Jason Bryk 

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-               Effective June 12, 2008, The Manitoba Personal Property Security Act (the "MPPSA") was altered by certain amendments (the "Investment Property Amendments") which, to a substantial extent, modify Manitoba's rules regarding the taking, perfecting and realization of security interests in most types of personal property usually thought of as investments.  That is, such things as stocks, bonds and other investments in businesses and business ventures, as well as rights and interests in or derived from same.

-               The Investment Property Amendments are contained in Part 7 of the new Manitoba Securities Transfer Act (the "MSTA"), the MSTA having been enacted to alter theManitoba rules dealing generally with purchases and sales of investments.  The Investment Property Amendments borrow heavily and incorporate definitions and concepts from the MSTA, so in order to understand the Investment Property Amendments, it is necessary to review and understand substantial portions of the MSTA.

-               Both the MSTA and the Investment Property Amendments:

(a)          reflect the modern reality of the existence of "intermediaries" in the investments marketplace, that is, that, at least for publically traded investments, most investors do not hold their investments directly from the issuers thereof, but rather hold interests (or undivided interests) in investments which are in turn acquired by one or more intermediaries from the original issuers (intermediaries being typically banks, trust companies, brokers, investment dealers, etc.);

(b)          bringManitoba's rules for dealings (including secured transactions) with investments substantially in line with the similar rules enacted in theU.S.and in (now) most Canadian provinces;

(c)           reflect the fact that, although sometimes (although less and less frequently), one's investments may be represented by a tangible (ie., paper) certificate, in essence, all investments covered by the MSTA and the Investment Property Amendments comprise one or more (typically a "bundle") of intangible rights and interests.  An investor may own 1,000 common type shares in ABC Widgets Ltd. which are represented by a share certificate, but the share certificate itself (a mere piece of paper) has no inherent value, rather, it is the rights to receive dividends and/or capital, to vote in the operation of the business being carried on by the issuing corporation etc. to which the investor is entitled by virtue of owning the shares that constitute the real value of the share certificate.  Even in the case of futures contracts, while the underlying subject matter of this type of arrangement may well be - and frequently is - some tangible goods/commodities, most futures contracts investors never intend to acquire, keep and then physically dispose of the underlying goods/commodities, rather, it is the (possible and hoped for) gain in a futures transaction which an investor values.

-               The MPPSA definition and concept of collateral which is "intangible" continues to exist, but with intangible personal property which falls within the category of "investment property" (as defined in the Investment Property Amendments) now being excluded from the formally defined category of "intangible" personal property.  Some investments may not in fact fall within the definition of "investment property" under the Investment Property Amendments, and in any such case, it is likely that such investment would fall within the MPPSA’s definition and category of "intangible" personal property.

2.         Some new concepts

-               The key to understanding the Investment Property Amendments and how they operate is to comprehend the meanings of a number of new definitions and concepts which have been introduced by the Investment Property Amendments.  In particular, note the following:

(a)          "investment property" is defined in the MPPSA (as amended) as a "security", or, a "security entitlement", or, a "securities account", or, a "futures contract", or, a "futures account";

(b)          each of the aforementioned components of the definition of "investment property" is further defined, either in the MPPSA (as amended) or in the MSTA.  Note in particular:

(i)            a "security" is defined to mean what we normally consider as an investment issued by an entity directly to the holder thereof, including debt type obligations and equity/participation shares or interests, whether represented by a (paper) certificate or merely recorded in the holder's name in the issuer's records;

(ii)            a "securities account" is defined to mean an arrangement in which one or more investments are placed for the benefit of an investor by someone else who, as or as part of their regular business, establishes and maintains "securities accounts". The person who establishes and maintains such an account is called (and defined as) a "securities intermediary".  Typically securities intermediaries are brokers, banks and trust companies. 

(iii)          A "security entitlement" is defined to mean the rights and interests which an investor has as against a securities intermediary as recorded in the securities intermediary's records pertaining to one or more investments (and perhaps other assets of value which are not strictly investments) maintained by the security intermediary in a securities account established for the investor.  Such investor is defined as an "entitlement holder";

(iv)          A futures contract is defined as an arrangement whereby an investor has the right to deal with (to buy, to sell or to have an option to buy or to sell) something of value in the future on specified terms (obviously in particular specifying the "price" or consideration involved/to be involved), where such arrangement is traded on or is subject to the rules of a futures exchange, is standardized (presumably pursuant to the rules or requirements of such futures exchange), and, where the investor's rights and interests under the contract are "carried on the books of a futures intermediary".  "Futures intermediary" is defined to be either a party dealing in futures who is permitted to trade, either as principal or as agent, under the securities or commodities futures laws of Canada, or, is a clearing house recognized or otherwise regulated by Canadian authority;

(v)           A “futures account” is defined to mean an arrangement in which one or more futures contracts are maintained by a futures intermediary for the benefit of an investor.

(c)           the MPPSA (as amended) defines "control" by reference to its definition in the MSTA.  "Control" describes the dominion over an investment which is granted to or taken by someone acquiring ownership of such investment, or, in the context of a secured transaction, the dominion which is granted to or taken by a secured party in an investment who acquires such dominion by virtue of acquiring a security interest in such investment.  In this regard, note:

(i)            different rules for how to obtain control of an investment apply depending on what type of investment property one is dealing with.  The methods of obtaining control range from the simple act of a secured party obtaining physical possession of a certificated security in bearer form from or under the authority of the debtor/owner of the security, to more complex arrangements existing between the secured party, the issuer of a security (or an "intermediary") and the debtor/owner of the investment, such arrangements typically involving the secured party having an overriding right to liquidate (or redeem) the investment, but with the debtor retaining, to a greater or lesser degree, the ability to exercise the rights which normally attach to ownership of the investment;

(ii)           the arrangements just referred to will be most typically utilized for investments which are not certificated securities. Although not specifically defined as such in the legislation, such arrangements have become known as "control agreements".  These agreements have been previously utilized in situations where an investor owns a "pool" of investments which are held for the investor by a broker, dealer or other person (who under the new legislation would now be called an "intermediary").  In connection with a "pooling" arrangement,  the investor wishes to grant security in its "pool" of investments, but at the same time wishes to continue to be able to (i) utilize the intermediary's judgement and advice in selecting and modifying investments in the "pool" from time to time, and (ii) have the intermediary acquire new investments to be added to the "pool", often with the intermediary extending credit, in whole or in part, to the investor to finance new acquisitions, and, (iii) itself buy and sell investments in the "pool", as well as exercise other rights attaching to the investments such as obtaining or dealing in options to acquire investments or further investments, redeem investments and exercise voting rights.  What is key here and what will make for interesting and perhaps creative drafting by counsel are "control agreement" provisions which balance the rights and obligations of each of the secured party, the investor/debtor and the intermediary, bearing in mind each of their sometimes conflicting interests;

(d)          The MSTA makes it clear that:

(i)            even though a control agreement permits the investor/debtor to retain certain rights to deal with the pledged collateral - thus taking away somewhat from the secured party's primary rights to sell or redeem the collateral - the secured party will nevertheless be deemed to remain "in control" of the pledged collateral;

(ii)           the issuer of an uncertificated security or a securities or futures intermediary will not be entitled to enter into a control agreement with a secured party unless the investor/debtor specifically consents to same.  Thus secured parties will need to ensure that such consent has been issued;

(iii)          even if the owner of an investment and its secured party agree upon the need for a control agreement to be entered into with the relevant intermediary or uncertificated security issuer, the intermediary or the issuer will not be obliged to enter into a control agreement unless it consents to do so.  Thus, where a proposed debtor suggests pledging investment property (involving an intermediary or the issuer of an uncertificated security) to its proposed secured party/creditor, the secured party/creditor should not waste too much time on the matter without first ascertaining whether or not the intermediary or issuer is prepared to enter into a reasonable control agreement;

(iv)          where an intermediary or the issuer of an uncertificated security has entered into a control agreement, it is not either entitled or obliged to provide details of same to third parties unless the investor/debtor has authorized the intermediary or issuer to do so.  Thus, it will be necessary for investor/debtors to ensure that their securities issuers or intermediaries are authorized (and indeed required) to provide at least some information to at least certain enquiring third parties regarding particulars of any existing control agreements.  Otherwise new potential creditor/secured parties to whom the debtor may wish to pledge the remaining equity in its investment(s) will be unable to obtain needed information pertaining to any existing control agreement arrangements;

(v)           as just noted, it may be appropriate (and commercially reasonable) for an investor holding one or more uncertificated securities and/or a "pool" of investments through an intermediary to be able to grant security in its investments to more than one creditor/secured party at the same time.  This would be the situation where there is or it is anticipated that there will be sufficient equity/value in the investor's investments to secure credit extended from two - or perhaps even more - creditors.  In any such case, in addition to each creditor/secured party having its own control agreement pertaining to its security, it would probably be appropriate for all of the creditor/secured parties (along with the investor/owner) to enter into an intercreditor agreement, or perhaps, one "master" control agreement involving all of the interested secured creditors.  Such arrangements would be intended to provide at least some assurance to each of the creditors that its (security) interest in the collateral would be protected and maintained.  These would no doubt deal with the situation where it became necessary for the pledged collateral to be liquidated for the benefit of all of the creditors involved.

(vi)          if an investor obtains credit from its intermediary (as noted above, this would typically occur where an investor adds to its "pool" of investments held/maintained by a broker, dealer, bank, etc. on credit extended by the broker, dealer, bank etc.) and thereupon grants a security interest in the investor's "pool" of investments to its intermediary, the mere granting of the security interest "automatically" gives the intermediary control of the "pool" of investments.  Other secured parties must both have the debtor enter into a security agreement and take the steps required in order to achieve control.  Thus intermediaries who enable their customers to acquire investments utilizing the intermediaries’ credit are given a favoured position under the legislation in comparison with other secured parties.  However, note that intermediaries in this position are no different from secured parties who obtain "purchase money security interests" who are already given a favoured position under the existing legislation.

3.         Perfection and attachment

-           These expressions are used in the legislation to describe the status of a security interest held by a secured party in relation to the secured party's right to enforce or realize upon its security interest in the collateral as against or in relation to :

(a)         the debtor; and

(b)         other persons having interests in the collateral, including, but not limited to, other secured parties.

             Part - although not all - of the requirements to achieve "attachment" for a security interest have to do with establishing the security interest as being enforceable by the secured party against the debtor only.  Part of one of the requirements for "attachment" and all of the requirements for "perfection" of a security interest have to do with the security interest being established as enforceable by the secured party against persons other than the debtor.

             "Perfected" status for a security interest cannot be achieved unless all of the requirements for attachment have also been achieved.   Having achieved "attached" status, in order to achieve perfected status, the secured party must, in most - although not all – cases, take one or more further steps or actions.  When a security interest has achieved "perfected" status, it then gives the secured party the highest and best "bundle" of rights with respect to the collateral against not only the debtor, but also against other persons with interests in the collateral (as noted, most typically, but not exclusively, against other secured parties).

-           The requirements for attachment remain essentially the same, namely that:

(a)          value must have been provided to the debtor; and

(b)          the debtor must have rights in the collateral (the Investment Property Amendments have added an alternative to this, namely that the debtor must be able to transfer rights in the collateral to the secured party); and

(c)          the security interest must have become enforceable against third parties pursuant to the requirements contained in Section 10 of the MPPSA (as amended).

