Jason Bryk 

Phone: 204.956.3510

Fax: 204.957.0227

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Section 77 of the Manitoba Real Property Act (the "MRPA") provides, in effect, that where title to land which is subject to a "mortgage" or an "encumbrance" is transferred, the transferee is deemed to covenant to the holder of the "mortgage" or "encumbrance" that the transferee will pay and perform all obligations contained in the "mortgage" or "encumbrance", and, that the transferee will additionally be deemed to covenant to the transferor that the transferee will so pay and perform and will indemnify the transferor from liabilities sustained by the transferor by virtue of the transferee's failure to so pay/perform in favour of the holder of the "mortgage" or the "encumbrance".  Additionally, Section 77 specifies that "one or more (or all) of these "deemed covenants" may be negatived (i.e., eliminated) by the simple unilateral act of the transferor including a negativing statement or declaration within the transfer instrument.  These provisions raise the following questions:

(a)          it doesn't seem reasonable that the transferor can by its own act, eliminate the deemed covenant which would otherwise have to be undertaken by the transferee in favour of the holder of the "mortgage" or the "encumbrance", and that the transferor could no doubt do this without the mortgagee or holder of the encumbrance even knowing about this.

(b)          "mortgage" is defined in Section 1 of the MRPA to be "a charge on land created for securing a debt, existing, future or contingent, or a loan, and includes an hypothecation of the charge".  Given that Section 77 limits itself to titled real estate, it is reasonable to assume that in the overwhelming majority of cases, "mortgage" will mean a real property mortgage in the form prescribed under the MRPA.  "Encumbrance" is also defined in Section 1 of the MRPA to be "a charge or lien on land other than a mortgage, and includes an hypothecation of the charge or lien".  Does this latter definition include:

(i)            a builders lien or a judgment lien? - probably "yes";

(ii)           an easement, a negative covenant or a building scheme? - probably "no";

(iii)          the portion or those portions of a municipal subdivision agreement, zoning agreement or development agreement which obligate the property owner and its successors in title to pay certain amounts of money, in particular, where the agreement includes wording to the effect that the obligation to pay such money is "charged" against the ownership of the land? - uncertain; and

(iv)         those portions of a lease which obligate the lessee to pay certain monies (whether expressed as rental or otherwise)? - probably "no".

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November 2003


 

            A person (the “Creditor”) provides value to/extends credit to another person (the “Debtor”) and the resulting indebtedness is evidenced by a promissory note (the “Note”) issued by the Debtor to the Creditor specifying the amount of the value advanced or credit extended.  It is agreed that the indebtedness will be payable on demand, and, because the parties are not dealing at arms’ length, or for some other reason (for example, the Debtor may have provided some other consideration or accommodation to the Creditor), they agree that either no interest whatsoever will be payable by the Debtor on the indebtedness, or, that interest will only be payable after demand.  The terms of this agreement are reflected in the Note.

            More than six years expire after the issuance of the Note and then the Creditor decides that it wants its money back and demands payment from the Debtor.

            If the Debtor doesn’t pay, can the Creditor commence an action to be paid, or is the Creditor statute-barred under the provisions of The Limitation of Actions Act (Manitoba) (the “Act”)?  Section 2(1)(i) of the Act makes it clear that an action for recovery of money (except money charged upon land) must be commenced within six years “after the cause of action arose.”

            It may seem logical to think that a cause of action would not arise against the Debtor until the Creditor had made a demand for payment and the Debtor failed to pay.  If the policy behind the Act is to induce a potential claimant to commence legal action sooner rather than later (i.e., within the statutorily-specified time periods referred to in the Act) following the point in time where a “wrong” has been done to the claimant (in this case, the failure of the Debtor to make payment when the Creditor required it to do so), surely no “wrong” has been done to the Creditor until after it chooses to make demand under the Note and the Debtor doesn’t make payment.

            While such thinking may be logical, it is clearly not reflective of the law.  In fact, it has been long settled that the cause of action in favour of a promisee under a demand promissory note arises against the maker thereof forthwith upon the issuance of the note, and not at a later time when the promisee makes demand.  While the Act does provide that the cause of action starts again, whether before or after the six-year period starting with the issuance of the note, on the occasion of each acknowledgement of the indebtedness by the maker, such as payment of periodic interest, remember that in the above example, no interest is owed or payable by the Debtor until after the Creditor makes demand.

