Jason Bryk 

Phone: 204.956.3510

Fax: 204.957.0227

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THE BROWN PAPERS

OCTOBER 2013


The following-described scenarios may, at first glance, seem to be questions which might be raised at a Law School to test the analytical capacity of law students.  In fact, they represent "real life" scenarios that the writer has recently encountered.

  1. May one hold a security interest in a debtor's collateral without the debtor owning any obligations (of any type) to the security holder?

A extends credit to B (either by way of a sale or a loan) and to secure B's obligations arising out of the indebtedness, B creates a security interest in B's personalty (presently owned and after-acquired), but grants that security interest not to A, but rather to C with C holding the security for A.  Is this legally feasible, given the fact that a security interest cannot legally exist unless it secures payment or performance of obligations and given that in this situation, the debt obligation is owed to A, not the holder of the security, B?  Note that such an arrangement would not be one where A first got the security interest itself from B and then assigned the debt and the security interest to C.  Nor would this be a situation where A assigns the debt to C and then C takes the security interest directly from B.  A careful reading of the definition of "security interest" in The Manitoba Personal Property Security Act reveals that such an arrangement would indeed be legally possible.  The definition does not provide that the security interest has to be held by the person to whom the obligations secured are owed, merely that the security interest has to secure obligations.  Thus there is no legal - or for that matter policy - reason why a creditor can't have someone else hold a security interest granted by the creditor's debtor.  Such an arrangement will be advantageous to all concerned where multiple creditors band together to provide credit to a debtor, and rather than having the debtor provide separate security interests in its assets to each of the creditors, or having all of the creditors named as grantees of the security, all the creditors and the debtor agree that the debtor's security interest will be provided to either one only of the creditors, or to a separate entity which will hold as a "collateral agent".  Needless to say, there will have to be an agreement amongst the participants - especially amongst the creditors and with the "collateral agent" if there is one - that spells out the rights of the holder of the security and the obligations that holder will have to the other creditors with respect to the security, in particular, in a realization/enforcement situation.

  1. Change of ownership of collateral subject to a general security agreement.

A grants a security interest in all of A's presently owned and after-acquired personal property to B's Bank X.  X properly register's a financing statement in the Personal Property Registry giving notice of its security interest in A's assets.  B grants a security interest in all of its presently owned and after-acquired personal property to its bank, Bank Y, and, Bank Y duly registers its security interest in the Personal Property Registry.  Subsequently, A sells its business and all (or virtually all) of its assets, including its personal property, to B.  Bank X's security interest, covering, as it does, all of B's after-acquired personalty, would, upon B's acquisition from A of A's personalty, extend to and charge A's personalty now held by B.  But wouldn't also Bank X's security interest "follow" A's assets into the hands of B and charge A's personalty, now in the hands of B?  Would Bank X's security, pursuant to the terms of its security agreement, also extend to the personalty that B acquires subsequent to its acquisition of A's personalty?  Who would have priority - Bank X or Bank Y over (i) the personalty now held by B which it has just acquired from A, and, (ii) B's personalty that it currently owns other than the personalty it has acquired from A, and, (iii) personalty that B acquires in the future?

The "threshold" question to ask here is whether or not Bank X consented to the transfer of A's assets to B.  Under the PPSA, if Bank X did consent to A's disposition, then Bank X's security interest in the transferred assets is extinguished.  Bank X would have a security interest in any proceeds obtained by A for its disposition to B, but Bank X would no longer have any security interest in the transferred assets.  Unless B had confirmed or regranted a security interest in B's other personalty and/B's subsequently acquired personalty, Bank X would (also) have no security interest in such other assets of B.

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February 2020


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


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

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

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

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

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

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

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

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

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

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

The Court further held that:

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

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

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

Note in particular in the Keatley Case:

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

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

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

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

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

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

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

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

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May 2014 



Mr. and Mrs. Jones have farmed a Section of land for virtually all of their adult lives, but they are now thinking of retiring and would like to turn over the farm operation to their two sons who wish to carry on as agricultural producers.  The Jones family home is situated on a portion of one of the quarters of the Section, and the Jones (mother and father) wish to continue to occupy (and if possible, "own") the home while transferring ownership of the rest of the farm land to the sons.  The mother and father do not wish to retain any of the land itself underlying their home.  They also have no desire to transfer ownership of the home to anyone else during the course of their lifetimes, and upon the death of the last of them to pass on, they would want to transfer ownership of the home to their sons.  The sons are quite willing to go along with this arrangement.


