Jason Bryk 

Phone: 204.956.3510

Fax: 204.957.0227

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February 2016

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Counsel might consider the following:

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

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

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

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

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July 2010

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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January 2009

You own a parcel of land (the "Property") and have decided to sell it to someone (the "Purchaser") on the understanding that the Purchaser uses the Property for a specified purpose and develops the Property with particular/particular types of improvements.  A more or less common example of this situation is where the current owner (you) subdivides a Property into a number of building lots and then enters into purchase and sale contracts with a number of buyers who promise that they will use their lots solely for, say, recreational purposes, and additionally promise you that they will, within a specified period of time, build cottages on the lots, with the cottages having to be constructed to meet, to a greater or lesser degree, your specifications.  Such an arrangement may be encouraged or indeed required by the municipal/local government for the jurisdiction in which the Property is situated.

You know that you can enforce the Purchaser's promises by court action brought against the Purchaser, but you also know that positive - as opposed to negative - covenants (promises) are not considered interests in land which are capable of being enforced against a successor in title to the original contracting Purchaser, absent the original Purchaser's successor undertaking to you directly to be bound by the original Purchaser's promises to you.  Instead, you accept the suggestion of a lawyer, who has a little, but not sufficient knowledge of these matters, to include an option in your favour to buy back the Property from the Purchaser, if and when the Purchaser breaches its promises to you.  The lawyer tells you that such an option is an interest in land and thus, if properly recorded (caveated) against the title to the Property, will indeed bind all successive title holders of the Property.

The use of options to purchase in this situation is fairly common, and while it is true that a "pure"/"unadulterated" option to purchase does constitute an immediate interest in land, an option in the above-described situation - which is really a conditional option which will only arise in the future upon the occurrence of some event which may or may not happen (ie., the original Purchaser's breach of its promise(s) to you) - is not an interest in land.  The arrangement is binding between the immediate parties to it, but will not "follow" the title into the hands of subsequent owners, barring an undertaking by a subsequent owner to be bound by the arrangement (ie., the conditional option).  The case law makes it clear that this type of a (conditional) option is really akin to a first right of refusal (which is also not an interest in land, although some people think it is and even try to caveat it), because unless and until the Purchaser breaches its promises to the promisee, the promisee has no unequivocally existing right to compel (at its choice) reconveyance of the Property.

Can an original land owner enter into any sort of arrangement with its Purchaser which would enable the original owner to get the Property back where the Purchaser's promise(s) is/are breached by a successor in title, with the original owner being able to enforce the promise(s) against a successor in title?  The answer is "yes", although counsel for the original owner will have to be very careful how he or she drafts the contract.

Before dealing with the law pertaining to this matter, please keep in mind that there are two elements of the Purchaser's promise(s) referred to above, namely:

(i)            the promise to only use the Property for a specified purpose; and

(ii)           the promise to develop/construct specified improvements on the Property.

Common law recognizes two similar, but in fact, in terms of legal consequences, substantially different, types of fee simple estates in land, namely:

(i)            a determinable fee simple.  This is a grant of fee simple ownership by the original owner to the transferee to last and exist during a period of time in which, or only for so long as, the transferee uses the Property for a specified use or uses.  Upon the Property ceasing to be used for the specified purpose or purposes, the fee simple ownership of the Property automatically reverts to the original owner, that is, reversion occurs without any exercise of discretion, an option, etc. on the part of the original owner.  The determinable fee simple is an interest in land and as such is caveatable against the title to the subject Property and will bind successors in title.

(ii)           a fee simple which is terminable upon a condition subsequent.  Here, where the Purchaser breaches its promise(s) to the original owner, then the original owner has a right or choice to require forfeiture of the Property back to the original owner.  Such an arrangement is enforceable between the parties but is not an interest in land which would bind successors in title.

Case law and legal commentators have made it clear that "the law has been jealous in its scrutiny of conditions subsequent and will readily hold them void as offending pubic policy, as incapable of performance, or for uncertainty".  In such a case, when the Court holds the condition subsequent to be void, the result is that the fee simple estate becomes absolute in the hands of the (then current) owner.  On the other hand, in the case of a determinable fee simple where the Court holds that the requirement specified to end the estate is void, typically due to uncertainty, the transferred estate will be held to have terminated, with the result that ownership will automatically revert to the original owner (ie., the result would be the same as where the terminating requirement was held to be valid and enforceable and that such event had occurred).

So, going back to the original example, if you are contemplating the sale of your Property, and you wish to induce performance of the purchaser's use/development promise(s) to you with the threat of forcing the return of the Property to you, and you would in fact want the Property back in your hands if the Purchaser (or its successor in title) ceased to use it in accordance with the Purchaser's promise(s) to you, how should the contract be worded?

The key is to word the agreement/transfer of ownership so that the conveyance is to be "for so long as" or "during when" the conveyed lands are used for one or more specified purposes only, or possibly "for so long as" or "during when" the lands are used in accordance with certain specified (typically, development) requirements.  The writer uses the word "possibly" here because when you move from characterizing the transferred ownership as being required to be utilized for a specified use or uses, to specifying compliance with requirements other than "purely" usage obligations, you start to get into the area of what may be, in any particular instance, requirements which obligate the owner to take specific actions and/or expend monies in order to meet the requirements.  The Courts have traditionally frowned on promises binding successors in title whereby the owner is obliged to take certain actions and/or expend monies.  In other words, it is one thing to require that the land be used only for "recreational purposes", but perhaps quite another to require that the owner (and its successors in title) build a cottage (in accordance with certain specifications) by a certain deadline.  The latter requirement, which would obligate the owner (or its successor) to take certain actions and/or expend funds, are requirements which are substantially akin to the imposition of positive - as opposed to (passive) negative - covenants/promises on or against land, and as such, may not be enforceable against successors in title.

Nevertheless, the dividing line between a grant of ownership "for so long as"/"during when" the land is used only for specific purposes, and a grant of ownership "for so long as"/"during when" the land is used in accordance with specific (development type) requirements, is a fine one.  Thus, counsel would no doubt be better advised to at least attempt to arrange for a conveyance of ownership "for so long as"/"during when" the land is utilized in accordance with specific development type requirements, than attempt to establish an arrangement whereby the vendor has a conditional option to re-acquire the land where the Purchaser (or its successor) breaches the obligation to develop the Property in accordance with specified development type requirements.