             The Investment Property Amendments have altered Section 10 with respect to investment property - although the requirements of Section 10 remain unchanged for collateral other than investment property.  The investment property changes are as follows:

(a)         where the collateral is a certificated security in registered form, attachment will occur if the security certificate has been delivered to the secured party in accordance with the rules for "delivery", set forth in Section 68(1) of the MSTA; and

(b)         where the collateral is investment property generally, attachment will occur when the secured party acquires control of the collateral.

Attachment also requires the entering into of a security agreement, and note that if the security agreement contains a proper description of the collateral (as specified in Section 10 (1)(d) of the MPPSA (as amended)), then the existence of such signed security agreement with such proper description will itself satisfy the requirements of Section 10 (1).  The likely reason why a secured party would both want the debtor to enter into a security agreement with a proper description of the pledged collateral as well as wanting to obtain control of the pledged collateral would be because, in most instances, where a secured party has obtained control of investment property, that gives the secured party the highest and best perfection rights (as well as the achievement of “attachment”) for the secured party's security interest.

The Investment Property Amendments also specify that where a secured party's security interest attaches to a security account or to a futures account, same will also, respectively, constitute "automatic" attachment of the security interest to all of the security entitlements "carried in the security account", or, as the case may be, "automatic" attachment of the security...

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You have been retained by a married or common-law cohabiting couple to act for them in connection with their acquisition of a residential property.  At the time your clients come to your office to be advised generally on the transaction and to "sign up" the required documents, including, in particular, the mortgage they intend to have registered against the property upon their acquisition thereof:

(i)            one (or both) of your clients have signed a binding purchase and sale agreement; and

(ii)           they have not yet commenced to occupy the property as their residence.

You place the mortgage documentation before your clients, explaining that they will have to sign and swear (or affirm) as to the fact that the property is their homestead under The Manitoba Homesteads Act (the "Act"), and where one only of your clients is to be on title, the "off-title" client must provide a Homesteads Act consent to the mortgaging which is to be acknowledged separate and apart from the "on-title" client.  This would be a scenario repeated time and again throughoutManitobain lawyers' offices.

But is this in fact a correct procedure?  At the time that the clients attend upon you to sign the mortgage - with its accompanying statements under the Act - given that your clients are not yet occupying the property as their residence, does the Act apply?  Would it be more appropriate for the Homesteads Act statement negativing the application of the Act to be made?

The writer has to credit Mr. Gordon Hoeschen of Hoeschen & Sloane in Morden for raising this question/problem, and the writer thanks Mr. Hoeschen for same.

Consider the following:

  1. The definition of "homestead" in Section I of the Act clearly refers to a residence being occupied by a couple. Section 4(a) of the Act, referring to the need for there to be a consent to a disposition, does not say (one way or the other) that when the consent is given, the person giving it (and his or her "on-title" spouse) have to then occupy the subject residence although it does refer to a consent to a disposition of a "homestead" (which as just noted, is defined on the basis of occupancy by a couple).
  2. Section 5(1) of the Act, referring to the mode of creation of "proof" as to the non-applicability of the Act, does appear to require that when the statements are made, they are to "speak" from the time when the statements are made, not as to what will or will not be the case at some future time. (In this regard, Section 194 of the Manitoba Real Property Act must be kept in mind, in that it deems a statement contained in a prescribed form - admittedly "prescribed" meaning prescribed under the Real Property Act, not the Homesteads Act - to be the equivalent of a statement made under oath or in an affidavit, affirmation or statutory declaration under the Manitoba Evidence Act, although it is logical to assume that the intent of the legislation was that the statement should/would "speak" from the time when it is made).
  3. The definition of "land" in the Manitoba Real Property Act, Section 1 refers to, inter alia "land, …of every kind and description, whatever the estate or interest therein, and whether legal or equitable…". Is this definition broad enough to include a future/prospective interest in land, for example, the homestead rights (and obligations) that an "off-title" spouse and his or her "on-title" spouse will acquire when they take up occupancy of the subject property?  Is there a more or less current, existing interest, at least in the person who intends to be "on-title", provided that he or she is a purchaser under a purchase and sale agreement, so that at the time the Homestead Act statements are made in a mortgage, at least the intended "on-title" spouse has at that time a sufficient equitable interest in the subject property by virtue of the purchase and sale agreement?
  4. Sections 63(2), 63(3) and 66(4) of the Manitoba Real Property Act provide, in effect, that an instrument (whether a mortgage or otherwise) only effectively performs its function when it is duly registered against title at the Land Titles Office. This appears to support an argument that the provision of Act evidence and the making of acknowledged consents to dispositions of a homestead "speak" or take effect prospectively, that is, only when the instrument is registered, notwithstanding that the language of the Act prescribed statements and the language of the Homestead Act consent (which appears in the prescribed forms of mortgage and transfer, etc.) appear to "speak" currently and not prospectively.

After considering this matter, I believe that those who argue that prior to occupancy, there are no homestead rights, are probably correct. However, I think that the timing problem could be alleviated - and solicitors dealing with the above-described situation can arrange for the provision of the Homestead Act statements or, as the case requires, acknowledged Homestead Act consents, at the time when the parties attend upon the solicitor.  This would be done by changing the wording of the Homestead Act statements and consent to disposition so that they either (ie., "pick one" as is (then) applicable) "speak" currently or, as the case requires, that they "speak" prospectively and contingently. The contingency here is simply that the parties who sign the documents subsequently take up occupancy. If that occupation occurs after the instrument is registered, the Homestead Act statements, or as the case may be, acknowledged consent, would validate the transaction previously effected by the registration of the instrument. If occupancy is taken up between when the document is signed and when registration occurs, then the Homestead Act statements, or, as the case may be, the acknowledged consent, would be deemed to take effect immediately or perhaps thereafter at the time of registration. If after the time of signing, the parties never take up occupancy (because they choose to live elsewhere) but the "on-title" spouse wishes to go through with the acquisition and mortgaging, then the Homestead Act statements, or as the case may be, the Homestead Act acknowledged consent would simply be deemed to not exist (or perhaps, the "on-title" spouse's Homestead Act statement would be deemed to be given at the time of registration and the statement "The within land is not the homestead of me within the meaning of the Manitoba Homesteads Act" would be deemed to have been made by the spouse taking title.

Examples of prospective statements might be:

"My co-mortgagor is my spouse (common-law partner) and (he/she) has Homestead Act rights in the within land by virtue of our occupancy of the within land as our home" ("We do not occupy the within land at the date of this statement, but we intend to so occupy same in the future, and when and if we so occupy, my co-mortgagor who is then my spouse or common-law partner will have Homestead Act rights in the within land upon our so commencing to so occupy the within land").

The writer appreciates that the foregoing described "solution" to the timing problem would require a statutory amendment to the Act.

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In a typical construction project scenario, the property owner contracts with a "general contractor" who promises to construct, or cause to be constructed, the specific project desired by the owners, with completion promised (subject to unforeseen contingencies) by a specified deadline date, and for a consideration or price worked out and agreed to by the parties in advance.  If the contractor fails to do what it promised, the owner has the right to sue the general contractor for the owner's loss.  The general contractor will enter into a number of further contracts with others who are able to and typically "specialize" in providing the different goods and services required to complete the project.  This would typically include an excavation/ foundation firm, a framing firm, a drywall firm, a plumbing firm and an electrical firm.  Suppliers and installers of fixtures and equipment required to heat and light the completed project would also have to be engaged in order to provide the owner with what it has bargained for.  These other providers of "inputs" to the project, that is, providers other than the general contractor, will not have their own direct contracts with the owner, rather, their contracts will be with the general contractor.  Such other providers are usually referred to as "subcontractors" or "subtrades".  The general contractor and the subcontractors will typically engage a number of individual persons to do the actual work ("employees"), and additionally, some of the subcontractors will have to purchase materials from other firms who are in the business of selling such goods ("suppliers").  So what happens if, notwithstanding that the owner is able to and pays what it owes to the general contractor, the general contractor is unable to or otherwise fails to pay what it owes to its subcontractors, suppliers, the subcontractors' own suppliers and the employees of all of these other inputting parties?  The subcontractors can sue the general contractor (they have direct contractual relationships with the general contractor), but what if the general contractor has become insolvent?  They can't sue the owner because they don't have any direct contractual relationship with the owner.  To alleviate this problem, Manitoba - and indeed most other North American jurisdictions - have long ago enacted legislation giving protection to those persons who "improve" a property, but who have no direct contractual relationship with the owner of the property.  The Manitoba Builders' Liens Act (the "BL Act") is the current Manitoba version of that legislation. 

The BL Act, broadly speaking, provides for three legal "mechanisms" to protect persons "improving" real property, namely:

  1. a lien against the property, which, to some degree, provides the improving party with something akin to a real property mortgage (if the improving party isn't paid, it can liquidate the property so as to generate funds required to pay what is owed to it);

  1. the requirement that every time the property owner makes a payment to the general contractor on account of the general contract, 7½% of each such payment is to be held back from the general contractor and, in most construction projects, placed in a distinct trust account, with the funds to be released when the project is completed; and

  1. the imposition of a trust applicable to funds earmarked to be used to pay for the project, with the resulting imposition of trustee obligations on those persons receiving those funds. 

(I)         The Lien

(i)            The BL Act creates liens in favour of those improving real property which form a charge against the real property being improved, and, gives the lien holder the right to have the improved property sold for the purpose of raising funds to pay monies due to the lien holder.

(ii)           With respect to any particular real estate project, whether or not one or more Liens hold priority over a Lender’s duly registered mortgage security:

(1)          is not dependant on whether or not the BL Act holdbacks which are supposed to be made, are or are not made; and

(2)          is dependant on whether or not the Lender advances funds under its mortgage security at a time when one or more Liens have been registered against the title to the real property. If any such advance is made when one or more Liens are so registered, the Lender’s mortgage security, with respect to that advance, will be subordinate to the claims of the holders of the registered Lien or Liens.

(iii)          Where a particular  project is covered by one, or perhaps two or three, titles, it is relatively fast and inexpensive for the Lender to search the title or titles. All such searches should be conducted after 3:00 p.m. local time, when the Manitoba Land Titles Offices cease taking registrations, and, assuming no Lien or Liens have been registered, the funds should be released to the owner before 9:00 a.m. on the next following business day when the Land Titles Offices reopen to take registrations.

(iv)          The problem in effecting title searches arises where, with respect to a particular project, that project is covered by many titles.  For example, a project may comprise a large number of separately titled single family residential units, or a project has been condominiumized and there are a large number of separately titled condominium units. In these cases:

(1)          where the Lender is financing a project with many titles, only randomly selected titles be searched after 3:00 p.m. on the date of intended advancement (we recollect a situation where we acted for a lender providing advances to the owner of a 310 condominium unit building, and, given that it was impossible to conduct 310 after 3:00 p.m. title sub-searches, we searched, say, the titles for units 1, 25, 50, 75, 100, etc. For the next advance, we searched the titles to units 10, 40, 70, 100, etc.).  If the Lender is financing a project where all of the project's titles are in the name of the same owner, it is very unlikely that a Lien would be registered against only one title, and far more likely that if there was a Lien claimant, that claimant would have registered against all of the project’s titles;

(2)          generally however, where a particular project is a relatively large one and the Lender’s advances are in substantial amounts, and, provided that the project only has a few titles, it would be best to search all titles with respect to each advance.