The Jones family attends upon you as their counsel and ask you if you can document the transmission of "ownership" of the home to the Jones for a period ending with the death of both the father and mother.  The Manitoba Planning Act would permit the parents to "sever" the land underlying their home and surrounding without subdivision control approval, provided that the area of the land so severed was not less than 80 acres.  But as previously stated, the Jones do not wish to retain any of the land.  What considerations are relevant and what can you do?


Canadian case law over at least the last 100 years clearly indicates that the Courts have been willing, as long as the intentions of the parties are clear, to allow a home - which is otherwise clearly attached to and forms part of the underlying land - to be treated as if it was a chattel, separate and apart from the underlying land.  Therefore, one way to document the Jones' arrangement would be for the mother and father to transfer all of their real property to their sons, with their sons then transferring the home (and only the home) back to the parents, that is, excluding any of the underlying or surrounding land.  Land Titles records would show the sons as the owners of all of the realty, and arguably, the parents could register a caveat against the sons' title giving notice of their ownership of the home.  Presumably, the legal description contained in the parents' caveat would be all of the land contained in the sons' title, as the parents would not be claiming any ownership interest in the land underlying the home (at least in this scenario).  A variation on the foregoing would be for the sons to execute a written declaration of trust whereby they state that they are holding the home as trustees only, for and on behalf of the parents, with the parents then being able, again, arguably to caveat the whole of the sons' title to give notice of this trustee - beneficiary relationship.

It would almost certainly be necessary for the sons to additionally grant a right of access, to and from the home so as to allow legal ingress and egress to and from the adjacent public road or highway and - arguably - an additional caveat could be registered by the parents against the sons' title to give notice of this easement.



However:

  1. Would the foregoing arrangements run afoul of the subdivision control rules in The Manitoba Planning Act?  At first blush, one would think that the subdivision control rules would have no application to the arrangement, because no interest in land - only an interest (ie, ownership) in the home - is granted to the parents.  However, the definition of "land" in The Planning Act includes what are referred to as "messuages" and "hereditaments".  I have found a definition of "messuage" as being "a dwelling house together with its buildings, cottage and the adjacent land appropriated to its use".  This suggests that a "messuage" must combine both one or more buildings and the land underlying or adjacent to it (or them) reasonably necessary for its (their) normal use.  However additionally, I have found a definition of "corporeal hereditament" as being "a permanent tangible object that can be seen and handled and is confined to the land".  Thus, at least arguably, a conveyance of ownership of a (corporeal) hereditament (a house) is a "subdivision" within The Planning Act.  "Subdivision" is defined to mean "the division of land by an instrument…".  Therefore it appears that even though one can lawfully otherwise convey ownership of or create other interests in a home, exclusive of any dealing with the underlying land, such a "bare" dealing with the home may nevertheless constitute a form of "subdivision" within the ambit of the legislation, thereby necessitating compliance with the - no doubt time consuming, onerous and expensive - subdivision control rules.
  2. If the home itself alone, without including any of the underlying or surrounding land, is conveyed, or held in trust by the sons for the parents, then arguably, the parents do not acquire any interest in land.  If they don't acquire an interest in land, they shouldn't be filing a caveat against the sons' title.  Lest anyone think otherwise, the parents could not file a Personal Property Security Act fixtures notice against the sons' title on the basis that what has been conveyed to them is a "fixture", simply because the conveyance of "ownership" of the home does not constitute a security interest within the meaning of The Personal Property Security Act.  That is, there is no secured transaction.
  3. In all likelihood, the purported grant of easement by the sons to the parents to provide access to and from the home to the nearest public road is not in law an easement at all.  Thus, it is not caveatable.  This is because to create an easement against land (ie, against a "servient tenement"), there must (at least in this type of situation) be a dominant tenement, and the home alone, in effect, severed from the underlying land, would not - in this context - constitute land.