Land owners contemplating the imposition of usage/specific development type requirements on one or more purchasers from them by way of the establishment of determinable fee simple arrangement(s), should take into account the likely reaction of a Purchaser's (or its succesors') mortgage financier(s).  No mortgage lender would want its security to suddenly disappear by virtue of reversion of ownership of the mortgaged land back to the mortgagee's mortgagor's vendor, free and clear of the lender's security.  At the very least, a mortgagee would want its mortgage security to "follow" ownership of the Property back to the vendor, with some assurance that the vendor would be bound - at least on a non-recourse basis - under the mortgagee's security.  Whether the original owner/vendor would be willing to be bound by a Purchaser's mortgage financing may be a difficult question to answer, but it is certain that no mortgagee in its right mind would advance money to a mortgagor where the mortgagor's ownership could suddenly disappear through no fault of the mortgagee.

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Readers are referred to the writer's earlier memorandum entitled "NEW PROVINCIAL GOVERNMENT RULES FOR WASTEWATER MANAGEMENT SYSTEMS" ("Original Memorandum").  Since sending out the Original Memorandum, the writer has received a number of comments thereon which he believes are worth sharing with interested persons.  Words and expressions used in this memorandum which have been given defined meanings in the Original Memorandum shall have the same meanings herein as given to them in the Original Memorandum.

  1. Might the Amended Wastewater Regulation apply to leased property?  Given the number of cottages/recreational properties utilizing (private) onsite wastewater management systems, this is much more than an academic question.  Sections 8.1 to 8.3 refer to a/the "land owner" and to a/the "transfer of (the) land".  The Amended Wastewater Regulation does not define "owner" nor does it define "transfer", so that arguably, the lessee under a (typically, although not necessarily, long-term) lease of land and any transfer, assignment, etc by the lessee to an assignee might well be caught up under the Regulation's requirements for onsite wastewater management systems.  The same analysis applies to Section 14.2 of the Amended Wastewater Regulation dealing specifically with sewage ejectors.  If lessees are caught, it is the writer's view that a lessee plus the lessee's lessor would be both obliged to comply with and would both be subject to sanction under the Amended Wastewater Regulation.
  2. Should purchasers, mortgagees and their counsel require the inclusion of one or more appropriate statements in a seller's/mortgagor's typically taken (at closing) statutory declaration as to possession ("Closing Declaration")?  A statement or statements pertaining to the status of the property in relation to onsite wastewater management systems and/or the availability of a ("public") wastewater collection system contained in a Closing Declaration couldn't "hurt".  However:

(a)          a written statement/advice as to the availability of a ("public") wastewater collection system and/or the likelihood of one becoming available within the next five years issued by Manitoba Conservation would be preferable to a statement to that effect by the seller/mortgagor; and

(b)          because a Closing Declaration is not typically taken until just before or concurrently with a closing of a transaction - ie., long after when the  sale or mortgage contract is first entered into - the practical usefulness of relying solely on statements in a Closing Declaration is probably minimal.  The time when an intending purchaser or mortgagee would want to learn of the status of the property in relation to these matters would be at the time of, and in fact preferably before, when the contract is entered into.  That way the contract (sale agreement/mortgage commitment letter agreement) can be adjusted to specify the appropriate warranties and to properly specify who is to do what (and when) in relation to compliance, and in particular, non-compliance, with the applicable requirements of the Amended Wastewater Regulation.  Such matters would likely have a bearing on the purchase and sale price or the amount and the timing of advancement of a mortgage loan.

  1. Septic tanks and fields will be banned for properties which are less than two acres or which have less than 60 meters (198 feet) frontage, and this is so even if there is no available ("public") wastewater collection system.  This is a new requirement under the Amended Wastewater Regulation which was not mentioned in the Original Memorandum.  While it is possible for a property owner to apply to the government for permission to install a septic tank or septic field type system, there certainly is no guarantee that an applicant would be successful.  This is of course of concern to any cottage/recreational property owners who frequently have less than two acres land or less than 60 meters (198 feet) frontage.  The Amended Wastewater Regulation does not specify what "frontage" means here - does it mean frontage on a public or road or a private road?
  2. In the Original Memorandum, the writer suggested that persons who contracted for the sale of affected property before and without knowledge of the coming into force of the amending regulation #156/2009 consider "splitting the difference" of the costs of compliance.  It has been suggested to the writer that a seller might reasonably agree that a "50 - 50 split" doesn’t make sense for the simple reason that the purchaser will be getting a substantial benefit from the remedial action that the seller is forced to make prior to closing, and that consequently, the purchaser should pay for most if not all of such benefit.  Difficult negotiations may well be in store for sellers and purchasers in this position.

Generally speaking, in considering the matters raised in this memorandum and the Original Memorandum, the writer strongly believes that the following should be done:

(i)            As noted above, the time when a (potential) purchaser or mortgagee should be aware of the status of the seller's/mortgagor's property in relation to onsite wastewater management systems is before the underlying contract is entered into.  If the underlying contract fails to properly deal with the matter, then by the time that lawyers become involved, it will, in most if not all cases, be too late.  Thus the need for potential buyers and potential mortgagees - as well as potential sellers and mortgagors - to be properly educated on the Amended Wastewater Regulation.  Hopefully, one can assume that most businesses purchasing real estate or advancing value on the security of real property mortgages will so educate themselves either directly, or through their legal advisors.  For the vast majority of others involved, in particular, "ordinary" sellers and buyers of real properties outside of areas served by ("public") wastewater collection systems, that will mean that the usual "gatekeepers", namely REALTORS must be educated so that they can advise and assist their seller and buyer clients to properly complete purchase and sale agreements.  The writer is aware of certain efforts being made - and which have already been made - to so educate realtors, and this effort must be kept up and be ongoing.

(ii)           It is necessary for the government to clarify certain of the questions which have arisen and which will no doubt arise in the day-to-day application of the Amended Wastewater Regulation.  The original memorandum and this memorandum have raised some of those questions, and no doubt those "in the field" will, through experience, raise others.  Ideally, these questions should be clarified by further amendment to the Amended Wastewater Regulation, but even the publication of written statements of policy or intention by Manitoba Conservation would be helpful.  One significant question raised by one of the writer's correspondents has to do with such correspondent's understanding from Manitoba Environment regarding the disconnection and decommissioning of sewage ejectors.  It is this person's understanding that where an owner sells its property to a purchaser who specifically agrees to undertake to disconnect and decommission the ejector within two years from closing, the seller would not be prosecuted.  Unfortunately, the way that the Amended Wastewater Regulation currently reads, this doesn't appear to be the case, and in fact, even where a purchaser undertakes responsibility and then fulfills that responsibility to remove the ejector, the seller is still open to prosecution.  Clearly, the government should clarify this matter, perhaps by a policy statement.

