July 2020

English law has - for centuries - paid special attention to protecting rights in real property.  The expression "A man's home is his castle" reflected the prevailing view of judges and lawyers (in particular, conveyancers), at least insofar as royalty/the aristocracy/the landed classes were concerned.  In disputes between rival claimants to land - or an interest in land - the system favoured the current owner/occupant and made it difficult for a challenger to dislodge the current owner/occupier.

As nations became more sympathetic to "progressive" and "collective" viewpoints, this deference to the sanctity of property rights has been eroded.  An illustration of this can be seen in the (relatively) recent repatriation of Canada's constitution (from the UK Parliament) in which property rights protections were conspicuous by their absence.  However, notwithstanding the loss of enthusiasm for protecting property rights, they are still substantially protected under current Canadian law.  Illustrations of the Courts' hesitancy to overlook vested property rights can be found in certain cases dealing with easements, restrictive covenants and profits à prendre.  Consider the following holdings:

(i)            St. Boniface Warehousing Ltd. v. BBD Holdings Ltd. (2019 MBQB 181, judgment given December 9, 2019, hereinafter the "St. Boniface Case").  This case involved a claimant trying to establish easement rights against a neighbour's land, in part referable to an earlier easement grant and in part referable to a claim for a prescriptive easement (ie, an easement right based on long and unchallenged use of the neighbour's property).

(ii)           RPM Farms Ltd. et al v. Laurence Jay Rosenberg et al (2019 MBQB 140, judgment given September 27, 2019, hereinafter the "RPM Case").  This case involved a property owner claiming prescriptive easements against several of its neighbours' lands.

(iii)          Emil Stephen Delnea and Leslie Kim Delnea v. Richard Vanhouwe and Michelle Vanhouwe (2019 SKQB 255, judgment given September 27, 2019, hereinafter, the "Delnea Case").  This (Saskatchewan) case involved a property owner claiming rights against its neighbour's property with reference to certain improvements which the property owner had inadvertently placed on the neighbour's land.  The property owner's claim was based on Saskatchewan legislation which is substantially similar to Sections 27 and 28 of The Law of Property Act (Manitoba).

In the St. Boniface Case, neighbour "A" ("Neighbour "A"") bought its property (Parcel "1") in east Winnipeg in 1998 and Neighbour "B" ("Neighbour "B"") bought the adjacent property (Parcel "2") in 1987.  Neighbour "B" needed access over part of Neighbour "A"'s land (Parcel "1") in order to access a railway spur track so as to load and unload (from railway cars) product that Neighbour "B" produced, stored and distributed on and from its property.  A predecessor in title to Neighbour "B" obtained a grant of easement from a predecessor in title to Neighbour "A'"s over Parcel "1" permitting the then required access.  Subsequently, Neighbour "B" started making use of an additional portion of Neighbour "A"'s land (part of Parcel "1") for the purpose of allowing its trucks to make required turns to move in and out of Neighbour "B"'s property in order to load and unload Neighbour "B"'s products delivered to Neighbour "B" by way of the railway spur.  Additionally, Neighbour "B"'s principal used part of Parcel "1" to park his personal vehicle and Neighbour "B" also used part of Parcel "1" for the storage of pallets and trailers.  When Neighbour "A" discovered that Neighbour "B" was, in effect, trespassing on Neighbour "A"'s property, Neighbour "A" demanded that Neighbour "B" cease such trespasses.  Neighbour "B" resisted and ultimately - after an unusually long period of time - the matter came before the Court for determination.  Neighbour "B" defended its position with respect to Parcel "1" by pointing to the previously granted easement over Parcel "1", and, defended its right to use additional parts of Parcel "1" on the basis of continuous unchallenged and open use for a period in excess of 20 years (ie, Neighbour "B" claimed a "prescriptive easement").  The Court rejected the bulk of Neighbour "B"'s claims, based on the following reasoning:

(a)          there was insufficient evidence of continuous (over a 20 year plus period) use of the additional portions of Parcel "1" claimed.  In particular, there appeared to be no evidence of meaningful use during the period 1984 to 1990.

(b)          there was - in the Court's words, "…(a) lack of precision as to what portions of Parcel "1" were claimed (for a prescriptive easement)".  The Court cited previous authority that "…to be capable of bearing a prescriptive easement, the land over which the easement is claimed must be capable of being described with some specificity.".

(c)          as to that portion of Parcel "1" covered by the older easement grant, the Court did recognize the binding nature of the easement grant previously obtained by a predecessor of Neighbour "B" against the title to Neighbour "A"'s land, but held that Neighbour "B" had unilaterally and in an unjustified manner expanded the "scope" of its easement over Parcel "1".  Based on the evidence before it, the Court concluded that the easement grant's original purpose - as reflected in its wording - was to allow the occupant of Neighbour "B"'s property access to the rail spur located just inside the boundary of Parcel "1", for the purpose of loading and unloading trucks.  The easement grant did not contemplate the expansion of Neighbour "B"'s business operations so as to require additional portions of Parcel "1" to facilitate Neighbour "B" being able to use very large transport trucks whose size would have necessitated their being moved onto and through much greater portions of Parcel "1".

In the RPM Case, the defendant's property (the "Defendant's Property") was adjacent to and bordered by neighbour "X" ("Neighbour "X"") on the north, the south and in part on the west sides of the Defendant's Property ("Neighbour "X"'s Property"), and additionally, on part of the Defendant's westerly boundary, by land owned by neighbour "Y" ("Neighbour "Y"", Neighbour "Y"'s property being hereinafter referred to as "Neighbour "Y"'s Property").  The Defendant claimed prescriptive easements in favour of the Defendant's Property over portions Neighbour "X"'s Property and over part of Neighbour "Y"'s Property in support of the Defendant's claims, and for the purpose of challenging same, witnesses were presented to the Court together with certain documentation including affidavit evidence.  The most substantial difficulty encountered by the Defendant - and this would appear to be typical in cases of this type - was the fact that ownership of the various neighbouring parcels had, over the twenty year period required to be established to validly claim a prescriptive easement, had changed from time to time.  In fact, for a five or six year period within the alleged twenty year period, one of the parcels had been leased by its owner to a tenant. It is often difficult to locate witnesses - or written confirmations of land usage - going back over twenty years; some witnesses will never be located, others will have died and the memories of most of them - the further back in time you go - will have faded.  As the Court observed, "…Here, the defendants seek to support their position by relying upon the hearsay evidence of unnamed people in the community…".  In particular, there was insufficient credible unambiguous evidence of continuous usage, and, insufficient evidence that Neighbour "X" and Neighbour "Y" had, with knowledge of their own property rights (ie, that what the owner/occupier of the Defendant's Property was doing constituted trespasses) combined with acquiescence by Neighbour "X" and Neighbour "Y", key requirements to establish prescriptive easements.  These particular holdings/observations by/of the Court are instructive:

(i)            Courts should be wary of recognizing prescriptive easements because to so will "…subject a property owner to a burden without compensation".

(ii)           No prescriptive easement can be held to have arisen where it is alleged to have commenced at a point in time where the servient tenement property was leased by a tenant.  Specifically, the "…a tenant may not grant a perpetual easement that would bind a registered owner after the expiration of the lease".

(iii)          One of the Defendant's claims for a prescriptive easement was based on the Defendant (predecessor in title to the Defendant's Property) having planted a tree line just beyond the northerly boundary of the Defendant's Property.  The Court held that the mere planting of a tree line should not form the basis of a prescriptive easement per se.

(iv)         In part, the Defendant's prescriptive easement claims were based on the fact that the servient tenement owner had given "informal permission" for the use of its land.  "Neighbourly permissions have not been recognized as creating a basis for a prescriptive easement".  Usage of the servient tenement property owner's land by the owners/occupiers of the Defendant's Property "…was permitted by neighbourly goodwill rather than simply acquiescence".  It was the Court's view that clearly, it is not in the public interest for the legal system to discourage neighbourly cooperation and the provision of neighbourly permissions.