The writer is not aware of any case which has considered the issue of whether or not conveyance of an interest (in particular, an ownership interest) in a house, conceptually divorced from the underlying land, would - or would not - be a "subdivision" within the meaning of The Planning Act.  The writer doubts that it was the Legislature's intent to "catch" this type of a "subdivision" (assuming that it is a subdivision), yet given the current wording in the legislation, it is possible that a Court might hold that subdivision approval is needed for this type of an arrangement.

But consider this alternative - instead of the sons conveying ownership of the home (separate and apart from the underlying land) to the parents, the sons could instead long-term lease the home, severed or divorced from the underlying land, to the parents.  The parents could then - arguably - file a lease caveat against the sons' title.  There would be no subdivision control problem because the definition of "subdivision" in The Planning Act specifically does "not (include) a lease respecting only floor space in a building".  A lease could also contain a (non-registerable) license (not an easement) to the parents (co-extensive with the continuing existence of the lease) for access to and from the closest public road.  The lease would no doubt specify a nominal rent and would obligate the parents to be responsible for the payment of taxes, insurance, maintenance, etc.  However, again, it is necessary to be concerned about whether or not the parents' lease caveat would really be giving notice of an interest in land.  The subject matter of the lease is - presumably - only a chattel.


Neither the lease approach nor the conveyance of the home as a chattel divorced form the land would allow the parents to mortgage their rights in the home to a financier utilizing the "usual" LTO prescribed form of (freehold) real property mortgage.  A lender willing to advance value to the parents against the home would have to take (where a lease was used), a leasehold mortgage.  Arguably, such a leasehold mortgage would, at least in part, be a species of security agreement and the lender could register a Personal Property Security Act fixtures notice against the sons' title.  The leasing solution is probably the safest way to deal with the Jones' situation, unless and until an amendment is made to The Planning Act to make it completely clear that conveyance (not just a lease) of a building, divorced from the underlying land, is not a species of "subdivision".


Assuming the same basic fact situation as outlined at the beginning of this paper (the Jones parents wish to retire, pass the farming operation to their sons but retain their home), another approach would be for the Jones to incorporate a corporation to which they would transfer ownership of all of the buildings and improvements on the farmland except for their home and also except for all of the land.  The Jones would then lease all of their land to their corporation.  The corporation would grant a licence to the Jones providing for access to and from their home to the nearest public road.  The corporation would then register a caveat giving notice of its lease rights against the title to the whole of the land (which would include the land underlying the Jones' home).  Transfer of ownership of the corporation from the Jones parents to their sons would be effected by the sons acquiring shares (no doubt "equity" shares) in the corporation.  There should be no problem with the corporation's lease caveat because clearly, the lease constitutes an interest in land.  However, the question remains as to whether or not the Jones' retention of ownership of the home alone (divorced from the underlying land) constitutes a subdivision.  Similarly, does the conveyance by the parents to the corporation of ownership of all of the buildings and improvements other than the home constitute a subdivision?  As stated above, the writer doubts that conveyances of buildings alone was intended to be "caught" by the subdivision control rules in The Planning Act.  But so far, we just don't know for sure.


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August 2015


People enter into all sorts of agreements and arrangements pertaining to the use, disposition and security pledging of interests in real estate.  Some of such contracts or arrangements immediately create interests in the subject realty, such as, an unconditional contract for the sale and purchase of realty, a mortgage charging realty to secure payment of a debt, a leasing of realty and a grant of usage in the nature of an easement.  Other contracts and arrangements create legally enforceable rights and obligations between parties pertaining to realty, but do not (and will not likely ever) create realty interests, such as, a permission to enter (and perhaps to some degree use) realty, typically, for a limited period of time, that is, a permit to allow the recipient to do what would otherwise be an unlawful trespass.  The essential difference between the first and second types of contracts or arrangements is that in the case of the first type, an interest is created in the subject realty, and because it is an "interest", it will "follow" successive ownerships of the realty (in other words, it will bind the successors and assigns of the party whose realty is originally affected by the interest).  In the case of the second type of contract or arrangement, the party granted the rights in relation to the subject realty is not able to enforce those rights against a successor in title to the realty owner who first granted the rights.  The rights are purely personal between the original parties.


