As Chair of the Real Property Subsection Committee for the Manitoba Bar Association and as the Designated Representative for Manitoba Real Property for the Canadian Bar Association I am often contacted by solicitors who have general questions about real property law in Manitoba; pursuant to a recent inquiry, real estate solicitors may find the following to be not only informative but also practical.

Being a Manitoba solicitor and a Public Member of the Association of Manitoba Land Surveyors, the practical information that will be shared in this article must be qualified with a disclaimer that pursuant to The Land Surveyors Act C.C.S.M. c. L60 (Manitoba) no person other than a Manitoba land surveyor shall engage in the practice of land surveying and thereby no person other than a Manitoba land surveyor shall determine, establish, locate, demarcate or define a boundary used to reference, describe or delineate, inter alia, land.

On occasion a solicitor may encounter a title with a legal description whereby a Legal Subdivision is referenced in lieu of a plan number, for example:

LEGAL SUBDIVISIONS 3, 6, 11 AND 14 OF SECTION 22-13-8 WPM

The reference to "legal subdivision" may cause confusion and with no ability to order a "plan" the solicitor must consider standard Section measurements in determining "what land" the title is for.

Importantly:

(a)  1 square mile is equal to 5,280 feet x 5,280 feet;

(b)  1 Section is equal to 640 acres or one square mile;

(c)  4 Quarter Sections equal 1 Section;

(d)  1 Quarter is equal to 160 acres;

(e)  1 Legal Subdivision is equal to 1320 feet x 1320 feet akin to one quarter of a Quarter Section

As a Legal Subdivision is equal to 1320 feet x 1320 feet is akin to one quarter of a Quarter Section,  the next question is where within a Quarter Section and where within a Section is a Legal Subdivision located?  To answer, a diagram of a Section is of remarkable assistance:

SECTION 22-13-8 WPM

 

In considering this information we should keep in mind why it is important for a solicitor to know where the land they intend to convey is located; one must only consider the problems that have occurred within various condominium corporations throughout the Province of Manitoba where a condominium unit is incorrectly conveyed, for example, unit owner A is the registered owner of unit 1 but actually resides in unit 2, the registered owner of unit 2 being unit owner B; the incorrectly conveyed unit would most certainly have conveyed correctly had the solicitor, or for that matter the real estate salesperson, reviewed the condominium plan with the prospective unit owner prior to the conveyance and thereby identified the location of the unit not having relied solely upon the numerical designation for the physical condominium suite.   Notwithstanding that condominium units and Legal Subdivisions are different, the same principles apply whereby the solicitor, or for that matter the real estate salesperson, should ensure that the Legal Subdivision being conveyed is indeed the same physical land that the transferor believes it is transferring.

To conclude, you may still be wondering why the title of this article is "Are you looking for 20 chains?", importantly the "chain" was the manner in which our early River Lots, Outer Two Miles and Sections were measured and a Legal Subdivision being equal to one quarter of a quarter section is equal to 20 chains x 20 chains or 1320 feet x 1320 feet.  So, if you are conveying a Legal Subdivision it is prudent to "look for 20 chains" to ensure that the land being legally conveying is indeed the physical land that ought to be conveyed.

May 2003

 

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

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

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

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

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

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

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

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

November 2010

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

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

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

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

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

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

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

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

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

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

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

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

(b)          for where the sewage ejector:

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

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

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

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

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

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

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

Some other matters to note are:

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

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

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

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

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

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

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

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

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

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

September 2012 

In November of 2010, The Supreme Court of Canada held that where a provincially governed (Personal Property Security Act) security interest came in conflict with a security assignment taken by a chartered bank under the Bank Act (Canada), that is, where both the security interest and the security assignment covered the same property with each secured party claiming priority for its respective interest, the priority rules set out in the Bank Act did not provide an answer to the question, at least for the fact situations in the two cases the Court then considered.  In these two cases (the "Innovation Case" and the "Radius Case", hereinafter, collectively, the "Previous Cases"), in essence, the Court held that, due to the constitutional primacy of the federal Parliament over the provincial legislature, a provincial Personal Property Security Act could not set out rules to solve priority disputes; the Bank Act did set out rules for determining priority between these types of interests in some situations, but not the situations in the Previous Cases.

In both of the Previous Cases, a credit union took a provincially governed personal property security interest in certain collateral and failed to register notice of same in the appropriate Personal Property Registry.  Thereafter, a chartered bank took a Bank Act, Section 427 security assignment affecting the same property, and the bank did everything it was supposed to do under the Bank Act to establish the priority of its security assignment (including filing a Notice of Intention by the debtor to grant the security assignment to the bank in the appropriate registry office).  The Court held that the fact that the credit union had not registered a financing statement under the Personal Property Security Act did not adversely affect its priority position vis-à-vis the bank with respect to its Bank Act security assignment, because (as noted above), the Bank Act did not provide a rule to determine priority in this particular situation.  The Court then went back to basic principles to determine priority, including concepts such as "first come, first served" and "once you've given away all your rights in property, you have nothing further to give to anyone else".

The result of the Previous Cases was to put chartered banks taking only Bank Act security in a difficult position.  Even where a bank searched the debtor's name in the appropriate Personal Property Registry, the bank will not find any record an unregistered provincially governed security interest against the debtor's name.  In an earlier paper dealing with the Previous Cases, the writer suggested that one solution to this dilemma would be for a bank to take both Bank Act security and Personal Property Security Act security.  However, by far, the best solution would be for Parliament to amend the Bank Act to provide an appropriate priority rule for this situation.  This has now been done.

Sections 426(7), 426(7.1), 428(1), 428(1.1) and 428(2) of the Bank Act now make it clear that where a provincially governed security interest is not duly registered ("perfected"), a properly taken and subsequently acquired Bank Act security assignment will prevail over the charged secured property.  The legislation does however make it clear that if a bank takes a Bank Act security assignment with the knowledge that the affected collateral is already subject to a previously created but unregistered provincially governed personal property security interest, then the bank's security will be subordinate.  In the Previous Cases, the debtors, either intentionally or unintentionally, did not advise the banks of the previously granted provincially governed security interests.  Thus the banks didn't know about the pre-existing security, and searching in the Personal Property Registry would have told them nothing.

This is a big improvement in the law of secured debt transactions.

March 2009 

On October 29, 2008, the Manitoba Court of Appeal delivered its decision in Re Ehrmantraut (Bankrupt), 2008 MBCA 127, affirming the Manitoba Queen's Bench judgment delivered on May 13, 2008 (the "Ehrmantraut Case").

This case involved a situation where a father wished to acquire certain improved real estate (the "Realty"). The father needed mortgage financing in order to complete his acquisition, but could not get same unless the lender also obtained the benefit of the father's son's covenant to repay the loan. The lender could have allowed the Realty to be put in the father's name alone and got a separate guarantee undertaking from the son, but instead, the lender stipulated that both father and son be put on title as owners/mortgagors. Although not stated as such in the Ehrmantraut Case judgment, one can only assume that the lender believed that the son's covenant to repay would be less likely to be avoided if the son was also shown on title as having an interest in the Realty. Financing was provided, the acquisition closed and father and son were listed on title as joint tenants.

Sometime later, the son became bankrupt and the son's trustee in bankruptcy found that the son's estate included the son's interest in the Realty or the value thereof. In support of the trustee’s position it was submitted that:

(i) a Declaration as to Possession for the Realty was sworn and signed by both the father and the son, containing declarations that they were both entitled to be registered owners in fee simple in possession of the Realty;

(ii) a Statement of Affairs was sworn by the son, declaring his joint interest in the Realty; and

            (iii) by pledging his credit, the son had given good value for the joint interest in the Realty.

The father opposed, maintaining that the son's joint interest in the Realty was held as trustee for his father. In support of the father's position, it was submitted that:

(i)         the Realty was leased and all of the rentals were deposited to the father's bank account (presumably, with the son not objecting to this arrangement);

(ii)        the son did not advance monies either for the purchase of the Realty or to cover its maintenance costs;

(iii)       the father made all of the mortgage loan payments and paid all expenses required for/related to the Realty;

(iv)       the father paid income tax on the rental income derived from the Realty; and

(v)        the arrangement between father and son was simply that the son was "lending his (the son's) name to enable me (the father) to obtain financing and that I (the father) would pay all the expenses for the purchase of (the Realty) and would be the beneficial owner of (the Realty)".

After reviewing the evidence, the Madam Justice McKelvey of the Court of Queen’s Bench (the “Court) noted that there was also no evidence of a (written) trust agreement/arrangement/declaration and no caveat had been registered against the title to the Realty giving notice of the father's alleged trust.

The Court held that although the above-described evidence (including the father's evidence of the intentions of himself and his son) suggested the possibility of a trust arrangement, there was insufficient evidence presented to convince the Court to hold that a trust did in fact exist. The Court suggested certain other possible indicia which could have been put forward (which were not presented by either the father or the trustee in bankruptcy) to argue for the existence of a trust, which included an affidavit from the son, an affidavit from the lawyer who handled the Realty acquisition transaction, an affidavit from an individual employed by the lender at the financial institution involved, an acknowledgement that the son received independent legal advice, an indemnification agreement by the father covering the son should the son be called upon to pay any of the mortgage payments and/or a caveat registered against the title to the Realty giving notice of the trust's existence. The finding of no trust meant that the son's interest in the property was both legal and equitable, and was thus available to the son's creditors in the son's bankruptcy. The Court also found that the son had given valuable consideration to the father (for acquiring his interest in the Realty) by pledging his credit as a mortgagor/owner.

The Ehrmantraut Case suggests that where someone is to be on title as an owner (or part owner) of real property and the arrangement is that such person is not to have any true or beneficial ownership interest in the property, the trust arrangement should be clearly documented and the beneficial owner (or owners) should register notice (by caveat) of their true or beneficial ownership interest in the property.

Express written trusts (and frequently trust notification caveats) are in fact frequently put in place by solicitors acting for one or more true or beneficial owners who decide to take title to real property in the name of a bare trustee corporation. However, in the Ehrmantraut Case, the son's bankruptcy trustee raised another challenge to the alleged trust's existence which frankly, this writer has never heard of or considered. This argument is based on the "indefeasibility of title/ownership" rule found in Section 59(1) of The Real Property Act (Manitoba)(the "MRPA"). Section 59(1) is, in this writer's opinion, at the very core and is of the essence of the MRPA's rules and concepts relating to the ownership of titled real property as it deals with the essential nature and extent of real property ownership. It is worthwhile to set it out in full:

59(1) Every certificate of title, so long as it remains in force and uncancelled, is conclusive evidence at law and in equity, as against Her Majesty and all persons, that the person named in the certificate is entitled to the land described therein for the estate or interest therein specified, subject, however, to the right of any person to show that the land is subject to any of the exceptions or reservations mentioned in section 58, or to show fraud wherein the registered owner, mortgagee, or encumbrancer, has participated or colluded and as against the registered owner, mortgagee, or encumbrancer; but the onus of proving that the certificate is so subject, or of proving the fraud, is upon the person who alleges it.

The trustee in bankruptcy argued on this point that since the existence of a trust is not specified as an exception to the declaration of ownership rights in Section 59(1), registered ownership by a person with a title under the MRPA cannot in law be subject to a trust (for the benefit of one or more off-title owners). This argument was bolstered by reference to certain rules/requirements in Sections 49(2) and 81(1) of the MRPA, which say, in effect, that a Land Titles Office is not, except in certain specified situations which don't concern us here, to make entries on a title or in the register of any trusts or the existence of any trusts, whether "expressed, implied or constructive".

Fortunately for the sake of persons (and their counsel) who have utilized and will in the future wish to continue to utilize express (typically "bare") trusts for the holding of title to real property, the Court appeared to disagree with this argument. The writer uses the word "appeared" here because the Court of Appeal did not specifically deal with this issue, and the trial judge seems to have dealt with the issue somewhat inconsistently.

Notwithstanding the holding in the Ehrmantraut Case - and perhaps due to the Court's lack of unequivocal pronouncements on the effect of Section 59(1) of the MRPA in the context of trusts - the writer is concerned that either in Manitoba or in another Canadian jurisdiction which has statutory language dealing with titled ownership similar to that quoted above, sometime in the future, a court may hold that the combination of these three sections does in fact bar the recognition or imposition of a trust on titled real property. Current Manitoba Land Titles system practice is in fact to permit a caveat to be registered against a title giving notice of a trustee -beneficial owner(s) relationship. But is such practice in fact contrary to Sections 49(2) and 81(1) of the MRPA? Presumably, the basis of the rules in Sections 49(2) and 81(1) is that the government doesn't want Land Titles personnel to have to review the (perhaps lengthy and complex) documents creating express trusts, whether with respect to the existence of the trust or as to the trustees' rights and powers thereunder so as to ensure that a particular dealing by the registered owner is in compliance with the obligations of the trustee(s) under the trust.

Perhaps the MRPA could be amended so as to confirm current Land Titles practice, but make it clear that registration of a caveat giving notice of a beneficial owner-trustee relationship (i) does not obligate the Land Titles system to review and ensure compliance with the limitations and powers on and held by the trustees (or even to ensure the existence of the trust), and (ii) does not of itself confirm or validate the existence of the "alleged" trust, nor constitute a confirmation that any particular dealing with the property by the registered owner thereof (the "alleged" trustee(s)) is authorized under the terms of the trust, these matters to be capable of being challenged by all interested parties. Currently, this is the situation with caveats in that someone who wishes to challenge the validity of the right, claim, or interest of which a registered caveat gives notice is entitled to bring the matter before a Court and argue the merits of the right, claim or interest in that forum.