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The recent Manitoba Court of Appeal decision (Kadyschuk and Sawchuk, hereinafter the "Kadyschuk Case") confirmed what has been established law for quite some time relating to first rights of refusal.  That is, that such arrangements are purely contractual in nature and do not constitute interests in land, and thus cannot - apart from further contractual assignments and undertakings - bind a successor in title to the original land owner who grants a first right of refusal. The theory underlying this is that, unlike an option to purchase which gives the optionee the right and power to compel the optionor to sell its land to the optionee (upon the optionee properly exercising the option), under a first right of refusal, the grantee thereof does not have such right and power within its control, but must await the occurrence of one or more acts and/or decisions taken by the grantor of the first right of refusal, which acts/decisions are entirely within the control or discretion of the grantor, and in particular, are not within the control or discretion of the grantee.

At first instance in the Kadyschuk Case, the motions judge, in referring to the first right of refusal which the parties had agreed to, stated that "…that right needs to be placed not only in this agreement but on the title or registered somewhere such that an innocent party without notice is not caught in this legal argument that there is a first right of refusal. …I am not going as far as saying that (the grantee of the first right of refusal) has an interest in the land…but he certainly has a right that has to be registered and that right, in this court's opinion, can be registered on title in the Winnipeg Land Titles Office…".

As the Court of Appeal pointed out, the problem with the motion's judge's position was that registration of the grantee's rights of first refusal can not be made against the grantor's title (by way of caveat or otherwise), because under the Real Property Act (Manitoba), a caveat can only be used to register an interest in land and a first right of refusal is not an interest in land. However the motions judge did raise an interesting question as to whether or not a third party contemplating taking an interest in the grantor's land (after the grantor has provided a first right of refusal to a grantee thereof), namely someone who the motions judge would refer to as an "innocent party", who searches the title and finds no record of the first right of refusal, would be prejudiced by its existence where such "innocent party" contracted to purchase the land and then got caught up in an argument as to whether or not the first right of refusal took priority over the "innocent party's" purchase rights. One could argue that if the first right of refusal is not a registrable interest in land and the third party purchaser has no knowledge of it and is thus not bound by it, by being not bound by it and being able to close its purchase free and clear of the first right of refusal, the "innocent" third party purchaser is not prejudiced. Also, it is probably reasonable to assume that in most cases, in accepting a third party purchaser's offer to purchase, an owner would make it clear that its acceptance was subject to the first right of refusal, and that the sale transaction could only be completed if the holder of the first right of refusal failed to exercise its rights. The writer has often heard from other counsel and people in the land development business that clients/developers would not be amendable to spending the time required to consider the possible purchase of a land owner's property and to engaging counsel to draft an offer to purchase, if they knew at the outset that their time, trouble and expense could be all for naught and would merely establish a benchmark price and sale terms for a sale by the owner to the holder of the first right of refusal. In this situation, and assuming that a first right of refusal was legally capable of being registered against the owner's title, the potential third party purchaser would not be prejudiced because, seeing the first right of refusal caveated against the owner's title, he would simply "walk away" and not make an offer to purchase.  However, the owner would be prejudiced because the existence of notice of the first right of refusal on the title would no doubt "scare off" most potential purchasers. But wouldn't that prejudice to the owner/grantor of the first right of refusal "come with the territory" when the owner agrees to a first right of refusal and is thereafter open to receiving and/or soliciting offers to purchase from third parties?

The other party possibly prejudiced by the fact that a first right of refusal is not currently capable of being registered on the owner/grantor's title is the grantee of the first right. As stated above, it is the writer's assumption that most grantors of first rights of refusal will honour same and make it clear to any third party purchaser that acceptance of purchaser's offer is subject to the first right of refusal.  But what about the first right of refusal grantor who fails (carelessly or fraudulently) to advise a subsequent third party purchaser - or for that matter, anyone else contemplating acquiring a subsequent interest in the land, such a mortgagee - of the existence of the first right of refusal? Under current law, the subsequent third party purchaser, mortgagee or other person acquiring an interest in the land would no doubt acquire free and clear of the first right of refusal. This would leave the grantee of the first right of refusal with a claim for damages against the owner.  Such a claim may not be adequate redress for the aggrieved first right of refusal holder.

PerhapsManitobalegislation should be amended so that holders of first rights of refusal are able to register, record or otherwise place notice of their rights against the owner's title so as to bind persons subsequently acquiring any interest in the owner's land.  Such amendment could specify that:

             (i)                in order to so register, record or otherwise place notice on title, the agreement creating the first right of refusal must clearly specify that it is the intention of the owner and grantee that the rights given to the grantee are intended to bind successors in title to and other persons acquiring interests in the owner's land; and

            (ii)                the agreement must itself be a legally valid agreement or grant (this may go without saying, but - and as noted by the Court in the Kadyschuk Case - it was open to argument that the first right of refusal agreement in question was void for uncertainty in several respects).

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-               When financing a borrower's acquisition of equipment, and taking security on that equipment, the following matters should be kept in mind:

(i)            to obtain the highest possible priority for your security (which means it will have retroactive priority over most previous security interests), you must file your financing statement in the Personal Property Registry no later than 15 days after the day upon which the borrower acquires possession of the equipment;

(ii)           If the equipment is "serial numbered goods" within the meaning of The Personal Property Security Act (Manitoba) (the "PPSA"), then in your financing statement, you have to include an accurate statement of the serial number (or numbers) together with statements pertaining to the make, model, manufacturing year and the "type" of equipment involved; and

(iii)          If the equipment is "mobile equipment", then you must perfect (typically, register a financing statement in) the jurisdiction in which the borrower is "located".  For an individual borrower, that would be the borrower's place of residence.  For a corporate borrower, that would be the jurisdiction in which the borrower has its office, and if it has more than one office, then in the jurisdiction in which the borrower's chief executive office is located.

-               For equipment that isn't "serial numbered goods", your financing statement should still include the serial number - if one is available - but it doesn't have to be included in the "serial numbered goods" portion of the financing statement.  As with any secured collateral, your financing statement should describe the collateral in a way that enables third parties to - relatively easily - identify it, and, to be able to distinguish it from other equipment (or other collateral) which the borrower holds but which is not subject to your security.