In the Delnea Case, neighbours "X" and "Y" owned adjacent cottage properties.  Neighbour "X" ("Neighbour "X"") had installed an underground septic tank which encroached upon the property of "Y" (Neighbour "Y").  Based on Section 2 of The Improvements Under Mistake of Title Act (Saskatchewan) (similar to Sections 27 and 28 of The Law of Property Act (Manitoba), Neighbour "X" requested the Court to grant Neighbour "X" an easement covering the portion of Neighbour "Y"'s property that contained the tank.  The Court observed that there were two primary requirements that had to be fulfilled before Neighbour "X" would be successful in its claim, namely, firstly that the tank was a "lasting improvement" on Neighbour "Y"'s land, and, secondly, the installation by Neighbour "X" was done under the "…mistaken belief that the land (was) (Neighbour "X"'s)".  The Court concluded that although arguable, the evidence suggested that the tank was of a "permanent" nature, and that Neighbour "X" had genuinely believed that the tank was being installed on Neighbour "X"'s property.  In this situation, the Court has two remedial options, one, to place a lien on Neighbour "Y" property in the amount that the improvement enhanced the value of Neighbour "Y"'s property, or, two, to permit Neighbour "X" to acquire ownership of the encroached upon land, provided that appropriate compensation is paid to Neighbour "Y".  Clearly, the first remedial option was inapplicable in the circumstances of the Delnea Case.  The second option was appropriate, but the Court was not provided with evidence dealing with the matter of the quantum of compensation which should go to Neighbour "Y" for losing a (small) portion of its property.  The Court ruled that the parties would have a further short (30 days) period of time within which to address the issue of compensation.  Unlike the outcomes of the St. Boniface Case and the RPM Case where a claim against a neighbour's lands was rejected, the encroaching Neighbour "X" was successful in claiming rights in the neighbouring property.  However, this case illustrates the need for counsel to be fully prepared and to understand exactly just what sort of issues have to be dealt with and to craft a presentation of the necessary evidence accordingly.

November 2008

Most lenders and informed lawyers are aware of the rule which provides that where a mortgagee forecloses upon mortgaged real estate - as opposed to exercising the mortgagee's right to sell the real estate - the debt secured by the mortgage is extinguished.  In Manitoba, this rule is found in Section 16 of The Manitoba Mortgage Act (the "MMA"), and is actually broader than specifying extinguishment of the mortgage secured debt by way of foreclosure; in fact, Section 16 provide, in effect, that the mortgage secured debt is extinguished where the mortgagee forecloses by court order, forecloses through the Land Titles system (without the assistance of the court) under The Manitoba Real Property Act (the "MRPA"), or the mortgagee "otherwise" becomes the owner of the mortgaged realty.  Section 16 also clearly applies to mortgages of interests in real estate less than freehold or fee simple ownership, such as mortgages of leaseholds, mortgages of easements etc.

The MMA Section 16 rule is of fairly ancient heritage and it is the writer's understanding that it is based on a matter of policy or principle to the effect that where a mortgagee ends up with ownership of the mortgaged property, the mortgagee then has the realty "for better or worse".  Thus if the value of the realty is less than the previously secured debt, the mortgagee - who will probably try to sell it sooner or later - will suffer a deficiency.  On the other hand, if the mortgagee waits until the value of the realty increases and such increase is in excess of the amount of the previously secured debt, the mortgagee gets to keep any "profit" it may make on its eventual sale of the realty (ie., all proceeds in excess of the previously secured debt).  Where a mortgagee merely sells the mortgaged realty as part of its mortgage realization process, any sale proceeds in excess of the debt owed to the mortgagee must go to subsequently ranking (ie.,subsequent to the selling mortgagee) monetary claimants to the realty, (and to the mortgagor).

What about a creditor who holds a security interest in personal property?  Section 61(2) of The Manitoba Personal Property Security Act (the "MPPSA") contains a rule applicable to personal property security interests which is somewhat the same as the rule for real property security in Section 16 of the MMA.  The rule for security in personalty is, in effect, that where, after default has occurred under the security agreement, the secured party gives notice to the debtor and certain other specified interested persons that the secured party intends to "take the collateral in satisfaction of the obligation secured", and, none of the persons to whom such notice is given object to such proposal within 15 days after receiving the notice, the secured party, immediately following the end of such 15 day period is "deemed to irrevocably elect to take the collateral in satisfaction of the obligation secured…".  Section 61 doesn't say that the debt is extinguished, but it comes pretty close to stating what amounts to the same thing.

Some questions which may arise in the application of Section 16 of the MMA and Section 61 of the MPPSA are:

(i)            what happens when a creditor holds two or more real property mortgages and/or security agreements covering multiple parcels of real estate and/or multiple items of personal property, with each of the securities securing payment of one particular loan only, and, the mortgagee/secured party acquires ownership of some, but not all, of the realty and/or personalty, with the thus acquired realty and/or personalty having an (aggregate) value less than the amount of the outstanding indebtedness?  Is the mortgagee/secured party now barred from acting under its then existing not yet realized real property and/or personal property security by virtue of the operation of either one (or both) of Section 16 of the MMA and Section 61 of the MPPSA?  Consider the situation of a creditor who is owed, say, $1,000,000.00 and has taken, say, a real property mortgage on one parcel of land worth $100,000.00, a further real property mortgage on a second parcel of real property worth $150,000.00, a further real property mortgage on a third parcel of realty worth $200,000.00, and, a personal property security agreement against certain equipment belonging to the debtor worth $300,000.00, each of these securities securing payment of the same $1,000,000.00 debt. Even if the creditor was to simultaneously (which may be impossible!) foreclose upon all three parcels of realty and the equipment, it would still suffer a shortfall of $250,000.00. What if the creditor foreclosed upon the equipment only? - if each of the three real property mortgages and one security agreement by their terms secured the same $1,000,000.00 debt, would the creditor be unable to realize under its real property mortgages by virtue of the operation of Section 61 of the MPPSA (i.e. it has taken the equipment "in satisfaction of the debt" so that there is nothing left for the real property mortgages to secure)?  Even if the aggregate value of the pledged realty and personalty was in excess of the amount of the debt (i.e. in excess of $1,000,000.00), is it really possible to coordinate the creditor's foreclosure proceedings such that it would be able to take title to the real estate and take ownership of the equipment at precisely the same point in time, thereby avoiding the debt extinguishment provisions contained in Section 16 of the MMA and Section 61 of the MPPSA? Would a possible solution to this dilemma be for the creditor to ask the Court to issue a vesting order vesting (foreclosing upon) all of the pledged realty and personalty simultaneously?

(ii)           what happens where one or more real property mortgages and/or one or more security agreements held by a mortgagee/secured party, by their terms secure all of the mortgagor's/debtor's present and future liabilities, indebtedness and obligations from time to time owed to the mortgagee/secured party, where the value of each security (ie the value of what is mortgaged/secured by each security) as well as the value of all of the securities is less than the total aggregate indebtedness owed by the mortgagor/debtor at the time that the creditor goes to/wishes to realize upon its securities?  Consider the situation of a creditor who has obtained the same security described in (i) above except that each security by its terms secures the payment of all present and future obligations owed by the debtor to the creditor, present and future; if the creditor is owed a total of $1,000,000.00 by the debtor and the creditor forecloses upon one or more (but less than all) or, even upon all of its securities, given that each of the securities provides that it secures all of the debtor's obligations owed to the creditor, upon any foreclosure, wouldn't all of the indebtedness (ie., $1,000,000.00) be extinguished?

Here are some possible solutions to these problems:

(a)          In the situation where there are multiple securities securing one only particular debt, consider:

(i)            utilize one security agreement only, such as a "debenture" which covers both realty and personalty, and which may be amended from time to time to add further, new or additional parcels of real property to be specifically mortgaged to secure the particular debt (this type of security is typically utilized in multiple jurisdictions and may also make it easier for the courts to order one or more (simultaneous) vesting orders where the creditor wishes to foreclose upon all of the property);

(ii)           have each mortgage and security agreement (where there are multiple mortgages and/or security agreements) specifically state that while each of them secures the same particular debt, each of them will, in the case of foreclosure, secure only that portion of the debt which is equal to the value of the pledged realty and/or personalty at the time of foreclosure (this may convince a court called upon to determine the effect of Sections 16 and 61 upon the foreclosure(s) to conclude that it is only portions of the total debt which are to be extinguished (or satisfied) upon each separate foreclosure;

(b)          in/for both real property mortgages and personal property security agreements, specify maximum principal or face amounts thereof where such face or maximum principal amounts approximate (or are only slightly higher than) the anticipated (i.e. anticipated near term) values of each respective property pledged; and

(c)          do not foreclose against any of the secured property until after all reasonable efforts have been made to sell the pledged assets, utilizing foreclosure only as a last possible resort. In some cases, it may be appropriate to sell everything except for secured assets which are only of very small value and, then simply discharge the remaining security; this would at least leave any yet to be satisfied debt remaining in existence.

