Jason Bryk 

Phone: 204.956.3510

Fax: 204.957.0227

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January 2020

In the past, it was legally impossible for a corporation to be a party to an agreement where the agreement was entered into on behalf of the corporation prior to the incorporation of the corporation. So if "A", being a developer and promoter of an anticipated business venture, entered into a contract with "B" in connection with that business venture, and "A" did so on behalf of - and in anticipation of "A"'s incorporation of - his corporation, notwithstanding the subsequent incorporation, it could not be bound by - or obtain the benefits of - the contract*.

This changed when in 1976, when the Corporation's Act (Manitoba) (the "MCA") was amended to include what is now Section 14. This contemplates and provides for the validation of pre-incorporation contracts. In essence, Section 14 provides that:

(i)    a contract (which must be in writing) which is entered into on behalf of a yet to be created corporation, if adopted by the corporation within a reasonable time after it comes into existence, will bind the corporation and the corporation will be entitled to the benefits thereof;  and

(ii)   the person who entered into the contract on behalf of the yet to be created corporation will be personally bound by (and entitled to the benefits under) the contract immediately upon his/her/it entering into the contract, except where:

(a)  the corporation does in fact within a reasonable period of time after it has been incorporated, adopt the contract; or

(b)  the contract expressly provides that the person who entered into it on behalf of the corporation (prior to its coming into existence) is not to be bound by same (or to obtain the benefits thereof).

If a pre-incorporation contract is entered into by the anticipated corporation's promoter and the corporation does not come into existence within what would be considered a "reasonable" period of time in the circumstances, the promoter continues to be personally liable (and entitled to the benefits) under the contract.

Since its enactment, Section 14 of the MCA has been used many times by business promoters where the promoter wants to have his/her/its business venture owned and/or operated under a corporation (typically owned or controlled by the promoter), but where "commercial necessity" dictated the need to have the contract entered into before the new corporation could be created. Frequently, such pre-incorporation contracts specify that the promoter will have no "personal" liability upon the incorporation of the corporation and its adoption of the contract. There is nothing wrong with such a provision because it merely recites what the law states in Section 14. However, some pre-incorporation contracts simply stipulate that the promoter will have "no personal liability". In certain situations, this last-mentioned "no personal liability" provision may not go far enough to shield the promoter from the legal consequences of the promoter's acts and omissions done and made in the context of the contract and the relationship between the parties.

This type of dilemma - for a corporate promoter - was considered in the Ontario Court of Appeal judgment in Benedetto v. 2453912 Ontario Inc., 2019 OSCA 149, judgment issued February 25, 2019 (hereinafter, the "Benedetto Case"). In the Benedetto Case, a promoter signed an agreement to purchase real property, and in that agreement the promoter stipulated that he was buying "in trust for a company to be incorporated without personal liabilities". The promoter paid the seller a deposit of $100,000.00. Although not expressly stated in the Court's judgment, it can be assumed that the deposit was intended to be dealt with as follows:

(i)    if the deal closed, the deposit would be applied on account of the balance of the purchase price due on closing to the seller; and

(ii)   if the contract was repudiated - without legal justification - by the buyer (the promoter), the seller would be able to keep the deposit, as compensation for its loss of the bargain.

In fact, the promoter repudiated and did so before the corporation had come into existence and adopted it. Nevertheless, the promoter argued that the wording "without any personal liabilities" meant that he should be able to get back his $100,000.00 deposit. The Court disagreed. The Court pointed out that deposits paid under contracts perform two separate functions, namely those mentioned above. A deposit is both a mechanism for part payment of the purchase price and an "earnest" for the benefit of the seller whose function is to discourage the buyer from unilaterally and without justification reneging. Viewed in that manner, the making (or pledging) of a deposit should be considered as something separate from the remainder of the rights and obligations of the parties to a contract. The Court pointed out that in a situation like that of the Benedetto Case, to allow the promoter (the buyer) to get its deposit back on the basis that the promoter had no personal liabilities whatsoever in the situation would result in the aggrieved seller having no remedy whatsoever for the promoter's unjustified unilateral repudiation. That would have then an absurdity.