(v)           From a “risk management” perspective, if the Lender searches only random titles (where a project has many titles), while it is possible that the Lender may make an advance whilst one or more Liens have been registered, on the next succeeding titles search by the Lender, such Lien(s) would be discovered, and no further advances would be made until the Lien(s) were removed. In this way, the Lender would tend to minimize its risk, without completely eliminating it.

(II)        Holdbacks

(i)            The BL Act obligates the owner of a property being improved to hold back from each progress invoice submitted to such owner by the project (general) contractor, 7.5% of that invoice, and, where the contract between the contractor and the owner is in excess of $200,000, the owner and contractor are required by the BL Act to open an interest-bearing builders' liens holdback account with a Manitoba chartered bank, trust company or credit union. Although somewhat simplified, in essence, the holdback monies are to be withheld from the contractor until 40 days after the first to occur of completion or abandonment of the project by the contractor. At that point in time, provided that no Lien or Liens have been registered against the project title, the monies in the holdback account may be released to the contractor.

(ii)           Payment of each contractor invoice to the extent of 92.5% of the invoiced amount by the owner to the contractor will reduce the project Lien claimants' (including the general contractor's) Liens to the extent of and in proportion to that 92.5% payment portion, provided that when the owner makes payment, it does so “in good faith” and before the registration of any Liens against the owner’s title. We take “in good faith” to mean that the owner, when making payment, should have no reason to believe that the general contractor who he pays will fail to make payment to those who are in turn engaged by the general contractor to assist it in fulfilling its duties under its contract with the owner.

(iii)          As previously stated, whether or not BL Act holdbacks are made does not affect the priority of the Lender’s mortgage security against the property being improved. Further, the BL Act does not specify that there is any obligation on an owner’s financier to make or to ensure that the holdbacks are made, and where required, be put into an interest bearing holdback account. Nevertheless there are some advantages to a project financier if the holdbacks are made and kept available during the course of construction.  Consider the situation where, before completion of the project, there is a failure to finish due to insolvency of the general contractor or a major sub-contractor.  In this situation the actual setting aside of holdback monies means that there are funds which can be paid into Court, for the purpose of having the Court order the discharge of all of the registered Liens (Section 55(2) of the BL Act). It has been our experience that where this has occurred, and provided that the owner is able to find a replacement general contractor (or major sub-contractor), the removal of the Liens enables the project financier to recommence making project advances, so that the project can be completed, at which time, the financier then has a completed project subject to its security.

(III)       The Trust

(i)            The BL Act imposes trust obligations on project owners, contractors and sub-contractors with respect to monies received by each of them in connection with construction projects. In essence, the trusts are established for the benefit of the persons whom the recipient or holder of project monies has contracted with in order to effect the construction, including contractors, sub-contractors, and certain other beneficiaries such as employees, and The Manitoba Workers Compensation Board. As a general rule, trust monies are not to be used for any purpose other than satisfying the claims of beneficiaries of the trust.

(ii)           A major advantage which accrues to the beneficiary of a trust is that the beneficiary can “trace” trust funds or property which the trustee has parted with in breach of the trust, provided that the trust monies or property can be “identified” in the form of some other property, or in a bank account.  It is possible that a Lender could be liable to a beneficiary that was a victim of a breach of trust committed by the owner, if that beneficiary is able to assert a tracing claim against the "misappropriated" trust money (and such tracing leads to funds that are in an owner's account with the Lender).  Tracing allows a beneficiary to access the specific trust funds it is entitled to, even if those funds are in the hands of third parties (such as a Lender), and even though the third parties themselves may not be guilty of breach of trust.  However:

(1)          tracing is only applicable if the trust property is "identifiable".  The comingling of other funds in an owner's account where the Lender and the owner have established a multi-account "set-off" arrangement, may reduce the likelihood that the particular beneficiaries' trust monies remain "identifiable";

(2)          other funds that may be present in an owner’s deposit account should not be available to a beneficiary who obtains a Court tracing order.  That is because tracing is a proprietary remedy, which means it attaches only to funds from a particular project.  The beneficiary would not be entitled to the owner’s other funds which may be held by the Lender if these other funds do not relate to the beneficiary's particular project; and

(3)          in the Supreme Court of Canada decision in Citadel General Assurance Co. v. Lloyds Bank Canada, [1997] 3 S.C.R. 805, La Forest J. stated that the tracing remedy is subject to certain equitable defences.  Some of these defences may be available to a Lender to allow it to resist a tracing claim.  In particular, as the Manitoba Court of Appeal held in Glenko Enterprises Ltd. v. Keller, 2000 MBCA 7, a tracing claim will be denied where trust funds come into the hands of a third party that gave consideration for the property and who had no notice that it was trust property or, if the third party did have notice that it was trust property, the third party did not have knowledge that an application of such trust property against the trustee's indebtedness constituted a breach of trust.  The court in that case suggested this defence may be available to banks in circumstances that are similar to the present issue.

(iii)          The BL Act does not specifically impose its trusts upon an owner’s financier. Pursuant to the Bank Act (Canada), banks (as depository financial institutions) are in most cases not obliged to determine whether or not funds placed with the depository institution are - or are not - trust funds and whether or not such funds are used in breach of trust obligations by those having control of such funds.

(iv)          However, under the Bank Act, notwithstanding the aforementioned “general” rule, a depository financial institution may be held directly liable to the beneficiaries of a trust in essentially two situations, namely:

(1)          where the institution knows that the trust is or may be breached and nevertheless applies trust monies on account of indebtedness owed by the trustee to the institution (“knowing receipt”);

(2)          where the institution facilitates or assists a trustee in effecting a breach of trust without the institution applying trust monies on account of the trustee’s indebtedness owed to the institution (“knowing assistance”).

(v)           Nevertheless, and in any event, for a Lender/depository financial institution to be liable to BL Act trust beneficiaries, it is not enough for a beneficiary to merely prove that the institution knew of the fact that there are or were trust monies standing to the credit of a trustee’s account with the institution.

In the ManitobaCourt of Queen's Bench decision in Glenko Enterprises v. Ernie Keller Contractors Ltd. (1994), 98 Man. R(2d) 141 (the "Glenko Case"), Beard J. synthesized the relevant case law into the following summary (which was expressly adopted by the Manitoba Court of Appeal and in several other Manitoba cases).

"11       In summary, the case law states that the following inquiries must be made to determine whether a bank which has applied trust funds received from a building contractor to reduce an account overdraft has participated in a breach of trust and must therefore account to the beneficiaries of that trust for those funds:

1.         Did the bank know that the monies being deposited by the customer were trust funds subject to statutory trust conditions?  (Most depository institutions would know this or, because the BL Act trust is a statutorily created trust, the institution would be deemed to know this.)

2.         Did the bank have actual knowledge of the fact that there were trust beneficiaries whose accounts were unpaid?  (This is a question of fact in each case, but certainly, there are probably many situations where the depository institution has no such knowledge.)

3.         If the bank did not have actual notice of unpaid trust beneficiaries, did it have knowledge of facts and circumstances sufficient to put it on inquiry? If so, did it make reasonable inquiries?  (Again, this would be a question of fact in each case, but there are certainly going to be situations where a bank does not have knowledge, and, even where it has, makes reasonable inquiries without ascertaining a breach of trust.)

4.         Did the bank receive and apply the funds in the ordinary course of business without knowledge of any unusual circumstances?  (In amplification of this the Court noted that:  "… the bank is not liable for the builder's breach of trust if the bank, in the ordinary course of business, accepts the deposits and allow cheques to be written thereon, - or for that matter if it applied to funds on overdraft - unless it had or clearly should have had knowledge of the breach of trust by the contractors or of facts to put it on notice".)"

In order for liability to attach to the institution, it would be necessary for a beneficiary to establish that the institution not only knew that it held trust monies, but also that it knew - or from the perspective of a reasonable party should have known - that beneficiaries had not been paid what was due to them when due or that there was a reasonable likelihood that such beneficiaries would not be paid what was then due to them

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 September, 2012

A seller ("S") enters into an agreement with a purchaser ("P") will sell to P, S's residential real estate (the "Property").  The sale and purchase agreement (the "Agreement") requires P to pay S a total of $100,000.00 for the Property, with P having to pay "upfront" a deposit of $5,000.00 (the "Deposit").  Before closing, P reneges and the transaction is aborted.  S takes the Deposit and subsequently resells the Property.

Two likely scenarios may occur here:

(i)            in reselling the Property, S sells for an amount less than the price stipulated in the (original) Agreement, say, for only $90,000.00 (the "Loss Scenario"); or

(ii)           in reselling the Property, S is able to obtain a sale price in excess of that stipulated in that (original) Agreement, say, $110,000.00 (the "Windfall Scenario").

What are S's rights (and obligations) in relation to the Deposit?  Both the Manitoba Court of Appeal 25 years ago and the British Columbia Supreme Court in a recent case (judgment issued February 9, 2012, hereinafter, the "Tang Case") have held that the parties' rights (and obligations) with respect to a deposit in this situation depends on the precise wording of the sale and purchase agreement.

The situation dealt with in the Tang Case is an example of the Windfall Scenario.  In that case, the Court compared the wording of the contract in the Tang Case with the wording in the contracts considered in two earlier B.C. cases and noted that:

(i)            in the Williamson Pacific Developments case, the deposit was stated to be "non-refundable", and the use of that word, together with the deposit forfeiture language in the contract, convinced the Court to hold that the deposit was forfeited to the aggrieved seller without the proof of actual damages; and

(ii)           in the Agosti case, the word "non-refundable" was not present, and the relevant language specified that where the buyer reneged, the deposit was "absolutely forfeited to the seller…on account of damages".  The Court concluded that this language meant that in order to actually claim the deposit monies, the seller would have to prove damages.  As the Agosti case was an example of the Loss Scenario, the aggrieved seller was entitled to damages, but the point here was that such entitlement only flowed from the fact that the seller did suffer a loss (in reselling the property).

The wording in the contract considered by the Manitoba Court of Appeal was also significant in that the Court held that when the buyer reneged and the seller took the buyer's deposit, that act also terminated the contract and all rights of the seller arising out of the buyer's default.  Consequently, when the seller resold the property at a loss (an example of the Loss Scenario), the aggrieved seller was not able claim against the buyer for the deficiency.  As a result, the wording in the standard Manitoba form of residential property offer to purchase mandated for use by realtors was changed so that an aggrieved seller would be able to claim the deposit while still maintaining the seller's right to claim further compensation from the buyer where the seller subsequently sold the property at a loss.

The aforementioned Manitoba standard form contract wording dealing with what happens to a deposit is as follows:

"Where the defaulting party is the Buyer, the Seller shall be entitled to retain the deposit as the Seller's own property, but whether or not the Seller has then terminated or thereafter terminates the Seller's right and obligation to sell and the Buyer's right and obligation to purchase under this agreement by virtue of the Buyer's default, such retainer of the deposit shall not itself constitute a termination of this agreement and shall not restrict the Seller from exercising any other remedies which the Seller may have by virtue of the Buyer's default, including the right to claim damages from the Buyer which the Seller sustains in excess of the deposit".

