate of interest becomes payable just before the end of the term (say one or two days before the maturity date), Section 8 may prohibit the arrangement on the basis of "substance over form".
3. Scenario #3 - would prohibit.  This is a "discount type" arrangement, and the Court emphasized that Section 8 is not restricted to the charging of interest post-default in the usual sense of the word "interest".  It also applies to discount incentives.
4. Scenario #4 - would prohibit.  This too is a "discount type" arrangement, or at least sufficiently analogous to one that it would be prohibited by Section 8.
5. Scenario #5 - would prohibit.  This contradicts what other Courts have felt to be permitted under the Section 8 restrictions, such arrangements being typically referred to as "zero rate" loans.
6. Scenario #6 - complies with Section 8.  The writer mentions this example simply to distinguish the discount transaction which exists between the creditor and the creditor's assignee, not between the creditor and the debtor.  The arrangement does not in any way change what the debtor is obliged to pay on account of its debt, whether before or after default.
7. Scenario #7 - complies with Section 8.  In this scenario, not only is the creditor not getting any rate of return, it is (arguably) agreeing, in advance, to take a loss on payment.  Commercially and realistically, it is almost impossible to visualize such an arrangement being entered into.

In coming to its conclusion in the Equitable Case, the Court stressed that Section 8 refers to what the effect of an arrangement is.  Where the agreement provides an inducement to the debtor to perform on time and where the debtor fails to perform on time, the debtor becomes obligated to pay value - in addition to the principal balance - in excess of what the debtor would have had to have paid if the debtor had performed on time, the arrangement is prohibited by Section 8.

The dissenting judges pointed out that if discount type inducements are not legally permissible, arrangements which may actually benefit debtors will be unavailable to them.  This writer agrees with the dissenting minority, but, with respect, it appears that the majority judges correctly interpreted the meaning of Section 8, based in particular on the evidence before them, including, in particular, the principles of statutory interpretation.  Accordingly, it is this writer's view that Parliament should amend Section 8 to narrow its application, and in particular, to permit the entering into and the offering of bona fide discount and similar inducements to perform on time.

If and when Parliament does consider this matter, the legislators should keep in mind that the prohibition in Section 8 only applies to real estate secured debt.  The Section was based on a pre-statutory equitable principle going back several hundred years to when most wealth was represented by real estate, not - as is the case today - equipment, inventories and investment property, all of which can secure debt which calls for post-default higher interest rates and other "penalties" (subject of course to the "penalties" or higher interest rates not being unconscionable).  At the very least, Parliament should consider amending Section 8 so as to remove its application from non-residential property secured loans and/or non-consumer credit transactions.

In attempting to navigate around the dangers which may be imposed - sometimes unexpectedly - by the application of Section 8 to credit transactions, consider the following:

(a)        Although unusual, a borrower, a lender (or other credit grantor) and a guarantor (of the borrower's obligation) could enter into an arrangement (with the borrower pledging real estate to secure its direct borrowing obligation) whereby after default by the borrower, and upon the lender making demand of the guarantor, the guarantor's obligation would be to not only pay the principal debt, but also to pay interest at a rate higher than the rate payable by the borrower on its debt obligation.  Would this arrangement run afoul of Section 8?  It would probably depend on whether or not a Court concluded that the guarantor's obligation was so closely related to (or derived from) the borrower's obligation, that Section 8 must apply both to the borrower and to the guarantor.  If the guarantor's obligation was replaced by an indemnification obligation, it appears to this writer that it would be less likely for Section 8 to be held to apply to the indemnifying party.

(b)        Where a creditor has obtained a real property mortgage from a debtor which, by its terms, secures all present and future obligations, limited only to the maximum principal or face amount of the mortgage (sometimes called a "multi-purpose mortgage" or a "collateral mortgage"), and one or more of the debts thereby secured contravene Section 8, with one or more of the other debts not being in contravention of Section 8, this can present a problem to the mortgagee.  It is the writer's practice to include a provision in this type of mortgage to the effect that where any debt secured by the mortgage by its terms contravenes Section 8, then either the mortgage doesn't secure that debt, or, it secures the debt, but only to the extent of non-contravention.  This may well be useful where one or more of the debts secured by the realty mortgage are also substantially secured by personal property security interests.  The rule in Section 8 does not apply to debts secured by charges on personalty.

September 2018

Readers of the writer's recent paper entitled "LENDERS AND THEIR LAWYERS: BEWARE OF SECTION 4 OF THE CANADA INTEREST ACT" will be aware of the recent (January 10, 2018) Ontario Superior Court of Justice's decision in the Solar Power Network Inc. v. ClearFlow Energy Finance Corp. case (the "Solar Case"). That Court held that Section 4 of the Interest Act invalidated certain interest-like claims of a creditor, notwithstanding that the interest payment, calculation and determination provisions of the documentation between the parties contained provisions which were very broadly utilized in Canadian credit transactions.  Fortunately, the Trial Court's decisions were - in part - overturned by the Appeal Court.