February 2011

The answer to the question posed in the heading of this paper is “sometimes”.  As unsatisfactory as such answer may be (from the point of view that predictability of the outcomes of legal questions should be an important feature of our legal system), it is necessary to keep in mind three rules found in the Personal Property Security Act (the “PPSA”):

(i)            the principles of common law, equity and the law merchant, except insofar as they are inconsistent with the provisions of (the PPSA), supplement (the PPSA) and continue to apply;

(ii)           the rights, duties and obligations arising under a security agreement, under (the PPSA) or under any other applicable law shall be exercised or discharged in good faith and in a commercially reasonable manner; and

(iii)          a persondoes not act in bad faith merely because the person acts with knowledge of the interest of some other person.

Generally, the PPSAs are intended to establish a regime where the priority of competing security interests can be clearly and easily determined. Thus, the general rule is that if you have a security interest and you want to come out ahead of any competitors, you had better register promptly (before a competitor registers) and, you had better register properly (in accordance with the rules for registration under the Act and its Regulations).

But what if a security interest is acquired by a creditor (“Creditor # 1”) who knows that another pre-existing secured creditor (“Creditor # 2”) has not registered, or has improperly/erroneously registered, with the result that Creditor # 1 ends up with an unexpected benefit, advantage or windfall?

Clearly, the third of the above quoted rules would appear to give Creditor # 1 an unexpected benefit where Creditor # 1 knew of the existence of Creditor # 2’s security interest and Creditor # 1 took advantage of Creditor # 2’s failure to register knowing that Creditor # 1’s registration would – in the absence of Creditor #2 properly registering – rank ahead of Creditor # 2’s interest.  Something more than mere knowledge on the part of Creditor # 1 (of the pre-existing security interest held by Creditor # 2) is required in order to subordinate Creditor # 1 to Creditor # 2.  In essence, that “something more” must comprise one or both of:

(a)          inequitable conduct (in the eyes of a Court) on the part of Creditor # 1; and/or

(b)          bad faith (in the eyes of a Court) on the part of Creditor # 1.

The application of these rules is illustrated in these three cases:

1. The Furmanek v Community Futures case (The “Furmanek Case”), British Columbia Court of Appeal.  In the Furmanek Case, the vendor of a business “took back” a security interest in the purchaser’s assets and made a proper registration of its security interest in the Personal Property Registry.  The purchaser paid part of the purchase price in cash which it borrowed from Community Futures Development Corporation of Howe Sound (“Development”) and Development also registered its security interest in the Personal Property Registry, but in so registering, Development erroneously omitted to refer to the purchaser’s inventory in its financing statement.  When the purchaser failed to pay what it owed, a contest arose between the vendor and Development as to who had priority over the purchaser’s inventory.  The vendor (for obvious reasons) argued that the PPSA required that a secured party strictly comply with the applicable registration rules, failing which it should not be considered to have perfected its security interest, or, in other words, it should not be entitled to priority as against the vendor’s proper registration.  Development argued that it was always understood by all parties concerned that Development was to have a first charge on inventory.  The Court noted the following facts:

(a)          the vendor knew that without Development’s financing, the sale and purchase transaction would not have been completed;

(b)          the vendor was actively involved in the negotiations between the purchaser and the Development leading to provision of the Development financing, and the vendor represented to Development that the assets being acquired by the purchaser from the vendor were “free and clear” and that accordingly, Development expected to obtain a first charge on the inventory;

(c)          the vendor knew that if Development did not obtain a first position on the purchaser’s inventory, Development would not provide financing; and

(d)          in the sale and purchase agreement between the vendor and the purchaser, the security interest granted by the purchaser back to the vendor for part of the purchase and sale price was referred to as a “second mortgage”.

The Court held in favour of Development. On the basis of the facts in the Furmanek Case, justice was done as it was manifestly unfair to allow the vendor to take advantage of Development’s registration omission.  However, the Court based its decision on more than just what seemed fair or unfair.  In particular, the Court held that:

(i)            while generally speaking, registration of a security interest with knowledge of a prior unregistered security interest will not of itself constitute bad faith or operate as an estoppel against the registering party, the circumstances in the Furmanek Case went “beyond mere knowledge of the fact that Development was asserting a prior interest”;

(ii)           although the vendor did not expressly agree to subordinate its security interest in favour of Development’s security, the PPSA makes it clear that a secured party may subordinate its interest in ways other than inclusion of a subordination provision in a security agreement.  The statute provides that “Any secured party may, in a security agreement or otherwise, subordinate his or her security interest to any other interest…”; and

(iii)          in light of the first of the above stated rules, PPSA priorities may be determined by the application of equitable principles.

            The Court held that on the basis of the vendor’s knowledge and its conduct, the vendor’s security interest in the purchaser’s inventory was equitably subordinated to Development’s interest.

                        Note:

(A)          the Court pointed out that its decision in the Furmanek Case was simply another in that long line of cases where the Courts have held that an act of a legislature will not be permitted to be utilized as an instrument of fraud.  In doing so, a Court does not hold invalid the legislature’s legislation, rather, on the basis of equity, it imposes an obligation on the individual who is seeking to take what the Court believes to be an inequitable advantage against one or more others on the basis of the strict operation/application of the legislation;

(B)          the vendor’s knowledge and unfair conduct would not have protected Development if an innocent third party was involved.  Thus if the vendor had sold its debt claim and security interest to a bona fide assignee, that assignee would almost certainly be entitled to hold priority over Development (some might argue that an assignee would and should acquire its interest "warts and all", no doubt on the basis that the PPSA provides that an assignee of a security interest takes the assigned security interest, essentially, "as is", as to the matter of perfection, but in this scenario, there was nothing wrong with the vendor's perfection, the problem being the vendor's inequitable conduct vis-a-vis Development, something that an assignee would not be "guilty" of); and

(C)         the Court of Appeal observed that another possible rationale for holding that Development had priority over the vendor would be on the basis of an implied agreement or undertaking by the vendor to subordinate its security position to that of the Developer.  In this regard, remember the above-noted factual holding that in the purchase and sale agreement, the vendor referred to its security interest as a “second mortgage”.

1. The Canadian Imperial Bank of Commerce v. A.K. Construction (1988) Ltd. Case (the “CIBC Case”), Alberta Court of Queen’s Bench.

In the CIBC Case, CIBC and RoyNat both loaned money to two debtor corporations related to each other (collectively, the “Debtor”) for the purpose of enabling the Debtor to acquire certain heavy construction equipment.  The equipment was “serial numbered goods” under the PPSA and its Regulations, but only CIBC properly registered its security interest against the serial numbers, RoyNat omitting to register against the serial numbers.  The Debtor became insolvent, the equipment was sold and a contest arose between CIBC and RoyNat as to who was entitled to the proceeds of sale.  CIBC argued that it had done what it was supposed to do under the legislation and RoyNat had failed to do what it was supposed to do, with the result that CIBC should be entitled to the proceeds of sale, not RoyNat.  RoyNat argued that there was an underlying understanding between CIBC and RoyNat to the effect that RoyNat was to have a first charge on the Debtor’s equipment and CIBC was to have a first charge on the Debtor’s accounts receivable and inventory.  There was at least one meeting between representatives of CIBC and RoyNat at which they discussed their respective security positions. However, the Court held that CIBC did not undertake to subordinate its security interest in favour of RoyNat (or treat RoyNat’s security interest as holding priority over CIBC’s security interest) so as to bar itself from relying on its (CIBC’s) rights under the legislation. The Court observed that knowledge held by CIBC of the existence of RoyNat’s security interest and its knowledge that if RoyNat had properly registered its security interest, it would have held priority over CIBC’s security interest (which had not been properly registered) was not sufficient to constitute “bad faith”.  For CIBC to have been subordinated to RoyNat, RoyNat would have had to have established something more which would constitute a waiver or an estoppel argument or involve CIBC in some nefarious conduct such as misleading RoyNat or hindering it in the perfection of its security interest. None of these could be “fastened” on CIBC in this case.

1. The Carson Restaurants International Ltd. v. A-1 United Restaurant Supply Ltd. (the “Carson Case”), Saskatchewan Court of Queen’s Bench

In the Carson Case, the priority contest was between:

(a)          the debtor Yorkton Restaurant as franchisee (being a corporation controlled by a Mr. Dennis A. Skuter, hereinafter, “Skuter”), the secured party, Carson as franchisor (also a corporation controlled by Skuter), the secured party Shonavan (also a corporation controlled by Skuter) and Mr. Dennis Skuter himself (collectively, the “Skuter Group”); and

(b)          A-1, being a secured party of the debtor with no connection to Mr. Skuter.

The sequence of events involving these parties was as follows:

(i)            In September of 1986,Carsonacquired a security interest in Yorkton Restaurant’s present and after acquired personal property;

(ii)           In April of 1987, A-1 acquired a security interest from Yorkton Restaurant covering goods provided by A-1 to Yorkton Restaurant on credit;

(iii)          In June of 1987, with Yorkton Restaurant being in default in the payment of its obligations owed to A-1, A-1 demanded payment and following that demand, there was a meeting between representatives of A-1 and Dennis Skuter.  Mr. Skuter assured A-1’s representative that Yorkton Restaurant would pay its debt to A-1;

(iv)         In July of 1987, A-1 registered its security interest but misdescribed Yorkton Restaurant’s name in its registered financing statement;

(v)          On October 1, 1987, Shonavan, in anticipation of selling certain equipment to Yorkton Restaurant on credit and taking a security interest therein, obtained a PPR search of Yorkton Restaurant’s correct name, which of course did not reveal A-1’s security interest which had been registered against Yorkton Restaurant’s incorrect name;

(vi)         On October 26, 1987, Carsonregistered its security interest against Yorkton Restaurant’s correct name, and on the same day, Shonavan also registered its security interest against Yorkton Restaurant’s correct name;

(vii)        In November of 1987, Mr. Skuter registered his own security interest against Yorkton Restaurant’s correct name;

(viii)       On January 20, 1988, with Yorkton Restaurant being in default of its obligations owed to Carson, Carson seized all of Yorkton Restaurant’s assets; and

(ix)         On January 26, 1988, A-1 amended its PPR registration to correct the name of Yorkton Restaurant.

The Court held that as between A-1 and the Skuter Group, A-1 should prevail.  The Court noted that fraud was not alleged against Mr. Skuter or the Skuter Group.  Nevertheless, the Court observed that “…in (these) circumstances…, to permit (the Skuter Group) through Skuter, to use (the PPSA and its registry system) has an instrument to defeat a claim of which (Skuter) was not only aware, but which he deceitfully delayed by his representations to A-1 when it was pursuing its security interest against Yorkton Restaurant on or about June 18, 1987 (emphasis being the writer’s here), would be inequitable. Accordingly, the priorities which would otherwise result from a strict application of the legislation should not hold and should be overturned by the application of equitable principles. 

What is interesting about the Carson Case is that the facts as spelled out in the decision do not themselves indicate that Mr. Skuter made deceitful representations to A-1 at the time of the June 18, 1987 meeting.  However, we can only assume that such deceitful representations were in fact made and that they were made by Mr. Skuter with the objective of inducing A-1 to not take the steps necessary to achieve PPSA priority for A-1’s security interest.

April 2021 Jason M.J. Bryk

I have recently been contacted by several solicitors in respect of the British Columbia Court of Appeal decision Griffin v. Martens, 1998 CanLii 2852 (BCCA).

By virtue of Griffin it has been suggested, and the writer does not agree, that if a condition precedent is boldly subjective it may render the entire contract unenforceable.

In Griffin the question in the appeal turned on the meaning of the following italicized clause in an interim agreement for the sale of land:

 

SUBJECT TO PURCHASER BEING ABLE TO ARRANGE SATISFACTORY FINANCING ON OR BEFORE FRIDAY, MAY 31, 1985, AT 6 P.M. THIS SUBJECT IS FOR THE BENEFIT OF THE PURCHASER AND SHALL BE REMOVED IN WRITING ON OR BEFORE 6 PM. MAY 31, OTHERWISE THIS OFFER IS NULL AND VOID.

The italicized clause is one which, in one form or another, is all too common in Manitoba real estate transitions.

There are real reasons why a contract may be unenforceable, void or voidable (illegality, unreasonable restraint of trade, minor, drunkard who promptly avoids a transaction upon sobriety) and thereby,  notwithstanding any application of severability, revocable; however in my opinion a boldly subjective condition precedent like the one written in italics above is not one of those reasons, nor should Griffin be used to support an opinion contrary to mine.

When reference is made to Griffin attention should be paid to the decision of Gordon Nelson Inc. v. Cameron, 2018 BCCA 304 (CanLII) in which the British Columbia Court of Appeal states:

"the case [Griffin] deals with a particular contract, does not lay down any general rule applicable to all financing conditions, and, expressly, does not purport to construct a contract for the parties to it. The case explicitly recognizes the right of parties to reach their own bargain. The most that can be said as a general proposition, in my opinion, is that the principle of good faith imposes a general duty of honest performance in all contracts: Bhasin v. Hrynew, 2014 SCC 71".

Thereby, Gordon Nelson has distinguished Griffin.