The question the writer poses in this paper is whether or not the above Manitoba language is sufficient to enable an aggrieved seller to keep a defaulting buyer's deposit without the need for the seller to suffer, and then if necessary, prove to a Court that the seller has suffered a loss?  The writer's belief is that the wording is sufficient for this purpose.  The word "non-refundable" does not appear in the wording, but it is clearly stated that the aggrieved seller "shall be entitled to retain the deposit as the Seller's own property".  This language - in the writer's view - is equivalent to the use of the word "non-refundable".  If the deposit is kept by the aggrieved seller and becomes the seller's "own property", then by the very nature of things, the deposit can't be "refundable".

The Tang Case also deals with an attempt by the buyer to have the sale agreement invalidated on the basis that the seller failed to provide the buyer with a title search.  Not surprisingly, the Court took the position that notwithstanding that the seller had promised to provide a title search to the buyer, the failure of the seller to do so was not "a condition precedent entitling (the buyer) to terminate the contract".  In so holding, the Court noted that the promise to provide a title search was not indicated to be a promise for "the sole benefit" of the buyer.  In the aforementioned Manitoba form of standardized offer to purchase residential real estate, there is a differentiation between conditions which "benefit the buyer" and conditions which "benefit the seller".  All of the conditions stated to "benefit the buyer" are prefaced with the words: "This agreement is terminated unless the following conditions for the benefit of the buyer are fulfilled or waived".  What would happen in Manitoba, if a buyer was able to have included under the heading "CONDITIONS BENEFITTING THE BUYER" a promise by the seller to produce a title search?  It is this writer's opinion that it would be inequitable to allow a buyer to terminate simply because no title search was produced, but that view would run contrary to the plain meaning of the language if such a condition was included in the place suggested.  Perhaps consideration should be given to amending the standard form offer so as to differentiate between conditions which benefit the seller, the non-fulfillment of which, would entitle the buyer to terminate, and other conditions which would not permit the buyer to terminate on non-fulfillment, but would be more in the nature of warranties.

The Tang Case does not deal with the question of whether not an aggrieved seller, who would otherwise be entitled to keep the defaulting buyer's deposit, would be prohibited in law from doing so by virtue of the fact that a Court adjudicating the matter concluded that the amount of the deposit, in relation to the total sale and purchase price, was excessive.  That is, where the Court holds that forfeiture of the deposit constitutes the seller obtaining an unfair or inequitable penalty imposed on the buyer.  The creation of an unfair penalty must be kept in mind by those persons who prepare agreements providing for the disposition and acquisition of interests in real estate.

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May, 2008

Presumably it is human nature that leads persons who suffer financial set backs to blame their banker for their misfortune, even where the banker cannot be reasonably held to have been responsible for the loss.  This may be due to the feeling amongst a broad segment of the population that banks are "big, bad" commercial enterprises who treat their customers, or at least their "smaller" customers, more or less onerously. Possibly, it is because of the perception that banks have "deep pockets" and can easily afford to compensate persons who are in fact the victims of their own carelessness or lack of business foresight.  Maybe, it is because in recent years, the Courts have on occasion held banks to be in a fiduciary position vis-à-vis some of their customers.

However, it is important to understand that where the Courts have held that a bank has a trustee type duty to its customer, this has almost always been in the situation where the customer is peculiarly vulnerable to being affected by the bank's conduct and where the customer has placed substantial reliance on the bank in conducting the customer's financial and/or business affairs. 

In the recent judgment in the Baldwin case (rendered September 27, 2006, hereinafter the "Baldwin Case"), the Ontario Court of Appeal held that in lending funds to customers which the customers then placed in certain investments, acting on the advice of financial advisors (the financial advisors not being connected to the bank), the customers were not entitled to hold the bank responsible for losses sustained in connection with their investments.  The customers attempted to claim compensation from the bank both on the basis of the bank's negligence and on the basis that the bank owed a fiduciary duty to the customers (which it breached) to advise them as to the risks inherent in investments and their obtaining of the loans from the bank.

Although not related to each other, the investment advisors and the bank did work together to facilitate a customer's borrowing from the bank and to effect the customer's investments utilizing the bank borrowings.  A customer would complete a loan application with the assistance of the financial advisor and the advisor would then submit the application to the bank.  Where the bank approved the loan for a particular customer, the bank would (presumably with the authorization of the customer) advance the loan proceeds directly to the customer's advisor who would then utilize same to make the customer's investments.  The customers pledged their investments to the bank to secure their loans and consequently, all of the loans had "margin requirements".  Thus if a customer's investments fell in value, the bank would require the customer to pay down the loan so as to take into account the then lower value of the bank's security.

Having had to have repaid their loans in whole or substantially in part, the customers claimed variously that:

(i)            the bank did not explain the "margin requirement" terms of the loans;

(ii)           the customers did not understand the loan documents (the documents having in fact contained clear advice/information as to the "margin requirement" terms);

(iii)          the bank had the same duty of care to advise the customers of the risks involved as did their financial advisors (whom the customers also sued); and

(iv)          the bank owed the customers a fiduciary duty of care (in addition to any obligation the bank might have had not to be negligent vis-à-vis the customers), presumably, on the basis that the customers were vulnerable and that the bank was in a position to adversely affect the customers by making (and later demanding repayment of) the loans to the customers.

The Courts (at trial and on appeal) noted:

  1. The loan documents contained "various provisions by which the borrowers (acknowledged) responsibility for the borrowing and investment decisions, and (disclaimed) any responsibility on part the of the lender";
  2. "There was nothing to suggest to the (bank) that (the bank) ought to (have inferred) that, contrary to what the signed documents said, the (borrowers) had not read the documents;
  3. While it is true that the losses sustained by the customers would not have occurred if the bank had not made the loans to them, "…the making of (the loans) requires the consents of two parties (in the case of each loan) the lender and the borrower, (and) the lender cannot impose the loan on the borrower";
  4. The customers "went to the (bank), not for advice, but for loans";
  5. The customers'financial advisors "…knew the intended investment programs of (the customers) and (the financial advisors) were in a position under the applicable regulatory requirements to develop and recommend and implement those investment programs for (the customers) and to monitor them over time, (and) the bank was not in this position"; and
  6. While the bank did "promote" the concept of its making loans available to the customers so that they could purchase their investments through the financial advisors, such promotional activity by the bank was made towards the financial advisors, not towards the customers.

Based on the foregoing, the appeal Court held that the bank had no obligation to any of its customers for their investment losses.

Reading the decision in the Baldwin Case, one might ask the question as to what would happen in a similar situation where the bank chooses to conduct "due diligence" as to the viability of the proposed investments to be made by its customers utilizing the funds to be borrowed from the bank, and such "due diligence" reveals one or more substantial "weaknesses" in the contemplated investments?  Common sense would suggest that, to protect itself, the bank should not make the loans (or perhaps reduce the size of the loans it was originally asked to make) because the viability of its security (a pledge of the customers'investments) would be in doubt.  Additionally, the bank might incur liability to its customers in this situation by failing to warn them of the "weaknesses" which the bank's research has revealed.  However, in a situation where the bank did not intend to rely on its security, and instead intended to rely essentially on a customer's promise to repay the loan (no doubt due to the customer's strong creditworthiness), the bank would probably be able to extricate itself from liability by having the customer sign a written acknowledgement in which the bank set forth the results of its "due diligence" and contained a signed acknowledgement by the customer that, notwithstanding the specified "weaknesses" in the contemplated investments, the customer wished to go ahead and make the investments and thus borrow the required funds for same from the bank.

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April, 2018

Persons and businesses extending credit at a cost and their counsel have for a long time been - or should have been - aware of the requirements of Section 4 of the Interest Act (Canada) (the "Act").  Section 4 requires that where a person (the "Lender") extends credit to another person (the "Borrower"), and the Borrower is required to pay value to the Lender in exchange for such credit (such value being typically what is commonly considered to be "interest"), in order to get anything more than a return of 5% per annum on the outstanding credit (owed from time to time), the Lender must ensure that the documentation entered into by the Borrower with the Lender specifies what the consideration is on an annualized basis.  The usual situations in which an annualized specification is required is where the interest payable on the credit extended is:

(i)            described as being calculated on a basis of a "yearly" period of less than 365 days (or less than 366 days in a leap year), with the "yearly period" being frequently defined as 360 days; and

(ii)           described as a percentage of the credit extended calculated and payable (and compounded if not paid) on a monthly basis (ie, 2% per month).

In both these cases, the Lender must disclose the annualized version of these rates.  Traditionally, lenders have responded to this requirement by either making a relatively simple mathematical calculation to obtain the annualized equivalent rate and then specifying the precise equivalent rate, or by specifying a formula pursuant to which the Borrower may (with relative ease) make its own mathematical calculation to arrive at the required annualized rate.

Section 4 applies where the credit extended by the Lender is secured by personalty, or not secured at all.  It does not apply where the credit is secured by real estate.

The matter of what a Lender must do to comply with Section 4 was dealt with - and expanded upon - by the Ontario Superior Court of Justice in its recent (January 10, 2018) decision in the Solar Power Network Inc. v. ClearFlow Energy Finance Corp. case (hereinafter, the "Solar Case").  As stated in paragraph (1) of the judgement, Solar Power Network Inc. and related entities were renewable energy companies specializing in installing solar panels in commercial, institutional and industrial rooftops.  The respondent ClearFlow Energy Finance Corp. was a project finance company that provided financing to the solar energy and clean technology sector.  And that was precisely the relationship between ClearFlow (as "Lender") and Solar Power Network (as "Borrower").  The Lender provided a number of separate loans (or financings) to the Borrower to enable it to obtain and install solar power equipment.  The loans were initially intended - by both parties - to be of a short term nature, with the Borrower arranging for longer term more "conventional" financing in due course.  The loans were documented in various ways, including loan agreements and promissory notes, but, as observed by the Court, regardless of the form of the documentation, each loan provided for three different "components" of remuneration payable by the Borrower in connection with the making of the loans, namely:

(i)            An interest rate which was usually set at 12% per annum, compounded and calculated monthly, and, 24% per annum following default (the "Base Interest").

(ii)           An administration fee charged at the outset of the loan transaction calculated as a percentage of the principal amount of the loan advanced.  If a loan was not repaid on time, then the initial administrative fee was tacked on to the principal balance of the loan and carried forward as an extended loan, with a new administrative fee being charged on the total amount of the extended loan.  These fees are referred to herein as the "Administration Fees"; and

(iii)          A discount of 0.003% of the outstanding principal balance of a loan, calculated on a daily basis for each day that the loan was outstanding.  If the discount fee had not been paid when the initial term of the loan had expired, the outstanding balance of the discount fee applicable to the loan during its initial term would be added on to the loan and carried forward to form part of the principal amount of the extended loan, to which a further discount fee would be applicable.  These discount fees are referred to herein as the "Discount Fees".

The Court observed that the Administration Fees were calculated over 90 or 180 day periods, while the Discount Fees were calculated daily.

There were a number of issues between the parties which the Court had to consider.  Two of those issues related to the proper categorization of the Administration Fees and the Discount Fees for the purpose of applying Section 4 of the Act to these charges.  The first issue relating to Section 4 was whether or not the Administration Fees and the Discount Fees were "interest" within the meaning of Section 4.  A second question relating to Section 4 was whether or not, if either one or both of the Administration Fees and the Discount Fees were to be considered as interest within the meaning of Section 4, did Section 4 operate to limit the Lender's entitlement to interest - including the Base Interest - to a "mere" 5% per annum.