In effect, the Court held that there are two separate contractual relationships involved.  One is between the buyer and the seller pertaining to the agreement of purchase and sale.  The other is between the promoter and the seller pertaining to the deposit in the deposit's capacity as a pledge or earnest.

Counsel should consider the Benedetto Case when engaged by a pre-incorporation promoter to advise on a pre-incorporation contract. Clear wording will be needed in order to enable the promoter to obtain the return of the deposit where the promoter repudiates or where the corporation doesn't come into existence within a reasonable period of time in the circumstances or where the corporation does not adopt the contract within a reasonable period of time. In so advising the promoter, counsel should also bear in mind that a potential counterparty (typically a seller) and its counsel, if they have an understanding of the Benedetto Case, will almost certainly reject any attempt to enable the promoter to get a full - and perhaps even a partial - return of the deposit in this scenario.


December 2003

OnFebruary 19, 2002, the Act and its regulation (MR 28/2002) came into force.  The objective of the Act is to eliminate or suppress certain specified activities in and about properties, including in particular, but not exclusively limited to, residential properties.  These include use of a property for the consumption or sale of alcohol illegally, the consumption and sale of other drugs, and prostitution and related activities.  Provision is made for the making of complaints concerning such uses to a government official (the “Director of Public Safety”), the making of applications to the Court of Queen’s Bench for orders, and the making of such orders.  Orders may require the vacating of a property and a prohibition on any re-entering or re-occupying of the same, the termination of a tenancy and the closing up of a property for a specified period of time.  Lawyers acting for the owner a property which may become subject to the Act, potential purchasers or mortgagees of a property and their respective lawyers should be aware of the Act and its potential impact on the property.  Section 38 imposes obligations of disclosure on an owner whose property become subject to an application for an order under the Act (or whose property becomes subject to such an order) where the owner is selling or leasing the property.

            Unless and until the provincial government establishes an easily accessible and low-cost mechanism to enable lawyers to determine, with respect to a particular property, whether or not a complaint has been made, whether or not an application has been made and whether or not the Court Order has been made, it would be appropriate for a lawyer advising his or her client with respect to a contemplated transaction with respect to the client’s property as to the adverse impact that the Act could have on the property and on the transaction.  At this point in time, the government does not appear ready to establish such a mechanism although it appears likely that when a Court application is made, the name of the property owner will be included therein so that lawyers may obtain some information by searching in the Queen’s Bench Office. 

            However, such a search may not be entirely reliable and it certainly would not indicate whether or not a complaint had been made, or whether or not there was the possibility of a complaint based upon inappropriate activities being conducted in and about the property.  It is our understanding that even when a Court Order is made under the Act, there is no mechanism to have it registered against title.

            Given this situation, it is recommended that:

  1. A lawyer acting for a property owner who is consulted with respect to a contemplated real estate transaction make himself or herself sufficiently familiar with the Act so as to be able to advise as to the possible adverse effects of the Act.  This may be particularly critical in the case of a property owner who does not reside on site and has little knowledge of what’s going on at the property.  It might be useful for lawyers acting for owner/vendors to have a standard form letter to hand out to their clients which outlines (with as little “legalese” language as possible) the possible impact of the Act on the owner and any transaction he or she is contemplating.  It is appreciated that with respect to some owners and their lawyers, the lawyer may feel embarrassed to raise the spectre of the Act in relation to the client’s property given the moral opprobrium usually associated with the specified uses stipulated in the Act.  This embarrassment could perhaps be eliminated, or at least minimized by advising the client that providing advice on this matter is required by your firm's policies.
  2. Because it is arguable that the usual promise in a purchase and sale contract to the effect that the seller promises the purchaser that the property will be transferred “free and clear”, would not cover the potential adverse effects of the Act, lawyers are encouraged - where they have the opportunity to advise clients as to the contents of purchase and sale agreements before they are signed - to include in their clients’ contracts, representations negativing the application of the Act to their clients’ properties.  This could take the form of a series of representations along the lines of what is suggested below to be included in the owner/vendor’s statutory declaration, or perhaps it could be as simple as a statement to the effect that “No activities are being conducted in and about the property which has resulted, or which would, could or might result in an order being made under the The Safer Communities and Neighbourhoods Act (Manitoba) with respect to the property”.
  3. Lawyers acting for a property owner (whether as vendor or mortgagor), lawyers acting for purchasers and lawyers acting for mortgagees require the property owner to include in the usual vendor’s statutory declaration as to possession, or obtain a separate statutory declaration from the owner which includes the following statements:

(a)          That the owner is not aware of and has no reason to believe that the property is being used for any of the "specified uses" as defined in Section 1(1) of the Act (the descriptions of the "specified uses" should be set out, virtually verbatim from the definition in the Act, rather than the statement being merely something like "I am not aware of and have no reason to believe that the property or any portion or portions thereof are being used for any "specified uses" as defined in The Safer Communities and Neighbourhoods Act (Manitoba)”.  The reason for this is because many (if not most) property owners will not be aware of the list or the whole list of “specified uses” in Section 1(1).

(b)          That the owner is not aware of and has no reason to believe that a complaint concerning the property or any portion or portions thereof has been made under the Act alleging that the property's community or neighbourhood is being adversely affected by reason of the property being used for one or more "specified uses" aforementioned.

(c)           That no application has been made to the Courts for a community safety order under the Act pertaining to the property or any portion or portions thereof; and

(d)          That no community safety order has been made under the Act pertaining to the property or any portion or portions thereof.

Needless to say, if the owner advised that he or she could not then make one or more of the above statements because such statements would not be correct, the statements would have to be modified to reflect the reality, or at least the reality as the owner then understood/knew it.

            The statutory declaration should also include a statement by the owner to the effect that its contents - or at least, and in particular, the above proposed statements pertaining to the Act - are to be relied upon (the owner specifically acknowledging the same) by all of the owner's solicitor, the potential purchaser, the potential mortgagee of the purchaser and the respective solicitors of the potential purchaser and the potential mortgagee of the purchaser.  Such a statement, in particular that the owner/vendor’s own solicitor can rely on the statutory declaration, is not usual, but it provides some degree of comfort to the owner’s lawyer that he or she has at least advised the client about the possible impact of the Act.


September 2012

With the availability of title insurance, which permits a virtual immediate release of the proceeds of sale on the closing of a real estate purchase and sale transaction (such availability being of relatively recent vintage), and, with purchase financing lenders who are prepared to permit the lawyer acting for a purchaser and such lender to release financing proceeds to the seller's lender virtually upon closing (this lender practice having, amongst some lenders at least, gone on for quite some time), certain problems have arisen for the lawyers involved.

"Traditionally", on a real estate sale and purchase closing, the purchaser's lawyer pays the "adjusted" balance to close to the seller's lawyer on the understanding that the transfer of land provided by the seller's lawyer will, when registered by the purchaser's lawyer in series with the purchaser's new mortgage financing documents, result in title being recorded in the purchaser's name(s) subject only to the purchaser's mortgage and any other registrations which the purchaser has agreed to accept.  Following closing (with possession typically having been provided to the purchaser), and pending the Land Titles system processing the registered documents leading to the issuance of a new title, the matter rests somewhat "in abeyance".  Nevertheless, during this abeyance period, the purchaser has the benefit of possession and certain adjustments in its favour from and after the closing date.  Yet the seller's lawyer and in particular the seller, do not yet have the full consideration for which the seller bargained in the purchase and sale agreement (the "Agreement"), pending completion of registrations and the purchaser/mortgagee's lawyer reporting to the mortgage lender, obtaining the mortgage loan monies and sending them to the seller's lawyer.  The seller is compensated for this delay in payment by the purchaser agreeing to pay and ultimately paying interest on the unpaid balance of the sale price to the seller.  This Land Titles system processing delay (commonly called the "gap" period) and the purchaser's obligation to compensate the still unpaid seller for this delay are recognized in the standard form of residential property offer to purchase mandated for use by real estate brokers in Manitoba.  That form of Agreement specifies that pending the receipt of the purchase price represented by the purchaser's new financing, the purchaser will pay the seller interest on that balance at the same rate that the purchaser is paying to its mortgage financier.