-               "Mobile collateral" is - obviously - motor vehicles. But it also includes less obvious "moveable" goods such as:

(i)            outboard motors on motor boats;

(ii)           aircraft;

(iii)          certain kinds of trailers;

(iv)         forklifts; and

(v)          heavy construction equipment that is "mobile", even if it doesn't move very fast and only (typically) moves short distances within an area within which it is being used.

-               Most farming equipment - even if it is "mobile" is not considered to be mobile equipment.  However, the two main exceptions to this are:

(i)            harvesting machines; and

(ii)           tractors.

-               Where the equipment you are financing is to be incorporated into real estate and as such, the equipment, when so incorporated, would be considered to be a "fixture" within the meaning of the PPSA, additional steps should "usually") be taken.  Generally, fixtures are any tangible goods which are built into, incorporated into or affixed into land and/buildings, excluding:

(i)            building materials; and

(ii)           elements or portions of a building or other improvement which, if removed, would adversely affect its structural integrity or the removal of which would expose the building to adverse effects of the elements.

-               Where what you are financing is or is to become a fixture, then in addition to filing a financing statement in the Personal Property Registry, you should also file a "Notice" against the title to the underlying land which states your interest in fixtures/goods which are described in your registered financing statement.  The priority you hold with respect to the affixed fixture depends on the alacrity with which you file your Notice against the title.  In this regard:

(i)            if your security interest attaches to the equipment before the equipment is affixed to the realty, then your security interest will hold priority over anyone with a competing interest in the land who has registered their claim or interest prior to the fixtures affixation date. However, a pre-existing registered mortgagee who makes an advance under its mortgage subsequent to when your financed equipment becomes a fixture may hold priority over your interest in the fixtures;

(ii)           where your security interest does not attach to the equipment until after the equipment has become affixed to the realty, you will be subordinate to:

(A)          all pre-existing real estate registered interests; and

(B)          any subsequent arising real estate interest who registers its interest before you register your Notice against title.

-               In my experience, where security is taken by a lender to finance a debtor's acquisition of equipment that becomes affixed to land, the required registrations - including registration of a Notice against the title to the underlying land - are not done until after the equipment has become affixed.  Thus in most cases, in addition to registering against the underlying land's title, you should do a search of the title before advancing value so as to ensure that there are no pre-existing competing mortgages or other interests.  Or if there are any of the same, you should not advance until you have  postponements or consents to advance from the prior registered land interest holders.

-               Where the debtor defaults and you wish to realize against your security, you are entitled to enter upon the land and remove the affixed equipment provided that you don't cause any damage in effecting the removal.  You do have to provide prior notice to all interested parties. Anyone who has an interest ranking in priority to your interest in the affixed equipment is entitled to require you to put up security to cover any damage to the property you cause by removal.

-               Where you are financing a debtor's acquisition of equipment which is not affixed - or to be affixed - to the realty, you should proceed in the ordinary course.  However, if the debtor doesn't own the underlying land but is merely a tenant holding from somebody else, you should get some sort of a subordination/consent from the landlord to permit you to remove the goods and liquidate them for your own account, in particular, with reference to the landlord's right to levy distress against goods on the premises for rent arrears.

-               If you are financing a tenant's "leasehold improvements" - which may or may not include fixtures - you should (again) obtain a postponement/consent from the landlord.  However additionally, you should review the lease between the parties so as to determine what your rights are should you find yourself in a position where you wish to realize on your security.  Matters of particular interest to consider in a lease in this context are:

(i)            What does the lease say about the ownership of leasehold improvements (fixtures and non-fixtures) in the contexts of termination of the agreed to lease term by virtue of the tenant's default or the landlord's default under the lease?

(ii)           Does the lease outright prohibit the taking of any security in the leasehold improvements?

(iii)          What are the rights and obligations of the involved parties consequent upon damage or destruction to the property?

-               If you are financing a tenant's leasehold improvements and the tenant has a "long-term" lease, it may be appropriate for you to take security against not only the leasehold improvements, but also - and perhaps in particular - against the tenant's leasehold interest.  In other words, you want a mortgage of the borrower's leasehold interest.  In that case you will definitely have to review the terms of the lease to see what - if anything - the lease says about granting of such security by the tenant.  You have to consider carefully, keeping what's in and what's not in the lease - about what you would want to have happen where:

(i)            the tenant defaults to the landlord and the landlord has the right to terminate the lease;

(ii)           the tenant as your borrower defaults in the performance of its obligations owed to you and you wish to realize your security.  This would no doubt mean your selling the balance of the term of the lease (and the right to hold and use the improvements you have financed) over the balance of the term, to a new lessee.

(iii)          the tenant becomes bankrupt?

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February 2019

If I, as the owner of land, engage a single person to make improvements to my land, the respective rights and obligations of the two parties will usually be set out clearly in the contract we enter into for this purpose. If the other contracting party does not engage any others to assist in effecting the improvements, then what can - and usually would - happen where the improvements are properly effected but I, for some reason, fail to make payment therefor, is that the other contracting party can sue me for breach of contract, get a money judgment and then use that judgment to realize against (i.e., liquidate) so much of my assets as is necessary to recoup the judgement debt. If the other party's monetary entitlement is very high - a rather unlikely situation in the case of a one-person contractor - the other party can - if I'm agreeable - extract a mortgage against my property to better assure the payment of what I owe.

However, in the "real world", with respect to the vast majority of construction/development projects, no such simple two-party/one contract arrangement is possible. The owner of real estate engages what is commonly known as a general contractor to effect substantial - and often costly - improvements to the owner's property. The general contractor performs its tasks by engaging and coordinating the activities of multiple other parties, usually called "subcontractors". One or more - or all - of each of those subcontractors may in turn engage sub-subcontractors and so on "down the line to the bottom". The "bottom" refers to the notional construct of the grouping of the parties involved and takes the shape of a pyramid, with the owner at the top, the general contractor immediately below the owner, and subs and sub-subs, etc. spreading out below the general contractor to the bottom level of subcontractors. At each level, starting with the general contractor, each of the parties inputting the improvements will typically engage a number of employees and purchase supplies from other parties. Unlike the "two party/one contract" arrangement described above, there will not be contracts between the various parties situated at different "separated" levels of the "pyramid".  Parties situated at lower levels of the "pyramid" will be separated by one or more other levels of parties within the "pyramid". Thus the owner, while it will have a contract with the general contractor, won't have any contracts with any of the subcontractors or with the sub-subcontractors. The general contractor will have contracts with the level of subcontractors immediately beneath its level in the "pyramid" but it will not have contracts with any of the lower level participants. This means that where the owner makes a payment of part of what it owes to the general contractor, but the general contractor fails to pay one of its direct subcontractors, absent "remedial legislation", the unpaid subcontractor has no source of recoupment of what is owed to it, other than by making a claim against the general contractor. Again, absent "remedial legislation", if the general contractor has become insolvent (or bankrupt), the unpaid subcontractor would have no claim against the owner and no security in the project which it has assisted in improving.