The Court's review and analysis of the aforementioned fees is enlightening and brings some clarification to the meaning of Section 4 (which was previously absent in the case law).  This is of critical importance for lenders and their counsel in devising the appropriate wording for the payment of the consideration to be provided in exchange for the extension of credit.  In particular, the questions dealt with were:

  1. Are the Administration Fees "interest" within the meaning of Section 4?

The Court held that the Administration Fees were not interest.  In coming to this conclusion, the Court took note of several aspects of the relationship between the parties, some of which were arguably "fact specific" to the Solar Case.  In particular:

(a)          the Administration Fees were compensation for the Lender's "administrative work in setting up and administering the loans";

(b)          the Borrower's applications to obtain the loans and the loan documents themselves required negotiation and were "document intensive";

(c)           on the average, 35 invoices from 15 separate suppliers were required with respect to the subject matter of each loan;

(d)          additional administrative work was required once the Lender ascertained that the Borrower was having financial difficulties; and

(e)          the Administration Fees were charged on a one-time basis only, and would only be charged if a loan was not repaid within its term.

  1. Were the Discount Fees interest within the meaning of Section 4?

The Court held that the Discount Fees were a form of interest, and did so, notwithstanding that the Lender argued that these fees were an additional consideration for its administration of the financings, and, notwithstanding that the Borrower did not present any evidence to the contrary.  The Court stated that when looking at the "substance" of the Discount Fees, the following matters indicated that these fees should be considered interest (ie, essentially, consideration for the use of money over a period of time, with the consideration being determined with reference to the principal amount of the credit extended and the length of time that the credit is outstanding):

(a)          the Discount Fees were not connected to the creation of a new loan or a renewal of an existing loan, or the documentation pertaining thereto;

(b)          unlike the Administration Fees which varied depending on the "risk and resulting work undertaken by the Lender", the Discount Fees were the same for all types of loans and loan documentation (Editorial comment: in deciding whether or not to charge interest, and in particular, the rate of interest, a creditor usually does take into account the riskiness of the loan transaction);

(c)           while the Administration Fees were charged at the beginning of the loan term (or upon a renewal of an existing loan) the Discount Fees varied, and in particular, increased, over the period of a loan's term;

(d)          in cross-examination, a representative of a Lender acknowledged that the Borrower's obligation to pay the Discount Fees "incentivized" the Borrower "to make earlier payout of the loans".  The fact that the Discount Fees were designed to "encourage the hastening of the pay down of the loans" savours of interest, not a fee for the time and efforts required to administer the loans.

  1. If the Discount Fees were interest, does Section 4 require that only the Discount Fees be reduced to 5% per annum, or is the Lender additionally limited to collecting 5% per annum with respect to the Base Interest?

As the Court held that the Administration Fees were not interest, Section 4 did not apply to these fees in the sense of requiring the disclosure of an annualized rate.  However, the parties disagreed as to whether or not Section 4 should, in addition to applying to the Discount Fees, also apply to the Base Interest Rate.  The Base Interest Rate, taken by itself, did not breach the requirements of Section 4.  That rate was stipulated to be 12% per annum, compounded and calculated monthly, 24% per annum after default*.  The Court held that the meaning (and Parliament's intent) of/for Section 4 was to limit the Lender to 5% per annum even though part of the interest stipulated did not breach the Section 4 requirements, but another part (or parts) thereof did so.  In other words, if a creditor obligates its debtor to pay two or more "types" of interest, and one of those "types" is worded so as to breach Section 4, that breach "taints" all other interest obligations, even though the other types(s) of interest comply with Section 4 (ie, even though they are specified to be calculated on an annual basis).  The Court observed that "the case law has repeatedly recognized that Section 4 of the Act should be applied equally to sophisticated and unsophisticated parties".  Thus the fact that the Lender and the Borrower in the Solar Case were "sophisticated" (ie, financially experienced business parties, and that each had their own counsel) did not relieve the Lender of its Section 4 obligations.  Additionally, the Court stated that "As draconian as it may seem to limit all of the interest to 5% where the offending Discount Fees are only a small portion of the overall interest obligation, the result is in keeping with the consumer protection purpose of this legislation".

  1. Did the fact that the loan documents contained a formula for calculating the annual rate of interest for the Discount Fees satisfy the requirements of Section 4?

The Lender argued that, assuming that Section 4 did apply to the Discount Fees, it had complied with Section 4 because it had included a formula which should have enabled the Borrower to easily calculate the annualized rate that the Discount Fees represented.  This formula is very similar to the formula that lenders and their counsel frequently use.  In essence, it provides that where an amount of interest, fees or other charge is stated to be applicable at a rate based on a period comprising less than 365 days (or less than 366 days in a leap year), the "equivalent yearly rate" is determined by dividing the specified rate by the number of days in the period and then multiplying that result by the actual number of days in the calendar year.  The Solar Case Discount Fees rate was stated to be 0.003, and the Lender's position was that all that the Borrower needed to do (to determine the annual equivalent) was to multiply 0.003 by 365 (or 366 in a leap year).  Notwithstanding the apparent simplicity of this formula, the Court held that "a formula does not necessarily allow for (a) clear understanding to occur.  Formulas can be confusing and even misleading".  Interest was required to be paid on outstanding interest when a loan rolled over, thus the Court declared that it was "…not accurate to say that by simply multiplying 0.003% times 365 that the Discount Fees annualized rate would be…clearly understood (by the Borrower".  Unless and until the Solar Case decision is overturned or legislatively altered, lenders and their counsel should no longer rely on the efficacy of an "equivalent rate formula" to satisfy Section 4's requirements, and precise statements of equivalent rates per 365 (or 366 in a leap year) day periods should be included in loan documentation.

  1. How are lenders and their counsel to calculate annualized interest rates?

In considering whether or not an "equivalent rate formula" would - or would not - satisfy Section 4's requirements, the Court observed that there were "two potential methods of expressing the equivalent rate of interest".  These are:

(a)          simply multiplying the stated interest rate by the number of compounding periods (or interest payment intervals) in the year (ie, 2% per month times 12 months is "equivalent" to 24% per annum").  This is called the "nominal interest rate";

(b)          where a calculation is made in which takes into account the value that a lender gets when it doesn't  have wait until the end of the year to obtain the benefit of the interest it is entitled to. This is called the "effective annual rate".  It factors in the "effect that compounding has on the overall interest rate (ie, 2% per month, when factoring in the monthly compounding, is "equivalent" to 26.8% per annum)".  Although not expressly stated, this writer assumes that the Court is referring here to the concept of the value or benefit that a creditor receives when it obtains interest - primarily determined with respect to a period of one year - at intervals more frequent than yearly.  This is sometimes referred to as the "re-investment of interest theory".

The Court concluded that the more accurate method of calculation of the annualized rate required by Section 4 is the "effective annual rate".**

Some other conclusions and observations of the Court in the Solar Case worth noting are:

(I)            The Lender argued that it received legal opinions from the Borrower's counsel which stated that the loan documents were "enforceable".  The Lender argued that these legal opinion letters supported its position that the Borrower "knew the fees were in fact fees and not interest".  The Court held that since the opinion letters included the (usual) stipulation that the enforceability opinions were limited by "laws affecting creditors' rights generally", and since Section 4 affects creditors' rights generally, the Lender was not entitled to rely on the Borrower's counsel's legal opinions.  Had those opinions not included the usual limitation statement, might the Court have come to a different conclusion in the Solar Case?  We'll probably never know, but it does emphasize the significance of the need for lawyers to include (reasonable) limitations and qualifications to enforceability opinions.

(II)          The Lender also argued that after the Borrower encountered financial difficulties and it entered into several "forbearance agreements", those agreements provided a defense for the Lender due to the presence of a provision to the effect that the indebtedness owed by the Borrower, together with interest, fees, costs, etc. "(were) unconditionally owing by the Borrower to the Lender without offset, defense or counterclaim of any kind, nature or description whatsoever" (underlining here for emphasis purposes).  The Court disposed of this argument because a more recent forbearance agreement (four had been entered into) qualified the above provision by concluding with "except as may be otherwise required by law".  The Court held that that exception did permit the Borrower to challenge the Lender's entitlement to interest under the loan documents.

* Interestingly, if the loan indebtedness had been secured by a charge on real estate, Section 8 of the Act would have prohibited the Lender from charging and collecting interest at any rate per annum in excess of the rate per annum stipulated as being applicable before default.

** Section 6 of the Act has often been considered to require disclosure of what amounts to the effective annual interest rate, but only for indebtedness secured by real property mortgages and only where there are periodic "blended" payments of principal and interest called for under the terms of the payment/repayment of the secured debt.

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January, 2011

Security interests, unlike diamonds, do not necessarily last forever or lose their lustre ("priority").  Two common situations in which a secured party can lose its security interest or the priority thereof are:

(i)            under Section 20 of the Manitoba Personal Property Security Act (the "MPPSA") - where a secured party fails to properly perfect its interest.  In this situation, the security interest doesn't entirely disappear, but it become unenforceable against most third party claimants, including the debtor's bankruptcy trustee; and

(ii)           Section 30(2) of the MPPSA - where the secured party holds a security interest in the debtor's inventory and the debtor sells items of its inventory to a buyer or buyers in the ordinary course of the debtor's business.  In this situation, the secured party's security interest is completely terminated insofar as the sold inventory is concerned, although the secured party is entitled to have its interest continue as against ("traceable") proceeds generated from the debtor's sale or sales (if there are any traceable proceeds).

The generally accepted rationale for the existence of Section 30(2) is that if "ordinary course" buyers couldn't purchase items of the debtor's inventory without having to search the registry to see if the debtor has given a security interest to its financier and then have to get the financier to release its security interest as against the particular item or items purchased, commerce would grind to a halt.

But what about a debtor who gives a security interest in its inventory to a financier, but who then leases - as opposed to selling - inventory items to one or more lessees?  Section 30(2) of the MPPSA provides that in this situation, the lessee "takes free of any perfected or unperfected security interest given by the lessor…whether or not the lessee knows of it (i.e., the security interest given to the lessor's financier) unless the lessee also knows that the lease constitutes a breach of the security agreement under which the security interest was created".  It would be rare indeed for an "ordinary course" lessee to know both of the existence of a security interest given to the lessor's financier and of the fact that the lease was contrary to the terms of the financier's security agreement with the lessor.