December 2016

Where an easement is granted by a servient tenement owner ("Servient Owner") to an adjacent (or nearby) dominant tenement owner ("Dominant Owner"), typically, the Servient Owner undertakes to the Dominant Owner to permit the Dominant Owner to make certain specified usage of the Servient Owner's land.  The intent of the owners (and the result, if the easement grant or agreement is properly worded) is to bind the owners' respective lands, with the burdens of the easement being primarily placed upon the Servient Owner, and with the benefits of the easement primarily accruing to the Dominant Owner.  That is, the easement (and its accompanying/specified rights and obligations) will bind not only the original parties (the grantor original Servient Owner and the grantee original Dominant Owner), but also all successive successors-in-title to the affected lands, indefinitely.  The usage to be made by the Dominant Owner of the Servient Owner's lands will, to a greater or lesser degree, be specified in the instrument creating the easement.  Usage specification will usually depend upon what each of the parties is currently doing in relation to each's respective property, or what one or both of the parties intend to do in the near future with respect to the properties.

But what happens if, after a period of time, perhaps a lengthy period of time, the intentions and objectives of the Dominant and Servient Owners (who may not at that point in time be the original parties, but rather immediate or more remote successors in title), are different from those of the original parties at the time when the easement was created?  Usually the question is whether or not what the current owners want to do with their properties - and in particular, whether or not the parties' current intentions - jibe with the terms of the easement agreement.  Where there is a disagreement on these matters between the current owners which they are unable to amicably resolve with amendments or restatements of the original easement, resort may be - and on many occasions has been - made to the Courts for a resolution.

The relatively recent judgement issued March 11, 2016 by the Supreme Court of British Columbia in Houghton and Houghton v. O'Rourke Family Vineyards Ltd., (hereinafter, the "Vineyards Case") dealt with this very situation.  The facts of the Vineyards Case may be summarized as follows:

(1)          The plaintiffs and the defendant owned adjacent properties.  The plaintiffs' property abutted Okanogan lake, and the defendant's property was situated back from that lake adjacent to the plaintiffs' property. 

(2)          The easement in question (the "Easement") had been created by the plaintiffs' and defendant's predecessors-in-title.  The plaintiffs' predecessors used their property for residential purposes and this usage was continued by the plaintiffs.  The defendants predecessor used its property for an orchard. The defendant continued this usage, but now wished to convert a substantial portion of its property for use as grape growing "farm" and as a winery.

(3)          The Easement permitted the from time to time owners of the defendant's property to utilize a portion of the plaintiffs' property for the purpose of drawing water from the lake and piping it through the plaintiffs' property to the defendant's property.  Thus the plaintiffs' property was the "servient tenement" land, and the defendant's property was the "dominant tenement" land.  Notice of the Easement had been registered against the title to the plaintiffs' property, and there was no argument between the parties that the Easement bound and benefitted both the original property owners who had created the Easement, and each of their respective from time to time existing successors-in-title.

(4)          The core of the rights granted to the dominant tenement owner under the Easement were stated to be: "an easement and right in perpetuity to enter into and use that portion of the grantor's land shown outlined in red on a Plan of Easement registered in the Kamloops Land Registry Office under No. A11976 (the "Easement Area for the purposes of constructing, installing, maintaining, inspecting, altering and repairing pipes and works for the carriage and delivery of water" (the underlining here is by the writer for the purpose of emphasis).  In considering the Court's decision in this matter, it is important to keep in mind what the foregoing quoted words both say and what they don't say.

(5)          Currently, the easement area under the Easement (the "Easement Area") contained pipes and certain equipment/facilities which carried water from the lake to the plaintiffs' property.  Although there had been no upgrading, expansion or otherwise substantial change to the pipes and equipment/facilities (the "Works") since the defendant acquired the property, the defendant had occasionally entered into the Easement Area "in order to conduct repairs or maintenance of the Works".  The plaintiffs had not objected to this activity.

(6)          The currently existing Works comprised a pump house and above-ground pipes extending to and then from the pump house, and in the words of the Court, the Works were "antiquated and in severe disrepair".

(7)          The defendant now wished to, in effect, accomplish two things, namely:

(a)          to modernize and upgrade the Works so as to meet modern standards and satisfy safety and government regulation requirements; and

(b)          to increase the capacity of the Works in order to facilitate the defendant's plan to replace what had been an apple orchard with grape vines, together with the establishment of a winery.

(8)          The defendant's contemplated upgrading and capacity increase for the Works would involve installing wider pipes, relocating the pipes underground, replacing the pump house with a much larger pump house containing more powerful pumps, with the consequent expansion of the Works to occupy virtually all of the Easement Area.  The defendant's plan did not involve expanding the area or the boundaries of the Easement Area.  Because the upgraded and expanded Works would take up virtually all of the Easement Area, it would be necessary for the defendant to temporarily access portions of the plaintiffs' property which would lie outside the Easement Area boundaries.

(9)          The defendant and the plaintiffs had ongoing discussions regarding the defendant's proposals, but unfortunately, the parties were "unable to come to an agreement".  Thus the matter had come before the Court.

The plaintiffs argued that upon a proper interpretation of the wording in the Easement, most of what the defendant proposed was not permitted.  The following outlines each of the plaintiffs' particular arguments and how the Court considered and dealt with them:

(i)            The plaintiffs argued that the defendant could not effect its proposed upgrading and enhancements, and, indeed, could not do anything else in relation to the Easement, without either getting a Court order or getting the plaintiffs' consent.  The Court disagreed and stated that the grantee under an easement was entitled to exercise the rights granted to it "as a matter of right".  The Defendant did not have what amounted to unlimited rights under the Easement, only those given to it which were set forth in the wording of the grant.

(ii)           The Plaintiffs argued that the Defendant should not be permitted to make "excessive use" of the Easement Area.  The Defendant's proposal would expand their use of the Easement Area out to the Easement's borders and this would extinguish the Plaintiffs' ability to make use of or to access the Easement Area.  Additionally, the Plaintiffs pointed out that the Defendant's proposal would "interfere with the appearance" of the Easement Area when the Plaintiffs viewed it.  The Court disagreed and pointed out that by its very nature, an easement diminishes the potential use and enjoyment of the land (affected).  The Plaintiffs acknowledged that the Defendant's proposal was, (if anything, an "improvement" from the transmission pipes to be relocated underground which should esthetically enhance the appearance of the Easement Area and reduce the noise that would otherwise be caused by the passage of water through surface pipes), and, the new Works including rebuilt pump house should be an improvement over the appearance of the current Works.  The Defendant's proposal would "not somehow constitute excessive use" of the Easement.

(iii)          The Plaintiffs argued that the Defendant should be entitled to enter the Plaintiffs' property outside of the Easement Area.  The Court disagreed and pointed out that grantees of easements "may access the land of the grantor to the extent that it is reasonably necessary to  the exercise and enjoyment of the easement".

(iv)          The Plaintiffs argued that the Easement did not grant any "subsurface rights", so that the Defendant should not be entitled to relocate the pipes underground.  In support of this argument, the Plaintiffs pointed out that in the recital of the Easement grant, it was stated that: "Grantor proposes to grant to the Grantee and easement over a portion of the said land" (the underlining is the writer's for emphasis purposes).  "Over" did not mean "under".  Because the Court disagreed and pointed out that the Easement did not specifically refer to subsurface rights, but at the same time, it did not expressly refer to surface rights.  The word "over" in the recital "simply refers to a bundle of legal rights.  It does not refer to any physical notion of over the land or under the land".

(v)           The Plaintiffs argued that the Easement was only intended to facilitate the transmission of water from the lake to the Defendant's land for the purpose of irrigating an apple orchard, not for the purpose of irrigating grape vines and/or operation a winery.  What the parties contemplated at the time of the Easement was created should determine all future uses.  The Court acknowledged that Easement grant did not contain any reference to the Defendant's proposed usage, but nevertheless (again) disagreed with the Plaintiffs.  The Defendant's proposed use was not specified in the Easement grant, but for that matter, neither was the original use of the Defendant's land namely for an apple orchard.  "All that is referred to is the "carriage and delivery of water"".  Unless there is an ambiguity in the wording of the grant, and in that wording and not the original parties' intentions- which determine the rights granted under an easement.