Notwithstanding Gordon Nelson distinguished Griffin, attention should also be paid to what a conditional real estate sales "contract" (i.e. residential or commercial form of offer) is; in my opinion a conditional real estate sales "contract" is one of the following:

(a)       an accepted "option" supported by consideration and thereby it is an "option given for valuable consideration" and is irrevocable (Friedman, "The Law of Contract in Canada", Sixth Edition, Carswell, 45) unless the parties bargained otherwise to permit revocation in certain circumstances; or

(b)      an accepted "offer" and thereby a contract and like an option, is also irrevocable (Friedman, The Law of Contract in Canada, 45) unless the parties bargained otherwise to permit revocation in certain circumstances.

Importantly, irrespective of the subjective or quasi-subjective meaning of "satisfactory", use of the word "satisfactory" within a purchaser's condition pursuant to an accepted conditional real estate sales "contract", whether it be an accepted option or an accepted offer and thereby a contract does not mean the "contract" is revocable and unenforceable but rather it means there is an implied term whereby there is a general duty of honest performance (Griffin, Gordon Nelson, Bhasin) which is a standard less than the standard of "best efforts" referenced in Griffin which decision is now distinguished by Gordon Nelson.

Jason M.J. Bryk

March 2009

Sometimes when properties are surveyed, it is discovered that an improvement which is primarily on a particular parcel of land encroaches (ie., trespasses) across the property's boundary onto the adjacent/neighbouring property.  Encroachments by garages, tool sheds and other "out" buildings are common examples.  In older commercial areas where buildings are typically built up to or very close to the lot lines, encroachments of substantial portions of walls, roof overhangs, drainpipes and similar "appurtenances" frequently occur.  Aside from the fact that the owner of an encroaching improvement is thus committing a trespass against its neighbour which in many cases would entitle the neighbour to forcibly remove (or obtain a court ordered removal) of the trespass with attendant costs, dislocation and related problems - mortgagees, purchasers and persons contemplating taking mortgages in or purchasing the encroaching owner's property will be reluctant to complete their transactions, at least until the "encroachment problem" is solved.

A frequently utilized, and probably the least expensive manner of solving an "encroachment problem" involves the encroaching property owner (the "Dominant Tenement Owner") entering into an agreement with the owner of the property upon which the encroachment(s) exist (the "Servient Tenement Owner") in which the Servient Tenement Owner agrees with the Dominant Tenement Owner that the encroachment from the Dominant Tenement Owner's property can continue to exist on the Servient Tenement Owner's property, notwithstanding what would otherwise be a trespass, typically, during the remaining "lifetime" or existence of the building or other improvement of which the encroachment forms part.

In such an agreement ("Encroachment Agreement"), the parties purport to bind and benefit the respective future owners of the two properties and will usually describe the rights or interests granted to the Dominant Tenement Owner (and its successors in title) as an easement.  To ensure that all successors in title of both properties (and others acquiring or thinking of acquiring interests in them) are made aware of the rights and interests of the parties under the Encroachment Agreement, the Dominant Tenement Owner will usually register a notice of the Encroachment Agreement (ie., by way of caveat) against the title to the Servient Tenement Owner's property.  Under current Land Titles Office practice, particulars of the registration of that caveat will appear on the titles to both properties.

The question which the writer wishes to raise in this memo is whether or not the rights and interests granted to a Dominant Tenement Owner under an Encroachment Agreement are really a legally recognized easement which constitute an interest or interests in land which are capable of binding the successors in title to the original Servient Tenement Owner?  Clearly, if such an arrangement is an easement, it  is a species of interest in land which does "follow" successors in title - but can an easement be established/created for/to protect an encroachment?  Or does an Encroachment Agreement intended to protect an encroachment create only contractual rights enforceable between the immediate parties to the Encroachment Agreement, but which do not, as a matter of law, "follow" the titles to the properties affected - at least in the absence of successors in title specifically agreeing to be bound by the Encroachment Agreement?

The reason why the writer raises this question is because his recent review of the law pertaining to easements suggests that, while a right granted to a property owner to do something on its neighbour's land is generally recognized as an easement, the act, action, activity or usage made by the benefitted property owner must not amount to a right whose exercise completely excludes the neighbour's use of the affected property.  For example, if the owner of Parcel "A" grants its neighbour the owner of Parcel "B", the right to use a pathway over "A"'s land, "A" still has the right to use its land, including the pathway.  But where "A" grants it's neighbour "B", the right to maintain on "A"'s land, a part of a garage primarily situated on "B"'s land which encroaches over part of "A"'s land, then the encroaching portion of the garage, by the very nature of things, excludes "A" from in any way using the land underlying the encroachment.

In other words, for the period of time during which the Encroachment Agreement is in effect, what "A" has granted to "B" is probably what amounts to a right of exclusive use/possession of the land underlying the encroachment.  The writer submits that whatever such arrangement may be, it is strongly arguable that it is not an easement.

But if an Encroachment Agreement does not create an easement, does it create any rights or interests in the affected lands over and above contractual rights and obligations between the original parties to the Encroachment Agreement?  The writer submits that the answer to this question may, in many cases, be "yes", and that the rights or interests granted in the foregoing example are in the nature of a lease whereby "A" as lessor leases the land underlying the encroachment to "B" as lessee.  As we all know, a lease is in fact an interest in land which is legally recognized as being capable of binding successors in title to the lessor.

So if the parties to an Encroachment Agreement refer in it to the rights granted to the Dominant Tenement Owner as an "easement" (or "easements"), might a Court called upon to review the matter hold that the Encroachment Agreement is in substance a lease?  Perhaps - or perhaps not - but even if an Encroachment Agreement is characterized as a lease, rather than as an easement, this raises another problem for the parties concerned (and their counsel).  That problem is the existence of subdivision control rules (in The City of Winnipeg Charter Act and in The Manitoba Planning Act) which specifically exempt easements from the need to comply with subdivision control requirements, but which do not do so for a lease in excess (or capable of running in excess of) of 21 years.

The writer believes that his above argument that one cannot obtain an easement to protect an encroachment is supported by the existence of Sections 27 and 28 of The Manitoba Law of Property Act.  These Sections permit a (superior) Court to confirm or grant rights to an encroaching property owner in its neighbour's land to protect/with respect to encroachments made by the encroaching property owner on its neighbour's land.  Why would the Legislature have enacted these Sections if it was not recognized that an easement either couldn’t be legally obtained, or was difficult to legally obtain, to protect an encroachment?  In any event, these Sections make it clear that whether or not the Court provides relief to the encroaching property owner is in the discretion of the Court, so an encroaching property owner has no guarantee that it will achieve legal protection for its encroachment.

If the writer is correct in the foregoing analysis, then it would appear appropriate for the Legislature to vary subdivision control rules to exempt leases which merely protect encroachments (regardless of their length or potential length) from subdivision control requirements.

In most cases, the roles played by each "participant" in a construction/development project (the "Project") are quite distinct.  There is the owner/developer which holds title to the property and wishes to develop it with the Project (the "Owner"), the (general) contractor which is engaged by the Owner to oversee and effect construction of the Project (the "General Contractor") and those engaged under the General Contractor to provide the labour, services, materials and components required to complete the Project (the "Subcontractors").  Some of the Subcontractors will be engaged directly by the General Contractor, and others will be engaged by other Subcontractors.  In this sense, the individual persons who are engaged to provide labour can be considered Subcontractors.  An additional - and usually critically important - participant is the Owner's financier/lender who will typically take a real property mortgage from the Owner on the Owner's interest in the realty which includes the Project as it is constituted (the "Mortgagee).  The Mortgagee's financing (usually provided over a period of time and made available as the improvements are put in place) will be secured by the Mortgagee's mortgage.

The Builders' Liens Act (Manitoba) (and similar legislation in other jurisdictions) provides some measure of security for those Subcontractors who do not have the benefit of a direct contractual relationship with the Owner.  The legislation (the "Act"), among other things, gives such Subcontractors a monetary charge (a "builders' lien") against the Project.  This is a mechanism which performs a similar function to the Mortgagee's mortgage security.  If not paid, the Subcontractor (or more likely, a substantial portion or all of the Subcontractors, acting collectively) can cause the realty to be put up for sale, with theproceeds (or some of them) being then made available to satisfy the claims of the unpaid Subcontractors.

Wherever a debtor has two or more creditors, each of whom have acquired security in the same assets of the debtor, there is a potential for conflict between the secured creditors - unless the collateral available to all of the secured creditors is sufficient to satisfy all of their claims, a situation which usually doesn't occur when the debtor is in financial difficulties or is otherwise unable to fulfill its obligations to its creditors.  Thus there are sometimes disputes ("priority disputes") which arise between Subcontractors holding builders' liens and an Owner's Mortgagee.  Where an Owner finds itself in financial difficulties, typically in the midst of completion of a Project, you have the Mortgagee who has provided value to the Owner (financing) and the Subcontractors who have provided value to the Owner (their "inputs").  So the Owner has received value from all of these parties, and the Mortgagee and the Subcontractors - who are not being paid when due - feel "stiffed".  In other words, the Mortgagee and the Subcontractors are the "good guys" and the Owner is the "bad guy".  Of course there can be situations where the Mortgagee, without justification, reneges on its financing commitment and/or situations where the Subcontractors' inputs are deficient or defective.  But in most cases the contest - insofar as the secured creditors are concerned - is between two different sets of "good guys", the Mortgagee and the Subcontractors.  To the extent that the Mortgagee can achieve legally enforceable priority over the Subcontractors, the Mortgagee "wins", and, to the extent that the Subcontractors can achieve legally enforceable priority over the Mortgagee, the Subcontractors "win".  It will be appreciated that in most situations, nobody really "wins", so it's a matter of which of the competing secured creditors can get the most out of the collateral.

The Act spells out differing rights and obligations of each of the Owner, the Subcontractors (and the General Contractor) and the Mortgagee.  Generally speaking, the Subcontractors' and the Mortgagee's interests are both protected , provided that each of them follows the rules set out in the Act.  For the reasons aforementioned, the Mortgagee's position is better protected (under the Act) than the Owner's.  Thus, where unpaid Subcontractors are able to legally establish that a Mortgagee has been acting like an Owner, a Court may hold that the Mortgagee is an "Owner" under the Act.  If this happens, the Mortgagee's position under the Act, including with respect to its security, may end up being subordinated to that of the Subcontractors.

"Owner" is defined in the Act to mean: "…any person having any estate or interest in the structure and the land occupied thereby or enjoyed therewith, or in the land upon or in respect of which work is done or services are provided or materials are supplied, at whose request:

(a)          upon whose credit, or

(b)          on whose behalf, or

(c)          with whose privity or consent, or

(d)          for whose direct benefit,

the work is done or the services are provided or the materials are supplied, and all persons claiming under or through him whose rights are acquired after the work or services were commenced or after the materials were supplied."

An Owner (as so defined) and a Mortgagee clearly both each have an estate or interest in the realty and the improvements forming part thereof.  Also clearly, both the Owner and the Mortgagee benefit from the creation of the improvements on the Owner's realty.  The Owner gets a more valuable parcel of realty and the Mortgagee's security attaches to a more valuable parcel of realty.  But is the benefit so flowing to the Mortgagee a "direct" benefit?  While the Subcontractors are not being extended credit directly by the Mortgagee ("credit", in the usual sense of the word, is provided by the Mortgagee to the Owner), could one argue that the creditworthiness of the Mortgagee enhances the creditworthiness of the Owner, thereby inducing the Subcontractors to provide their inputs?  Again, while there is no "privity of contract" (a contract between parties) between the Subcontractors and the Mortgagee, in providing financing to the Owner, the Mortgagee desires - and contractually obligates the Owner to - effect the improvements, so could it be argued that the Mortgagee, in so requiring, has given its "consent" to the Subcontractors providing their inputs?

Whenever a Mortgagee's loan agreement with an Owner specifies (typically in great detail) the Mortgagee's requirements of the Owner in connection with the improvements which the Mortgagee is financing, and where the Mortgagee takes an active role in overseeing and monitoring completion of the improvements, there is a danger that the Mortgagee will end up being "too close" to the Owner (and the effecting of the improvements).  This may result in the Mortgagee being held to have acted so as to be deemed to be an "owner" under the Act.  That would then put the Mortgagee at a distinct disadvantage vis-à-vis the Subcontractors.

A recent judgement of the Alberta Court of Queen's Bench (Westpoint Capital Court v. Solomon Spruce Ridge Inc., judgement issued April 6, 2017, hereinafter, the "Westpoint Case") is an example of priority dispute in which a mortgagee (Westpoint) was alleged to have acted so as to be deemed to be an "owner" under the (Alberta) version of the Act.  In the Westpoint Case, S acquired a parcel of realty, entered into a loan agreement with Westpoint whereby Westpoint undertook to finance improvement of the realty, and S (as required by the loan agreement) provided a mortgage on the property to Westpoint.  Work on the project started, but in fairly short order, S defaulted in the performance of its obligations owed to Westpoint.  Westpoint commenced to enforce its security, and in the realization proceedings, B purchased the property.  B filed a caveat against the property's title giving notice of its purchase rights.  Subsequently, P (a subcontractor) filed a builder's lien claim against the title.  B's purchase money was paid into Court, and each of Westpoint, B and P claimed those monies, Westpoint as mortgagee, B as purchaser and P as a builder's lien claimant.