The holder of an interest in land is entitled to give notice of its interest and in particular, give notice to persons subsequently acquiring interests in the realty of the holder's interest, by filing a caveat against the current owner's title.  In the case of a right in land in the nature of a "mere" permit, because it is not a land interest, the holder is not entitled to register a caveat.  Even if such a holder was able to register a caveat, a subsequent owner would not, in most cases, be bound to recognize the permit holder's rights.


For the purpose of this review, we need to take note of what amounts to a third type of contract or arrangement pertaining to realty which initially results in the creation of rights enforceable between the parties to the contract or arrangement only, with there being no interest in the subject realty being immediately created, but with the contract or arrangement providing for the arising or possibly arising in the future of an interest in the subject realty, depending on whether or not a condition or contingency is fulfilled.  Hereinafter, I will refer to these as "contingent land interests".


An understanding of the difference between a contract or arrangement which immediately creates a land interest, and a contract or arrangement which provides for a contingent land interest can be gleaned from the examination of the elements of an unconditional option to purchase realty, and the elements of what is commonly called a "first right of refusal".  In the case of an unconditional option to purchase, "A", being the owner of a real estate interest, enters into a contract with "B" pursuant to which "B" is given a clear and unequivocal right to choose (within a specified period) to purchase the realty from "A" on clearly specified terms as to payment.  "B" is free to exercise its option to purchase by simply fulfilling its obligations to do so as specified in the contract, typically, to give proper notice of exercise of the option and to pay the purchase and sale price on the specified closing date.  An unconditional option to purchase creates an immediate interest in land which in this example, "B" can immediately caveat by registering notice of the option against "A"'s title.  In the case of a first right of refusal, "A", being the owner of the subject realty, enters into a contract with "B", whereby "A" promises "B" that if and when "A" receives an offer to purchase the subject realty, which "A" is otherwise prepared to accept, "A" will not so accept without first going to "B" and giving "B" a limited period of time within which "B" can choose to either "match" the third party offer which "A" has received (in which case there would arise a binding agreement of sale and purchase between "A" and "B", and, the original third party offer would be at an end), or, "B" can simply "walk away" from the deal and let "A" and its third party offeror conclude their sale and purchase transaction.  No interest in land is created upon the entering into of the first right of refusal contract between "A" and "B", although clearly, if "B" "matches" the third party offer received by "A", then an interest in land would arise in favour of "B" by virtue of the contract of sale and purchase between "A" and "B".  For the purposes of this review, it is important to note that the essential difference between an unconditional option to purchase and a first right of refusal is the fact that in the case of the unconditional option to purchase, immediately upon the entering into of the option contract, "B" has it solely within its power and discretion whether or not to exercise the option and acquire ownership of the subject land.  In other words, "B" has, from the outset, what amounts to "control" over whether or not "B" acquires "A" realty interest.  In the case of the first right of refusal, "B" has no immediate right whatsoever to acquire "A"'s realty interest unless and until a third party presents "A" with a viable (from "A"'s perspective) offer to purchase.  In other words, "B" has no "control" over the situation as there may never be any viable third party offer submitted to "A".


A first right of refusal is a type of contingent land interest.  No land interest is thereby immediately created, and it is possible that no land interest will ever be created.  A land interest will only arise if the specified contingency occurs.