(vi)          Lastly, the Plaintiffs argued that the benefits of the Easement should be interpreted as applying only to the lands held by the dominant tenement owner at the time the Easement was created.  This argument was raised because the Defendant's proposal would include operating the grape vines and winery on additional lands held by the Defendant which were not part of the original dominant tenement.  The Court agreed with the Plaintiffs' position in principle, and pointed out that the Easement grant contained a statement in its recital to  the effect that the Easement was to be" for the purposes of … benefitting (the originally specified dominant tenement lands)" however, the Court stated that: "once water is carried to the subject properties via the easement, the intention of being used on the subject properties, the Plaintiff has no right to restrict or dictate what the Defendant may do with that water.  Their rights do not extend to what happens to the water after it leaves the Easement Area". In the writer's mind, this appears to be a thoroughly fine distinction.

What should the Court's conclusions in the Vineyards Case suggest to parties contemplating obtaining and granting easements and to their counsel? Consider:

            (A) With respect to the plaintiffs' above- noted last argument, an intending easement grantee's counsel might be tempted to add wording to the grant to make it clear that the benefits of the easements may be enjoyed by additional lands subsequently owned by the holder of the specified dominant tenement lands.  The problem with this is that a Court would probably hold such a provision to be too imprecise, and traditionally, for an easement to bind land (as well as the original parties to the easement) both the dominant tenement lands and the servient tenement land must be clearly specified.  Such a provision would not be "illegal" as such, but would not be a binding interest in land.  It would, at best, only constitute a contractual right or (or license) in favour of the grantee. It would not benefit the original grantee's successors in title to the dominant lands or any additional lands acquired by the original grantee or by a subsequent successor in title to the original grantee. However, in the Vineyards Case any ambiguity might have been eliminated by the additional wording to the effect that the grantee (and its successors in title to the specified dominant tenement lands) would be entitled to use water piped to the originally specified dominant tenement lands in any matter which might benefit adjacent additional lands held by the dominant tenement owner.  Essentially, this is what the Court implied, but having it clearly specified in the original grant would (presumably) not have allowed the plaintiffs to raise this argument at all.

            (B)  The writer believes that the core of the decision in the Vineyards Case was that one must look to the actual wording of the grant (assuming it is unambiguous) in order to determine the extent of - and the limitations on - the grantee's rights.  Thus from the grantee's point of view, its counsel must endeavor to use wording which will accommodate not only the grantee's originally intended usage of its easement rights, but also accommodate changes in the original grantee's and its successors in title's circumstances and land usage.  As one can appreciate, attempting to draft provisions to cover future unknown changes of circumstances and usage- at least in any precise manner- is virtually impossible.  Perhaps all that can be done- from the grantee's point of view- is to ensure that the operative wording in the easement grant is broad or general in nature.  That appears to have been the case in the Vineyards Case and assisted the defendant greatly in convincing the Court of the validity of its position.  From the point of view of the grantor, the drafting task may be more difficult.  The grantor's counsel should attempt to determine what the grantor, looking at its own current situation and guesstimating its future situation and those of its successors in title- needs to do to limit the otherwise "broad/general" grant wording required by the grantee.  Not an easy task, but one which must at least be attempted by the grantor's counsel. 

February 2017

Sometimes, in order to make full - or even some - desired usage of one's land, it is necessary for the landowner to be able to (legally) make use of a neighbouring property owner's land.  Such usage of the neighbouring owner's land involves rights constituting something less than full ownership of the neighbouring property.  The most common situation is where one owner needs to use a path or roadway over its neighbour's property to be able to access a road, lake or a river waterfront.  Similarly, a property owner may need to be able to connect the improvements on its land to a water distribution system, a sewage system, a natural gas transmission system, or an electrical transmission system, and such connection involves the installation and maintenance of pipes, conduits, etc. over the neighbouring owner's land.  The need to make use of the neighbouring owner's land will frequently arise in the situation where an owner subdivides its land into two or more parcels, with the subdivider retaining ownership of part of the property, and selling and transferring the other part or parts to someone else.  The parcel retained by the subdivider is now "isolated" from a main roadway (or from utility type services transmission facilities), and needs to obtain access over the neighbouring owner's lands to "connect".  Ideally, the subdividing party will have anticipated its retained property's "isolation", absent the right to access/connect over the neighbouring owners' lands, and accordingly reserves or bargains for the required limited usage rights over the neighbour's lands.  The rights so reserved, or acquired (typically by way of bargain as part of the subdivider's transfer and sale to the neighbour), are a species of a land interest long time recognized in our legal system and is known as an "easement".  As an interest in land, an easement, if it is properly conceived of and documented, will bind not only the original owner of the neighbouring (affected) lands, but also its successors-in-title, indefinitely.  Similarly, the benefit of the easement will enure to the benefit of not only the original subdividing land owner (who needs the easement for its benefit), but also for the benefit of such original owner's successors-in-title.

But what happens where the original subdividing owner and its neighbouring purchaser(s) fail to create the required legally enforceable easement (or easements), and instead, the owner benefitting from the easement simply exercises access rights over its neighbour's (or neighbours') land(s), without the formal and legal creation of one or more easements, and without the neighbouring owner (or owners) objecting to or challenging the use of its (their) land(s)?  In other words, what happens where the benefitted land owner simply goes ahead and acts as if it had an easement, with the neighbouring owner acquiescing in that usage?  Of course, as long as the benefitting owner (and its successors-in-title) make use of the neighbour's lands, and the neighbour doesn't object, there is no real problem.  But if at some later point in time, the current owner of the neighbouring property chooses to object - and perhaps takes active steps to stop or hinder the usage of its land - such as, by way of erecting barriers, putting up fences, etc. - does the then owner of the benefitted property have any legal recourse?  For a long time, the law has recognized that in some situations, the owner of the benefitted property should be given easement rights over its neighbour's property, notwithstanding the absence of a previous formally created easement.  One of those situations is where the benefitted property owner's (or owners') usage has been longstanding, open and unchallenged.  Then the owner of the benefitted property is said to have acquired an easement by prescription (or an easement obtained by lengthy and unchallenged usage).  The other basis on which a non-formally created easement may be recognized is where the benefitted owner is able to convince a Court that without the benefit of an enforceable easement, the benefitted owner's property is not capable of being used, at least for most, if not all, purposes.  This is called an "easement of necessity".

The problem with a benefitted owner having to rely on a Court recognizing that it has an easement of necessity over its neighbour's (or neighbours') lands is that the Courts have, for many years, taken the position that an easement of necessity will not be recognized merely because, without the entitlement to the easement, the usage of or access to the benefitted owner's property is merely inconvenient.  The Court must be convinced that it is virtually impossible for the benefitted owner's property to be used without the benefit of the easement.  Thus the use of the word "necessity" here.

The difficulty in establishing an easement of necessity was recently illustrated by the Ontario Court of Appeal decision in Toronto-Dominion Bank v. Wise (Judgement, August 16, 2016, hereinafter, the "Wise Case").  In the Wise Case, Mr. and Mrs. Wise owned property fronting on a lake, and they decided to - and did - split their land into two lots, gifting one of the lots to their daughter and retaining the balance of the land which then had access only by way of the lake, and not by way of the neighbouring municipal road which ran adjacent to the daughter's lot, but after the title split, was not adjacent to the Wises' (retained) lot.  The Wises did not arrange for the formal creation of an easement over the lot transferred to their daughter.  The Toronto-Dominion Bank was involved because it held a mortgage on the Wises' (retained) lot and wished to protect or enhance its security by ensuring that it had proper access to the municipal road. At the original trial of this matter, the trial judge held that the Wises' property did have an easement of necessity over their daughter's lot because water access to their lot was, compared to access by way of land, "impractical".  In particular, the trial judge concluded that the "common law requirement of absolute or strict necessity (to justify an easement of necessity) had developed into a rule of "practical necessity"".

The Ontario Court of Appeal held/concluded that:

(i)            An easement of necessity "must be necessary to use or access the property; if access without it is merely inconvenient, the easement will not be implied".  This was and continues to be true, and accordingly, the trial Court was in error in holding (as above mentioned) that the law pertaining to easements had been modified into something more "practical".  In other words, if you believe that your property requires an easement over a neighbour's property, get the neighbour to agree "at the outset".

(ii)           Whether or not an easement of necessity may be implied depends on the circumstances of the property or properties at the time when one parcel of land becomes split into two or more parcels. 