But what does Section 30(2) actually mean to the lessee and those claiming under and through the lessee, such as others to whom the lessee might attempt to sell or re-lease the goods, others to whom the lessee might attempt to mortgage the goods, and, the lessee's trustee in bankruptcy where the lessee becomes bankrupt?  Three cases form the 1990s and a B.C. case decided in November of 2010 give guidance to those involved in goods leasing transactions.  The most recent case is the Perimeter/Century/GE case (the “GE Case", British Columbia Court of Appeal).  The 1990s cases were reviewed by the Court in the GE Case. Before considering the facts and reasoning in the GE Case, it is instructive to consider the Court’s analysis of the aforementioned three previous cases. The following is a summary of these cases:

  1. The Car-Ant Investments Ltd. case, Saskatchewan Court of Queen's Bench, 1990 (the "Car-Ant Case").  "D" acquired ownership of some trailers and then leased them to "B", the lease including options to purchase.  "D" failed to properly register its lease interest in the Personal Property Registry.  Subsequently, "D" granted a security interest in the trailers (and the leases) to GMAC.  GMAC did duly register its security interest in the Personal Property Registry, against both the trailers and the leases.  Subsequently, "B" became bankrupt.  The Court noted that "D" was in the finance business, not the business of dealing in trailers.  "B's" bankruptcy trustee argued that in order for GMAC to have priority over the trustee with respect to the trailers, GMAC not only had to duly register against the trailers, but that it also should have ensured that "D" had duly registered its lease interest against the trailers.  The Court disagreed, stating that it was not necessary for a financier in GMAC's position to have to ensure "double" perfection against the leased goods.  The Court also held that GMAC's right to proceed against the trailers arose immediately, and that it was not necessary for GMAC to honour the lease.  This was because "D" was not leasing the trailers to "B" in "D's" ordinary course of business, with the result that the Saskatchewan equivalent of the above-quoted rule (i.e., the Saskatchewan equivalent to Section 30(2)) did not apply.
  2. The David Morris Fine Cars Ltd. case, Alberta Court of Queen's Bench, 1994 (the "Morris Case").  "M", being in the business of leasing and selling vehicles, leased a vehicle to "B".  "M" failed to register its lease interest in the Personal Property Registry.  Subsequently, "M" mortgaged its interest in the vehicle (and the lease) to BMO.  BMO duly registered its interest against the vehicle (and the lease) in the Personal Property Registry.  Subsequently, "B" became bankrupt.  A contest arose over who was entitled to the vehicle (or the proceeds of sale thereof), "B's" bankruptcy trustee or BMO.  The trustee argued that because BMO had taken its security interest in the vehicle after "M" had leased it to "B", BMO took its security subject to the "weakness" in "M's" legal position (i.e., "M's" failure to register notice of its lease rights in the vehicle in the Personal Property Registry), so that BMO's position was subordinate to the trustee's position.  Although not stated explicitly, there is a suggestion here that had "M" first granted security in the vehicle to BMO, with BMO duly registering its interest in the Personal Property Registry, a subsequent leasing of the vehicle to "B" might have given BMO priority over "B’s” bankruptcy trustee notwithstanding the failure by "M" to register its lease interest in the Personal Property Registry.  The Court also appears to have taken the view that with "M" having leased the vehicle to "B" in the ordinary course of the carrying on of "M's" business, unlike the situation in the Car-Ant Case, the Alberta equivalent of Manitoba Section 30(2) applied and, contrary to what was held in the Car-Ant Case, the affect of the legislation was to exterminate BMO's security interest.  As it turned out, BMO appealed the trial Court's decision, but for whatever reason, that appeal was never heard.
  3. The Re Giffen case, Supreme Court of Canada, 1998 (the "Giffen Case").  Here TLC, which was in the business of leasing and dealing in motor vehicles, leased a vehicle to "T".  Thereafter, "T" subleased the vehicle to "B".  Neither of TLC or "T" duly registered their lease and sublease interests in the Personal Property Registry.  Subsequently, "B" became bankrupt, and a contest arose between "B’s” bankruptcy trustee and TLC as to who was entitled to priority in the vehicle (or the sale proceeds thereof).  The Court noted that while TLC was in the business of leasing vehicles, "T" was not.  The contest was between the bankruptcy trustee and TLC (not “T”) as to who had priority over the vehicle or the proceeds of sale thereof.  The trustee argued that the effect of the British Columbia equivalent to Manitoba Section 20(b)(i) was to subordinate (or extinguish) TLC's rights in the vehicle in favour of the trustee's rights.  On an initial appeal, TLC argued that on the basis of Section 71(2) of the Canada Bankruptcy and Insolvency Act (the "BIA"), the bankruptcy trustee only succeeded to whatever were the property rights of the bankrupt on bankruptcy and that at the time of its bankruptcy, "B" was merely a lessee and not an owner of the vehicle.  This appeal initially succeeded, but the Supreme Court of Canada disagreed. It held that in considering the application of the Personal Property Security Act to this situation, it is not appropriate to focus on such concepts as proprietary rights, title and ownership.  Personal Property Security legislation ignores the concepts of title and ownership, and instead, focuses on the priority of competing rights and interests, and that is the correct way to resolve these disputes.  Thus "B’s” trustee was entitled to enforce its rights under the BIA (for the benefit of "B’s” creditors generally) in priority to the rights of either TLC or ("T") because neither of TLC or "T" had properly perfected their lease and sublease interests in the PPR.  In effect, the trustee could and did get a better "title" to the vehicle than TLC and "T".

In the GE Case, “L”, being the owner of three buses, leased those buses to “B” but “L” failed to properly register its lease interest in the British Columbia PPR. Subsequently, “L” granted a security interest in the buses and in its rights under the leases to GE.  GE did properly register its security interest against the buses as well as against “L’s” rights under the leases. Subsequently, “B” became bankrupt and a contest arose between “B’s” bankruptcy trustee and GE as to who had priority with respect to the buses and/or the proceeds of sale thereof. The Court noted that in leasing the buses to “B”, “L” was doing so in the course of the ordinary carrying on of “L’s” business. Taking into account the reasoning in the aforementioned cases (the Car-Ant Case and the Giffen Case in particular) and the British Columbia equivalent of the above cited PPR rules, the Court held in favour of GE. The Court emphasized that when someone like “L” leases goods in the ordinary course of its business, the effect of the legislation is that a security interest in the goods granted by the lessor to its financier, will, as between the financier and the lessee, becomes “abridged”, but that that security interest will "spring back to life" (and thus enable the financier to realize its security) upon termination of the lease. The lessee does not acquire ownership of the goods, but instead can assert its lease rights (essentially possession of the leased goods) in priority to the financier’s security rights but only until the lease ends. In the GE Case, “B’s” trustee did not make any of the rental payments due under the leases, the buses were returned to “L”/GE and consequently, the leases were at an end.

What does the GE Case and the earlier cases considered by the Court in the GE Case suggest for those in the leasing business and those financing such business? I suggest the following:

(i)            the need for lessors and their secured creditors to make proper registrations in the Personal Property Registry;

(ii)           a lessor’s financier does not - for its own sake alone - have to ensure that the lessor properly registers its lease interest as long as the financier has properly registered its security interest (although, for their own benefit, lessors should duly register their lease interests); and

(iii)          where a lessor has leased goods to a lessee in the ordinary course of the lessor’s business, and, prior or subsequent to such leasing, the lessor grants a security interest in the goods to the lessor’s financier, the financier’s security interest is not capable of being enforced by the financier as against the lessee’s possessory rights under its lease unless and until the lease ends.

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October 2011

You are interested in buying a home and you find one in what appears to be a very attractive district of older (but well kept up) homes in a heavily treed neighbourhood. The particular property you are interested in has all the amenities that you and your young family (three growing children) could ever want. The price and terms are acceptable to you, and you make an offer which is quickly accepted. Before contracting to buy, you had two or three "walk-throughs" on the property and you didn't notice any existing or potential problems. However, after you move in, you discover that behind the recently installed drywall in the basement rec room and underneath the rugs on the rec room floor, there are a number of cracks/fissures. Not only is moisture slowly seeping in, but there is strong evidence (visually and odiferously) of the existence of black mould on the walls and the floors. You consult with foundation experts and are told that there are severe structural (and mould) problems with the home and that it will cost at least $100,000 to remedy the situation. Even then, the "experts" tell you that there are no "guarantees", because an underground river runs directly beneath the property. It is quite clear that your vendor intentionally misled you with respect to these problems by hiding them, utilizing the aforementioned drywall and strategically placed rugs, such rugs having been put underneath extremely heavy furniture which the vendor had in place at the time of your inspections. Most people (lawyers and laypersons) would agree that you have a remedy against your vendor on the basis that the vendor has intentionally deceived you by hiding these defects - which were not easily ascertainable by you when you made your inspections - because these "latent" defects constitute a substantial impediment to your enjoyment of the property, at least without your incurring a very high remediation cost.

            But what if the "defect", also latent in the sense that it would not be ascertainable upon a reasonable inspection of the property, is something external to the property? This very question came before the Ontario Superior Court of Justice (judgment March 11, 2011) in the Dennis v. Gray case (the "Gray Case"). In the Gray Case, the "defect" ascertained by the purchaser after the purchaser had committed to buy was the fact that a convicted child pornographer lived across the street. When the purchaser learned of this fact, the purchaser became concerned for the well being of his children and didn't want to complete the purchase transaction. The hearing was not a full blown trial to decide the merits of the plaintiff's case, but rather the determination of a preliminary motion by the defendant in which the defendant sought to convince the Court to strike out the plaintiff's claim on the basis that there should be no trial because "it is (not) "plain and obvious" that such a fact does . . . in law amount to a "latent defect" of such a nature that it must be disclosed to a purchaser." However, the Court concluded that it was not so plain and obvious and thus, regardless of whether or not the plaintiff would ultimately succeed in its claim, it was appropriate for the claim to at least go forward to trial. The defendant argued that the existence of the convicted child pornographer was generally known in the neighbourhood, but the Court observed that in fact, the criminal record of the neighbour could not be ascertained from any routine inspection, at least not ascertained with certainty. The Court also observed that what has been held by the Courts to be an actionable latent defect has generally expanded somewhat over time, and thus it is not necessary to foreclose completely the possibility of considering as latent defects, elements which are external to the actual property.

            It will be interesting to discover what happens with the Gray Case if it does proceed to a formal trial, perhaps followed by one or more appeals. There are certainly other elements external to certain properties which, if known to a potential purchaser at an early stage, might very well discourage the purchaser from committing himself/herself. Examples might be noises emanating from a manufacturing/processing facility, even though the facility is situated several miles away. Consider odours emanating from such a source, again, notwithstanding that the source is situated several miles away (think of the old sugar beet processing facility in Fort Garry, or a sewage treatment facility). Another possible irritant to a potential purchaser - although this would not be external to the property - is the fact that the home to be purchased is reputed to have been haunted by ghosts for many years. Surely all of these would be expansions - perhaps reasonable expansions, perhaps not - of what the law views as being an actionable latent defect.

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October 2019

You are in the business of making real property mortgage secured loans, and you are approached by a person requesting a loan to be secured by a mortgage of such person's title to particular land.  You make what are currently considered to be prudent "credit checking" investigations with respect to the contemplated loan - in particular, you order, obtain and review a search of the proposed borrower's title to the subject land (which confirms that the title is in the name of who the borrower claims to be) and you request and obtain and review at least two pieces of the borrower's identification, including one piece of "photo identification" (which also confirms that the person indicated in such identification is one and the same as the person the borrower purports to be).  You may also make enquiries of the borrower as to how the borrower came to acquire the property, and the borrower advises that he/she acquired it by a previous purchase or acquired it by inheritance.  Although you do not make further inquiries in order to verify the alleged facts behind such acquisition (most lenders would not do so unless they had some reason to be suspicious, and this doesn't appear to be the case here), you have no reason to doubt the accuracy of the borrower's explanation of its acquisition of the land.

You approve the loan, take and register a mortgage of the borrower's land and advance funds. 