However, as we all know, there is "remedial legislation", namely the Builders' Liens Act (the "BL Act"). The BL Act provides more than one "mechanism" to assist parties improving or assisting in improving real estate that do not have a direct contractual relationship with the owner (the ultimate beneficiary of the improved real estate) or any effective security for the payment of what is owed to them. The builders' lien is one such mechanism.

This paper deals with another mechanism, namely the BL Act's creation of a trust or trusts imposed by the BL Act on the various levels of participants in the construction "pyramid" with respect to funds received by each of them for the benefit of those situated below their level in the "pyramid". Generally speaking when funds are acquired by an owner, a general contractor, a subcontractor, or a sub-subcontractor, etc., those funds are received by the recipient subject to a trust obligation to ensure that they are used firstly to pay those immediately below them in the construction pyramid before any of the funds are used for any other purpose including any "personal" usage thereof by the funds recipient (eg, including repayment of debts owed by the funds recipient to its creditors).

The application and operation of the trust provisions of the Manitoba BL Act and of other similar legislation in other jurisdictions is often cumbersome and somewhat ineffective. The expectations of the various parties in a construction pyramid - starting with the owner - are often unrealistic and construction disputes are a common feature of much real estate related litigation. With that problem in mind, private business interests have for many years worked out an alternate mechanism to provide some assurance to at least some of the participants in construction pyramids, in particular, those at the lower levels of the pyramid.  This mechanism involves the issuance of "bonds" by specialized underwriters.  There are two general categories of Bonds:

(i)            a Performance Bond - a contract entered into by a general contractor and a surety corporation in which the general contractor and the surety corporation guarantee the project owner that the general contractor will perform its obligations under the general contractor's general construction contract with the owner. Where the general contractor fails to perform, the owner may claim against the surety corporation under the bond for the costs of completing the project and certain related costs, up to the maximum amount specified in the bond; and

(ii)           a Labour and Material Payment Bond - a contract entered into by a general contractor and a surety corporation which guarantees that the general contractor will pay its subcontractors, suppliers and labourers on a specific project. If the general contractor fails to honor its payment obligations, then the subcontractors, suppliers and labourers may claim against the surety corporation for payment under the bond up to the maximum amount specified in the bond. In a large construction project, such bonds may be issued by a surety corporation and a subcontractor to provide assurance to the general contractor that the subcontractor will pay its sub-subcontractors, suppliers, and labourers on the project.

A bond of the second of the above-described types (a Labour and Material Payment Bond) was the subject matter of a dispute which was recently decided by the Supreme Court of Canada in the Valard Construction Ltd. v. Bird Construction Co. case (judgment issued February 15, 2018 hereinafter, "Valard Case"). In the Valard Case:

(i)            Suncorp was the owner of an oil sands project in northern Alberta and wished to expand/improve its existing project;

(ii)           Suncorp entered into a (general) construction contract with Bird Construction to effect the improvements;

(iii)          Bird Construction entered into a contract with Langford (a subcontractor) to perform/assist in performing the general contractor's project improvement obligations owed to Suncorp;

(iv)         Langford entered into a contract with Valard (as a sub-subcontractor) pursuant to which Valard was required to provide certain inputs to assist/facilitate Langford in the performance of its obligations owed to Bird Construction. Valard did what it was supposed to do under its sub-subcontract with Langford, but Langford failed to pay what was due to Valard and then Lanford became insolvent and completely unable to pay what it owed to Valard. Subsequently - and this related to the core issue before the Court - Valard discovered that to protect itself, Bird Construction had obligated Langford to produce a surety corporation backed Labour and Materials Bond to Bird Construction. Valard then made a claim against the surety corporation for what was owed to it, but was legitimately turned down by the surety corporation on the basis that the bond specifically required that claims be made within 120 days and that that deadline hadn't been met.

At the lower Court level, Valard argued that it couldn't make a claim within the 120 day limit because it had no knowledge of the existence of the Labour and Materials Bond. The Court of Appeal held that, in this situation, that was simply Valard's "tough luck". Although there was some dissent, the Supreme Court disagreed and confirmed Valard's claim.

The Supreme Court held that because the parties who could make claims under the Labour and Materials Payment Bond were, in effect, beneficiaries of or under the bond, the holder thereof (here, Bird Construction) owed trustee duties to the beneficiaries.  This included an obligation to exercise at least reasonable efforts to notify the beneficiaries of the existence of the bond.  That should have included Valard.  Bird did not exercise such efforts, which might have included, at the least, posting a notice at the construction site of particulars of the bond.  Consequently, Bird was liable to Valard for its loss.

The Court's judgements acknowledged that industry practice, at least in the context of the Alberta oil sands developments, was for the holders of Labour and Material Payment Bonds to not have to communicate such bonds' existences to the bond beneficiaries.


(i)            as a result of the Valard Case, it wouldn't be too surprising if bonding/surety companies increased their premiums/charges for bonds, in particular, Labour and Material Payment Bonds.  If the Valard Case results in bond holders making efforts - or greater efforts - to communicate the bonds' existences, it stands to reason that there will be more claims made.  If more claims are made, it is likely that the "price" of construction bonds will rise.

(ii)           in its recent report and review of the BL Act, The Manitoba Law Reform Commission recommended that bonding become mandatory for construction projects/contracts in excess of $500,000.00 where public works are involved.  As the Commission has stated, there are certain advantages to the use of construction bonds to ensure payment to those involved in real estate improvement which are not available when relying on the remedies available under the BL Act.

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July 2017

Many businesses operate, in whole or in part, out of leased premises.  A business owner may lease fully developed and fully completed premises in an existing building with all services and amenities already in place.  At the other end of the spectrum, a business owner may lease - typically on a long term basis - vacant undeveloped land on the understanding that the business owner will improve the land with the facilities - including making arrangements with local government utility service providers - and for the services that the owner requires in order to operate its business.  In the latter situation, the business owner/tenant will usually need to have much work and materials done and brought and incorporated on to and into the site in order to be in a position to "open its doors" and commence to carry on its business.  But even the business owner who leases space in a fully developed building will usually require some renovations or design alterations to the existing premises in order to "customize" the space for the owner's particular needs and desires.  Businesses in both types of situations will also need to acquire equipment, business furnishings and the like, and ,office "supplies" will, in almost all cases, be needed.  For a business that is producing and/or selling goods (retail and/or wholesale), the owner will have to acquire, usually on an ongoing basis, inventories.