The obligation of the purchaser to pay such interest ceases when the seller's lawyer receives the balance of the funds (originating from the purchaser's mortgage financier).  The underlying understanding and rationale for this has usually been that with the seller's lawyer having received what he/she is supposed to receive, and, with the purchaser having received what it has bargained for, the sale proceeds can then be paid by the seller's lawyer to the seller as the seller's unconditional own property.  Also, at this point in time, the seller's lawyer is then free to pay out the seller's "old" mortgage financier thus, clearing the title (now in the purchaser's name) from the seller's "old" mortgage, and consequently ending the seller's obligation to pay interest on its "old" mortgage).

The arrangements described above presume that at the point in time when the purchaser's mortgage financier's loan monies are sent to the seller's lawyer, Land Titles registrations will have been properly completed, and the seller's lawyer will, at that point in time, be entirely free to release ALL of the sale proceeds, including both the purchaser's own equity payment and the purchaser's mortgage financier's loan monies.  But what happens - or should happen - if the purchaser's mortgage financier provides its loan monies to the purchaser/mortgagee's lawyer on or just before closing, on the understanding that the purchaser/mortgagee's lawyer can pay all of such loan monies immediately to the seller's lawyer at the time of closing, and in any event, before Land Titles registrations have been properly completed?

This situation arises primarily where:

(i)            title insurance is obtained for the benefit of the purchaser's mortgage financier which protects the financier against not getting what it has bargained for by virtue of something going wrong with respect to the conveyancing during the so-called "gap" period.  With the financier thus protected, the financier can feel safe in releasing loan monies immediately on closing without waiting for Land Titles registrations to be properly completed; and

(ii)           even though the mortgage financier does not obtain title insurance, the purchaser's  financier's policy is to provide the full loan monies to its own lawyer on or immediately prior to closing, allowing such lawyer to pay out the loan monies to the seller's lawyer on closing, but on the understanding that the purchaser's/financier's lawyer takes all responsibility for, and in effect, guaranteeing that, the financier obtains what it has bargained for (typically, a first registered mortgage charge against the subject property in the purchaser's/mortgagor(s) names).

In either case, when the purchaser's lawyer sends all of the purchaser's financier's loan monies to the seller's lawyer at closing, the purchaser's lawyer will take the position that the purchaser's obligation to pay interest on the unpaid balance of the sale price (as per the terms of the Agreement) ceases.  But, in many cases, the purchaser/financier's lawyer will, when sending the financier's loan monies to the seller's lawyer, impose a trust condition with respect to those funds to the effect that the seller's lawyer cannot release those monies (whether to pay off the seller's "old" mortgage or to the seller itself), unless and until title to the property is transferred in the Land Titles records into the purchaser's name subject only to the purchaser's financier's mortgage and no other registrations except those agreed to by the purchaser under the terms of the Agreement. Thus the seller's lawyer has the full purchase and sale price in his/her trust account, but, just as in the "traditional" manner of closing transactions, the seller's lawyer cannot release funds until Land Titles registrations have been completed.  Yet the purchaser's lawyer takes the position that with all of the consideration now having been paid to the seller's lawyer, the purchaser is no longer obligated to pay any interest to the seller's lawyer on the purchase price.

While the amount of interest thus "lost" by the seller in residential real estate transactions is, in most cases, quite small, this same situation is increasingly occurring  in commercial real estate transactions where the seller's "loss" of compensation for not being able to utilize the proceeds of sale represented by the mortgage financing is very substantial.