With the foregoing in mind, it is interesting to analyze a number of frequently utilized forms of real estate disposition contracts which may, at first glance, appear to create immediate interests in land, but which in fact, only provide for contingent land interests.  For example, consider the following:

  1. "A" enters into a contract with "B", whereby "A" undertakes to sell and convey ownership of specified realty to "B", with the transaction to close in, say, eight months.  The eight month delay is specified because the transaction cannot be completed unless subdivision approval is given to permit "A" to convey the agreed upon parcel to "B", and indeed, the contract (and the parties' obligations to complete) are specified as being conditional upon subdivision approval being issued within the eight month delay period. This is a sale which cannot occur until a contingency (subdivision approval being issued) is fulfilled, and as such, no immediate interest in the land is created in favour of the purchaser "B".  Accordingly, "B" is not legally entitled to register a caveat against "A"'s title giving notice of "B"'s rights.
  2. "A" enters into a sale agreement with "B" for the sale of "A"'s realty to "B", but the parties' rights and obligations to complete are conditional upon "B" obtaining specified financing to enable it to finance its acquisition.  As in the case of the prior example, a substantial delay period is chosen, say, four months, to enable "B" to get its desired financing.  Whether or not a lender provides the desired financing to "B" is not - at least not entirely - within "B"'s control, so once again, "B" has what amounts to a contingent land interest, at least until it gets its financing.  Would it make any difference if the contract allowed "B" to waive its financing condition? Arguably, the answer would be "yes", and if, at any time within the four month delay period before closing, "B" had unfettered discretion to waive its financing condition, then a strong argument could be made that "B"'s financing condition is not a true contingency (in the context discussed), so that "B" would have an immediately arising interest in the land consequent upon entering into the sale and purchase contract with "A".  Note that in this case, as opposed to the example given in paragraph #1 above, the financing condition is at least potentially "waiveable", whereas in the prior example, neither "A" nor "B" are legally capable of waiving the need for subdivision approval.
  3. "A" enters into an option agreement with "B", whereby "A" agrees that "B" is entitled (at "B"'s choice) to purchase "A"'s realty (on specified terms) if "A" fails to fulfill some specified obligation undertaken by "A" to "B".  Whether or not "A" fulfills its obligation is clearly not within "B"'s control, so no immediate land interest is created.  An example of this sort of an arrangement would be where "B" is a land developer and sells and conveys a subdivision lot to "A", but with "A" undertaking to "B" that "A" will build a building on the lot within a specified time period to certain specifications.  If "A" fails to so build within the specified time limit, "B" has an immediately enforceable option to buy back the land from "A".
  4. "A" grants an option to purchase "A"'s realty to "B" within a specified two year period, but with that two year period not commencing for, say, one year after the option agreement is entered into. "B" does not have control over whether or not it can acquire "A"'s realty until the initial one year period has passed by.  In substance, this is not really a contingent land interest (there is in fact no contingency, as the one year period will inevitably pass by), but it is a like a contingent land interest in that "B" does not have an unequivocal right to acquire the land until after the initial one year period has expired.

In all of the above-described examples, with no immediate interests in land being created, "B" has no legal right to register a caveat against "A" title.  This may come as somewhat of a shock to counsel who have successfully registered caveats against titles where a delayed or contingent land interest only has been created.  In a recent discussion the writer had with a senior Manitoba Land Titles official, he was advised that this no doubt happens because counsel will typically file a caveat which simply describes an "option to purchase" or a "sale and purchase of realty transaction", without referring to the contingency or any delay period which must expire before the grantee (or purchaser) has an unequivocal right (ie, "control") to acquire ownership of the realty interest involved.  It is important to remember that just because the Land Titles Office permits a caveat to be registered, does not, of itself, mean that the caveator has in fact a viable land interest.  Whether or not the caveator has a land interest depends on the application of law, in particular, the common law land principles worked out by the Courts over many years.  A caveat is not an interest or right and does not create interest or right, but merely gives notice of what the caveator alleges is an immediately created land interest.


A question which sometimes arises, is whether or not a person searching an owner's title who sees that the title is subject to a caveat claiming an interest in land, when in fact there is no interest in land, is nevertheless bound (when he, she or it acquires their own interest in the land) to acquire subject to the caveator's rights?  If the person making such search and acquiring an interest from the owner is bound, when in fact no interest in land has been created, then the general rule noted above - that a successor in title to real estate will not be bound by a right which is not a land interest - appears to be subverted.  In other words, can the caveator, by registering (and getting the Land Titles Office to accept for registration) a caveat, thereby bind successors in title in the same manner as would have been the case if the caveated right was in fact an interest in land?  Common sense, and perhaps fairness, would suggest that if the acquiring person knows about the right, he, she or it should be bound by it, and be forced - as a matter of policy - to acquire subject to the caveator's rights.