All of this costs money.  Frequently, in commercial leasing arrangements, the landlord will, as "part of the deal", pay for the cost of acquisition and/or installation of some - and sometimes virtually all - of the tenant's required improvements.  In many cases, the business owner will have to finance such acquisition and installation.  Thus banks, credit unions and other professional lenders will often be called upon to provide credit to a business tenant in order to enable it to improve the leased realty, and additionally, to financing the business's acquisition of equipment, office supplies and inventory.  It follows that the lender which provides value to the commercial tenant so as to enable it to acquire and install what it needs to carry on its business, will wish to take security in the subject matters of what it finances.  Thus, lenders will take security in the business's inventories (including the "proceeds" thereof, typically accounts receivable) and will take security interests in the business's equipment, furnishings etc.  A lender who is called upon to finance a tenant's improvements will wish to take security in:

(i)            what can perhaps be best described as the "bundle" of rights that the tenant obtains under or by virtue of the lease (or what is often called the tenant's "leasehold interest"); and

(ii)           the tenant's leasehold improvements themselves.

The efficacy of security held or acquired by a lender depends on the ease with which it can liquidate the security's subject matter so as to generate funds which can be applied on account of the secured debt.  Some leasehold improvements are more easily capable of being so liquidated than others.  Clearly, improvements that have become attached or affixed to or incorporated into the building (of which the leased premises form part), but which may be removed and taken away to be sold and used in another location, without undue cost and difficulty, are most valuable to the lender as security.  Unfortunately, it often happens that when a commercial tenant's business fails, and both the tenant's landlord and its lender wish to end their relationships with the tenant, disputes arise between the landlord and the tenant's lender as to just what, and to what degree, the lender should be entitled to remove the tenant's improvements and sell them to someone else, or, if convenient, sell those improvements to the landlord or to a new tenant that the landlord brings into the premises to replace the previous tenant.  Complicating such disputes are these two particular factors:

(a)           the fairly ancient common-law rule that when the owner of tangible property attaches, affixes, or incorporates such property into real property (land and/or buildings) belonging to someone else, the owner of the tangible personal property loses its ownership and such items become the property of the realty owner, but with the exception of what have been called "trade fixtures".  Trade fixtures are goods that a tenant brings onto and incorporates into the landlord's realty but which have a particular or a peculiar connection to the tenant or  the tenant's business operations, so that on termination of the lease, it is considered reasonable for the tenant to remove and retain the same as its own property; and

(b)           the often conflicting and confusing terms found in commercial leases dealing with what is to happen regarding tenant's improvements on termination of the lease (the provisions often varying within the same lease, depending on the cause or reason for the lease's termination).

The recent Ontario Superior Court of Justice case The Toronto-Dominion Bank and The Hockey Academy Inc. (and others), judgement given August 2, 2016, (hereinafter, the "Hockey Academy Case") illustrates the difficulties that can arise on lease termination where a tenant's landlord and its lender each claim entitlement to improvements made to the leased premises which have been financed by the lender for the tenant.

The facts in the Hockey Academy Case were that Hockey Academy entered into a lease of premises from its landlord (Champagne Centre Ltd., hereinafter the "Landlord"), and as contemplated by, and pursuant to, the terms of the lease (the "Lease"), Hockey Academy developed a commercial hockey rink facility.  The Lease was twice amended.  To finance its said facility, Hockey Academy borrowed a substantial sum from The Toronto-Dominion Bank (the "Bank"), and in consideration thereof, Hockey Academy entered into a general security agreement (the "GSA") with the Bank, pursuant to which it granted the Bank a security interest in all of Hockey Academy's present and after-acquired personal properties, including Hockey Academy's rink and related equipment facilities.  Subsequently, the Landlord terminated Hockey Academy's lease, and following default in payment of its obligations owed to the Bank, the Bank demanded repayment in full and proceeded to realize its security under the GSA.  The Bank and the Landlord then argued over which of them was entitled to the rink equipment or the realization proceeds thereof.  That dispute led to the Hockey Academy Case.

The Court neatly summarized the "essence" of the dispute as follows:

"At the heart of the main dispute is whether, on a lease termination, the debtor (Hockey Academy) retained ownership of the disputed items or whether these items became fixtures of the premises and therefore owned by the Landlord.  It is common ground that this dispute principally falls to be determined by an interpretation of the debtor's lease with the Landlord (as amended)."

In reviewing the matter, the Court took note of the following terms of the Lease;

(i)            The Lease provided that "nothing herein prevents or bars the tenant from pledging and borrowing against its leasehold improvements";

(ii)           The Lease further provided that "all alterations and additions to the premises made by or on behalf the tenant, other than the tenant's trade fixtures, shall immediately become the property of the landlord without compensation to the tenant. The Lease defined trade fixtures as items designated as such on a plan of the premises.

(iii)          The original iteration of the Lease allowed the tenant to make alterations and additions and to designate any of the same as "trade fixtures", with trade fixtures not to become the property of the Landlord. Additionally, it permitted the tenant to remove trade fixtures at the end of the Lease term, and required the tenant, upon any termination of the Lease, to remove all rink equipment and fixtures not permanently attached to the premises.  The subsequent amendments to the provided that on "expiration or (any other) early termination of the Lease", the tenant was not required to remove additions or improvements, except for "rinks, sand, boards, piping, refrigeration, and related rink equipment". It further provided that the tenant had the right to remove "other trade fixtures" and equipment not permanently attached to the premises.

(iv)         Thus under the Lease, as amended, the tenant was both required and permitted to remove its equipment. Lest anyone might wonder if the specification of a tenant's obligation to remove its equipment/trade fixtures did not also, at least by implication, give the tenant the right to remove same, the Court clearly enunciated that an obligation to remove encompasses a right to remove.

(v)          Clearly, the tenant would not be entitled to, in effect, remove the whole building, or the structural elements thereof, but as the Court observed, "…it is…entirely reasonable for the tenant to retain the ownership of the rink equipment because it was the tenant, not the Landlord, that was in the hockey rink facility business".

(vi)         Thus, since the tenant's equipment was held to be its property, and not that of the Landlord, the Bank's security interest in the same trumped the Landlord's interest therein. 