(iii)          An easement of necessity may be implied - if the right circumstances are present - in the situation where the original owner of the whole property splits its ownership and transfers part to a new owner where the original owner then lacks access, or, where the original owner retains access, but transfers part of what was its property to a new owner and the new owner is without access (the former situation being the one present in the Wise Case).

In the Wise Case, at the time of the split in ownership, the originally held lands had water access, and that in itself was sufficient to defeat Mr. and Mrs. Wise's claim for an implied easement over their daughter's adjacent property.  It didn't matter that access to Mr. and Mrs. Wise's property by way of water was inconvenient - and perhaps difficult - compared to being able to have access (by way of a path or roadway) over their daughter's property, and, it didn't matter that in fact, no one had ever accessed Mr. and Mrs. Wise's property from the adjacent lake.

So, what is the "moral" of this story?  The writer suggests that the Wise Case emphasizes the need for people who are intending to subdivide their property to ensure that they will have proper access once ownership of the adjacent (subdivided) lands has changed, and this should be properly dealt with (with input from knowledgeable counsel) before any transfer or commitment to transfer is made.

March 2017

You and a neighbour own adjoining properties, and you grant an easement to the neighbour to come and go over a road which runs over your property, for the purpose of giving your neighbour access to the public street (or it could be a park or a shoreline) adjacent to your property.  Or, you grant an easement to your neighbour to enable your neighbour to run connecting pipes to a water well on your property (and to draw water from the well for the neighbour's purposes).  The right to make use of the easement is stated to be binding on not only you and your neighbour, but also your and your neighbour's respective successors-in-title to the adjacent two properties.  To bolster this ongoing binding nature of the easement rights, your neighbour registers a caveat against your property's title giving notice of the easement.  The easement agreement provides that you and your successors-in-title to your property, will maintain (and perhaps insure and pay the property taxes applicable to) the well and the connecting pipes which run through the easement area from your neighbour's property to the wellhead on your property.

Just what obligations do you owe to your neighbour with respect to the easement?  Clearly, you have no right to complain about the fact that the neighbour uses its easement rights to access and draw water from your well.  Additionally, as between you and your neighbour, and based on the easement contract between the two of you, you have an obligation to maintain (and, depending on the terms of the easement agreement, insure and pay the property taxes applicable to) the well and connecting pipes.

But what happens if you sell your property to a new owner (the "New Servient Tenement Owner")?  Does the New Servient Tenement Owner owe an obligation to its neighbour to honour the easement rights granted to the neighbour? The answer to this question is clearly "yes".  But what about the contractually specified (in the easement agreement) obligation to maintain, repair (and, if applicable), insure and pay the property taxes referable to the road, well and connecting pipes?  Under long existing non-statutory law, the New Servient Tenement Owner (i) does not owe any obligation to do anything other than to honour the neighbour's easement rights of usage or utilization, and, (ii) in particular, does not owe any obligation to take any active steps to maintain or to pay for anything referable to the easement and the equipment/facilities it protects for the neighbour's benefit.  However there are two exceptions to this, namely: (a) the New Servient Tenement Owner will be obliged to maintain, pay costs, etc. if the New Servient Tenement Owner has specifically bound itself to the neighbour under the easement agreement.  That is, where the New Servient Tenement Owner has "stepped into the shoes" of the original servient tenement owner for all purposes under the easement agreement, and, (b) the New Servient Tenement Owner is obliged to not take any positive action or steps to destroy, hinder or adversely affect the neighbour's easement rights.  However, and assuming no new binding obligation is undertaken in favour of the neighbour, if the New Servient Tenement Owner simply does nothing, it owes no further obligations to the owner of the dominant tenement.

The recent Ontario Superior Court of Justice case Middlesex Condominium Corporation No. 229 and 1510231 Ontario Inc. (judgement date October 11, 2016, hereinafter, the "Middlesex Condominium Case") dealt with this issue.  The pertinent facts of the Middlesex Condominium Case were:

(i)            the plaintiff condominium corporation and the defendant each owned lands bordering a creek in London, Ontario;

(ii)           the plaintiff and the defendant shared ownership of a retaining wall which provided support to each of their properties in relation to the creek bank, and it also provided support to easements benefitting the plaintiff over the defendant's property relating to an access road and a sanitary sewage pipe;

(iii)          the retaining wall was built and the easements granted for the benefit of the plaintiff's land prior to when each of the plaintiff and the defendant acquired their respective properties;

(iv)          the plaintiff acquired its property in 1991, 12 years before the defendant acquired its property;

(v)           the retaining wall commenced to deteriorate in 1998, and in 2003 there was a "catastrophic failure" of the wall on the properties of both of the plaintiff and the defendant;

(vi)          the defendant acquired its property in October of 2003, after the wall's failure;

(vii)         after 2003, the wall continued to deteriorate and was not repaired or remediated by either of the parties; and

(viii)        in 2009, the plaintiff commenced an action against the defendant alleging that the defendant was "negligent in failing to maintain and repair that portion of the (retaining) wall located on its (ie, the defendant's) property, thereby causing and continuing to cause damage to the plaintiff by interfering with its easement rights.".

The Court observed:

(a)          The case "is about what the (defendant) did not do, rather than what it did do".  The claim against the defendant was one for damages to the plaintiff's easement rights, "arising solely from the defendant's failure to maintain and repair the wall since its acquisition of the property in 2003".

(b)          The claim does not relate to loss to the plaintiff with respect to its property generally, only with respect to the plaintiff's loss of the benefit of its easement rights over the defendant's land (in fact, five years earlier than the Middlesex Condominium Case, the plaintiff had commenced an action against the defendant for loss/damage suffered by the plaintiff to its property in addition to, or over and above, the plaintiff's loss of the benefits of its easements).

(c)          The Middlesex Condominium Case did not involve the conduct of the defendant relating to the collapse of the retaining wall.  Rather, the claim was based on the plaintiff's view that the defendant owed an obligation to the plaintiff to repair the defendant's portion of the wall so that the plaintiff (could) continue to enjoy its rights of easement over (the defendant's) property".

(d)          In addition to alleging the existence of a duty by the defendant to take positive action to repair the retaining wall as an incident of the defendant's primary obligation to permit the from time to time owners of the plaintiff's lands to exercise their right-of-way entitlements, the plaintiff also claimed that the defendant had a contractual or "deemed" contractual obligation to repair and maintain the retaining wall by virtue of the defendant's predecessor-in-title having entered into a development agreement with the local government which obligated the property owner to maintain, which agreement was stated to be binding on all "successors-in-title", and which was registered against the title to the defendant's property.

The Court neatly summed up the essence of the dispute as being whether or not "a servient tenement (owner) has a duty to repair with respect to easement rights of the dominant tenement (owner)?".  And, "…whether substantial interference with the dominant tenement (owner)'s easement rights may arise from passive conduct of the servient tenement (owner) by failing to do something". And, "…does a servient tenement (owner) have an obligation to be proactive to prevent damage to the dominant tenement (owner)'s easement rights"?

The Court held:

(A)          Pursuant to long-standing non-statutory law (common law and equity), the plaintiff's case could not succeed because the defendant not only did not own its property at the time that the retaining wall collapsed (and caused consequent damage to both parties' properties), but additionally, the defendant had not done anything since its acquisition of its property that could be considered as causing or amplifying the problem originally caused by the retaining wall's collapse.  The defendant simply "did nothing", and as noted, the owner of a servient tenement is not obliged to take any positive action (or expend any funds) in order to protect, maintain or enhance the works or facilities on or forming the subject matter of the dominant tenement owner's easement.

(B)          The plaintiff's argument that the municipal development agreement obligated the from time to time owners of the defendant's property to maintain the retaining wall, and thus the plaintiff had a claim against the defendant  based on the defendant's breach of that agreement, also failed because "the Plaintiff and its predecessors in title (were) not parties to the development agreement".  In other words, a breach by the defendant of its (continuing) obligations under the development agreement did not give the plaintiff a cause of action against the defendant.

Readers should keep in mind the fact that a statute can impose positive obligations (to do something or expend monies) on a successor-in-title to the original grantor of an easement (or other owner of real estate or a real estate interest) to maintain, pay the taxes on and insure at its cost, etc.  Four Manitoba examples of such statutory "interference" with "judge made law" are:

(i)            Section 111.1(1) of The Manitoba Real Property Act which provides that where a "statutory easement" is registered on title, the easement constitutes an interest in land, runs with the title to the land, and, "the conditions and covenants expressed in the instrument apply to and bind the respective successors, personal representatives and assigns of the grantor and the grantee (except to the extent that a contrary intention appears in the instrument)".  A "statutory easement" is, generally speaking, an easement in favour of the provider of a service, in particular, "utility type" services, and which (usually) are created for the benefit of the service provider, without the service provider holding an adjacent or neighbouring "dominant tenement" parcel.