As between B (as purchaser) and P (as builder's lien claimant), although P's input to the Project predated B's contracting to Purchase the property, P did not register its lien claim until after B had registered its purchase notice. Thus as between those two, B had priority.  As between P (as builder's lien claimant) and Westpoint (as mortgagee), "normally", Westpoint, having registered its mortgage and made its advances before P registered its lien claim, Westpoint would have priority.  However, if it could be established (to the Court's satisfaction) that Westpoint had acted as, or was in substance, an "owner", then (arguably) Westpoint's mortgage interest would be merged or subsumed into its ownership interest.  Then, as between P and Westpoint, P's lien claim would hold priority over Westpoint's interest (such interest having started out as a mortgage interest, and then becoming "converted" to an ownership interest).  If P's claim interest held priority over Westpoint's interest, and, B's purchase interest held priority over P's lien claim interest, then B would hold priority over Westpoint's interest.  The result would be that B would be entitled to acquire ownership of the property "free and clear" of Westpoint's (mortgage) interest.

It was alleged that Westpoint was an "owner", essentially on these basis, namely:

(i)         because of its interest or "stake" in completion of the project, it was or became a "beneficial" owner (although clearly, not the titleholder);

(ii)        Westpoint benefitted from having the property improved to such a degree that it could be said that P's input was provided "on behalf of" Westpoint; and

(iii)       S had no realistic ability to effect the improvements without Westpoint's credit (in other words, P and the other parties inputting did so, only because of Westpoint's - as opposed to S's - creditworthiness).

The Court held that, on the basis of the evidence before it, Westpoint was not an "owner".  In so concluding, the Court noted the following:

(a)        The protections given under the Act (in particular, the right of lien) are extraordinary remedies in that they advantage persons (lien claimants) who have no (direct) contractual dealings with the Owner.  As such, it is proper for Courts to interpret (and they have traditionally done so) such rights and remedies "strictly";

(b)        The assertion that Westpoint had acted as an "owner" was a substantially "bald" assertion, with no adequate evidence having been presented to back it up.  In particular, there was no evidence of the following:

(i)            that there were non-arm's length dealings between Westpoint as mortgagee and B as purchaser on the one hand, and S on the other hand.  The same individual person controlled both Westpoint and B, but there was nothing "particularly sinister or suspicious" about this.

(ii)           that S left a "wake of creditors behind", given the purchase price that B paid to acquire the property in mortgage realization proceedings.  This did not appear to be an "engineered insolvency" whereby the debtor intentionally "stiffed" the Subcontractors and then colluded with the mortgage realization purchaser to acquire the property at a "cheap price".

(iii)          that there were any direct dealings between Westpoint and any of the General Contractor and/or the Subcontracors.  In particular, there was no evidence that P had any dealings with Westpoint until after it filed its lien.

(iv)          that Westpoint paid any of the General Contractor and/or the Subcontractors directly.  "Westpoint had no involvement with the construction on the lands, other than to release monies…after it was satisfied that certain work had been completed".

(v)           that at any time prior to when S defaulted in its obligations owed to Westpoint, Westpoint had any intention of acquiring an interest in the lands, "other than as mortgagee".

(vi)          that any request was made by Westpoint, "express or implied, that any (General Contractor) or Subcontractor (do) any work on the property".  As the Court stated, privity and consent are not made out, and "direct benefit" is at best doubtful.

Additionally, the Court held that:

(I)            There was nothing in the builder's lien claim document, or even in P's statement of claim, to indicate that it was taking the position that Westpoint should be treated as an owner for the purposes of the Act.  "Indeed, Westpoint is named in the statement of claim as a prior encumbrancer".

(II)           Any builder's lien claim against Westpoint (itself) would be well past the filing deadline.  "Not by a few days or weeks, but rather years".  In fact, Westpoint did not make its lien claim against Westpoint's interest in the land (rather, the claim was recorded against S's interest in the land).

(III)          B's position is "curious".  It would "have a purchaser's lien caveat improve its "priority" position because of the filing of an unrelated builder's lien by a claimant who is unable to prove that the mortgagee acted as "owner" within the meaning of the Act.  As the Court rhetorically asked, "Why would a mortgagee lose priority (for) its bona fide advanced mortgage to a subsequent encumbrancer with whom it had no dealings?".  And the Court concluded that "There is no legal or equitable theory that supports the notion of a subsequent encumbrancer improving its priority position against a mortgagee simply because a builder's lien claimant is able to show that the mortgagee acted in the position of an owner with respect to its builder's lien claim".

(IV)         B's alternative argument that even if Westpoint was not an "owner" within the meaning of the Act, it was a beneficial owner of the property, and thus, should be held to be an "owner" under the Act, is simply wrong.  The Court held that "The Act and the cases in this area do not support an argument that if a mortgagee (or a landlord) has become an "owner" for the purposes of a particular claimant's builder's lien, that mortgagee (or landlord) becomes an "owner" for the purposes of every other claimant's lien claim (or for that matter, any other interest claimant who doesn't hold a lien).".

Somewhat incidentally, the Court also observed that "There is no authority to the effect that a lien claimant can piggy-back on another claimant's lien…".  Each lien claimant's claim "must be perfected by proper registration and the filing of a certificate of lis pendens".  A lien claimant may (in fact) shelter under another lien claimant's law suit, but that "is only to avoid a multiplicity of actions and reduce costs and complexity in managing builder's lien actions, especially when a project fails and there are multiple lien claims at various levels".  This last statement - although not really required in order for the Court to have reached its other conclusions concerning the law in this particular case - should be kept in mind by those attempting to understand the relationship between an Owner, a General Contractor, the Subcontractors under a General Contractor and other persons having an interest in an improved (or being improved) parcel of real estate.

 

January 1997

The case which this comment deals with (the Bills Investments Case, decided by the Saskatchewan Court of Appeal on July 5, 1990, hereafter the “Bills Case”) is not a recent court decision. Nevertheless the ruling must be kept in mind by persons giving or taking what are commonly known as “blanket” or “wrap-around” mortgages.

What is blanket mortgage? By its nature, it must be at least a second mortgage, although in some cases, it could end up being a third, fourth or even a fifth mortgage. The core of what it’s about is that the mortgagor agrees with the mortgagee that the face amount of the blanket mortgage will include not only the “new” advances being made by the mortgagee to the mortgagor, but also the balance or balances outstanding on one or more pre-existing mortgage or mortgages held by third parties. The mortgagor will make loan payments to the mortgagee which include not only the amount required to service the debt arising out of the new advances made by the mortgagee, but also the amounts required to service the debt(s) under the prior mortgage(s). Provided all of those payments are made, the mortgagee agrees that he will make timely payments on the prior loan or loans thus keeping them in good standing. In other words, the mortgagee’s mortgage “blankets” or “wraps around” one or more pre-existing prior mortgages.

Why would a lender want to take a blanket mortgage, and why would a borrower want to give one. Consider the following:

(i)            For whatever reason, the prior mortgages are not to be paid off, and the blanket mortgagee wishes to take control of the loan repayment process for the prior mortgages. Perhaps the blanket mortgagee does not entirely trust the mortgagor to properly service the prior mortgage debt. One can see an analogy here to the situation where a mortgagee collects monies from the mortgagor (over and above repayment of the debt with interest) to ensure that the property taxes and/or the condominium common element expenses are properly paid. Failure to pay such amounts - or failure to pay the debt service on the prior blanketed mortgage(s) - would clearly put the blanket mortgagee’s position in jeopardy.

(ii)           The rate of interest stated in the blanket mortgage applies not only to the new advances being made by the blanket mortgagee, but also to the balance(s) outstanding under the prior blanketed mortgage loan(s), and, the interest rate(s) applicable to those other loan(s) are lower than the rate under the blanket mortgage. Thus the blanket mortgagee obtains an additional benefit (ie. in addition to the interest he collects on the new advances he has made) which is the interest differential between the blanket mortgage interest rate and the mortgage rate(s) on the prior blanketed mortgages. Incidentally, if getting the benefit of this interest differential is the mortgagee’s sole motivation to take a blanket mortgage, he can probably accomplish the same thing - without running some of the risks dealt with in the Bills Case by taking an “ordinary” (i.e., not a blanket) mortgage (which would be a second, third, fourth, or as the case may be, mortgage) with a higher interest rate.

(iii)          The property owner is selling his property subject to one or more existing mortgages which have what then appear to be very attractive (i.e., low) interest rates with relatively long terms. This will only work if the existing mortgages are assumable, but assume they are assumable. Also assume that the purchaser needs more money to pay the purchase price to the vendor (i.e., something over and above the amount covered by the purchaser’s assumption of the existing mortgages). That additional credit can come either from a new lender or from the vendor acquiring a take-back mortgage from the purchaser. In either case, the person extending the additional credit may find that a mortgage blanketing the prior mortgages is attractive because of the opportunity of getting the interest differential, plus the right to take control of servicing the debt on the prior mortgages. These advantages compensate for the relatively greater risk undertaken by holding a second, third, fourth, or as the case may be, other subsequent mortgage. Where the new credit is being provided on a relatively short term basis and the blanketed mortgages (with their longer terms and low interest rates) will continue after the blanket mortgage is paid off, the arrangement can be seen to be quite advantageous from the purchaser’s/mortgagor’s point of view.

In the Bills Case, after providing the mortgagee with a blanket mortgage covering one prior mortgage, the mortgagor argued that, in spite of the wording of the mortgage contract, the mortgagor should not have to pay interest on the amount owed under the prior blanketed mortgage loan. Its position was that it should only have to pay interest on the monies actually advanced to it by the blanket mortgagee. This of course would deprive the blanket mortgagee of the benefit of the interest differential. The mortgagor agreed that if the blanket mortgagee had made payments on account of the blanketed mortgage debt (no doubt to protect itself from a default by the mortgagor), then the blanket mortgagee would have been entitled to receive interest on any such “new” advances made by the blanket mortgagee. In other words, the mortgagor took the position that even if it had contractually promised to pay the blanket mortgagee interest on the prior mortgagee’s debt, since that debt was not incurred by reason of advances made by the blanket mortgagee, the mortgagor was not lawfully obliged to pay such interest and should be relieved of its promise.

The Court held that there were two principles involved. The first was the general rule that a mortgagee could only charge interest from the time when it advanced credit. This principle supported the mortgagor’s argument. However, the second principle was that, notwithstanding the first principle, if the parties have clearly agreed that the mortgagee is entitled to interest on credit not actually advanced by the mortgagee, then such an agreement will be enforced against the mortgagor. Obviously, this principle supported the position of the blanket mortgagee. The question then became, did the transaction evidence a clear intention by the parties that the mortgagor would pay the blanket mortgagee interest on the prior blanketed mortgage loan even though none of that loan had been advanced by the blanket mortgagee?

The Court decided that although there wasn’t a “black and white” statement in the mortgage that the mortgagor was to pay interest on the prior loan, the rest of the terms of the loan and the surrounding circumstances offered sufficient evidence that that indeed was the parties’ intent.

The Bills Case may suggest that in drawing a blanket mortgage, it would be helpful for the blanket mortgagee’s lawyer to include an unequivocal “black and white” promise by the mortgagor that the mortgagor will pay the mortgagee interest on the full (i.e., face) amount of the blanket mortgage including that portion which represents the prior blanketed mortgage loan or loans, notwithstanding that the blanket mortgagee may never make any payments out of its own monies on account of such prior loans.

April 2007

You have decided to provide financing to the owner/developer ("Mortgagor") of a single tenanted real estate development ("Realty").  Your loan agreement/commitment letter agreement with the Mortgagor obligates the Mortgagor to provide you with a mortgage charging the Realty and a security assignment of the Mortgagor's from time to time existing rights as landlord under its lease ("Lease") of the Realty to the tenant thereof ("Tenant"), including the Mortgagor's right to the payment of rental.

From a "security" point of view, what you now hope and expect you would have to cover potential losses in the situation where the Mortgagor fails to repay the loan would be:

(i)            the right to sell the Realty (with the Lease) and thus recoup the loan indebtedness, in whole or in part, and if in part only, a continuing right to claim against the Mortgagor - and perhaps under other securities including guarantees - for any shortfall, and, if there was no meaningful "market" for a sale of the Realty, the right to foreclose upon and become the absolute owner of the Realty; and

(ii)           under the security assignment covering the Mortgagor's rights and claims under the Lease ("Security Assignment"), the right to collect the rents payable under the Lease, and the right to "step into the shoes" of the Mortgagor as landlord under the Lease and thus hold the Tenant to all of its from time to time existing obligations under the Lease (including the obligation to pay rent).

You would also (typically) want an understanding with the Tenant whereby, in essence, the Tenant agrees to subordinate its rights and interests in the Realty under the Lease in favour of your rights in the Realty under the Mortgage.  In exchange therefor, you would undertake to the Tenant that if you realized your security (including by way of mortgage sale proceedings, taking possession or by way of foreclosure) consequent upon default by the Mortgagor, neither you nor any mortgage purchaser from you would (notwithstanding your priority under your mortgage with respect to the Realty) extinguish/terminate the Lease, provided that the Tenant continued to fulfill its obligations under the Lease.  In other words, you would enter into what is commonly known as a "postponement and non-disturbance agreement" ("PNDA") with the Tenant.  Now assume that, some time after advancing the loan, the Mortgagor defaults in its loan obligations to you.  You demand repayment in full (having given an acceleration notice to the Mortgagor), start mortgage realization proceedings, and, in order to try to maintain some cash inflow from your investment, you notify the Tenant that you are proceeding to realize your security (including under your Security Assignment) and that you now require the Tenant to immediately commence to pay its rentals to you, rather than to the Mortgagor.