What then does the Hockey Academy Case suggest for those considering leasing realty and lenders considering advancing credit - often substantial credit - to such prospective tenants, on the security of the tenant's leasehold improvements and equipment?

The Court noted that "at the heart of the main dispute", the question was, upon lease termination, did certain tangible items remain with and form part of the realty, thus subsumed into the realty owned by the Landlord, or, did such items continue to be owned by the tenant, and thus subject to the Bank's prior ranking security interest?  The Court also stated that the dispute "principally falls to be determined by an interpretation of the debtor's lease…".

Applying the principle that when interpreting a contract, a court is to determine the intentions of the parties, in the first instance, by looking at the "plain meaning" of the words used by the parties in their contract, and, considering the above-noted contract terms, the items in dispute did not revert to the Landlord (as part of its real property ownership), but were in fact the property of the tenant removable by the tenant on lease termination.  None of the removable items were improvements which "entirely (had) to do with the building itself, such as: column and removal, structural framework, drains for washrooms, cinder block walls and provision for exterior access to the building's sprinkler system".  Rather, the removable items all had to do with the tenant's operation of the premises as a hockey rink facility business.  It should be emphasized that these conclusions were based essentially on the wording contained in the contract, but the Court also observed that it would have held the tenant's items to have been its property and not "fixtures" at common law (ie, not part of the Landlord's reversionary interest), even if the Court's decision based on the contract wording was later held to be incorrect.

Landlords, tenants and tenants' leasehold improvement financiers (and their respective counsel) should carefully review the terms of a proposed commercial lease before committing themselves to same.  It is this writer's experience that, depending upon the precedent used, most typically by a landlord or its counsel, the wording pertaining to rights and obligations relating to leasehold improvements - and in particular, those relating to the a tenant's right to remove or pledge same - will differ from lease to lease.  The particular wording proposed in each lease should be carefully reviewed and considered by each of the parties, and not merely "glossed over".

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January 2005

Under the version of The Personal Property Security Act (Manitoba) in force prior to September 5, 2000, serial-numbered goods were limited to motor vehicles (broadly defined) and aircraft.  Under the current version of the legislation (the "MPPSA"), serial-numbered goods include not only motor vehicles and aircraft, but also trailers (i.e.; whether or not they are self-propelled), boats, outboard motors for boats, tractors and combines.

A question sometimes raised is whether or not a secured party who acquires a security interest in serial-numbered consumer goods or equipment must comply with the MPPSA registration requirements for both a debtor's name and the serial numbers and related information for the goods.  It has been argued that if a secured party registers with the correct name of the debtor but either with no serial numbers or with incorrect serial number information or if a secured party registers with correct serial number information but with an incorrect or incomplete name of the debtor, the secured party's registration should nevertheless be considered valid.  This is based on the view that anyone who is thinking of taking an interest in the debtor's serial-numbered goods (typically, someone who is thinking of extending credit and taking a new security interest in the goods, or who is contemplating purchasing the goods) should, as a prudent person, search in the Personal Property Registry both with respect to the debtor's name and the serial numbers of the goods.

While such a position is logically attractive, it appears that on the basis of Section 43(8) of the MPPSA, this position is not really correct.  Section 43(8) provides, in effect, that where the secured goods are serial-numbered consumer goods, the secured party must indeed include complete and correct information for both the debtor's name and the serial numbers and related information for the goods.  If it fails to fulfill both of these requirements, then the secured party's registration is completely invalid and unenforceable against any third party.  However, Section 43(8) does not mention serial-numbered goods which are equipment - it only refers to serial-numbered consumer goods.  Thus if the serial-numbered goods are equipment, the secured party's registration will not be completely invalid if the serial information is omitted or is incorrect, provided that the information pertaining to the name of the debtor (and all other registration information required by the MPPSA) is properly completed in the secured party's financing statement.

Nevertheless, based on a combined reading of Sections 43(8), 30(6) and 35(4) of the MPPSA, it appears that if a secured party with a security interest in equipment which is serial-numbered goods does not include proper serial-numbered goods information in its registered financing statement, then such secured party:

(a)        will not hold priority over the interests of an "ordinary course of business" purchaser or lessee of the goods from the debtor who is unaware of the secured party's security interest;

(b)        will not hold priority over the interests of other competing secured parties who hold security interests in the goods (and who properly perfect their security interests before the first-named secured party properly perfects - if indeed it ever does - its security interest);

(c)        will not be able to obtain what amounts to retroactive priority where the secured party has inadvertently discharged its security interest or allowed it to lapse but re-registers within thirty days following the inadvertent discharge or lapse;

(d)        will not have the benefit of the rule in the MPPSA which provides that the secured party's security interest will continue to enjoy its priority in the goods where the goods are transferred by the debtor to someone else and the secured party makes a supplementary registration against the transferee within a limited period of time; and

(e)        will not enjoy the retroactive priority given to a secured party whose security interest constitutes a purchase money security interest in relation to certain pre-existing security interests, provided that the secured party perfects within a limited period of time after when the debtor acquires possession of the goods.

The secured party's security interest in the debtor's equipment will only be validly enforceable against execution creditors and the bankruptcy trustee of the debtor.  Thus, for all practical purposes, a secured party taking a security interest in serial-numbered equipment should - just like a secured party taking a security interest in consumer goods - include both complete and correct information as to the debtor's name and as to the serial-numbered goods in its financing statement.

Given that the MPPSA does not provide for any adverse priority consequences for a secured party whose registered security interest is in serial-numbered goods which are "inventory", one might ask why the MPPSA even provides for the possibility of registering serial numbers in financing statements covering inventory.  Inventory usually comes and goes into and out of a merchant's hands fairly quickly, and having to keep serial number particulars of inventory correct in the Personal Property Registry would, in most cases, be a time-consuming and expensive task.  Why not treat inventory the same as non-serial-numbered goods?  The writer suggests that there may be situations - probably few and far between - where it is to the secured party's advantage to place the maximum amount of information pertaining to inventory goods in the secured party's financing statement, simply for the salutary purpose it will or may have on third parties who choose to search against both a debtor's name and against the serial numbers.  Consider the example of an aircraft manufacturer who sells a $100,000,000.00 aircraft on credit to someone who, in effect, acts as an intermediary (a "retailer") between the manufacturer and the ultimate user of the aircraft (typically an airline or a government, and sometimes a private business).  Even if the intermediary intended to hold the aircraft for a relatively short period of time before reselling it, given the substantial amount of the credit probably extended by the manufacturer to the intermediary on the security of the aircraft, it would probably be a wise investment of time and money (and not much of either would be required) for the manufacturer to include the correct serial-numbered goods (as well as correct debtor name) information for the aircraft in its financing statement.