The Manitoba Court of Appeal decision (Willman and Ducks Unlimited (Canada), October 8, 2004 with judgment having been delivered by Justice Martin Freedman) may provide guidance on this matter.  Mr. Willman owned a parcel of land in southwest Manitoba, and prior to his acquisition of title, Mr. Willman's predecessor owner entered into an arrangement with Ducks Unlimited permitting Ducks Unlimited to enter upon the property and conduct certain measures (including installation of certain facilities) to maintain and enhance the wetlands in and about the property.  Ducks Unlimited had registered notice of its rights under this arrangement against the predecessor's title, and Mr. Willman acquired his title subject to such notice (ie, a caveat).  Mr. Willman took the position that he was not bound by any obligations owed to Ducks Unlimited under the arrangement, and Ducks Unlimited argued that its rights constituted a land interest which was the proper subject matter of a caveat and thus bound Mr. Willman as successor-in-title to the party who had originally contracted with Ducks Unlimited.  Ducks Unlimited attempted to categorize its rights, variously, an easement, a lease and ultimately, a licence which, because it had been granted for value and pursuant to a contract, bound successors-in-title.  The Court held that the arrangement was not an easement, not a lease and it was in fact merely a licence (or a permit) which could not, in law, be magically transformed into a land interest by agreement between the parties and bind successors-in-title.  Mr. Willman was not bound and for our purposes, it is significant to note that he was not bound even though he had ample notice of the arrangement and its terms.  Not only was Ducks Unlimited's caveat on title when Mr. Willman acquired ownership, but also Mr. Willman had been provided with copies of the documentation comprising the Ducks Unlimited arrangement at the time he acquired ownership.  In fact, the Land Titles Office was in error when it accepted Ducks Unlimited's caveat and registered it.  In other words, if your arrangement is not an interest in land, but you somehow are able to get the Land Titles Office to register notice of your right, the fact that the notice has been registered does not, of itself, convert a non-land interest into a land interest.


Alert counsel may attempt to circumvent the somewhat restrictive rules on what does - and does not - bind title successors, by requiring a land owner granting a licence or permit to undertake to the grantee that the grantor will cause its successor-in-title to undertake to be bound in writing to the grantee (and its successors and assigns), with the proviso that the new owner, and indeed, each successive owner, is obligated to get the next succeeding owner to so bind itself to the grantee.  As long as the successive owners comply with this undertaking, the grantee will essentially have the same ability to enforce its rights against successive owners as if he had a land interest, and without filing any notice or caveat against the title.  Of course the problem with this solution is that if any one of the successive land owners (for that matter, including the very first one) fails to fulfill its undertaking, the next succeeding owner will not (at least not likely) be bound under the licence or permit.

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November 2010


THE SOMETIMES CONFUSING INTERPLAY BETWEEN SECURITY TAKEN UNDER

THE BANK ACT (CANADA), SECTION 427, AND, SECURITY TAKEN UNDER A PROVINCIALLY GOVERNED PERSONAL PROPERTY SECURITY ACT


Two recently released judgments by The Supreme Court of Canada, Innovation Credit Union (November 5, 2010, hereinafter, the “Innovation Case”), and, Radius Credit Union (also November 5, 2010, hereinafter, the “Radius Case”), both of these decisions upholding the previous decisions of The Saskatchewan Court of Appeal, highlight and analyze the dilemma referred to in the title to this paper.  The problem arises where one creditor takes security on collateral under Section 427 of the Bank Act (Canada) (only banks chartered under that Act can acquire this type of security) and, another creditor takes security on the same collateral under one of the common-law provinces’ Personal Property Security Acts (“PPSA”, any creditor can take this type of security).  In both the Innovation Case and the Radius Case, a bank and a credit union each took security on the same collateral, the credit union taking its security under the Saskatchewan PPSA and the bank taking its security under Section 427 of the Bank Act.  In both cases, the question to be determined was which of the credit union and the bank had priority with respect to the commonly secured collateral. 