Imagine your shock, dismay - and perhaps disgust - when the Tenant responds by advising you that its obligation to pay rent under the Lease must be set off against a judgment previously obtained by the Tenant against the Mortgagor ("Judgment").  The Judgment is for a very substantial amount of money and arose out certain previous outrageously bad conduct of the Mortgagor as landlord under the Lease.

The foregoing is almost exactly what happened to the mortgage lender (the "Mortgagee") in a Ontario Court of Appeal decision (the "TDL Case", judgment rendered July 27, 2006).  Unfortunately for the Mortgagee, the Court agreed with the Tenant's position, with the result that the Mortgagee was unable to collect rent from the Tenant. 

It is interesting to note (in the context of the discussion which follows below) that the Security Assignment in the TDL Case - unlike the one described in the hypothetical situation set forth above - was not an assignment of all of the Mortgagor's rights and claims as landlord under the Lease; rather it merely covered the Landlord's right and claim to the rentals payable by the Tenant.  It is also interesting to note that the Lease - which established a contractual relationship between the Mortgagor and the Tenant - specified that the Tenant was to pay rental "without any set off" (with one minor exception).

The Mortgagee's problem here was the wording in the PNDA.  Obviously, the Mortgagee would have preferred that the Court hold that its relationship with the Tenant was governed by the terms of the Lease  which negatived the possibility of the Tenant setting-off any claims it had against its landlord, against the rental.  However, the Court noted that - unlike the Lease, which established a contractual relationship between the Mortgagor/landlord and the Tenant - the PNDA established a contractual relationship between the Mortgagee and the Tenant, and it was this contractual relationship which governed the Mortgagee's claim to rentals.  In particular, under the PNDA, the Mortgagee promised the Tenant that if the Mortgagee realized its security and "stepped into the shoes" of the Mortgagor/landlord under the Lease, then the Mortgagee (in the Court's words) "simply took over the landlord's position under the Lease, (and), absent an agreement to the contrary, the Mortgagee was bound by the state of accounts between (the Tenant) and (the Mortgagor/landlord), which included (the Tenant's) right of set-off".  Unlike what is included in many similar agreements between mortgagees and tenants, the PNDA did not contain a promise by the Tenant that it would not be entitled to set-off its Lease related claims against the rent that it would otherwise be obliged to pay to the Mortgagee.

There is a suggestion in the TDL Case that had the Mortgagee taken a Security Assignment which covered not just the rentals payable under the Lease, but also all of the Landlord's rights under the Lease - and presumably, did not enter into the PNDA - the Mortgagee might well have been able to claim rents from the Tenant and enforce the Tenant's Lease promise or agreement not to set off.  Nevertheless, it is the absence in the PNDA of a provision prohibiting the Tenant from setting off which really did in the Mortgagee here.  The Court noted that the PNDA was in the Tenant's form, and that it appeared that the Mortgagee (and/or its advisors) did not attempt to modify the contents of the PNDA.  The Court also observed that "…both sides were represented by experienced commercial lawyers…".

Also, the language of the PNDA was not ambiguous, so there was no room for the Court to employ the rule of interpretation which requires a contractual ambiguity to be resolved against the interest or position of the party who drafted the contract.

An even more frightening scenario from a mortgagee's point of view would be a situation in which the PNDA not only failed to prohibit set-off by the tenant, but also - perhaps inadvertently - obligated the mortgagee to completely honour all of the mortgagor/landlord's obligations under or by virtue of the lease existing at the time that the mortgagee starts to realize its security and, in effect, "steps into the shoes" of the mortgagor/landlord.  What if, given such an arrangement, the tenant then had a claim - whether in the form of a judgment or some other claim such as a right to reimbursement for leasehold improvements - which exceeded all of the rentals payable under the lease for the balance of its term?  Arguably, the mortgagee would not only lose the benefit of rental, but would also be liable to the tenant for the excess of its claim over the rental!

What should mortgagees do to protect themselves from the problems encountered by the Mortgagee in the TDL Case?  Consider the following:

1. Ensure that any PNDA entered into with a tenant makes it clear that the tenant must, following the mortgagee's "stepping in", continue to fulfill the tenant's ongoing obligations under the lease, including its obligation to pay rent, without any set-off, and notwithstanding the occurrence of any pre-existing default or defaults by the mortgagor/landlord under the lease.
2. Ensure that the lease clearly provides that the tenant's promise to pay rental is buttressed by a further promise not to set-off any claims which the tenant may have against the landlord against the tenant's rent obligation, and, take an assignment of all of the mortgagor/landlord's rights, claims and entitlements under the lease, not just an assignment of the rentals payable, and, make sure that the security assignment makes it clear that the benefit of the tenant's agreement not to set-off is included in the assignment.
3. Ensure that the PNDA includes a promise by the tenant to periodically provide the mortgagee with written statements (commonly called "estoppel certificates") advising as to the estate of accounts between the mortgagor/landlord and the tenant.  Depending on the frequency with which the mortgagee obtains such information from the tenant, these statements will probably alert the mortgagee to a recently developing problem in the landlord - tenant relationship.  However, if a long time passes between when the mortgagee obtains these statements, by the time it does get a current one, a full-blown problem may have arisen and "matured".

July 2017

You wish to buy land and develop some improvement(s) on it.  You complete your purchase, take title and apply for a building permit to your local municipal government.  The government responds by insisting that as a condition of the issuance of a building permit, you and your adjacent neighbour or neighbours enter into a "conforming construction agreement".  You are told that this type of an agreement ("Conforming Agreement") requires one or both of the following:

(i)            a minimum separation distance be established between a wall (or building face) and your lot line; and/or

(ii)           providing public access ("thoroughfares") from the building exists to "public streets" through the "use of neighbouring parcels".

Alternatively, you wish to buy an already improved property, but when you search the title to same, you discover that the local government has already caused your predecessor in title and one or more of the neighbouring property owners to enter into a Conforming Agreement, with the result that the title to the property you are interested in is subject to a caveat giving notice of the existence of the Conforming Agreement, and the restrictions it imposes on your property.

The above-described scenarios are now more likely possibilities with the enactment by the Manitoba Legislature of an Act entitled "THE CITY OF WINNIPEG OF WINNIPEG CHARTER AMENDING, PLANNING AMENDMENT AND REAL PROPERTY AMENDMENT ACT (CONFORMING TO CONSTRUCTION STANDARDS THROUGH AGREEMENTS)" (the "Conforming Construction Act").  The entitlement of a local government to extract Conforming Agreements from property owners as a condition of the issuance of building permits constitute land use restrictions in addition to those contained in zoning by-laws, planning schemes, zoning agreements, development agreements and subdivision agreements.  The Conforming Construction Act was given royal assent and came into effect on June 1, 2017.  The objective of a Conforming Agreement is to ensure that improvements on land are set back far enough from their boundaries, so as to ensure that persons who are living, working or otherwise present in a building have sufficient "access space" within which to exit the building in the event of a calamity, most typically, but certainly not limited to, fire.  Additionally, maximizing the space between buildings on neighboring properties will decrease the likelihood of damage - again, typically, fire damage - spreading from one building to the neighbouring buildings.  Where buildings are built - on both sides - typically right up to the property line between them, a Conforming Agreement can ensure that persons from either one or both of the affected buildings are able to escape calamity by passing over or through the neighbouring building or property.

Where neighbouring property owners do not seek a building permit, the local government does not have the ability to unilaterally foist a Conforming Agreement on either one (or both) of them.  Remember however that building permits are needed, not only to initially construct a building or other improvement, but also to effect most additions and alterations to existing buildings.

The need for a local government to extract Conforming Agreements pretty much disappears in the newer areas of settlement where the initial location and development of improvements results in the establishment of fairly substantial "separation distances" between neighbouring buildings/improvements.  However, in "older" areas where buildings - commercial or residential - are built close to and sometimes right up to the dividing property lines, one can expect that local governments will now seriously consider compelling neighbouring property owners (seeking to improve their properties), to enter into Conforming Agreements pursuant to the Conforming Construction Act. 

If you or your client:

(a)          contemplate acquiring ownership of land where you (or your client) wish to initially improve or add improvements to the property, your due diligence should include a discussion with the local government as to whether or not it will require you (and one or more of your neighbours) to enter into a Conforming Agreement; and

(b)          wish to acquire ownership of land that is already subject to a Conforming Agreement caveat, you should ensure that your purchase and sale agreement makes it clear that you can "back out" if, after investigation, and discussion with the local government and perhaps as well your anticipated neighbouring property owners, you decide that your plans for the property will not be practically possible due to the restrictions imposed by the existing Conforming Agreement.

Another matter which should be kept in mind when considering a local government's requirement for the imposition of a Conforming Agreement on property your client owns (or wishes to acquire) is the fact that the Conforming Construction Act does not provide any effective remedy where one of the property owners - not being the owner upon whom land use restrictions will be imposed under a government requested Conforming Agreement - simply refuses to sign the agreement. Consider this scenario:  your client wishes to add an addition to the building currently existing on your client's property, and when your client applies for a building permit, she or he is told that no permit will be issued unless your client and the neighbouring property owner enter into a Conforming Agreement.  Such agreement is to provide access over or through your property for the benefit of the neighbouring property owner. Assume that your client is willing to enter into the Conforming Agreement, but the neighbour refuses to do so, even though virtually all of the benefits under the agreement will accrue to the neighbour. It appears that all that can be done (by the local government) is to refuse to issue permit to your client!  Your client does not appear to have any right to require the neighbouring owner to enter into the proposed Conforming Agreement. A variation in this scenario would be where the neighbouring property owner is willing to sign the proposed Conforming Agreement, but will only do so upon your client paying an outrageously high consideration therefor. There appears to be nothing that you can do to alleviate this situation. It might be useful for the Legislature to amend the legislation so as to provide relief for a property owner who is faced with this dilemma.

March 2018

One of the first things that law students learn in Law School is that, as a matter of public policy, the "authorities" (usually the Courts) will, one way or another, enforce promises for value in exchange for other promises (also made for value).  In other words, promises made in a "commercial setting", usually in the form of a contract.  So if I promise you that I will pay you $1,000.00 in exchange for you promising me that you will provide or transfer goods or services to me, and I pay you (or "tender" or offer to pay you), but you fail to provide me with the goods and/or services you undertook to give me (or you provide shoddy goods or services to me), I will, generally speaking, have the right to ask a Court to either order you to fulfill your part of our deal, or compensate me for my loss resulting from my failure to get what I bargained for.  But in addition to enforcing promises made in a "commercial setting", our legal system has for many years also enforced certain promises made either in a non-commercial setting, or in a commercial setting where the person receiving the benefit of the promise (the "promisee") does not provide any immediate or direct benefit (ie, "value") to the party making the promise (the "promisor").

Generally, when a Court enforces a promise, it orders the recalcitrant promisor either to do what it originally promised to do, or orders the recalcitrant promisor to pay damages to the party who suffers (sustains a loss) by reason of the promisor's failure to fulfill.  In a non-commercial or an "indirect" commercial setting where a Court must adjudicate the unsatisfied promisee's complaint regarding the promisor's failure to fulfill its promise, the Court will, generally, not directly order the promisor to fulfill its promise (or pay damages to the promisee), but rather will order or restrain the promisor from going back - or continuing to go back - on its previously made promise.  In legal jargon, the promisor is said to have been "estopped" from going back (or continuing to go back) on its promise.  The legal doctrine concerning under what circumstances a promisor is held back from breaking its promise is known as "estoppel".  The "policy" behind why a Court will sanction a promisor who breaks its promise arises out of the perceived unfairness that occurs where the promisee, relying on the promise, acts - or fails to take certain action - and the promissee then suffers loss or other hardship which it wouldn't have suffered if the promisor had kept its promise.

In a recent case (Cowper-Smith v Morgan, Supreme Court of Canada, judgment given December, 2017, hereinafter, the "Cowper Case"), the Court dealt with a promise made in a non-commercial setting.  The promisor was the daughter of a deceased mother and the promisee was one of the deceased's sons.  The promisee was induced by his sister to move his family from Ireland to Canada where he then commenced to look after his and his sister's ailing and aged mother.  The promisee was so induced by the promisor assuring him that on the mother's death, he would acquire ownership of the family home.  Prior to his mother's death, the promisee learned that title to the family home had been transferred from his mother's name to his sister's (the promisor's name), but when questioned about this arrangement, the promisor assured the promisee that the title change had been arranged solely for the purpose of facilitating administration of the mother's estate.  After the mother's death, the promisor changed her "story" and took the position that the property had been transferred to her by the mother in the form of a gift, so that the promisor alone was entitled to ownership of the home. 

The promisee challenged the promisor's position in Court, thus the Cowper Case.  At the trial Court level, the Court held that the promisor was estopped from going back on her promise, and that accordingly, the promisee was entitled to acquire the interest in the home which he would have been entitled to acquire had the promisor not broken her promise.  At the initial appellate Court level, the Court held that, under the "traditional" legal concept of promissory estoppel, the promisee was not entitled to hold the promisor to her promise, because at the time she made the promise, she did not then hold any interest in the property (title was transferred from the mother to the daughter only after she made her promise to her brother).  The Supreme Court of Canada reversed the lower appellate Court and held that the promisor's promise was legally enforceable against her, notwithstanding that she held no interest in the property when she induced her brother to come back to Canada to look after the ailing mother.