(ii)           The City of Winnipeg Charter, dealing with development agreements, and with zoning and subdivision agreements, provides that when these types of agreements are registered against a title to land (typically, by way of caveat), such agreements bind both the owner and the owner's successors-in-title.  (The writer acknowledges that a Court might well hold that all this means is that an agreement's negative type obligations run with the title, and that more specific language would be required in order to cause a positive contractually created obligation to run with land, but I wouldn't want to take the chance!).

(iii)          Pursuant to The Manitoba Condominium Act, simply by reason of acquiring ownership of a condominium unit, such owner thereby becomes bound - without specifically covenanting or agreeing to become bound - to maintain not only the owner's unit, but frequently also, some (typically those adjacent to the owner's unit) common elements or common property, and, to pay a specified share of the condominium regime's common elements or common property.  Such obligations are "deemed" to be owed to the condominium corporation, and sometimes to a unit owner's neighbours.  The legislation also creates or "deems" the existence of various easements required to support and protect the condominium property including the units, again, without the owner specifically granting or confirming the existence of such easements.

(iv)          The current owner of a real estate interest is almost always subject to the imposition of property taxes upon its ownership interest, without the owner having to consent to being responsible for same.

The above examples are but a few of the situations in which the common law's tendency to not obligate a person to have to take action or expend monies simply by reason of one's ownership of real property or an interest in real property, has been eroded by statutory intervention.  Many - although clearly not all - such interventions are created for the benefit of one or more levels of government.  It is this writer's belief that our laws should be amended so as to better facilitate the establishment of positive obligations imposable upon property owners, especially in arrangements, such as "building schemes", where there is more than the average interconnectedness and proximity of interests amongst the neighbouring owners.

2007

Under the Real Property Act (Manitoba) (the "MRPA"), a person claiming an estate or interest in land (and as well, an estate or interest in a mortgage, encumbrance or lease) may, provided that the land (or the mortgage, encumbrance or lease) is under the new (titled Torrens system), file a caveat (in the prescribed form) which, in effect, records "notice" of the caveator's estate or interest against the land (or against the mortgage, encumbrance or lease).  This filing, in effect, establishes the priority of the caveator's estate or interest as against other claimants or holders of estates or interests in the land (or in the mortgage, encumbrance or lease).  Please refer to Sections 148(1) and 155 of the MRPA.

It is important to appreciate that a caveat is not an interest, estate or right of or by itself alone, but is merely a notice or warning (to all interested parties) that the caveator has an interest, estate or right.  That is why Section 154(1) of the MRPA requires that a caveat sets forth "the nature and particulars of the title, estate, interest or lien, under which the claim (of which the caveat is to give notice) is made".  There is case law (from Alberta and Saskatchewan) which holds that a caveat may not bind persons acquiring estates, interests or rights in the underlying land (or mortgage, encumbrance or lease), notwithstanding the caveat's due registration, where the caveat fails to either adequately describe the particulars of the caveator's estate, interest or right claimed, or, where the caveat fails to have attached to it (in effect, as a schedule), a copy of the underlying agreement, document or instrument which creates the estate, interest or right.

The fact that a registered caveat is something separate from the underlying agreement, document or instrument creating the claimed estate, interest or right must be kept in mind by counsel when caveats are discharged.  Caveats are discharged by the registration of the discharge instrument (in the prescribed form), or (occasionally) pursuant to action taken by the Land Titles Office consequent upon an interested person initiating what is commonly called a "30 day notice proceeding" under Section 150 of the MRPA.

Where a person decides to release, terminate, or otherwise give up such person's estate, interest or right which has previously been registered by way of a caveat, he, she, it, or as the case may be, they (or more accurately, the caveator's counsel) will typically discharge the registration of the caveat and do no more.  This is based on the assumption that discharging the caveat will of itself release, terminate or otherwise give up the underlying estate, interest or right.  While for some situations, simply discharging may be sufficient, it is this writer's view that the mere discharge of the caveat will not, or at least not necessarily, legally result in the underlying estate, interest or right itself being extinguished.  This writer believes that in addition to discharging, the caveator should also provide a written (simple) confirmation (ideally, to be stated to be issued to "all interested persons") that the caveator's estate, interest or right has in fact been released, terminated or otherwise extinguished.

Absent the issuance of such written confirmation, the (former) caveator or someone claiming under or through the (former) caveator may be able to argue that the estate, interest or right continues in effect, and, that, notwithstanding the discharge of the caveat:

(i)            while the estate, interest or right is probably not enforceable against persons acquiring interests in the land after the caveat's discharge, the estate, interest or right continues to be enforceable as against the owner of the land (or of the mortgage, encumbrance or lease); and

(ii)           absent agreement to the contrary, the holder of the estate, interest or right may be entitled to register a new caveat.

Some would argue that the act of discharging a caveat should be sufficient evidence to establish that the discharging caveator has released, terminated or extinguished the caveator's estate, interest or right.  In some instances, this may be a reasonable argument, but nevertheless, given the above-described function of a caveat (ie., it doesn't create an estate, interest or right, but merely gives notice and establishes the priority of the estate, interest or right), it would be far safer (from the perspective of someone who wants to ensure that the estate, interest or right is in fact extinguished) to insist that there be a written confirmation of such extinguishment plus a discharge of the caveat.

An interesting situation involving the need to differentiate between registration of an estate, interest or right (essentially to establish the priority of same) on the one hand, and the creation and existence of an estate, interest or right apart from any registration of same on the other hand, is found in Section 58(1)(c) of the MRPA.  Section 58(1)(c) provides that "any right-of-way or other easement, howsoever created, upon, over or in respect of, (the) land" binds such land in the title thereby affected without any registration or other recording of such right-of-way or other easement against the affected title.  If one agrees with the writer's foregoing thesis, then someone wishing to ensure the extinguishment of a right-of-way or other easement should obtain a written release, termination or other giving up of such right-of-way or other easement, whether or not the same has been registered.  Where a right-of-way or other easement has not been registered (and exists and binds the affected title by virtue of Section 58(1)(c)), it is obvious that there is nothing to be discharged in order to assist in removing or extinguishing the right-of-way or other easement; in such a situation, the issuance of a written confirmation of extinguishment is clearly required.  But the writer's thesis here is that even if a right-of-way or other easement has been registered by caveat, it is necessary to get a written confirmation of extinguishment of the same in addition to discharging the registration.

Consider the situation where there are two adjacent land owners and one has inadvertently effected improvements for the use and benefit of his or her land which trespass onto the other landowner's land.  The first mentioned land owner (the "Encroacher") discovers the encroachment and seeks and obtains a written easement agreement from the encroached upon land owner (the "Encroachee"), and the Encroachor registers a caveat giving notice of such easement agreement against the Encroachee's title.  Next assume that for whatever reason, the Encroachee decides that it doesn't want the encroachment to continue to exist, and induces the Encroacher to discharge the Encroacher's caveat.  Are the Encroacher's rights under the easement extinguished?  To be on the safe side, counsel for the Encroachee should insist on the Encroacher providing a written release and termination by the Encroacher of its easement rights (as well as insisting upon the Encroacher discharging its caveat).  The writer would also argue that in this situation, the release and termination document should also contain an extinguishment of any rights which the Encroacher may have had or might in the future have (or which might be acquired by any of the Encroacher's successors in title or anyone claiming under or through any of them in the future) under Sections 27 and 28 of the Law of Property Act (Manitoba) (the "MLPA").  These sections of the MLPA may give the Encroacher (or its successors and assigns) certain rights similar to what it had under the previous easement agreement, such rights arising/existing independently of any contract between the parties.

January 2011

 

 

A financial institution takes security from a business debtor on all of the debtor’s presently held and after-acquired personal property.  At the time of the entering into of the security agreement, either the financial institution is aware of the fact that the debtor owns one or more serial numbered goods and completes its financing statement accordingly (filling out the correct particulars, including the serial number or numbers, of the serial numbered good(s)), or, the debtor owns no serial numbered goods and the financial institution’s financing statement accordingly contains no particulars of any serial numbered goods.  At some point in the future, the debtor does acquire one or more serial numbered goods but this is not communicated to the financial institution, whether inadvertently or intentionally.  Subsequently, the debtor becomes insolvent or bankrupt and the financial institution decides to realize its security.  Consider the following:

(i)            with respect to the after-acquired serial numbered goods, does the financial institution have valid and enforceable security against same, as between the financial institution and the debtor?