The facts in the Innovation Case were:



(i)            first the debtor acquired the collateral;


(ii)           next, the debtor gave a PPSA governed security interest in the collateral to the credit union with, the credit union not filing (“perfecting”) its security interest in the Personal Property Registry;


(iii)          next, the debtor gave security in the same collateral to the bank under Section 427 of the Bank Act, with the bank:


(a)           duly registering notice of its taking of its security under Section 427; and



(b)           having no notice of the existence of the credit union’s earlier acquired security interest (the debtor, whether intentionally or negligently, failed to advise the bank that it had previously given security to the credit union), and, although the bank searched the debtor’s name in the Personal Property Registry, with the credit union having failed to file notice of its security therein, that search by the bank revealed nothing about the credit union’s security.


The facts in the Radius Case were:



(i)            first, the debtor gave a PPSA governed security interest in the debtor’s present and after-acquired personal property to the credit union, with the credit union not filing (“perfecting”) its security interest in the Personal Property Registry;


(ii)           next, debtor gave a security interest in (part of) its present and after-acquired personal property to the bank, with the bank:


(a)           duly registering notice of its taking of its security under Section 427 of the Bank Act; and



(b)           having no notice of the existence of the credit union’s prior security agreement (again, the debtor, whether intentionally or negligently, failed to advise the bank that it had previously granted security to the credit union), and, (again), with any search by the bank of the debtor’s name in the Personal Property Registry, the bank would not and could not have obtained notice of the credit union’s security because the credit union failed to register; and



(iii)          next, the debtor acquired collateral which became subject to both the credit union’s security and to the bank’s security (in the Court’s view, the credit union’s security and the bank’s security attached to the collateral simultaneously).


The only difference between the fact scenario in the Innovation Case and that in the Radius Case was that in the Radius Case, the debtor did not acquire the affected collateral until after it had entered into its security arrangements with (both of) the credit union and the bank.



Needless to say, the primary question in each case was which of the competing secured creditors had priority with respect to the affected collateral, the bank or the credit union?  The Saskatchewan Court of Appeal held for both of the credit unions, and The Supreme Court of Canada agreed with the Court of Appeal’s decisions.



Essentially, and in both cases, the Court held that:



(1)          In a dispute involving PPSA governed security and Bank Act, Section 427 security, you can’t look to the provincial legislation for a rule or an answer to determine this type of priority dispute;


(2)          When you analyze the Bank Act, while it is true that legislation does have some priority rules which would determine the outcome of priority disputes in some cases involving PPSA governed security and Bank Act, Section 427 security, the Bank Act itself does not have – at least in its present format – a rule which can be used to determine who has priority in these particular two cases;


(3)          The Bank Act requires one to examine the applicable provincial rules dealing with property rights and interests in order to determine what rights and interests the debtor had in the collateral at the times when it provided security to each of the credit union, and in particular, to the bank; and


(4)          UtilizingSaskatchewanproperty rights and interests laws – essentially common law rules and concepts:


(a)           In the Innovation Case, after the debtor had granted the credit union its security interest, the only rights and interests it retained in the collateral – which were then available to be granted to the bank – was the debtor’s equity of redemption (essentially, the debtor had nothing further available in the collateral to give to the bank, and the failure of the credit union to register its security interest didn’t and couldn’t change this); and


(b)           in the Radius case, although the debtor did not have any rights and interests in the subsequently-acquired collateral at the time that the debtor granted a security interest in such collateral to the credit union, the credit union nevertheless obtained what amounted to an “inchoate” right in the after-acquired collateral, as did the bank later on, but the credit union "wins" because it acquired its inchoate right prior in time to when the bank acquired its inchoate right. 


What do the Innovation Case and the Radius Case suggest for lenders and their counsel?  The writer suggests:


(i)            Parliament should amend the Bank Act, either to eliminate the security mechanism provided for in Section 427 completely, or, to provide that security interests taken under other personal property security regimes (such as the PPSAs) which are not duly registered in accordance with the requirements of such regimes will be subordinate to subsequently granted Bank Act security; or


(ii)           Whenever a bank takes Bank Act governed security, it should also take PPSA governed security and should perfect (ie, give public notice of) both of its securities under the respective federal and provincial legislation.  For banks wishing to take personal property security on assets situated inSaskatchewan,Saskatchewan counsel should be consulted due to the "peculiarities" of the Saskatchewan PPSA in its relationship with Bank Act governed security.


