May 2014 

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

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

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

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

However:

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

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

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

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

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

August 2015

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

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

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

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

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

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

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

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

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

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

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

November 2010

THE SOMETIMES CONFUSING INTERPLAY BETWEEN SECURITY TAKEN UNDER

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

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

The facts in the Innovation Case were:

(i)            first the debtor acquired the collateral;

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

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

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

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

The facts in the Radius Case were:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

May 2003

 

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

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

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

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

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

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

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

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

November 2010

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

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

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

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

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

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

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

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

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

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

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

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

(b)          for where the sewage ejector:

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

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

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

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

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

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

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

Some other matters to note are:

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

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

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

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

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

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

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

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

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

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