February 2016

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Counsel might consider the following:

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

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

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

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

July 2010

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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