Even where equipment being financed by a secured party for a debtor has serial numbers but is not prescribed as "serial-numbered goods" under the MPPSA, the secured party may wish to include particulars of the serial numbers and related information such as make, model, year of manufacture, etc.  The secured party would include such information in its financing statement simply to better identify the goods so that they could be more easily ascertained amongst the debtor's possessions to the exclusion of other goods not being financed by the secured party - in particular, in anticipation of realizing its security.  However, in this situation, it would not be proper for the secured party to include such information in the serial-numbered goods portion of the financing statement.  Rather, such information should be included in the general description of collateral portion of the financing statement.

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August 2013

Most readers will be familiar with the concept that certain land interests, although duly registered against the title to the affected land, will lose their registration priority where ownership of the land changes by reason of:

  1. a municipal property tax sale;
  2. a prior registered mortgagee's sale; or
  3. an acquisition of title from a prior registered mortgagee in a foreclosure proceeding.

It has been long accepted that, on a policy basis, it is appropriate for a prior registered monetary interest, when realized, to extinguish subsequently registered monetary interests ("first come, first served").  Thus the purchaser at a property tax sale, the purchaser from a selling mortgagee and a foreclosing mortgagee will acquire title "free and clear" of subordinately registered mortgages and judgments.  Again, as a matter of policy, perhaps not universally accepted, but certainly acquiesced in, the purchaser at a property tax sale acquires title free and clear of previously registered mortgages and judgments, notwithstanding that the default in payment of property taxes arose only after the prior registered monetary interest was obtained for value and recorded against the property's title.

As a general rule, the same result will occur where a property tax sale purchaser, a foreclosing mortgagee or a purchaser from a selling mortgagee acquires ownership of the property subject to a pre-existing pre-registered non-monetary real estate interest.  However, the Legislature has recognized that there are certain types of land interests which, even if created and registered subsequent to the registration and acquisition of a monetary interest, should not be extinguished upon the occurrence of a property tax sale, mortgage sale or mortgage foreclosure.  These interests are listed in Section 45(5) of The Real Property Act (Manitoba) (the "MRPA").  Such interests survive sale and foreclosure ("Surviving Interests") usually, although not always, because their continuing/ongoing existence, will, to a greater or lesser degree, benefit the land affected.  Even if they do not benefit the land affected (and merely "burden" such land), the Legislature has concluded that the "greater public good" is best served by permitting Surviving Interests to continue to exist, notwithstanding that the occurrence of the aforementioned non-consensual - as well as fully consensual - property ownership changes.

Clearly, a Surviving Interest must be duly registered against the title to the affected land.  But is there a difference - or should there be a difference - between where a Surviving Interest is registered:

(a)          by way of the recording of the agreement or instrument which itself creates the Surviving Interest ("Direct Registration"); and

(b)          by way of the recording of a caveat (or notice) against the title to the affected land, giving notice of the Caveator's rights and interests which constitute and comprise the Surviving Interest ("Caveat Registration")?

It appears that certain Surviving Interests will only survive mortgage realization or tax sale if the Surviving Interest is recorded by Direct Registration, not Caveat Registration.  These are:

(i)            easement agreements, including party wall agreements right-of-way agreements;

(ii)           statutory easements;

(iii)          rights analogous to easements as defined and referred to in The Real Property Act Sections 111.2(1) and 111.2(5);

(iv)          building restrictions covenants;

(v)           unilateral declarations under The Real Property Act Section 76(2); and

(vi)          development schemes. 

In each of these cases, it appears that if the Surviving Interest is recorded by Caveat registration - which is clearly permissible - such registration will not survive mortgage realization or tax sale.  However if these interests are recorded by Direct Registration, they will so survive.

On the other hand, other types of Surviving Interests will survive mortgage realization and tax sale even though they are recorded "merely" by way of Caveat Registration.  These are:

(i)            caveats relating to zoning or subdivision matters;

(ii)           caveats relating to development agreements made under The Planning Act or The City of Winnipeg Charter;

(iii)          caveats relating to an expropriation;

(iv)          a notice (which is obviously like a caveat) registered under Section 12 of The Energy Savings Act;

(v)           notices filed under Section 7(1) or liens described in Section 36(4) of The Contaminated Sites Remediation Act; and

(vi)          notices under Sections 4(4), 5.4(3) or 5.10(2) of The Condominium Act.

Why can't all Surviving Interests be capable of surviving mortgage realization or tax sale when recorded against title by Caveat Registration?

In part, the answer appears to be based on the requirements (set out in Sections 76(1), 76(2) and 76.2(1) of The Real Property Act).  When a Surviving Interest of the types described above which will survive if recorded by Direct Registration, (excepting for statutory easements, rights analogous to easements and building restriction covenants) is registered, no such Direct Registration is permitted by the Land Titles Office unless all persons holding pre-existing registered interests against the affected title provide their written consents to the Direct Registration.  If a pre-existing registered mortgagee or holder of a judgment lien consents to the subsequent registration of a Surviving Interest by Direct Registration, then such consent is taken to be the equivalent of a subordination by the pre-existing registered interest holder.  This is understandable.  But what isn't understandable is the fact that no such consent (from pre-existing registered interest holders) is required to effect the Direct Registration of statutory easements, rights analogous to easements and building restriction covenants.  It also doesn't explain why caveats and notices of the types described above as surviving, even though recorded "merely" by Caveat Registration, gain this survival advantage without the need for the party on whose behalf the caveat or notice is being filed having to get the consents of all pre-existing registered interest holders.

Whether or not the above "regime" seems reasonable, the important thing for practitioners (and their clients) to remember is that the above-noted differences in the ability of certain land interests to survive - or not to survive - mortgage realization and tax sale must be kept in mind when acting for persons taking, granting and otherwise dealing with interests in real property.

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July 2020

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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November 2008

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

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

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

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

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

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

Here are some possible solutions to these problems:

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

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

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

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

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

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December 2016

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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February 2017

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

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

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

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

The Ontario Court of Appeal held/concluded that:

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

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

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

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

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

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March 2017

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

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

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

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

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

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

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

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

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

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

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

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

The Court observed:

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

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

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

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

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

The Court held:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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January 2011



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

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

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

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

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

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

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

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

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

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

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

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August 2017

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

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

(a)          the unpaid amount;

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

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

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

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

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

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

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

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

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

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March 2013

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

These are the pertinent elements of the Kau Case:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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