Subsequently, you discover that the land was previously in the name of person "A" and that a fraudster (person "X") forged a transfer of title to "X"'s co-fraudster (person "Y"), "Y" being your borrower.  Your borrower has not misrepresented himself/herself to you as someone other than the real person "Y", namely the co-fraudster, but, as noted, you did not believe and had no reason to believe that "Y" was a fraudster and was involved in what amounted to the theft of the land from the original (and proper) owner "A".

Two questions arise here:

(i)               is "A" entitled to have "Y"'s title cancelled and title to the land restored in "A"'s name? and

(ii)              is your mortgage - obtained by you bona fide and for value - also to be cancelled or should your mortgage "follow" the title back from "Y"'s name to "A"'s name, with the result that "A" is now (clearly unfairly) saddled with your mortgage and the obligation to repay "Y"'s mortgage loan?

Two recent (March, 2009) British Columbia Court of Appeal cases (the "Gill Case" and the "Oehlerking Case") deal with these questions.  In both of these cases, the Court held that the innocently deprived landholder ("A") was entitled to a cancellation of the title held by the co-fraudster "Y" and to the restoration of title back in "A"'s name, but that the innocent mortgage lender was not entitled to have its mortgage "follow" title back into the hands of "A".

The Court's holding that the innocently deprived landholder was entitled to get its title back from someone involved in fraud is based on British Columbialand law which appears to be similar to that in other Canadian common law jurisdictions operating under Torrensland title systems.  The holding that the innocent mortgage lender who has advanced value loses its mortgage is based on the current state of British Columbialand law which may - or may not - be the same as the land laws of such other Canadian jurisdictions. 

Most Canadian jurisdictions (including British Columbia) will protect a bona fide and for value purchaser - as opposed to a bona fide and for value mortgage lender - who acquires title (ie. ownership, as opposed to a mortgage security) from a person who has been involved in fraud whereby the original owner is deprived of title, provided that such subsequent bona fide and for value purchaser acquires his/her title before the innocently deprived original owner learns of his/her loss and registers notice his or her claim to reinstatement against the title.  In other words, as long as a subsequent purchaser acquires from a fraudster bona fide and for value before the innocently deprived title holder can act, such purchaser will be able to acquire and keep his/her title to the exclusion of the innocently deprived owner.  But where the subsequently acquiring party acquires an interest bona fide and for value which is less than fee simple ownership, such as a mortgage, such subsequent bona fide and for value interest holder will lose its interest in favour of the innocently deprived owner.  That is the situation in British Columbia under its current legislative scheme and may be the situation in otherTorrens system based Canadian common law jurisdictions, depending on the provisions of such other jurisdictions' legislation.

A reading of the Gill Case and the Oehlerking Case (and related earlier jurisprudence) additionally raises or may suggest these questions:

(1)             what would be the position (inBritish Columbiaand in jurisdictions with legislation similar toBritish Columbia's) of a bona fide and for value purchaser (or mortgagee) who dealt with a fraudster who had arranged for the wrongful transfer of title from an innocently deprived previous owner into the name of a fictitious person (whom the fraudster then impersonates)?; and

(2)             what would be the position (in British Columbia and in jurisdictions with legislation similar to British Columbia's) of a person who has acquired an interest (whether ownership or some lesser interest such as a mortgage) bona fide and for value but who loses his/her interest by virtue of the operation of applicable land law legislation, where such subsequent bona fide and for value person makes a claim against his/her jurisdiction's government operated Assurance Fund?

The second question is complicated somewhat by the fact that whilst it should be relatively easy to remedy the loss sustained by a bona fide and for value mortgagee who loses its interest (ie. the amount of such party's compensation would simply be the balance of its outstanding loan), in the case of a bona fide and for value purchaser who loses his/her ownership interest, quantification of such person's loss may be hard to determine because of the difficulty in valuing the loss.  Where the subsequent bona fide and for value purchaser is entitled by applicable law to keep his/her title to the exclusion of the original innocently deprived owner, then the question becomes how to compensate the original owner.  Valuation of the original owner's loss may be even more difficult to determine.

In British Columbia and in jurisdictions whose legislation is similar to British Columbia's (or is held by the Courts to be of the same effect as British Columbia's), the law appears to place a fairly onerous burden on mortgage lenders.  Even if a lender conducts "due diligence" along the lines of what is described in the first paragraph of this paper, the lender may lose its security and thus fail to recoup, in whole or in part, its loan.  Of course, where a jurisdiction permits an innocently deprived mortgage lender to recoup itself out of an Assurance Fund, the lender's situation will be substantially alleviated.

InManitoba, the Real Property Act Sections 59(1), 62(1)(c) and 182(1) deal with these matters.  Using the above hypothetical example, is the writer's view that:

(i)               person "A" is clearly entitled to get title to "A"'s land back from person "Y";

(ii)              perhaps the bona fide and for value mortgagee's mortgage will follow the land back from "Y"'s name to "A"'s name in which case the Assurance Fund would be available to pay out the mortgage thereby having it discharged, but it may also be arguable that the mortgage was a nullity from the beginning, and thus is not capable of following title back into "A"'s name, and if the mortgage is considered to be a nullity, then Section 182(1) may not apply so as to enable the mortgagee to make a claim.

Some lenders, wishing to protect themselves from the risk of loss due to land fraud and/or wishing to minimize the necessity of having to make a formal claim for reimbursement against the Assurance Fund, may attempt to shift the burden of ensuring the absence of land fraud in a mortgage transaction to the lawyer providing the legal services in connection with the transaction.  This would be done by the lender's instructions to the lawyer specifying that it is the lawyer's responsibility to ensure that the person or persons purporting to be the mortgagor(s) are who they claim to be and/or that the mortgagor(s) have acquired the mortgaged real estate, in effect, honestly and for value.  A lawyer will be hard-pressed to fulfill this obligation where - as is the case in many if not most mortgage lending transactions - the lawyer does not know the borrower(s) until he or she meets with them for the first time in connection with the real estate transaction.  Where the lender's requirement of the lawyer is as aforementioned, no amount of due diligence on the part of the lawyer in identifying and/or verifying the identification of the borrower(s) will suffice, because what the lender is asking the lawyer to do, is, in effect, "guarantee" the identity of the borrower(s) and the validity of their underlying acquisition of the mortgaged realty.

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December 2003

A recent (April, 2003) New Brunswick Court of Appeal decision (the "Stevenson Case") makes it clear that when a secured party is taking a security interest in serial numbered goods, in order to ensure priority over other competing claims, the secured party must ensure accuracy in its financing statement both with respect to the name of the debtor and with respect to the serial number or numbers of the serial numbered goods.  The provisions of the New Brunswick Personal Property Security Act upon which the Court based its decision are substantially the same as those in the Manitoba Personal Property Security Act.

            In the Stevenson Case, the secured party had included correct particulars of the goods' serial number and related information, but had included an incorrect spelling of the debtor's name.  The secured party argued that anyone interested in acquiring an interest in the goods in question should be obliged to search both the debtor's name and the serial number of the goods, with the result that if there was an error in part of the registration (the name or the serial number particulars), but not in the other part of the registration, the party searching would be put on notice of the secured party's security interest by virtue of the presence of the correct information in the registry.

            The Court pointed out that the legislation makes it clear that a registration is invalidated if there is a seriously misleading error or omission in either the debtor's name or the serial number.  The Court also noted that in considering whether or not a seriously misleading error has been made, it is not appropriate to determine whether or not a third party was actually mislead (a subjective test), because the legislation makes it clear that the test is an objective one.  So even if a third party was not mislead by the error - because, for example, the secured party had searched both the name and the serial number and noted the secured party's security interest - the registration would be invalid.

            Thus it would appear that if you are anticipating inquiring an interest in someone's serial numbered goods, it is not necessary for you to search both the serial number and the person's name.  While this appears to be a logical conclusion from the Stevenson Case, it is the writer's "gut" instinct that a person conducting a search with respect to serial numbered goods should in fact search the owner's name and the serial numbers of the goods.  The costs of making the additional search are not substantial.  Also, the jurisprudence in other provinces also suggest that a person searching with respect to serial numbered goods is obliged to search both the owner's name and the serial numbers, so that an error in one will not invalidate an earlier registration provided that the earlier registration is correct in the other.  Searching both the name and the serial number completely eliminates any possible subsequent argument (which might be based on a change in how the Court's view the legislation) that a correct name overcomes an incorrect serial number or vice versa.

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After entering into a contract - which is otherwise binding on the parties to it - one of the parties may have a change of mind or, having for the first time thought out the consequences of the contractual commitment, decides that release of that person from their commitment would be in their own best interests.  Such persons may be able to convince a Court to extricate them from their agreements' obligations, reasons or excuses to so extricate vary from situation to situation, but a number of them are - in essence - that the party wishing to withdraw was misled by the other party, or that the party wishing to withdraw didn't understand the language in the written document or had not had the wording adequately explained to her/him.  A recent illustration of this situation is found in the Ontario Court of Appeal judgement Country Wide Homes Upper Thornhill Estates Inc. v. ge (2020 ONCA 400), judgement issued June 22, 2020 (the "Country Wide Case").  In the Country Wide Case, the vendor and the purchaser entered into an agreement for a sale to the purchaser of a substantial parcel of land (basic purchase price being $2,800,000.00).

Prior to closing, the purchaser took the position that the agreement was not binding.  The Court noted that "there was no issue with the agreement, its contents or the steps taken after it was signed.".  The purchaser's rationale for requesting confirmation of termination of the agreement included these allocations:

(i)    the agreement was lengthy and was signed by a non-English speaker;

(ii)   the agreement was signed without the purchaser having a solicitor of the purchaser's choosing review the agreement before the purchaser signed;

(iii)  the purchaser simply did not understand the contents of the agreement.

The Court rejected the purchaser's arguments and confirmed that the agreement was binding.  In particular, the Court pointed out:

(a)  Mandarin-English speaking real estate agent with whom he was able to fully communicate;

(b)  the purchaser was not a novice to the real estate market;

(c)  the purchaser had initialed every page of the agreement of purchase and sale and its schedules and had initially deleted the area where a purchaser could fill in the name of the purchaser's own lawyer; and

(d)  each page of the agreement of purchase and sale contained the following prominently displayed statement: "ORAL REPRESENTATIONS DO NOT FORM PART NOR CAN THEY AMEND THIS AGREEMENT".

There are undoubtedly situations where the above "background factors" leading to execution and delivery of the contract may taint the "meeting of the minds" process that a Court will excuse contractual performance.  But people contemplating entering into contracts and the counsel should tread carefully!

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February 2017

This paper has to do with a problem (the "Problem").

The Problem arises where a chartered bank (the "Bank") provides credit to an agricultural producer ("Producer") which is utilized, in whole or in part, to facilitate/effect the operation of the Producer's agricultural production business, in particular, the growing and production of crops ("Crops").  Typically, the Bank will take from the Producer to secure the obligations from time to time owed to the Bank by the Producer with respect to such credit, one or both of a security interest in the Producer's Crops governed by The Manitoba Personal Property Security Act (the "MPPSA") (usually in the form of a general security agreement, hereinafter a/the "GSA") plus a security assignment by the Producer to the Bank of the Producer's Crops pursuant to and as governed by Section 427 of the Bank Act (Canada) (hereinafter, the "Bank Act Security").

The Producer uses the value advanced by the Bank to produce the current year's crops, and (presumably) on an ongoing basis, the Bank advances further values year after year to the Producer on the ongoing security against each successive year's crops as created under the GSA and the Bank Act Security.