(ii)           what is the financial institution’s position if, after the financial institution registered its financing statement, the debtor granted a security interest in its after-acquired serial numbered goods to another secured party who did properly register a financing statement against the serial numbered goods?

The answer to the first question is quite clear – because the rules regarding the need to properly register against serial numbered goods relate to establishing the secured party’s priority against persons other than the debtor (ie it pertains to “perfection”), as between the financial institution and the debtor, the security interest is enforceable against the debtor.

What about the financial institution’s security (with respect to the serial numbered goods) as against the subsequent secured party (who did properly register against the serial numbered goods)?  This question was answered – in favour of the subsequent secured party – in the Deloitte case, Saskatchewan Court of Appeal, 1987 (hereinafter, the “Deloitte Case”).  In that case, Bank “A” acquired a general security agreement from the debtor and registered it in the Saskatchewan Personal Property Registry.  At the outset, the debtor did not own any serial numbered goods, but subsequently acquired some which became subject to a security interest in favour of Bank “B” which Bank “B” did properly register against the serial numbered goods.  Even though Bank “A” had taken and registered its security interest before Bank “B” took and registered its security interest, the Court held that Bank “A”’s security interest in the serial numbered goods was not perfected and that Bank “B”’s security interest in them was perfected.  In the circumstances, failure to register against the after-acquired serial numbered goods amounted to a failure to perfect Bank “A”’s security interest, as required by the Act and its regulations.

Although the judgment in the Deloitte Case does not say so, a likely reason why Bank “A” failed to amend its original registration to include proper serial numbered goods particulars was because Bank A was simply unaware of the fact that the debtor had acquired the serial numbered goods.  This is a dilemma for creditors who wish to acquire security in all of the debtor’s present and after-acquired personal property – i.e., that at a later point in time, the debtor may acquire serial numbered goods that the creditor isn’t even aware of, and thus fails to properly perfect against such goods, with the result that the creditor loses priority to a subsequent creditor of the debtor (who does properly register against the serial numbered goods), or to the debtor’s bankruptcy trustee.

Where the subsequent secured party properly registers against subsequently acquired serial numbered goods and that secured party finances the debtor’s acquisition of the goods (i.e. acquires a “purchase money security interest” in the goods), the result is arguably fair.  But where the subsequent secured party does not so finance, the result is arguably unfair.

Absent a change in the legislation (to somehow exempt the original secured party from the need to amend its registration to cover subsequently acquired serial numbered goods where the original secured party has no knowledge of the acquisition of such goods by the debtor), and, subject to what I say in the next succeeding paragraph hereof,  the only suggestion that this writer can make is for the original secured party to vigilantly monitor its debtor’s business activities and acquisitions on an ongoing basis.

There is another possible argument that the secured party might make to give it priority over a subsequent secured party, where the original secured party does not register against after-acquired serial numbered goods, but the later secured party does so.  This argument would only work where the original secured party is able to establish that the debtor's subsequently acquired serial numbered goods were proceeds of the original collateral subject to the earlier secured party's security interest.  The argument would be based on the priority given to a secured party's security interest in proceeds which are derived from original collateral which was subject to the secured party's security interest, Sections 28(1) and 28(2) of the Personal Property Security Act.  The argument also hinges on the way in which the PPSA deals with non-perfected security interests in serial numbered goods, namely:

(i)            Section 43(8) dealing with consumer serial numbered goods provides that failure to duly register against serial numbers means that the secured party's registration is ”invalid"; and

(ii)           Section 35(4) which deals with a secured party's failure to duly register against serial numbers where the collateral is business equipment, does not say "invalid", but instead provides that the security interest is not registered or perfected by registration for the purposes of Sections 35(1), 35(7), 35(8) and 34(2), the point being that none of these Sections refers to or includes aforementioned Section 28.

August 2017

The primary rules for determining what are - and what are not - amounts and claims owed to a Manitoba condominium corporation for which the corporation is entitled to exercise a lien against a unit owner's condominium unit and such owner's interest in the common property, are determined by what's in The Condominium Act (Manitoba) (the "MCA").  These rules may be summarized as follows:

1. Section 162(1) of the MCA - where an owner fails to contribute to (i) the project common expenses and/or (ii) project the reserve funds, the corporation "has a lien" against the owner's unit and interest in the common property for:

(a)          the unpaid amount;

(b)          that interest owing on the unpaid amount; and

(c)          reasonable costs and expenses incurred by the corporation in collecting or attempting to collect the unpaid amount.

Section 162(3) of the MCA provides that where a corporation has registered a lien (against the owner's title), the lien secures both the amount which was unpaid (which led to the arising of the lien) plus, "automatically", future amounts that become owing by the owner on account of common expenses and/or reserve fund contributions, together with interest and reasonable legal costs.

1. "common expense" is defined in Section 1(1) of the MCA to mean (i) an expense related to the "performance of a condominium corporation's mandate, duties and powers", and, (ii) "an expense specified as a common expense by (the MCA) or by a condominium corporation's declaration.

It is unlikely that one would have any difficulty in determining whether or not an amount owed by an owner was - or was not - a contribution to the condominium reserve fund.  But what about common expenses?  Although the wording "an expense related to the performance of a (condominium) corporation's mandate, duties and powers" is itself fairly broad, defining common expenses as including amounts specified as such in the declaration opens up - at least in theory - the concept considerably.  Yet, it is this writer's "gut feeling" that some of the claims which a corporation might have against an owner which were listed and considered in the above-mentioned Alberta Manor Case, would not likely held by a Court to be "common expenses".  Examples might be:

1. Section 162(6) of the MCA provides that a condominium corporation has "the right to enforce the (registered) lien in the same manner as a mortgage is enforced under The Real Property Act".  Although not explicitly stated in the MCA, it is reasonable to assume that an amount owed by an owner to a corporation which was not enforceable via the aforementioned lien, would, in most cases, be enforceable against the owner by way of an action in debt.  Clearly, this was the position taken by the Court considering the matter in the Alberta Manor Case, and it is most likely that the same situation would occur in the context of a Manitoba condominiumized property.
2. Sections 13(1)(h) and 13(1)(i) of the MCA - these provide that a condominium declaration must contain a statement or specification of (i) "the proportions in which the unit owners are to contribute to the common expenses, expressed in (the) percentages allocated to each unit", and, (ii) "the proportions in which the unit owners are required to contribute to the reserve fund, expressed in (the) percentages allocated to each unit".

Many - if not most - common expenses will relate to the corporation's rights and obligations to maintain the common property, including common property which happens to be situated within or running through a unit owner's unit.  Where all the common property benefits or is available for the benefit of all of the unit owners, it is logical that all of the owners should contribute.  That also goes for expenditures which may be made out of a corporation's reserve fund which benefit or are capable of benefitting all owners.  Although perhaps not immediately obvious, the same reasoning would apply to the situation where a condominium corporation is obliged to take steps to remedy a problem which has been caused by, or which is the responsibility of one or two - typically one only - unit owner(s), but the remedying of the situation by the corporation benefits all owners.  As long as the unit proportions are considered to be reasonable by those buying and selling the units (and those financing acquisitions of units), the arrangement "works".  Readers who are familiar with condominium projects will know that the "usual" basis for determining unit proportions is the relative size and amenities (and perhaps the relative desirability of the location) of and pertaining to each unit, in relation to the same "qualities" applicable to the other units.

One question which arises from a consideration of how Sections 13(1)(h) and 13(1)(i) operate, is whether or not, either at the outset, or subsequently by way of a duly effected amendment, a condominium declaration could specify some - and probably most - of the common expenses to be allocated to owners based on their respective unit proportions, with other expenses allocated on a different basis.  This could be (i) equally amongst all unit owners and/or (ii) 100% to a particular unit owner or owners who are responsible for the situation or "problem" which has led to the corporation having to expend monies to remediate a malfeasant owner's (or owners') misconduct, negligence or just general "bad behaviour".  The above-mentioned Saskatchewan Albony Case dealt with a condominium community where it was desired (at least on the part of some of the unit owners) to have some common expenses allocated on the basis of the unit proportions (on the theory that such expenses benefitted each unit owner in some way measurable or referable to the value of a unit owner's unit, with other expenses being allocated equally amongst all owners (on the theory that all owners, regardless of the relative value of their units, benefitted equally from the incurring of such expenses).  From the reasoning in the Manor Case, it appears that the corporation could have legally allocated common expenses on the two different basis, but did not follow the legislation's requirements to properly amend the corporation's "constating documents" so as to properly effect such a modification.  That would suggest that in Manitoba, such a (two or more) pronged basis for allocating common expenses would be legally effective, or could be made so, if the proper procedures for amending the declaration were observed.  Or they were put in place at the outset when the condominium was created.