Arguably, the Supreme Court's holding in the Cowper Case broadens the area in which non-commercial setting promises - when relied upon by the promisee to its detriment - will be enforced.  If one believes that, as a matter of public policy (or "morality"), those who make promises should be required to fulfil them (or suffer the consequences), this holding should be considered a positive development.

Going beyond the particular facts in the Cowper Case, counsel should be aware generally of the fact that their clients may be required to uphold their promises even though a promisor may not have strictly or clearly received "value" in exchange for a promise. Or where it is difficult to establish that "value" was received by the promisor. 

November 2018

Updated November, 2018

1. THE PROBLEM

Persons and businesses acquiring and disposing of interests in real property (including mortgagees) and their counsel are used to seeing - and frequently glossing over - the existence of utility and similar easements recorded either directly (or by way of caveat) against the titles to the lands with which they are concerned.  The rights and interests ("Utility Easements") given to holders of such interests ("Utilities") - who are usually, but not always, government, or government owned, created or regulated, entities authorized and tasked with the power and entitlement to provide services such as electricity, natural gas, water and sewage removal ("Utility Services") - require that landowners ("Landowners") grant them rights to enter on a Landowner's property and to install, operate, utilize and maintain the facilities and equipment required in order to create, transport and distribute the Utility Services.  Because a Utility will need to maintain its Utility Easements notwithstanding changes in ownership of the underlying lands, Utility Easements are constituted as interests in land so as to enable the Utility to continuously provide its Utility Services without interference from any Landowner succeeding the original granting Landowner in title.

In the past, original Utility Easement granting Landowners and others acquiring interests in the owner's property (including mortgagees and subsequent owners) did not usually consider the existence of an Utility Easement (and the Utility's right to maintain its Utility Easement rights in priority to all other land interests and rights in the property), as a substantial or material burden on the property's ownership.  This was because earlier versions of Utility Easement grants or agreements specifically limited the Utility's Utility Easement rights to a particular or defined area (or areas) over, along, above and/or below the Landowner's soil.  The area covered by a Utility Easement might be typically described as a strip of land 20 feet wide and running parallel to the northern boundary of the Landowner's property.  In more recent iterations of this scenario, the Utility Easement rights would be specified and limited to be those referable to a parcel of land shown outlined in a particular colour on a particular plan (an easement or right-of-way plan) registered (with its own unique registration number) in a particular Land Titles Office.  Thus, if I wanted to buy your land, and upon searching your title, I noted that a Utility had recorded a Utility Easement against it, I would know - before committing to close, or perhaps even before entering into a purchase and sale agreement - what were the limitations that I would "inherit" under the Utility Easement, and in particular, exactly where those rights applied. Thus, at the outset, I would know whether or not the Utility's Utility Easement rights would interfere with - or perhaps render impossible - my intended use, or future anticipated use, of the Landowner's property.  If my intended use of your property was completely incompatible with the Utilities Easement, I would simply "pass" on buying or completing the purchase of your property.  On the other hand - and this is usually what happened - I would conclude that the Utilities Utility Easement rights would not materially affect my intended use of the property, and thus I would be quite willing to buy (and my financier would be quite willing to lend against) the property subject to the Utility's prior easement rights.

More recently, Utilities have commenced taking Utility Easements which entitle them to enter and install, operate and maintain the Utility's facilities and equipment anywhere on the Landowner's property, in some place or places to be determined by the Utility in the future.  Thus, at the time of the creation of the Utility Easement, the Landowner does not then know, and may not know for some time, exactly where in her, his or its land the Utility Easement (and the rights and restrictions referable thereto) will be applicable within the boundaries of the Landowner's property.  It is this writer's understanding that the practice amongst at least some Utilities is to eventually "narrow" the application of the Utility Easement rights to a specified area or areas - no doubt delineated by a new plan recorded in the Land Titles Office.  But this will only happen at some initially unknown time in the future.  Presumably, the Utility's rationale for wanting this extreme flexibility is because that while, at the outset, it knows in principle that it will want and need Utility Easement rights somewhere over the owner's property, until future growth and development plans for the property - and in particular, the surrounding area - are actually known and substantially finalized, the Utility itself doesn't really know where its facilities and equipment will need to be located.  In the meantime, the result for the Landowner is that it can't really make any effective use of and can't practically make any concrete plans for the future use and development of the property.

Utility Easements of this nature ("Indefinite Area Utility Easements") have become popular (amongst Utilities) since the recent amendments to The Real Property Act (Manitoba) (the "MRPA") which sanction the creation of "statutory easements".  The primary differences between the "traditional" form of easement and a statutory easement are:

(a)          the holder of a statutory easement can enjoy it without itself owning an adjacent or nearby particular parcel of real estate to be benefitted by the easement (ie, no "dominant tenement" is required);

(b)          a statutory easement is not effective to create an interest in land, ie, binding the current and all successive owners, unless and until it is registered at the Land Titles Office*;

(c)          with a few exceptions, only government owned or government regulated and controlled Utility Services providers can hold a statutory easement; and

(d)          the holder of a statutory easement may, if it so desires, obtain a title to its easement, which then enables it to more easily and efficiently deal with its easement, whether by way of transfer, mortgage or other disposition.

The following are examples of the breadth of the wording in Indefinite Area Utility Easements which the writer has reviewed in two recently created (within the last 5 years) statutory easements:

(i)            First, the easement agreement recites the fact that the Landowner owns two parcels of land (Lots 1 and 2 in a specified registered plan), and then, in the "body" of the agreement, specifies that the Landowner grants to the Utility the right and easement "to enter into the right-of-way, and to use, excavate, construct, maintain, repair, etc. its overhead and/or underground equipment and facilities in, over and upon the "right-of-way", then, the agreement further provides that the Utility has the right and easement to "enter onto the land" for the purpose of cutting trees and bush which, in the Utility's opinion, may "interfere" with (its equipment).  The agreement further provides that without the Utility's prior consent in writing, the Landowner is not entitled to "excavate, drill, place, install, erect or permit to be executed, drilled, placed, installed or erected, any pit, well, foundation, pavement, material, fence, structure or other thing on or over the Land which will extend more than 12 feet above ground level or within 2 feet of underground cable".  What is particularly noteworthy concerning this easement granting language is the fact that the "right-of-way" is NOT, unlike aforementioned previously crafted easement agreements, in any way defined, other than with reference to the TOTALITY OF THE LANDOWNER'S LAND.  Thus the whole of the Landowner's property appears to be subject to the Utility's right to place and maintain its equipment anywhere of the Utility's choosing at some indefinite point in the future.

(ii)           A similar easement agreement but with a different Utility, (again) recites the fact that the Landowner owns particular parcels of land, and then goes on to provide for a grant to the Utility of a right and easement, being "…those portions of the said lands                  meters in width…", and the word "blanket" has been filled in (presumably by the Utility) in the indicated blank space.  Again, the Landowner is prohibited from effecting any improvements to the property without the Utility's prior written consent, thus effectively "sterilizing" (for an indefinite period of time into the future) the Landowner's property.

Lest there be any doubt about it, this writer does not find fault with easement agreements which, in addition to providing for a defined right-of-way, additionally grant the Utility certain "subsidiary or supporting rights and easements", in particular:

(a)          the right to enter other portions of the Landowner's property for the purpose of gaining access to and bringing equipment to the defined right-of-way area or areas; and

(b)          the right of the Utility to enter upon the Landowner's property for the purpose of cutting down trees, brush, etc. which interferes with the proper installation, operation and maintenance of the Utility's equipment;

provided that such "subsidiary" or "supporting" rights are exercised reasonably and don't interfere with or damage the property and other improvements on the property.

The "problem" is the virtual total emasculation of the Landowner's property rights when the property becomes subject to an Indefinitely Area Utility Easement.

1. THE NATURE OF STATUTORY EASEMENTS UNDER THE MANITOBA REAL PROPERTY ACT

As noted above, there are significant differences between the "traditional" or common law concept of an easement and a statutory easement.  Statutory easements have been contemplated and sanctioned under the MRPA for quite some time, but the provisions in the legislation dealing with them were expanded and strengthened in 2011, in part to make it clear that a statutory easement was, except as otherwise provided in the MRPA, an easement of the same nature and character as the "traditional" or common law easement.  This is reflected in Section 111.1(1) of the MRPA which provides, in effect, that once registered, a statutory easement "is an easement for all purposes", and, "is an interest in land", and, "runs with the land notwithstanding that the benefit of the right is not appurtenant or annexed to any land of the (grantee) in whose favour the right was granted".  Additionally, Section 111.1(1) provides that "…and the conditions and convenants expressed in the instrument (creating the easement) apply to and bind the respective successors, personal representatives and assigns of the grantor and grantee, except to the extent that a contrary intention appears in the instrument". (The underling here is for emphasis purposes).

Could a Utility successfully argue that an Indefinite Area Utility Easement created as a statutory easement is binding on the original grantor and all successors in title to the original Landowner's property, on the basis of the above-quoted provisions in Section 111.1(1), notwithstanding that there is no clear demarcation of the boundaries and/or location of the easement rights?  In this writer's opinion, while there may be a possibility of success for such an argument, it is unlikely that a Court would so interpret the statute in that manner.  This is because Section 111.1(1) appears to strengthen and emphasize the nature and effect of statutory easements by emphasizing that they are akin to "traditional" or common law easements.  The statute's language does not purport to do away with or exclude all of the previous law pertaining to easements generally.  Just the opposite.  The Courts have - and continue to be - wary of interpreting a statute on the basis that all common law related to the subject matter of the enactment is extinguished or excluded unless the statutory language specifically says so.

1. THE TRADITIONAL OR COMMON LAW APPLICABLE TO EASEMENTS

So what does the traditional/common law say about easements where the location of an easement is unknown, indefinite, unclear or is to be determined by the holder of the easement at some future time or times?  In reviewing the applicable law, the writer had hoped to find an unambiguous statement by Court to the effect that an easement of this nature is, in short, void for uncertainty.  In fact, the writer has not been able to find such a clear statement.  However, the case law and academic commentary does reveal certain general principles.  A sample of these are the following:

(a)          From Gale on Easements, Nineteenth Edition ("Gale"):

(1)        "It is necessary for an easement that there should be a servient tenement that can be defined and pointed out."

"Difficulty in identifying the servient tenement, though not any doubt as to its existence, may arise where, for instance, a house is granted with the right to receive water, or discharge drainage, through a pipe in an adjoining property retained by the grantor.  In such a case the servient tenement may be thought to consist of the adjoining property or some part of it, or of the pipe itself, if this is not part and parcel of the dominant land, or of the adjoining property and the pipe." 

"For most practical purposes the question is of little importance, where it is clear that the right is an easement, and that, whatever the servient tenement may be, the pipe is entitled to protection from interference, including presumably, interference by withdrawal of support.  Furthermore, in cases of doubt the deed will be construed against the Grantor.  In other similar cases the identity of the servient tenement may bear on the question of whether the so-called easement is not repugnant to the proprietary rights of the servient owner."

(2)        "It is obvious that the identity of the servient tenement is, at least in theory, a relevant consideration.  "If Blackacre had a right to receive water through a pipe laid under A's field, the right is clearly not repugnant to A's proprietary rights in the field, and if the servient tenement is considered to be the field, there is no difficulty on principle in establishing an easement.  A, however, could sell the greater part of the field to entirely free from the easement; the servient tenement must, it is thought, consist at most of the space occupied by the pipe and so much of the soil on each or one side as is necessary for access for repair.  Of the servient tenement so constituted A is very nearly (and certainly of the space occupied by the pipe) deprived of possession; yet the validity of an easement of this kind is undoubted."

(3)        "The question of whether the right granted or claimed by prescription is too extensive to be an easement has been considered in a large number of decided cases.  Unfortunately, the law is not clear and precise as to the boundary between a right which can be an easement and a right which is too invasive of the rights of the owner of the land to be an easement."

(4)        Quoting from the recent (2007) UK House of Lords Judgment in Moncrieff v. Jamieson, "Every servitude prevents any use of the servient land, whether ordinary or otherwise, that would interfere with the reasonable exercise of the servitude.  There will always be some such use that is prevented.  The servient land in relation to a servitude or easement is surely the land over which the servitude or easement is enjoyed, not the totality of the surrounding land of which the servient owner happens to be the owner." 

(5)        "…it would be fairly meaningless in relation to either easement to speak of the whole estate as the servient land."

(6)        "I do not see why a landowner should not grant rights of a servitudal character over his land to any extent that he wishes." 

(7)        "I would, for my part, reject the test that asks whether the servient owner is left with any reasonable use of his land, and substitutes for it a test which asks whether the servient owner retains possession and, subject to the reasonable exercise of the right in the question, control of the servient land."

(8)        "In the case of an express grant of a right of way, the extent of the right granted depends on the express (wording) of the grant.  Those terms must be construed in accordance with the general rules as to the interpretation of legal documents."

(9)        "A right of way should, generally speaking, … be bounded and circumscribed to a place certain, but (in a 1905 English Court of Appeal judgment) the Court was of the opinion that the fact that the occupiers of a tenement to which a way by user was claimed had used, not a definite road marked out between (specified or clearly delineated geographical lines) but a number of tracks indifferently, did not prevent the right from being acquired."