Some might argue that, although the seller can't directly access the proceeds of sale while they continue to be "tied up" in the seller's lawyer's trust account, the seller can still benefit from such holding of the funds by having his/her lawyer invest those funds in an interest-bearing (trust) account.  Unfortunately, the amount of interest that the seller's lawyer could thus earn for the seller (during the "gap" period) will almost always be much less than the rate of interest payable by the purchaser to its financier.  In fact, whatever interest the seller's lawyer could obtain on the seller's money during the "gap" period will almost always be far less than the amount of interest which the seller will continue to have to pay to his/her "old" mortgage lender.  Where the seller's "old" mortgagee's interest rate is higher than the interest rate being paid by the purchaser to its "new" mortgagee, even obligating the purchaser to pay interest during the "gap" period to the seller at the purchaser's mortgagee's interest rate will not adequately compensate the seller for his/her inability to obtain the proceeds of sale (and use them to pay off the "old" mortgage financier) during the "gap" period.

What could be done to "fix" this type of problem?  The writer suggests that, at least for residential real estate transactions, the standard form of broker's offer to purchase Agreement be amended as follows:

(a)          the amount of compensation to be paid by the purchaser to the seller during the "gap" period be made the greater of the purchaser's mortgage financier's interest rate and the seller's "old" mortgage lender's interest rate; and

(b)          the purchaser be obligated to pay "gap" period "compensatory interest" until the seller's lawyer becomes entitled to release funds.

In those situations where the purchaser has obtained title insurance to cover the purchaser's risk of loss during the "gap" period and those situations where the parties and their lawyers have agreed to a "protocol" closing, the purchaser's lawyer should not impose trust conditions on the seller's lawyer so as to "tie up" the proceeds of sale in the seller's lawyer's hands after the purchaser's lawyer has paid (or ensured payment) of all of the sale proceeds to the seller's lawyer.


March 2012

In recent years, the use of "all obligations" mortgages has become increasingly popular with both lenders and borrowers.  An "all obligations" mortgage - sometimes called an "all purpose mortgage" or a "collateral mortgage" - is designed to secure the borrower/mortgagor's present and future obligations of all kinds (direct borrowings, guarantees, etc.) in favour of the creditor/mortgagee, up to, at any one time, and from time to time, the maximum principal or face amount specified in the mortgage.  By their very nature, all obligations mortgages are designed to secure yet to exist and yet even to be imagined (let alone agreed upon) credit facilities.  This and a few other elements of all obligations mortgages discussed below can present certain difficulties for the creditor/mortgagee.

Consider the following:

  1. Acceleration and realization of security where not all of the debts secured are in default.  It would not be unusual for an all obligations mortgage to secure, at any particular time, say, two term loans, both repayable by way of installments of principal with interest.  Because there is only one mortgage involved as security for both loans, it is essential for the mortgagee that if one loan goes into default, the mortgagee must be able to treat the other loan as also being in default - whether or not it actually is in default.  This allows the mortgagee to realize its security primarily to recoup the debt which is in default.  Clearly, it would not be possible for the mortgagee to realize its security (typically, sell the mortgaged realty) to recoup the debt in default and still somehow preserve the mortgage as ongoing security for the loan which is not in default.  The mortgage security must be utilized to try to recoup both loans at the same time.  Thus for a single mortgage to stand as security for multiple obligations, it is necessary that the debtor agrees that default under any one or more of the secured debts is deemed to be default under all of them, with the result that the mortgagee can accelerate and demand repayment of all of them, and then realize its security to get back all of its money.  However, enabling the mortgagee to take this course of action seems to fly in the face of several rules which, in effect, permit a borrower/mortgagor to reinstate a loan which is in default.  Section 39 of the Manitoba Queen's Bench Act and Section 14 of the Manitoba Mortgage Act both, in effect, permit a mortgagor in default to cure the default and reinstate the term of a mortgage secured loan.  Assume that a mortgage secures two loans, each for $100,000.00 and each repayable by way of periodic payments of principal and interest over time; assume further that one of the two loans is in default and the mortgagee wishes to accelerate and realize its security to get back the defaulted loan; if the mortgagee takes this course of action, it will no longer have any mortgage security to secure payment of the other (not yet in default) loan, which is obviously not an acceptable situation for the mortgagee; thus it becomes necessary for the mortgagee to treat both loans as being in default, accelerate repayment in full of both of the loans and then realize its security to recoup what is owed to it with respect to both of the loans.  If the mortgagor exercises its aforementioned reinstatement rights, it is clear that it would have to pay the monies in default, typically, the installments of principal and interest actually in arrears (with costs) with respect to the loan which was in default.  But how does the mortgagor reinstate the other loan which itself was never in default?  The answer appears to be that the mortgagor must pay off in full the loan which was not actually in default.  Arguably, this is not fair to the mortgagor.
  2. Difficulty in complying with the disclosure requirements of Section 6 of the Canada Interest Act where one or more of the loans to be secured by the mortgage haven't yet even been considered or finalized.  Section 6 of the Canada Interest Act provides that where a real estate secured loan is repayable by way of blended installments of principal and interest, then unless the mortgage specifies the principal amount of the loan and the rate of interest applicable to it, calculated yearly or half-yearly, not in advance, the mortgagee is not legally entitled to collect interest.  Alternatively, if the mortgage contains a Section 6 type statement of principal and interest which is inconsistent with other provisions in the mortgage as to the repayment of principal and interest, then the mortgagee is only entitled to collect interest at the lower of the rates specified.  The problem with an all obligations mortgage is that it is intended to secure loans and credit facilities which may or may not exist in the future, and whose terms have not yet even been considered by the mortgagor and the mortgagee at the time when the all obligations mortgage is executed and registered.  Thus it is impossible for a mortgagee to comply with respect to Section 6 - at least for those future loans to which Section 6 would apply.  However, consider the following:

(a)          based on the case law to date, very few mortgages which secure loans repayable with equal periodic payments of principal and interest are really "blended" payment mortgages subject to Section 6;

(b)          the opening words of Section 6 are "whenever any principal money or interest secured by mortgage on real estate or hypothec on immoveables, is, by the mortgage or hypothec made payable on…any plan under which the payments of principal and interest are blended…" (the underlining is the writer's for emphasis purposes).  Arguably, the terms of payment/repayment of any particular loan secured by an all obligations mortgage are not contained within the four corners of the mortgage document itself.  Usually, the terms of payment/repayment are found in one or more documents separate from the mortgage document (ie, in loan agreements, promissory notes and the like).  On that basis, one could argue that the repayment terms are not "made payable…by the (terms of the) mortgage".  On the other hand, because most all obligations mortgages directly or indirectly incorporate all of the from time to time existing promissory notes, loan agreements, etc. between the parties, it may be difficult to successfully propound this position;

(c)           the primary purpose of Section 6 is to mandate disclosure of the cost of borrowing (interest) to borrowers/mortgagors.  Surely this can be effected by incorporating into each all obligations mortgage, a readily available "chart" of equivalent interest rates.

  1. High title insurance policy premiums for all obligations mortgages.  This problem arises because all obligations mortgages are designed to secure - currently and in the future - multiple loans, and because (at least in Manitoba) the Land Titles system charges relatively nominal fees for registering mortgages no matter how high the maximum principal or face amount of the mortgage.  It is typical for borrowers and lenders to create all obligations mortgages with very high maximum principal or face amounts.  A borrower's all obligations mortgage may have a face amount of, say, $1,000,000.00, but at any given point in time, it is unlikely that the aggregate debt secured by the mortgage will be anywhere near to $1,000,000.00.  For example, at a particular point in time, the borrower's aggregate debt may be, say $200,000.00, with the maximum principal or face amount of the mortgage being, $1,000,000.00.  However, title insurance companies usually charge premiums based on the maximum principal or face amount of the mortgage.  This results in exceedingly high title insurance premiums for mortgage secured debt where such debt is considerably less than the amount on which the title insurer has calculated its premium.  I say "usually" here, because it is my understanding that at least one title insurance company doing business in Canada is considering altering its practice so that the premium paid will be based on the currently contemplated debt to be secured by the mortgage.  In this situation, where future obligations increase the actual amount of the secured debt, then, (presumably), upon the borrower (or the lender) reporting the increased debt, the insurer will increase the policy limit and charge an additional premium.