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May 2003


 

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


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


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


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


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


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


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


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

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November 2010


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


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


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


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

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


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

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

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


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

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

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

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


(b)          for where the sewage ejector:


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


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

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


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

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

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

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

Some other matters to note are:


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


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


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


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


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


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


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

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


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

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

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September 2012 



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

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


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

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

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


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March 2009 


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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

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February 2011


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


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


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


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


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


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


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


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

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


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

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

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


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


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


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

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


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


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


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


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


                        Note:


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


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


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


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

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

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

In the Carson Case, the priority contest was between:


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


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

The sequence of events involving these parties was as follows:


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


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


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


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


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


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


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


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


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

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


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

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March 2009


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


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


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


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


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


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

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


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

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

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

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


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


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


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


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


(a)          upon whose credit, or

(b)          on whose behalf, or

(c)          with whose privity or consent, or

(d)          for whose direct benefit,


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

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


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


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


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

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


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

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

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

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


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


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


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

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

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

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

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

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


Additionally, the Court held that:


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

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

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

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


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

 

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January 1997


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


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


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


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


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


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


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


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


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


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


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April 2007


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


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


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


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


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


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


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

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


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


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


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


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


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

  1. Ensure that any PNDA entered into with a tenant makes it clear that the tenant must, following the mortgagee's "stepping in", continue to fulfill the tenant's ongoing obligations under the lease, including its obligation to pay rent, without any set-off, and notwithstanding the occurrence of any pre-existing default or defaults by the mortgagor/landlord under the lease.
  2. Ensure that the lease clearly provides that the tenant's promise to pay rental is buttressed by a further promise not to set-off any claims which the tenant may have against the landlord against the tenant's rent obligation, and, take an assignment of all of the mortgagor/landlord's rights, claims and entitlements under the lease, not just an assignment of the rentals payable, and, make sure that the security assignment makes it clear that the benefit of the tenant's agreement not to set-off is included in the assignment.
  3. Ensure that the PNDA includes a promise by the tenant to periodically provide the mortgagee with written statements (commonly called "estoppel certificates") advising as to the estate of accounts between the mortgagor/landlord and the tenant.  Depending on the frequency with which the mortgagee obtains such information from the tenant, these statements will probably alert the mortgagee to a recently developing problem in the landlord - tenant relationship.  However, if a long time passes between when the mortgagee obtains these statements, by the time it does get a current one, a full-blown problem may have arisen and "matured".
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July 2017


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


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

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


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


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


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


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

If you or your client:


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


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


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

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March 2018


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


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


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


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


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


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

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November 2018


Updated November, 2018

  1. THE PROBLEM

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


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


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


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


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


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


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


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

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


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


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

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


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


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


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


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

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

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

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

  1. THE TRADITIONAL OR COMMON LAW APPLICABLE TO EASEMENTS

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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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

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


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


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


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

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July 2019


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


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


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


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


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


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


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


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

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


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


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


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


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

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May 2019


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

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

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

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


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


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


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


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


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


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


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


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


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


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

  1. "Farm land" is defined to mean "real property which is situated outside a city, town, village (including an unincorporated village) or hamlet and that is used or is reasonably capable of being used for farming, excluding mines and minerals" (other than sand and gravel) and a couple of other exceptions.
  2. "Farmer" means an eligible individual "who receives a significant portion of his income either directly or indirectly from his occupation of farming and who spends a significant portion of his time actively engaged in farming".
  3. "Farming" includes "tillage of the soil, livestock production, raising poultry, dairying, fur farming, tree farming, horticulture, bee keeping, fish farming or any other activity undertaken to produce agriculture products, but does not include the purchase and resale of agricultural products, or the commercial processing of agricultural products".
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August 2010


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


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


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


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

From a practical perspective, the SNS Products Case suggests:

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