1. We know that a Manitoba condominium corporation's lien can (and indeed must) be registered against a recalcitrant owner's title, and that the lien may be realized in the same manner as a mortgage under The Manitoba Real Property Act, which means that the corporation can sell or foreclose upon the owner's title.  But what about the priority that such lien will hold in relation to other competing monetary claims against the owner's interest?

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.

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....

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.

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.

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.

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.

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.

February 2020

When you obtain a document from a Manitoba Land Titles Office/Manitoba Registry Office (a "Document"), you pay a fee.  Such payment is long accepted by lawyers and by others who, for their own purposes, choose to obtain Documents directly from a Land Titles Office.  The quid pro quo for such charge is in part related to the costs incurred in operating the land titles system, including the receipt, processing, storage and regurgitation of Documents and other information "officially" provided to the system.  It is also in part based on the fact that the operator of the land titles system either holds or operates under the copyright which attaches to Documents - or at least to certain Documents.

The types of documents obtainable from a Land Titles Office may be broken down - generally - into these categories:

(i)            statements, declarations or confirmations of certain of the information held by the system pertaining to particular types of interests in land, the most common being ownership ("Land Ownership Confirmation").  The most frequently requested form of Land Ownership Confirmation is the document currently called a "Status of Title Certificate".  It not only contains a current (as at the date of its issuance) summary of (certain of) the system's recorded/held information pertaining to the ownership of a particular parcel of land, but additionally comprises a certification by the system that such information is substantially correct.

(ii)           copies of documents which, in one manner or another, affect dealings with land interests ("Conveyancing Documents"). Examples of frequently obtained Conveyancing Documents are mortgages, caveats, easements, transfers and discharges.

(iii)          plans prepared by properly licenced surveyors which, when recorded/registered in a Land Titles Office, become "official" determinants used by lawyers, courts and other officials to ascertain the precise boundaries and the extent of parcels of land ("Ownership Delineation Plans").  A plan of subdivision delineating two or more parcels of land would be the most frequently encountered/dealt with Land Ownership Plan.

From time to time, questions arise as to who holds the copyright for various types of Documents and if so, who is entitled to enjoy the various rights (subject to the legal obligations) which flow from copyright ownership.  The recently decided Supreme Court of Canada decision in Keatley Surveying Ltd. and Teranet Inc., judgement issued September 26, 2019 (hereinafter the "Keatley Case") dealt with this issue.  An Ownership Delineation Plan was prepared by a "private" surveyor and then recorded in a land registry office.  The land registry office and the land titles system were owned by the Province of Ontario (the "Province") and by way of an arrangement between the Province and Teranet Inc., was operated by Teranet Inc. acting in part, as an agent of the Province.  Part of the arrangement between Ontario and Teranet involved Ontario providing a licence to Teranet to make use of the copyright which Ontario claimed in the Land Ownership Plan.  The Province's (and Teranet's) position was that by Section 12 of the Copyright Act (Canada) (the "Act"), the Province owned the Land Ownership Plan's copyright and that it had properly licenced that copyright to Teranet.  Keatley argued that it should not lose its copyright merely because the plan was recorded in the land titles system.  It's position was that, although Section 12 of the Act did enable the Province to, in effect, expropriate a surveyor's copyright in plans which he/she had prepared and recorded without compensation, claiming copyright in this situation was an "overreach", and that the intent of the drafters of the Act (in 1921) was not to give such broad expropriation rights to the Province (or the federal Crown).

The Supreme Court agreed that Section 12 was not intended to give unrestricted freedom to the Crown to expropriate copyright (without compensation).  However, it was not an "overreach" to conclude that, on a proper application of Section 12, copyright in Land Ownership Plans did, upon recording in the Land Titles system, completely pass to the Province.  Given the Province's interest in ensuring the integrity of Land Ownership Plans (once officially recorded in the system) and the degree to which the Province - through legislation and regulations - governed the manner in which Land Ownership Plans were to be prepared, and perhaps most significantly, given the public interest in maintaining assurance that recorded Land Ownership Plans would continue to officially and unequivocally determine the boundaries between parcels of land, a proper reading of Section 12 was that copyright did pass from the surveyor to the Province.

It is necessary to take a "deep dive" into the meaning of Section 12 and then apply the meaning(s) thereby garnered to the particular situation under consideration in order to properly answer a question regarding the Province's entitlement to copyright in any particular recorded Document.  The Court held that the meaning of Section 12 was that where:

(i)            a "work" has been prepared under the direction of  or control of Her Majesty; or

(ii)           published by or under the direction of or control of Her Majesty;

copyright in the "work" passes to the Crown, in effect, upon the occurrence of such preparation or the occurrence of such publication.

The Court further held that:

(a)          a "work" is prepared by the Crown when "… its agent or employee brings the work into existence for and on behalf of the Crown in the course of his or her employment or when the Crown essentially determines whether and how a work will be made, even if the work is produced by an independent contractor";

(b)          whether or not a work is published with sufficient governmental direction or control "… necessitates and inquiry into the Crown's interest in the work at the time of (and often, after) publication".  Where the following-described situations/circumstances can be proven to exist, it will be held that the work was so published, namely, inter alia, the presence of a statutory scheme transferring property rights in the work to the Crown, a statutory scheme which places strict controls on the form and content of the work, where the Crown physically possesses the work, where exclusive control is given to the government to modify the work and where there is a necessity for the Crown to make the work available to the public.  Presumably, if none - or only a very few - of the aforementioned situations/circumstances exist, then a work prepared by an independent contractor (ie, not a government employee or agent) may be held to have its copyright maintained in the author.  This may be so even though the work is "published" by or at the direction of the Crown.

Where an Ownership Delineation Plan, typically prepared by a private surveyor on engagement by a private person or business, has been placed the plan on record at a land/property registry, copyright passes to the Crown.  No one in the Keatley Case challenged the Crown's right to licence that copyright to Teranet as part of Teranet's contract with the Crown to operate the property registry.  While some may object to this decision on principle (ie, that it is inequitable for the surveyor to lose its copyright without compensation in this manner), this is - absent a change of mind by the Supreme Court or an amendment to the statute - a ruling we must accept.

Note in particular in the Keatley Case:

(a)          the Crown has established rules (some statutory, some regulatory and some merely policy or protocol rulings) in directing surveyors what information must be included in plans and how that information is to be presented;

(b)          once on record in the property registry, the content of plans cannot be altered without formal statutory procedures and/or guidelines; and

(c)          it was pointed out that third parties rely on the accuracy and currency of the information in recorded plans for the purpose of determining the extent of property rights.

Common sense suggests that without the above-mentioned "controls" and limitations, fraud and ultimately, chaos, would occur - or at least that it would be more likely to occur.

Given the Court's reasoning in the Keatley Case, it is interesting to speculate as to whether or not other Documents, once recorded in a property registry, would, upon such registration, have their copyright pass form the originator of any such Document to the Crown?  What about Land Ownership Confirmations and Conveyancing Documents?  Consider the following:

(A)          Land Ownership Confirmations certainly appear to meet the above-described criteria and they are, in any event, wholly created by the property registry.  Thus, assuming that a Land Ownership Confirmation is a "work", copyright in it almost certainly belongs to the Crown.

(B)          Conveyancing Documents are - like most Ownership Delineation Plans, prepared by privately engaged lawyers.  They too appear to meet the above-described criteria provided that they are legally "works".  However, if I as a practicing lawyer obtain a copy of a mortgage previously registered in the property registry, neither I nor (I believe) most other practitioners would consider me as breaching copyright by making further copies of same and distributing same to interested - or potentially interested parties.  Perhaps this question requires further clarification from the Courts.

It is also interesting to speculate on whether or not the Crown has copyright in information produced by the Personal Property Registry.  This may have to be clarified by the Courts in the future.

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.