(10)      "If the right in question did amount to a right to use the whole of the area to the complete exclusion of the owner, it could not be an easement"  A right to park a car on a forecourt capable of taking two or more other cars is, however, certainly capable of being an easement and falls on the easement side of what has been called the "ill-defined lined" between rights in the nature of an easement and rights in the nature of an exclusive right to possess or use."

(11)      "An easement that stops short of exclusive possession, even if it deprives the owner of much of the use of his land, or indeed of all reasonable use of it, should be valid."

(b)          From Chapter 17 of Anger and Honsberger, Law of Real Property, 3^rd edition

"(One of the requirements for the constitution of a valid easement is (that) the right must be reasonably definite." "It seems, however, that the standard of certainty is not a stringent one. In one application to have a right-of-way struck down as too vague, the court stated: "A document will not be set aside for vagueness unless, after the application of legal reasoning and legal analysis, it is impossible to decide the meaning that should be given to the document.".

(c)          From Chapter 17 INCORPOREAL HEREDITAMENTS in the Canadian Encyclopedia Digest 4^th (online) Easements:

(1)          "An easement may grant a right to construct and use a swimming pool on the servient land, but the extent of the right will be limited by the proprietary rights of the servient owner.".

(2)          "…a reciprocal parking agreement granting rights to park on "first come/first serve" basis (is) not...

July 2019

It is unlikely that any lawyer - or indeed any other professional person, or for that matter, any "layperson" - would knowingly/intentionally refer someone to another person for advice when the referring person knew or suspected that the referee was incompetent and/or untrustworthy.  But what if you don't know anything - or very much - about a possible referee, except for the fact that he or she holds himself/herself out as a person with a particular skill set and/or particular knowledge, qualifications and experience?  To what extent should you - morally and legally - be obliged to make inquiries (or conduct "due diligence") concerning the proposed referee's actual knowledge, experience, qualification(s) or reputation?

For most people and in most situations, it is unlikely that these questions will arise.  Or if they do, it is unlikely that the person being referred to a referee will suffer loss, or if he/she does suffer loss, that he/she will seek legal redress against the person making the reference.  But if the person contemplating a reference is a lawyer and the person to be referred to a contemplated referee is a client of that lawyer, then, the lawyer may have a significant obligation to take at least some care in making the reference.

Consider the case of a lawyer who commences to practice in a place different from where he/she previously practiced, say a small city of about 20,000 people.  In fairly short order, the lawyer would probably become familiar with at least the names and occupations of other professionals in the city, including other lawyers, financial planners, accountants, lenders and builders.  But for at least some time, the lawyer would not likely be familiar with the reputations and the skill sets - or lack thereof - of such other professionals.  Where a client of that lawyer requests the lawyer to "recommend" the services of another professional, just how far does the lawyer have to go in order to attempt to comprehend a proposed referee's ability, and the likelihood (or otherwise) that the proposed referee will provide a reasonable level of competence and is trustworthy?  Should the lawyer expend copious time and effort trying to "drill down" on the likelihood - or the non-likelihood - of the proposed referee's ability to properly service the client's needs?

These questions were considered - in the context of a lawyer's legal responsibilities - in the recent Supreme Court of Canada case Salomon v. Matte-Thompson, 2019 SCC 14, judgement issued February 28, 2019, hereinafter, the "Salomon Case".

The "facts" in the Salomon Case were that in 2003, a lawyer recommended and introduced his client to a financial adviser - who happened to be a personal friend of the lawyer - and recommended that the client consult with that adviser.  Over the next four years, the client invested in excess of $7,500,000.00 with that adviser's investment firm, and, over the course of that period, the lawyer repeatedly endorsed and recommended the adviser as a financial adviser and encouraged his client to make and retain certain investments with the investment firm.  In 2007, the adviser disappeared with the savings of approximately 100 investors, including those of those of the lawyer's client.  The client commenced an action against the lawyer and the lawyer's law firm for damages.

The Court held that the lawyer was liable to the client.  The Court emphasized that the lawyer had done substantially more than just referring his client to the adviser.  Over the period of four years, the lawyer had made repeated positive recommendations of the adviser's capabilities to his client, including urging the client to invest (through the adviser and his investment firm) in "risky" investments.  The client had specifically, at the outset, advised the lawyer that the client's needs were to place her funds in investments which would tend to protect her capital.  When the investments started to deteriorate in value, the lawyer - who had placed some of his own monies in those investments - did not suggest to the client that she reduce her holdings with the adviser and his investment firm.  Indeed, just the opposite occurred - the lawyer gave repeated assurances to his client that the investments were, and continued to be, safe and good investments.  Although the judgement doesn't unequivocally hold that the lawyer had received remuneration from the adviser for referring clients - including Mrs. Matte-Thompson - to the adviser, the facts presented to the Court strongly suggested that that was in fact the case.  Taken as a whole, the Court determined that the lawyer owed a duty to provide proper advice to the client as well as a duty of loyalty to the client.  The lawyer had not conducted any "due diligence" whatsoever pertaining to the adviser and his investment firm.  The Court held that had the lawyer done so and advised his client, his client would have almost certainly not made any investments with the adviser and his investment firm.

The Court emphasized that when a lawyer makes a reference of a client to another person for advice and guidance, the lawyer does not thereby guarantee to the client that the referred to adviser will achieve a particular result or objective or that the adviser will turn out to be wholly trustworthy and competent.  However, in the Salomon Case, the lawyer's conduct - which led to his client's losses - was far more than a mere reference.  The lawyer's course of conduct over the entire time period had to be taken into account.

What then does the Salomon Case suggest to practicing lawyers?  Consider the following:

(i)            if you know absolutely nothing about a contemplated referee, either don't make the reference - and explain to your client that that is the reason you are not making any reference - or:

(a)          conduct at least some "due diligence" with respect to the contemplated referee (for example, if the contemplated referee is a financial planner, inquire as to his/her credentials and whether or not he/she is registered or recorded with an organization whose members are regulated, either voluntarily or by government mandate, as to their conduct, competency, etc.); or

(b)          make the reference but get a written acknowledgement from your client that you have no knowledge and have not conducted any due diligence with respect to the contemplated referee, suggesting that the client seek the recommendations of one or more other persons in the community who might have more knowledge of the contemplated referee's reputation;

(ii)           if you either know or have certain information which would lead you to suspect that the contemplated referee is incompetent and/or untrustworthy, either decline to make the reference or before making it, or where you have "suspicious", conduct - and document that you have conducted - some "due diligence". Where your due diligence removes your "suspicions", make the reference, if you feel comfortable in doing so.

Readers will appreciate that there is a marked difference between the hypothetical fact scenario suggested at the beginning of this paper and the facts of the Salomon Case.  The Salomon Case deals with of a rather "extreme" situation.  Clearly, the lawyer there had a conflict of interest and a conflict of duty arising from his dual relationships with his client and with the financial adviser. There was a pattern of ignoring the ramifications of those conflicts over a long period of time.  While this writer's first reaction upon reading the Salomon Case was to fear that the Court had extended the duties and responsibilities of lawyers making referrals, the writer is now convinced that this is not so.  As stated at the outset, most lawyers will not intentionally refer a client to someone who they know - or suspect - to be incompetent and/or untrustworthy.  And where a lawyer contemplating a reference for a client has any suspicions concerning same, she or he will most likely either "diplomatically" not make the reference or not make it until sufficient "due diligence" has been conducted by the lawyer so as to assure herself/himself that making the reference to the particular client in the particular circumstances is reasonable.

May 2019

The basic landholding/restriction/prohibition/permission rules in The Farm Lands Ownership Act (Manitoba) (the "Act") are as follows:

1. The following "persons" (defined very broadly) can acquire farm land (see Section 4 of the Act):

(a)          a person acquiring "in conformity with the provisions of Section 2 or Section 3 of the Act"; and

(b)          a person acquiring which would result in that person having, directly or indirectly, interests in farm land that do not exceed 40 acres in aggregate.

Pursuant to Sections 2 and 3 of the Act, the following persons may acquire farm land:

(i)            an eligible individual (essentially, a Canadian citizen or a landed immigrant) (Section 2(a));

(ii)           a family farm corporation (essentially, a corporation owned and controlled by farmers and persons related to farmers) (Section 2(b));

(iii)          a municipality, a local government district and an agency of the government (Sections 2(c), 2(d) and 2(e));

(iv)          a qualified Canadian organization, "subject to any limitations provided for in the regulations (as at May 17, 2019, I have not been able to discover any regulations dealing with this matter).  A "qualified Canadian organization" (essentially, any business entity including LPs and trustees) where eligible individuals own the organization, excluding "corporations which have any shares listed on a stock exchange";

(v)           subject to Section 3(16), a "qualified immigrant";

(vi)          persons who are specifically permitted to acquire ownership interests in farm land by the Farm Industry Board (Section 3(3));

(vii)         a person who acquires an interest in farm land which secures a bona fide debt obligation - typically, a mortgage (Section 3(4));

(viii)        a "retired farmer" - Section 3(8) - essentially, this is a natural person wherever resident "who has been a farmer for a period of at least 10 years and who has retired from farming in Canada".

There are several other more exotic and less encountered specific permissions to hold farm land to a greater or lesser degree, found primarily in Section 3 of the Act.

1. "Farm land" is defined to mean "real property which is situated outside a city, town, village (including an unincorporated village) or hamlet and that is used or is reasonably capable of being used for farming, excluding mines and minerals" (other than sand and gravel) and a couple of other exceptions.
2. "Farmer" means an eligible individual "who receives a significant portion of his income either directly or indirectly from his occupation of farming and who spends a significant portion of his time actively engaged in farming".
3. "Farming" includes "tillage of the soil, livestock production, raising poultry, dairying, fur farming, tree farming, horticulture, bee keeping, fish farming or any other activity undertaken to produce agriculture products, but does not include the purchase and resale of agricultural products, or the commercial processing of agricultural products".

August 2010

It is probably generally understood amongst those who provide and consume banking type services that in most situations, where a fraudster has forged a bank's customer's cheque and funds have thereby been removed from the customer's account, as between the bank and its customer, the bank is responsible for the loss and must recredit its customer's account.  Section 48(1) of the Bills of Exchange Act (Canada) unequivocally states that a forged signature on a cheque is "wholly inoperative".

There are many ways in which funds may be removed from a customer's account without the customer's authorization.  Fraud is often behind an unauthorized removal, but sometimes an unauthorized removal occurs by reason of mistake.  In an attempt to minimize their responsibilities for unauthorized removals, most banks (and other deposit taking financial institutions) will usually require their customers to enter into an "Account Verification Agreement" or "Account Operation Agreement".  These arrangements will typically provide that if there is an unauthorized withdrawal, it must be reported to the bank within a limited period of time (usually 30 days) from when the bank provides its customer with a written summary of the customer's account's activity over the immediately previous period (usually, a one month period).

The recent (July, 2010) OntarioCourt of Appeal decision (hereinafter, the "SNS Products Case") illustrates how the Courts will interpret the provisions of these types of agreements strictly against their authors (ie, the banks).  In the SNS Products Case, a fraudster, over a period of time, forged a number of cheques on the customer's account, but the customer did not complain to the bank until after having received a number of account statements which (one supposes) would have - if the customer had carefully reviewed same - revealed the fraud.  The bank claimed that it wasn't responsible for the customer's losses on the basis that the wording in its account verification agreement completely excused it from having to reimburse its customer if the customer failed to notify the bank of the losses within the specified time limit.  The agreement referred to the need for the customer to report to the bank (in a timely manner) any "error", "irregularity" or "omission".  The agreement did not contain any references to unauthorized withdrawals caused by forgery or other fraud.  The Court held that in the absence of specific language referring to forgery and fraud, the agreement did not protect the bank, with the result that the bank had to make good the amount of the forged cheques.

While arguably "error" and "omission" do not properly describe forgery or other fraud, one could argue that forgery or fraud constitute an "irregularity".  Nevertheless, the Court took the traditional (and thus well established) position that documents are to be construed against those who create them, and that accordingly, it is up to the author of a document to be as explicit as possible in the wording used, in particular, for those provisions of the document which are intended to protect the interests of the document's author.

From a practical perspective, the SNS Products Case suggests:

1. Banks and other financial institutions taking deposits against which cheques may be written will have to shore up the protective language contained in their account agreements; and
2. Customers of such institutions should pay close attention to their bank statements and to the cancelled cheques or other payment instruments which usually accompany same.

May 2019

A lender ("Lender 1") makes a particular loan (the "Loan") to a debtor (the "Debtor") on the security of a real property mortgage (the "Mortgage"). The Loan is for five million ($5,000,000.00) dollars and the loan agreement between Lender 1 and the Debtor provides for amortization of twenty-five years and a term of five years. Nearing the end of the initial five-year term, the Debtor decides that it wishes to refinance the Loan with a different lender ("Lender 2"). The refinanced Loan with Lender 2 may continue on precisely the same payment/repayment terms as were stipulated in the loan agreement between the Debtor and Lender 1, or they may be substantially the same lending terms, but with a change in the interest rate and/or a change in the initial term of the financing with Lender 2. In either case, the Debtor wishes to end up in substantially the same position that it had with Lender 1, except the Loan would now be with Lender 2 with, depending on what is agreed upon between the Debtor and Lender 2, slightly revised payment/repayment terms.

