Jason Bryk 

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March 2013


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

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

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

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

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

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

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

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

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

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

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


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


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

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

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2019


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

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

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

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

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


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

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

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

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

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

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


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

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

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

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

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


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

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

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

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

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


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

These are the pertinent elements of the Kau Case:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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March 2011


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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December 2003


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

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

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

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


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August 2003


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

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

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

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

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May 2019


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

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

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

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

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

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


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Februray 2020


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


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

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

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

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


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


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

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

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

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

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

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

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