This paper assumes that the Bank will, in a timely manner, have made all registrations and taken all steps necessary to perfect it's security interests (under its GSA and under its Bank Act security) so as to achieve, at the earliest possible date, the highest possible priority.

The essence of the Problem arises when after the Bank has done all of the foregoing, someone else - typically an agricultural products support business ("Crops Inputter") - additionally provides inputs to assist the Producer to produce its Crops (on credit) and takes a security interest in those Crops.  Crops Inputters will usually provide such items as seed, fertilizer and pesticides.  The security taken by the Crops Inputter is governed by the MPPSA, the Crops Inputter being legally incapable of obtaining security under Section 427 of the Bank Act of Canada. 

Again, assume that the Crops Inputter has made registrations and done all that it can to achieve, as soon as possible, the highest possible priority for its security interest in the Crops.  Is it possible for the Crops Inputter, notwithstanding that it provides value to the producer and takes security after when the Bank has provided value and taken security in the same Crops from the same Producer, can obtain a retroactive priority over the Bank's security in the Crops?

If the Bank's provincially governed security interest could not "fit" within the classification of a "purchase money security interest" under the MPPSA and the Crops Inputter's provincially governed security interest could be so classified (and assuming that the Crops Inputter had done all that it needed to do under the MPPSA in order to achieve a retroactive purchase money security interest priority), then the Crops Inputter would indeed take priority in the Crops over the Bank, notwithstanding that the Bank had registered its provincially governed security interest before the Crops Inputter had registered its provincially governed security interest.  But is this really the case?

If the Bank's security interest could be classified as a "purchase money security interest" under the MPPSA, so that both the Bank's security interest and the Crops Inputter's (provincially governed) security interest would be classified as "purchase money security interests" under the MPPSA, then, depending on how the Crops Inputter advanced value, the Bank's security interest may - or may not - hold priority over the Crops Inputter's security interest.  If the Crops Inputter sold its inputs to the Producer on credit and took security therefor, then the Crops Inputter's security interest would hold its security over the prior the Bank security.  This is because the MPPSA says that where there are two purchase money security interests affecting the same collateral at the same time and one is "vendor credit" and the other is "lender credit", then - regardless of who has registered first - the holder of the security interest representing "vendor credit"  will win the priority contest.  On the other hand, if the Crops Inputter utilizes some subsidiary, affiliate or other financial institution to advance value to the Producer which the Producer then uses to buy inputs from the Crops Inputter, the Crops Inputter's (or more accurately, its subsidiary's affiliate's or connected financial institution's security interest) would - like the Bank - be a purchase money security interest securing "lender credit".  In that case, with the Bank having registered its "lender credit", purchase money security interest first, the Bank's security interest would hold priority over the Crop Inputter's (or its affiliate's) security interest.

But arguably, although the security interests held by each of the Bank and the Crops Inputter appear to be in the nature of purchase money security interests, in fact, they are NOT strictly speaking, "purchase money security interests", but rather a species of security interest which is sometimes colloquially called a "production value security interest" and which is dealt with specifically under Section 34(10) of the MPPSA.  In fact, the Bank's security interest under its GSA will most likely be in part a purchase money security interest, in part a production value security interest governed by Section 34(10) and in part, a security interest securing obligations which do not fall within the concepts of the values secured by purchase money security interests or production value security interests.

The answer to the above question is, in our opinion, "no".  This is essentially for two reasons:

  1. As mentioned above, a "production value security interest" is not dealt with in exactly the same way as a "purchase money security interest" under the MPPSA.  Section 34(10) of the MPPSA provides:

"A perfected security interest in crops or their proceeds given for value to enable the debtor to produce the crops and given while the crops are growing crops or during a period of six months immediately before the time the crops become growing crops (and continuing thereafter, until the crops start growing), has priority over any other security interest in the same collateral given by the same debtor." (the underlining is the writer's, for emphasis purposes).

Where the Bank provides value that does in fact enable a Producer "to produce the crops" and the Bank does everything it is supposed to do to achieve priority as required by said Section 34(10), and, a Crops Inputter perfects (registered) after the Bank has registered, then, insofar as the Producer's Crops are concerned (although not necessarily with respect to other collateral covered by the Bank's GSA), priority should go to the Bank.  Note that Section 34(5) of the MPPSA - which, in effect, provides that a vendor credit security interest will take priority over a lender credit security interest, only applies to purchase money security interests, and (again, as stated above), the production value security interest dealt with in Section 34(10) of the MPPSA is not - strictly speaking - a purchase money security interest.  That means that priority, as between the Bank's security interest and the Crops Inputter's security interest must be determined by the MPPSA "residual rule" (Section 35(1)) which provides that the first to register wins a priority contest.  In this example, the Bank has registered first so it "wins".  Obviously, if the Crops Inputter had registered its production value security interest before the Bank had registered, then the Crops Inputter would "win".

There is one question which we still have to resolve.  That is, just how broad is the meaning of the words "to produce the crops" found in Section 34(10)?  Is it restricted to what a Crops Inputter normally provides, such as seed, pesticides and fertilizer, or, is it broader to also include costs paid for (with the Bank's loaned monies) relating to employing farm hands, electricity consumed, costs of servicing and operating farm equipment and machinery, and for that matter, all costs generally of the Producer's agricultural production business?  If "to produce the Crops" is in fact limited to provision of inputs (on credit) such as seed, fertilizer and pesticides, then there may be a need to apportion the use by the Producer of the credit extended by the Bank amongst what are clearly direct production inputs and other inputs (paid for with the Bank's credit) which are less directly connected with the creation of the Crops.

  1. Where the Bank has acquired its Bank Act Security on the Producer's Crops and taken all steps required under the Bank Act to establish its priority, and, this occurs before the Crops Inputter perfects its security interests against the Crops, then the priority of the Bank's security in the Crops, as specified in Section 427 of the Bank Act, clearly gives the Bank priority over the provincially governed Crops Inputters security interest.  In this regard note:

(a)          Section 4(k) of the MPPSA provides that the MPPSA does not apply to a security arrangement governed by the Bank Act provided that the Bank Act "deals with the rights of parties to the (security) agreement or the rights of third parties affected by a security interest created by the agreement".  Clearly, Section 427 of the Bank Act (in particular, subsections (2)(d) and (4) so "deal with the rights of (the) parties…and…rights of third parties";

(b)          the Bank Act does not have any rules providing for two or more banks providing value to a Producer on the security of the same Crops, other than that if the Bank's Bank Act Security was competing with another Canadian chartered bank's Section 427 security on the same Crops, the bank which would "win" the priority contest between the two banks would be the bank that filed its Notice of Intention (to grant the Bank Act Security) first.

The foregoing considerations also raise the following issues and conclusions:

  1. Where the Bank has taken its security and registered first before a Crops Inputter's MPPSA financing statement registration, the Bank should "win" the priority contest.
  2. Where the Bank takes both a provincially governed GSA and a Bank Act Security assignment, the Bank's security would initially, under the GSA, extend to the seeds, fertilizer and pesticides which the Bank has financed the Producer's acquisition of (Section 427 (1)(d) of the Bank Act appears to limit the Bank's security to the Crops themselves), and thereafter, upon the seeds, fertilizer and pesticides being "put" into the soil, would also extend to the Crops commencing to grow therefrom, the Bank's GSA and its Bank Act Security would both extend to the Crops.  That does give a "window of opportunity" to the Crops Inputter, in that during the period of time that the Producer holds seed and/or fertilizer and/or pesticides (before the Producer puts those into the ground), the Crops Inputter's security interest - provided that the Crops Inputter is extending "vendor credit", not "lender credit" - would have priority over the Bank's GSA security interest in the same collateral.
  3. Perhaps the best practical advice that can be given in this scenario of competing/overlapping secured creditors with respect to a producer's crops is for all concerned creditors (including chartered banks, Crops Inputters and any other parties advancing or considering advancing credit to an agricultural producer), to get together and work out a reasonable intercreditor agreement.  Such agreement would spell out the types of credit being provided by each creditor and define all creditors' respective priorities with respect to the Producer's crop inputs, crops and proceeds of those crops.
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January 2002

Two recent cases (Schwab Construction Ltd. before the Saskatchewan Court of Queen’s Bench, judgment given March 27, 2001 [the “Schwab Case”], and Mega Pets Ltd. before the British Columbia Supreme Court, judgment given December 29, 2000 [the “Mega Case”]), illustrate the different approaches which can be taken by Courts in sorting out priority issues over entitlement to proceeds of disposition of assets held by a common debtor who is indebted to Canada Customs and Revenue Agency (formerly Revenue Canada, hereinafter, “CCRA”) for amounts deducted from employees for income tax, Canada Pension Plan premiums and Employment Insurance Plan premiums, and, indebtedness owed to private creditors.

Under the Income Tax Act (Canada), the CCRA claim to the assets of the common debtor (and in particular to the proceeds of disposition thereof) is given priority over a number of specifically listed commercial arrangements, including a “debenture,” a “mortgage,” a “lien,” a “pledge,” a “charge,” a “deemed” or an “actual trust,” an “assignment” and an “encumbrance” “of any kind whatever.” These are given as species of what that Act refers to as a “security interest.” In the Schwab Case, the Court held that it was not necessary or even appropriate to follow the rules contained in provincial personal property security legislation and in the cases dealing with same for the purpose of determining whether or not a particular commercial arrangement was or was not a “security interest” within the meaning of the Income Tax Act. In the Mega Case, the British Columbia Court came to the opposite conclusion.

Consequently in the Schwab Case the Saskatchewan Court, which had to consider several competing private claims in addition to that of CCRA, held as follows:

  1. Where the private creditor’s arrangement was structured in the form of a lease of goods, since the creditor at all times held ownership of the goods (as lessor), the private creditor should prevail.  Whether or not the lease would have been considered a financing lease or a “true” lease under provincial personal property security legislation is irrelevant.
  2. Where the private creditor’s arrangement was structured as a conditional sale contract, again with ownership of the goods at all times remaining with the creditor, the creditor’s claim should also prevail.  Again, it was irrelevant that the applicable provincial personal property security legislation would have treated the conditional sale arrangement as a security interest.
  3. Where the private creditor’s interest was clearly some other form of an ownership interest, again the private creditor should prevail.

On the other hand, the British Columbia Court in the Mega Case dealt with a conditional sale contract, and since this Court decided that, in categorizing a commercial arrangement as being or not being a “security interest” within the meaning of the Income Tax Act, it was appropriate to apply provincial personal property security legislation principles, the conditional sale contract clearly being a “security interest” under provincial legislation, so this Court held that CCRA should prevail.

Since it appears to be the objective of the federal government taxing authority to simply strip competing claimants of their property claims in the common debtor’s assets without compensation (in other words, expropriation without compensation), we can expect that if the Saskatchewan Court’s view of this matter gains any substantial judicial following, the federal government will - as it has done before - simply get Parliament to change the rules in its favour.  Don’t be surprised if the government does so on a retroactive basis as it did following the disappointing (to the government) result of the Supreme Court of Canada decision in the Royal Bank and Sparrow Case.

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

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

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

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

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

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

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

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November 2003


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

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

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

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

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

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

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

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

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

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

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February 2016

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Counsel might consider the following:

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

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

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

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

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July 2010

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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January 2009

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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