To recap the Trial Court's confirmation of the facts in the Solar Case, Solar Power Network Inc. and related entities were renewable energy companies specializing in installing solar panels in commercial, institutional and industrial rooftops.  The respondent ClearFlow Energy Finance Corp. was a project finance company that provided financing to the solar energy and clean technology sector.  And that was precisely the relationship between ClearFlow (as "Lender") and Solar Power Network (as "Borrower").  The Lender provided a number of separate loans (or financings) to the Borrower to enable it to obtain and install solar power equipment.  The loans were initially intended - by both parties - to be of a short term nature, with the Borrower arranging for longer term more "conventional" financing in due course.  The loans were documented in various ways, including loan agreements and promissory notes, but, as observed by the Court, regardless of the form of the documentation, each loan provided for three different "components" of remuneration payable by the Borrower in connection with the making of the loans, namely:

(i)            An interest rate which was usually set at 12% per annum, compounded and calculated monthly, and 24% per annum following default (the "Base Interest").

(ii)           An administration fee charged at the outset of the loan transaction calculated as a percentage of the principal amount of the loan advanced.  If a loan was not repaid on time, then the initial administrative fee was tacked on to the principal balance of the loan and carried forward as an extended loan, with a new administrative fee being charged on the total amount of the extended loan.  These fees are referred to herein as the "Administration Fees"; and

(iii)          A discount of 0.003% of the outstanding principal balance of a loan, calculated on a daily basis for each day that the loan was outstanding.  If the discount fee had not been paid when the initial term of the loan had expired, the outstanding balance of the discount fee applicable to the loan during its initial term would be added on to the loan and carried forward to form part of the principal amount of the extended loan, to which a further discount fee would be applicable.  These discount fees are referred to herein as the "Discount Fees".

The Trial Court concluded that:

(a)          The Discount Fees were interest within the meaning of Section 4, but the Administration Fees were not interest.

(b)          Although the Administrative Fees provisions were not subject to Section 4 and the Base Interest did not contravene Section 4, the fact that the provisions dealing with the Discount Fees breached Section 4's requirements "tainted" the Base Interest (as well as the Discount Fees) with the result that Section 4 applied so as to require reduction of the Base Interest to 5% per annum (the "default rate" where there is non-compliance with Section 4).

(c)           The relatively simple to state and simple to understand formula typically used by lenders to specify a rate of interest based on a one year period when the contractually stipulated rate is for a unit of time less than one year was not sufficient compliance with the disclosure requirements of Section 4.

(d)          Proper disclosure under Section 4 requires that the lender provides rate information which takes into account the compounding of interest.

The Ontario Court of Appeal agreed with the lower Court's view that the Administration Fees were not interest and that the Discount Fees were interest.  But it took exception to the lower Court's conclusion that the typical annualizing formula found in many Canadian business transaction documents was not sufficient disclosure.  This should be comforting to creditors and their counsel given that, had all of the trial Court's conclusions been upheld, it would have potentially invalidated a large number of interest calculation and payment provisions frequently found in credit transaction documents.  It was no coincidence that The Canadian Bankers' Association became an intervener at the Court of Appeal hearing.

Of particular interest were the following Appeal Court's holdings:

1. The Trial Court's conclusion that the Administration Fees were not interest and that the Discount Fees were interest was correct.  Just because the parties call a fee something other than "interest", it will in law be interest if, in the circumstances and considering the "purpose" of the fee, it carries the hallmarks of interest.  Specifically, the Discount Fees were "compensation for the use or retention of money, related to the principal amount owing and they accrued over time".
2. The commonly used "annualized formula" to produce a rate or percentage "equivalent" to the less than annualized stated rate was sufficient for the disclosure purposes of Section 4.  Thus an initially stated rate of, say, 2% per month is properly disclosed under Section 4 by additionally describing the rate as 24% per annum. Or, frequently, a rate stated at 2% for a 360 day year is equivalent to 2% times 365/360.
3. Although using these formulas does not take into account the effect of the compounding of interest (typically, monthly in arrears), this is about all that the creditor can do in those situations where compounding may occur, but it is impossible, at the outset, to know exactly when - and how frequently - the compounding will occur.  In the Solar Case scenario, and as stated by the Appeal Court, "…whether the Discount Fee would ever compound was entirely contingent on Solar Power requesting and ClearFlow granting an extension of the loan at the end of its term.  It was therefore impossible for the Loan Agreement to state an equivalent rate or percentage that took into account compounding of the discount fee".
4. The fact that there was no annualizing formula stated for the Discount Fees did not "taint" the provisions for payment of the Base Rate, so as to reduce it to 5% per annum.  The Base Rate had an annualizing formula which complied with Section 4.  In this case however, the matter was academic because the annualized rate for the Discount Fees was less than 5% per annum.

The Appeal Court noted that the parties in the Solar Case were experienced and business-sophisticated parties who both engaged counsel.  In applying the conclusions of the Court to future transactions, lawyers should keep this salient fact in mind.  In any event, and on the whole, it is refreshing to see a Court make the following statements:

(a)          "…consideration of all relevant principles of statutory interpretation indicates that a different interpretation, more in line with modern commercial reality and the expectations of the parties, is appropriate";

(b)          "Courts have repeatedly departed from the "plain meaning" (of statutory language) when interpreting legislation to avoid absurd results"; and

(c)           "(in the dealings between the parties in the Solar Case) there was plainly no attempt to subvert the law".