Lender 2 can secure its position in one of two ways:

(i)    by acquiring an entirely new mortgage from the Debtor securing an entirely new loan (from Lender 2), the proceeds of that new loan being used to pay out the (original) Loan owed to Lender 1; or

(ii)   by getting Lender 1 to assign its rights under and with respect to the Loan to Lender 2, together with an assignment of Lender 1's rights and interests under the (originally granted Mortgage).

What if Lender 1 takes the position that while it is to receive payout in full of the Loan, it is not prepared to assign the Loan and the Mortgage to Lender 2?

Section 6(1) of the Manitoba Mortgage Act (the "MMA") provides that:

"Where a mortgagor is entitled to redeem he may require the mortgagee, instead of giving a certificate of payment or re-conveying, and on the terms on which he would be bound to be re-convey, to assign the mortgage debt and convey the mortgaged property to any third person, as the mortgagor directs, and the mortgagee is bound to assign and convey accordingly". Section 6(5) of the MMA additionally provides that "This section has the effect notwithstanding any stipulation to the contrary."

Clearly, Lender 1 must assign the Loan and the Mortgage to Lender 2 where the Debtor pays the balance owing under the Loan to Lender 1 and directs and requires Lender 1 to assign to Lender 2. And this is so even if Lender 1 had previously got the Debtor to agree that when paying off the Loan, the Debtor would then only be entitled to a discharge, not get an assignment to a third party.

Two of the main reasons why a mortgagor - and its new intended lender - might prefer to have the original mortgagee assign the debt and the mortgage to the new lender are:

(a)  in most cases, it will be less expensive for the new lender to take an assignment of the existing loan and mortgage than for an entirely new mortgage to be in place; and

(b)  by taking an assignment of the existing loan and the mortgage which already exists and is in place (and presumably duly registered, etc.), the new lender should be able to gain priority over other parties who have acquired interests in the mortgagor's realty between the time that the existing mortgage was registered and the time that the new lender acquires the mortgage by assignment.

Section 6(2) of the MMA provides that the mortgagor's right to require its mortgagee to assign the mortgage to a third party is a right which is also exercisable by each encumbrancer.  So a second mortgagee has the right to tender payment (in full) to a first mortgagee and require the first mortgagee to assign its mortgage to the second mortgagee.  The Section also provides that: (i) if both the mortgagor and a subsequent mortgagee directs the Transfer to the prior mortgagee, the subsequent mortgagee's requirement to assign prevails over that of the mortgagor.  Finally, the Section specifies that where there are, say, three mortgages, the requirements to assign by the second mortgagee prevails over the requirement to assign issued by the third mortgagee.  IN other words, the highest ranking mortgage out of two or more mortgagees, all of whom wish to redeem a mortgage holding priority over all of them, has the overriding right to redeem the higher ranking of the requesting mortgagees - here, the second mortgagee - prevails over that of the third mortgagee.

Where another existing mortgagee wishes to pay off a prior mortgagee and get an assignment of the debt and the mortgage, Section 6(4) of the MMA stipulates that the mortgagor's entitlement to so direct the new lender or the other existing mortgagee is contingent upon the prior mortgagee being provided with "sufficient official certificates or evidence showing the number and order and amounts of the encumbrances and the names of the encumbrancors and also proof by statutory declaration of the existence of each subsequent encumbrance, and that it is wholly or partly unsatisfied, as the case may be." Thus the mortgagor/its new lender/the other existing mortgagee must ensure that the prior mortgagee (ie, the mortgagee being paid out) receives such documentation and information before or concurrently with the direction to assign. The word "encumbrance" is defined in the MMA to include a mortgage as well as "a trust for securing money, and a lien by registration of a judgment or otherwise, and a charge of a portion, annuity, or other capital or annual sum".

January 2014

October 2012

The following is an increasingly frequently occurring scenario.  A farmer ("Debtor") carries on the business of producing and selling one or more crops ("Crops").  To finance the Debtor's operations, the Debtor obtains a revolving operating line of credit from a Canadian chartered bank ("Bank").  The Debtor utilizes this credit to obtain various goods and services which it requires in order to conduct its operations, in particular, to grow, to harvest and to sell its Crops.  These include such items as seeds, fertilizers and pesticides ("Primary Inputs"), servicing and obtaining parts for the Debtor's production equipment (including the acquisition of fuel for same), consumption of electricity and payments made to farm employees/workers.  As security to better assure the Debtor's payment of its obligations arising out of such credit, the Bank obtains a general security agreement ("GSA") from the Debtor which, by its very nature, covers all of the from time to time existing personal properties, both tangible and intangible, of the Debtor, including the Debtor's Crops.  The Bank perfects its GSA security under the applicable Personal Property Security Act ("PPSA") by registering a financing statement in the Personal Property Registry ("PPR"), thereby establishing the priority of the Bank's security against, amongst other things, the Debtor's Crops.  Additionally, and to protect the Bank's security against real estate interests, the Bank files a PPSA Crops Notice against the title(s) to the Debtor's farmland on which the Debtor's Crops are to be/are growing.  For argument's sake, assume that at this point in time, no one has priority over the Bank with respect to the Bank's security against the Debtor's Crops.

Subsequently, the Debtor, decides that it needs more Primary Inputs than it has acquired via the Bank's financing.  It also concludes that it would be less expensive for it to acquire such additional Primary Inputs from an agricultural products supplier ("Primary Inputs Supplier").  So the Debtor acquires one or more of seeds, fertilizer and pesticides from a Primary Inputs Supplier on credit.  The Primary Inputs Supplier takes a security interest in the Primary Inputs which it has sold on credit to the Debtor plus a security interest in the Crops being grown/about to be grown by the Debtor.  The Primary Inputs Supplier promptly perfects its security interest. 

Can the Primary Inputs Supplier, in effect, retroactively, achieve priority over the Bank's security?  Consider these arguments which the Primary Inputs Supplier might make to support its claim for priority over the Bank's security:

1. The Primary Inputs Supplier has a purchase money security interest in the Crops.  In Section 1 of the PPSA (Manitoba), "purchase money security interest" is defined (insofar as a credit seller is concerned) to be "a security interest taken or reserved in collateral, other than investment property, to the extent that it secures all or part of its purchase price".  It is doubtful that the Primary Inputs Supplier could successfully argue that its security covers all of or any part of the "purchase price" of the Crops.  What the Primary Inputs Supplier does have is a purchase money security interest in the Primary Inputs themselves which it has sold on credit to the Debtor.  But it does not (likely) hold a purchase money security interest in the Crops.
2. The Primary Inputs Supplier's purchase money security interest in the Primary Inputs attaches to the Crops (with the same priority that its purchase money security interest had in the Primary Inputs themselves) on the basis that the Crops are "proceeds" of the Primary Inputs.  Section 1 of the PPSA (Manitoba) defines "proceeds" to include "identifiable or traceable personal property, fixtures and crops (i) derived directly or indirectly from any dealing with collateral or the proceeds of collateral, and, (ii) in which the debtor acquires an interest".  Clearly, the Crops are a species of personal property and clearly, the Debtor acquires an interest in them when they start growing.  But there are two problems for the Primary Inputs Supplier in making this argument.  First, it may be difficult to "trace" the Primary Inputs Supplier's Primary Inputs to the Crops themselves, bearing in mind that some of the Primary Inputs utilized by the Debtor to create the Crops (in the above example) were financed with value provided by the Bank.  Second, can it really be said that the Crops are "derived" from the Debtor's "dealing" with the Primary Inputs?
3. The Primary Inputs Supplier has obtained a perfected security interest in the Crops which "enables (the Debtor) to produce the Crops".  The quoted words come from the PPSA (Manitoba) Section 34(10) which states: "A perfected security interest in crops or their proceeds given for value to enable a debtor to produce the crops and given while the crops are growing crops or during the six months immediately before the time the crops become growing crops, has priority over any other security interest in the same collateral given by the same debtor".  There can be no doubt that provision of credit to the Debtor of the Primary Inputs by the Primary Inputs Supplier does "enable" the Debtor to "produce the crops".  But doesn't the Bank also provide value to the Debtor which enables the Debtor to produce the Crops?  In the example given here, the Bank assists the Debtor to produce the Crops by enabling the Debtor to acquire some (although only some) of the Primary Inputs required to produce the Crops.  So the situation is that both the Bank and the Primary Inputs Supplier have enabled the Debtor to produce the Crops.  There are two problems or questions which arise here: (i) where the financing provided by the Bank is utilized, not only to enable the Debtor to obtain some of the Primary Inputs required to produce the Crops, but also to enable the Debtor to generally carry on its crop production business (as described above), is the financing of the Debtor's acquisition of such other non-Primary Inputs costs and expenses just as much "value to enable (the Debtor) to produce the Crops" as the utilization by the Debtor of the Bank's financing to acquire some of the Primary Inputs for the Crops?, and, (ii) if both the Bank and the Primary Inputs Supplier can be said to have enabled the Debtor to produce the Crops, what rule in the PPSA resolves the priority dispute?  As to the latter question, one cannot look to the rule that provides, in effect, that in a competition between a seller's purchase money security interest and a lender's purchase money security interest, the seller's security interest holds priority over the lender's security interest.  Arguably, the Bank's and the Primary Inputs Supplier's security interests in the Crops are security interests governed by Section 34(10) and not "purchase money security interests" at all.  If that is the case, then one must fall back on the "residual" priority rule in the PPSA which provides that in a competition between two perfected security interests, priority is determined by who has perfected (in this case registered) first (Section 35(1) of the PPSA (Manitoba)).  In the example given here, that would put the Bank 100% ahead of the Primary Inputs Supplier insofar as the Crops are concerned.

In essence, I would argue that my analysis in paragraph #3 above is correct provided that a Court held that:

(a)          the Debtor's Crops are not "proceeds" of the Primary Inputs; and

(b)          the non-Primary Inputs acquired by the Debtor utilizing the Bank's funds are just as much inputs which "enable (the Debtor) to produce the (Crops)", as are the Primary Inputs themselves.

In support of my argument that the non-Primary Inputs should be considered to perform the same function as the Primary Inputs, I would ask readers to review Section 34(11) of the PPSA (Manitoba) which provides a limited priority for those taking security interests in animals to secure obligations arising out of the secured party's provision of value to the animals' owner to acquire "food, drugs or hormones to be fed to or placed in the animal(s)".  Section 34(11) specifies types of inputs for animals, but Section 34(10) does not specify types of Primary Inputs.  The expression "Primary Inputs" has been made up by the writer for illustrative purposes only and no such expression appears in the PPSA (Manitoba).

Assume that a Court disagreed with the writer's analysis of the above-described fact scenario. What could be done to protect the Bank?  Consider the following:

(A)          The Bank could take a Bank Act, Section 427 security assignment covering the Debtor's Crops.  If the Primary Inputs Supplier (which presumably is not another chartered bank) takes security in the Crops, it will undoubtedly be governed by the PPSA.  In a contest between a Bank Act, Section 427 security assignment and a PPSA governed security interest, the priority rules found in the Bank Act will determine priority.  If the Bank has taken and properly registered notice of its taking of its Bank Act, Section 427 security before the Primary Inputs Supplier has taken and properly registered its PPSA governed security, the Bank will prevail.  Section 4(k) of the PPSA (Manitoba) provides that the PPSA does not apply to Bank Act, Section 427 security where, as is the case with the Bank Act, the federal legislation spells out the rights and priorities of competing claimants against commonly charged collateral.

(B)          If, for whatever reason, the Bank chooses not to take Bank Act, Section 427 security, or, as might well be the case in the future, chartered banks are no longer able to obtain security under the Bank Act, then, absent a legislative solution to sort out priorities in the above-described fact scenario (ie, an amendment to the PPSA), the Bank could obtain a covenant from the Debtor to the effect that the Debtor is not to obtain additional credit (or at least additional secured credit) from any Primary Inputs Supplier without first obtaining the written consent of the Bank.  That way - and assuming that the Debtor honours its covenant - when the Debtor approaches the Bank and requests permission to obtain (secured) credit from a Primary Inputs Supplier, the Bank can then make a reasoned decision as to what to do.  The Bank may well agree to permit the Debtor to obtain some additional (secured) credit from a Primary Inputs Supplier, but only if the Primary Inputs Supplier enters into an intercreditor agreement with the Bank spelling out the Bank's and the Primary Inputs Supplier's respective priorities regarding the Debtor's Crops.

Note that in order to narrow a potential priority dispute down to one whereby the Bank and the Primary Inputs Supplier are the only meaningful competing claimants to the Debtor's Crops, both the Bank and the Primary Inputs Supplier will have to be mindful of certain "time restrictions" imposed on them by the PPSA (Manitoba).  Assume that the Bank is relying on PPSA security rather than Bank Act Section 427 security.  First, Section 13(2)(a) of the PPSA (Manitoba) provides that as a general rule, in order for a creditor's security interest to attach to crops at all, the crops must start growing no later than one year after the "security agreement is entered into".  Second, as noted above, Section 34(10) of the PPSA (Manitoba) requires that a creditor wishing to have as high as possible a security interest in crops must ensure that the security interest arises during a period of time commencing six months before the crops start growing, and continuing down to when the crops are threshed.  The need to have the security agreement signed no more than one year before the crops start growing is subject to an exception; where the security in the crops is given "in conjunction with…a mortgage of land…". Then if the parties so agree, the creditor's security interest in the crops will "attach to (the crops) to be grown on the land during the term of the…mortgage…".  In the above-described scenario, I have assumed that the Bank and the Primary Inputs Supplier have, in effect, "complied" with the aforementioned "time restrictions".