            If you have acted as the Creditor’s lawyer in the formulation of the Note, and you have failed to warn the Creditor that an action under the Note will be statutorily barred six years after issuance in the absence of the Creditor getting some acknowledgment of the indebtedness, or unless the terms of the underlying indebtedness are somehow changed so that the debt is not payable on demand (e.g., the debt is converted into a term loan requiring periodic payments to be made), are you liable to the Creditor in negligence?  In this writer’s opinion, the answer is probably “yes”.

            If you are the intended promisee under a contemplated promissory note, or you are the lawyer acting for such intended promisee, what can you do to avoid the possibility of the debt becoming statute-barred?  Assuming that the intended parties to the Note wish the indebtedness to be repayable only when the Creditor requires that it be repayable, there are several possibilities:

  1. The parties could agree that interest will be payable both before and after demand, so that on the occasion of each interest payment, the limitation period will again start to run.  This way, by the end of the six-year period starting with issuance of the note, and assuming that the interest payments have been duly made, the promisee would have another at least five and possibly six years in which to start an action against the debtor.  If the Debtor doesn’t really want to pay substantial interest and the Creditor is agreeable to not requiring that substantial interest be paid, the interest could be at some very low rate, with it being payable once a year, rather than the usual more frequent requirement for interest payments.
  2. The terms of the indebtedness and the Note could be structured so that the Creditor’s cause of action would not arise immediately upon the issuance of the note.  This could be done by having the note provide that in order to require that payment be made to the Creditor, the Creditor would not only have to, in effect, demand repayment, but the Creditor would also have to physically present the Note to the Debtor.  This may or may not work, because there is some ambiguity in the case law on this matter. It seems clear that a note which is stated to be payable on presentment without the maker being entitled to any period of time within which to make payment is considered to be equivalent to a demand promissory note.  However, there is case law that holds that if a note requires that payment be made at a specified place, then the promisee’s cause of action against the maker will not arise until the promisee has properly presented the note for payment at that place.  Thus it would appear that a promissory note which requires that payment be made immediately upon presentment at a specified place would allow the promisee to delay commencement of the limitation period running against it until it has made actual presentment at the specified place.  Nevertheless, the case law is also somewhat ambiguous on this point so the course of conduct suggested in paragraphs 1 above and 3 below would be safer.
  3. The Note could be structured so that it was clearly not evidence of a demand obligation.  This would necessitate specifying that the time for payment was neither “on demand”, nor “on presentment”, but rather that payment was due at the end of some specified period of time following presentment.  The period of time after presentment could be a relatively short one so as to approximate a demand obligation for practical purposes.  Presumably, the promisee’s cause of action would not arise until presentment had been made and the specified period of time had elapsed without any payment (or other acknowledgment of the indebtedness) having been made by the maker.  Although the writer is not aware of any case law on this particular point, he does have a concern about this sort of arrangement.  Because in substance, a note structured in this manner would perform virtually the same function (in terms of the time when payment is due) as would a demand note (or a note payable immediately upon presentation), a Court might hold that such a note was in substance equivalent to a demand note with the result that the promisee’s cause of action would in fact be held to arise immediately upon the issuance of the note and not at some later point in time.

            For those holding existing demand (with interest payable only after demand, if at all) promissory notes and their lawyers who have failed to counsel such holders as to the above potential problem under the Act, what can be done?  The writer suggests that such holders’ lawyers advise them now as to the potential problem and that attempts be made to solicit current acknowledgments of the indebtedness from the note-makers.

            The rationale behind the rule that the promisee’s cause of action arises, and thus the limitation period starts to run against him, forthwith upon the issuance of the note, rather than at some subsequent time when the promisee actually makes demand, probably relates to the fact that the maker could - if it chose to do so - wait an inordinately long period of time after issuance of the note, and certainly far longer than six years from the note issuance, before getting around to making a demand.  If time doesn’t start to run against the creditor upon issuance of the note, the creditor could in theory create its own limitation period for the note indebtedness by not demanding for, say, ten, twenty or thirty years.  That being the case, it would seem logical to conclude that as against a creditor under a guarantee, time would start running against the creditor immediately upon the issuance of the guarantee to it, and not when the creditor demands under the guarantee.  While logical, such thinking is not correct as the cases clearly indicate that time does not run until the creditor makes a demand under the guarantee.  The rationale behind this rule may be that in most cases, a creditor will not be entitled to demand under the guarantee until the principal debtor defaults in its obligations owed to the creditor.


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